<PAGE>
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 JUNE 30, 2000
Commission File Number 0-15313
BIO-TECHNOLOGY GENERAL CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 13-3033811
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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 August 8, 2000:
54,574,695
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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
June 30, 2000 and December 31, 1999......................................................3
Consolidated Statements of Operations
for the three and six months ended
June 30, 2000 and 1999....................................................................4
Consolidated Statement of Changes in
Stockholders' Equity for the six
months ended June 30, 2000................................................................5
Consolidated Statements of Cash Flows
for the six months ended
June 30, 2000 and 1999....................................................................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 5. Other Information...........................................................................16
Item 6. Exhibits and Reports on Form 8-K............................................................16
</TABLE>
2
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PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
(Unaudited)
-------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................... $ 16,594 $ 18,703
Short-term investments .............................. 85,196 68,547
Accounts receivable ................................. 36,095 37,504
Inventories ......................................... 9,882 8,624
Deferred income taxes ............................... 4,218 4,286
Prepaid expenses and other current assets ........... 249 220
--------- ---------
Total current assets ............................. 152,234 137,884
Account receivable ...................................... 2,443 2,443
Severance pay funded .................................... 2,434 2,369
Property and equipment, net ............................. 22,242 18,938
Other assets ............................................ 3,287 3,011
--------- ---------
Total assets ........................................ $ 182,640 $ 164,645
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable .................................... $ 8,276 $ 7,257
Other current liabilities ........................... 13,978 11,171
--------- ---------
Total current liabilities ....................... 22,254 18,428
--------- ---------
Long-term liabilities ................................... 4,481 4,333
--------- ---------
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: 54,450,000 (53,280,000 at
December 31, 1999) .................................... 544 533
Capital in excess of par value .......................... 175,953 168,743
Deficit ................................................. (15,586) (22,534)
Less - treasury stock at cost, 83,000 shares ............ (340) (340)
Accumulated other comprehensive income .................. (4,666) (4,518)
--------- ---------
Total stockholders' equity ............................ 155,905 141,884
--------- ---------
Total liabilities and stockholders' equity ........ $ 182,640 $ 164,645
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
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CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands except per share data)
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<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
--------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Product sales ................................................ $26,589 $35,248 $14,082 $19,381
Contract fees ................................................ 9,976 4,633 7,500 1,727
Royalties .................................................... 1,380 226 745 190
Other revenues ............................................... 893 990 462 529
Interest income .............................................. 3,192 2,011 1,841 1,053
------- ------- ------- -------
42,030 43,108 24,630 22,880
------- ------- ------- -------
Expenses:
Research and development ..................................... 11,032 8,977 5,635 4,359
Cost of product sales ........................................ 4,247 6,122 1,911 3,868
General and administrative ................................... 6,628 5,895 3,182 3,231
Marketing and sales .......................................... 8,571 8,324 5,315 3,765
Royalties .................................................... 918 717 264 396
Interest and finance ......................................... 47 60 17 57
------- ------- ------- -------
31,443 30,095 16,324 15,676
------- ------- ------- -------
Income before income taxes .................................... 10,587 13,013 8,306 7,204
Income taxes .................................................. 3,639 3,907 2,843 2,104
------- ------- ------- -------
Net income .................................................... $ 6,948 $ 9,106 $ 5,463 $ 5,100
------- ------- ------- -------
------- ------- ------- -------
Earnings per common share:
Basic ........................................................ $ 0.13 $ 0.18 $ 0.10 $ 0.10
======= ======= ======= =======
Diluted ...................................................... $ 0.12 $ 0.17 $ 0.10 $ 0.10
======= ======= ======= =======
Weighted average number of common and common equivalent shares:
Basic ........................................................ 54,026 52,014 54,303 52,086
======= ======= ======= =======
Diluted ...................................................... 57,188 53,217 57,015 53,358
======= ======= ======= =======
</TABLE>
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)
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<CAPTION>
Common Stock Accumulated
------------ 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, 1999 ..... 53,280 $ 533 $168,743 $(22,534) $ (340) $ (4,518) $141,884
Comprehensive income:
Net income for six months
ended June 30, 2000 ....... 6,948 6,948
Unrealized loss on marketable
securities, net ........... (148) (148)
--------
Total comprehensive income: .... 6,800
--------
Issuance of common stock ....... 154 1 851 852
Exercise of stock options ...... 1,016 10 6,359 6,369
------ -------- -------- -------- -------- -------- --------
Balance, June 30, 2000 ......... 54,450 $ 544 $175,953 $(15,586) $ (340) $ (4,666) $155,905
====== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
5
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
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<CAPTION>
Six Months
Ended June 30,
-------------------
2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 6,948 $ 9,106
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................... 1,467 1,692
Provision for severance pay ............................. 148 106
Loss on sales of short-term investments ................. 304 174
Gain on sales of fixed assets ........................... (16) (5)
Deferred income taxes ................................... 68 2,770
Common stock as payment for services .................... 30 30
Changes in: receivables ................................. 1,409 22,177
inventories .................................. (1,258) (724)
prepaid expenses and other current assets .... (29) (154)
accounts payable ............................. 1,019 (193)
other current liabilities .................... 2,807 681
-------- --------
Net cash provided by operating activities .................... 12,897 35,660
-------- --------
Cash flows from investing activities:
Short-term investments .................................... (26,152) (39,597)
Capital expenditures ...................................... (4,393) (8,629)
Changes in other assets ................................... (682) (293)
Severance pay funded ...................................... (65) (33)
Proceeds from sales of fixed assets ....................... 44 44
Proceeds from sales of short-term investments ............. 9,051 10,579
-------- --------
Net cash used in investing activities ....................... (22,197) (37,929)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock .................... 7,191 1,248
-------- --------
Net (decrease) increase in cash and cash equivalents ......... (2,109) (1,021)
Cash and cash equivalents at beginning of year ............... 18,703 9,431
-------- --------
Cash and cash equivalents at end of period ................... $ 16,594 $ 8,410
======== ========
SUPPLEMENTARY INFORMATION
Other information:
Income tax paid ........................................... $ -- $ 789
Income tax received ...................................... $ 1,410 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
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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, 1999. 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, 1999.
Note 2: CREDIT AGREEMENT
In June 2000 Bio-Technology General (Israel) Ltd., the Company's
wholly-owned subsidiary ("BTG-Israel"), entered into a $20,000,000
revolving credit facility with Bank Hapoalim B.M. to finance a portion
of the cost of completing its new production facility. Short-term
borrowing under the facility are due 12 months from the date of
borrowing and long-term borrowings are due five years from the date of
borrowing. Loans under the facility bear interest at the rate of LIBOR
plus 0.5% in the case of short-term borrowings and LIBOR plus 1% in the
case of long-term borrowings. Amounts repaid under the facility can be
reborrowed. The credit facility is secured by the assets of BTG-Israel
and has been guaranteed by the Company. At June 30, 2000 the Company
had no borrowings outstanding under the facility.
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Three and six months ended June 30, 2000
compared with three and six months ended June 30, 1999
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, 1999.
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 seven 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 and fermentation products
are primarily carried out through its wholly owned subsidiary in Rehovot,
Israel.
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
statements of operations.
8
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<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
---------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Product sales ............ 63.3% 81.8% 57.2% 84.7%
Contract fees ............ 23.7 10.7 30.4 7.6
Royalties ................ 3.3 0.5 3.0 0.8
Other revenues ........... 2.1 2.3 1.9 2.3
Interest income .......... 7.6 4.7 7.5 4.6
----- ----- ----- -----
Total ............... 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
Expenses:
Research and development . 26.2% 20.8% 22.9% 19.1%
Cost of product sales .... 10.1 14.2 7.7 16.9
General and administrative 15.8 13.7 12.9 14.1
Marketing and sales ...... 20.4 19.3 21.6 16.5
Royalties ................ 2.2 1.7 1.1 1.7
Interest and finance ..... 0.1 0.1 0.1 0.2
----- ----- ----- -----
Total ................ 74.8 69.8 66.3 68.5
----- ----- ----- -----
Income before taxes ........ 25.2 30.2 33.7 31.5
Income taxes ............... 8.7 9.1 11.5 9.2
----- ----- ----- -----
Net income ................. 16.5% 21.1% 22.2% 22.3%
===== ===== ===== =====
</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, the
operational needs of its customers, 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:
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Oxandrin-Registered Trademark-.... 42.9 38.5% 45.4% 35.3%
Bio-Tropin-TM-.................... 36.9 37.7 41.6 42.6
BioLon-TM- ....................... 13.2 11.5 12.0 9.1
Delatestryl-Registered Trademark-. 5.7 11.0 0.0 12.0
Other ............................ 1.3 1.3 1.0 1.0
---- ---- ---- ----
Total...................... 100.0% 100.0% 100.0% 100.0%
---- ---- ---- ----
---- ---- ---- ----
</TABLE>
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.
As previously announced, in April 1999 Gentiva Health Services, Inc.
("Gentiva"), BTG's distributor for Oxandrin, began to reduce its purchases of
Oxandrin in order to reduce the amount of Oxandrin inventory it carried as a
result of a slowing in the rate of increase of Oxandrin prescriptions.
Gentiva finished this inventory reduction in May 2000, and is now purchasing,
on a monthly basis, an amount of Oxandrin equal to the average end-user
(I.E., wholesaler) sales during the preceeding three months. Oxandrin
prescriptions in the first five months of 2000 increased by 7% over the
comparable 1999 period, reflecting a somewhat slower growth rate than in
prior periods in the market for all involuntary weight loss products for
individuals with HIV/AIDS. The Company believes that its co-promotion
agreement for Oxandrin with the Ross Products division of Abbott Laboratories
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>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
United States............................. 48.4% 45.3% 44.2% 37.2%
International............................. 51.6 54.7 55.8 62.8
---- ---- ---- ----
Total.............................. 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
REVENUES. Total revenues decreased 2.5% in the first half of 2000 to
$42,030,000 from $43,108,000 in the first half of 1999. Product sales decreased
by $8,659,000, or 24.6%, in the first half of 2000 from the comparable prior
period. Oxandrin sales to Gentiva Health Services, Inc. ("Gentiva"), the
Company's wholesale and retail distributor of Oxandrin in the United States,
decreased $178,000, or 1.6%, in the first half of 2000 compared to the first
half of 1999. The decrease in sales to Gentiva was due to Gentiva's decision,
10
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implemented in April 1999 and completed in May 2000, to reduce the amount of
Oxandrin inventory it carries; however, end-user sales of Oxandrin by Gentiva
increased in the first half of 2000 compared to the first half of 1999, due in
part to increased purchases by end-users in advance of a price increase
instituted effective June 1, 2000. Product sales of human growth hormone
("hGH"), BioLon and Delatestryl decreased $3,478,000, $554,000 and $2,377,000,
or 26.2%, 13.6% and 61.2%, respectively, compared to the first half of 1999.
These decreases in sales reflect quarterly variations in purchasing based on the
operational needs of the Company's customers. In addition, the Company had no
sales of Delatestryl in the second quarter of 2000 as compared to $2,317,000 in
the same period last year, as Gentiva, the Company's wholesale and retail
distributor of Delatestryl in the United States, elected to reduce its
Delatestryl inventory in response to its customers reduction of their inventory
and therefore made no purchases.
Contract fees are primarily generated from licensing and distribution
arrangements. Contract fees represented 23.7% of total revenues in the first
half of 2000 compared to 10.7% in the first half of 1999. Of the contract fees
earned in the first half of 2000, $5,000,000, or 50.1% of total contract fees,
was earned in respect of the license of distribution rights of BioHyJ to DePuy
Orthopaedics, a Johnson & Johnson company, on a substantially worldwide basis,
$2,500,000, or 25.1% of total contract fees, was earned as a milestone payment
under its strategic alliance with Teva Pharmaceutical Industries Ltd. focusing
on the development and global commercialization of several generic recombinant
therapeutic products and the license of distribution rights in the United States
for the Company's hGH and $1,475,000, or 14.8% of total contract fees, was
earned as milestone payments under its license and development and distribution
agreements with Swiss Serum relating to the Company's Hepatitis-B vaccine. Of
the contract fees earned in the first half of 1999, $4,197,000, or 90.6% of
total contract fees, was earned in respect of the license of distribution rights
for Insulin on a substantially worldwide basis.
Royalties were $1,380,000 in the first half of 2000, as compared to
$226,000 in the same period last year. These revenues consist of royalties from
the licensee of the Company's MircetteJ product.
Other revenues are primarily generated from partial research and
development funding by the Chief Scientist of the State of Israel.
Interest income increased $1,181,000, or 58.7%, over the comparable
prior period, primarily as a result of increased cash balances (including
short-term investments) resulting mainly from cash flow from operations and
exercise of options subsequent to June 30, 1999.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased 22.9% in the first half of 2000 to $11,032,000 from $8,977,000 in the
first half of 1999 The increase in research and development expenses resulted
mainly from the increase in research and development personnel and other
expenses associated with these additional personnel.
COST OF PRODUCT SALES. Cost of product sales decreased $1,875,000, or
30.6%, in the first half of 2000 to $4,247,000 from $6,122,000 in the first half
of 1999. Cost of product sales as a percentage of product sales decreased to
16.0% as compared to 17.4% in the comparable period last year. Cost of product
sales decreased in absolute terms due to decreased product sales and a more
favorable mix of products and as a percentage of revenues primarily as a result
of manufacturing efficiencies and the more favorable mix of products. Oxandrin
and human growth hormone have 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. The decrease in cost of product sales as a
percentage of product sales due to manufacturing efficiencies and the more
favorable product mix was partially offset by the fact that fixed production
costs, primarily overhead, were spread over a smaller amount 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 12.4% in the first half of 2000 to $6,628,000 from $5,895,000 in the
comparable prior period. As a percentage of revenues, general and administrative
expense increased to approximately15.8% of revenues in the first half of 2000 as
compared to 13.7% of revenues in the comparable prior year period. The increase
in general and administrative expense 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
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the United States and additional personnel and other expenses associated with
these personnel as a result of the Company's growth.
MARKETING AND SALES EXPENSE. Marketing and sales expense increased 3.0%
in the first half of 2000 to $8,571,000 from $8,324,000 for the prior year
period. As a percentage of revenues, marketing and sales expense increased to
approximately 20.4% from 19.3% for the first half of 1999. 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 increased personnel and other expenses
associated with these personnel and increased advertising, promotional and
market research activities, particularly in the second quarter.
ROYALTIES. Royalties were $918,000 in the first half of 2000, as
compared to $717,000 in the first half of 1999. These expenses consist primarily
of royalties to entities from which the Company licensed certain of its products
and to the Chief Scientist.
INCOME TAXES. Provision for income taxes for the six months ended June
30, 2000 was $3,639,000, representing approximately 34.4% of income before
income taxes as compared to $3,907,000, or 30.0% of income before income taxes,
in the first half of 1999. The increase in the effective tax rate in the first
half of 2000 compared to the first half of 1999 was primarily due to the
substantial reduction of certain research and experimental tax credits available
in prior years. The Company's consolidated tax rate differs from the statutory
rate because of Israeli tax benefits, tax credits and similar items which reduce
the tax rate.
EARNINGS PER COMMON SHARE. The Company had approximately 2.0 million
and 4.0 million additional basic and diluted weighted average shares
outstanding, respectively, for the six month period ended June 30, 2000, as
compared to the same period in 1999. The increased number of basic shares was
primarily the result of the issuance, subsequent to June 30, 1999, of shares
upon the exercise of options. The increase in the number of diluted shares was
the result of the increased number of shares outstanding, as well as 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 first half of 2000, which average fair market value was higher than in the
first half of 1999.
COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
REVENUES. Total revenues increased 7.6% in the second quarter of 2000
to $24,630,000 from $22,880,000 in the second quarter of 1999. Product sales
decreased by $5,299,000, or 27.3%, in the three months ended June 30, 2000 from
the comparable prior period. Oxandrin sales to Gentiva, the Company's wholesale
and retail distributor of Oxandrin in the United States, increased $1,542,000,
or 32.4%, in the three months ended June 30, 2000 compared to the three months
ended June 30, 1999. The increase in sales to Gentiva was due to the completion,
in May 2000, of Gentiva's reduction in the amount of Oxandrin inventory it
carries, which reduction began in April 1999, and increased purchases by
end-users in advance of a price increase instituted effective June 1, 2000.
End-user sales of Oxandrin by Gentiva increased in the three months ended June
30, 2000 compared to the same period last year. Product sales of hGH and BioLon
decreased $2,406,000 and $74,000, or 51% and 33%, respectively, compared to the
second quarter of 1999, due to quarterly variations in purchasing based on the
operational needs of the Company's customers. There were no sales of Delatestryl
in the second quarter of 2000 as compared to $2,317,000 in the same period last
year, as Gentiva, the Company's wholesale and retail distributor of Delatestryl
in the United States, elected to reduce its Delatestryl inventory and therefore
made no purchases.
Contract fees are primarily generated from licensing and distribution
arrangements. Contract fees represented 30.4% of total revenues in the three
months ended June 30, 2000 compared to 7.6% in the three months ended June 30,
1999. Of the contract fees earned in the second quarter of 2000, $5,000,000, or
66.7% of total contract fees, was earned in respect of the licence of
distribution rights of BioHy to DePuy Orthopaedics on a substantially worldwide
basis and $2,500,000, or 33.3% of total contract fees, was earned as a milestone
payment under its strategic alliance with Teva Pharmaceutical Industries Ltd.
focusing on the development and global commercialization of several generic
recombinant therapeutic products and the license of distribution rights in the
United States for the Company's hGH. Of the contract fees earned in the second
quarter of 1999, $1,600,000, or 93% of total contract fees, was earned in
respect of the license of distribution rights for Insulin on a substantially
worldwide basis.
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Royalties were $745,000 in the second quarter of 2000, as compared to
$190,000 in the same period last year. These revenues consist of royalties from
the licensee of the Company's Mircette product.
Other revenues are primarily generated from partial research and
development funding by the Chief Scientist of the State of Israel.
Interest income increased $788,000, or 74.8%, over the comparable prior
period, primarily as a result of increased cash balances (including short-term
investments) resulting mainly from cash flow from operations and exercise of
options subsequent to June 30, 1999.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased 29.3% in the second quarter of 2000 to $5,635,000 from $4,359,000 in
the second quarter of 1999. The increase in research and development expenses
resulted mainly from the increase in research and development personnel and
other expenses associated with these additional personnel.
COST OF PRODUCT SALES. Cost of product sales decreased $1,957,000, or
50.6%, in the three months ended June 30, 2000 to $1,911,000 from $3,868,000 in
the three months ended June 30, 1999. Cost of product sales as a percentage of
product sales decreased to 13.6% as compared to 20.0% in the comparable period
last year. Cost of product sales decreased in absolute terms due to decreased
product sales and a more favorable mix of products and as a percentage of
revenues primarily as a result of manufacturing efficiencies and the more
favorable mix of products. Oxandrin and human growth hormone have 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. The decrease in
cost of product sales as a percentage of product sales due to manufacturing
efficiencies and the more favorable product mix was partially offset by the fact
that fixed production costs, primarily overhead, were spread over a smaller
amount 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
decreased slightly by 1.5% in the three months ended June 30, 2000 to $3,182,000
from $3,231,000 in the comparable prior period. As a percentage of revenues,
general and administrative expense decreased to approximately 12.9% of revenues
in the second quarter of 2000 versus 14.1% of revenues in the comparable prior
year period.
MARKETING AND SALES EXPENSE. Marketing and sales expense increased
41.2% in the second quarter of 2000 to $5,316,000 from $3,765,000 for the prior
year period. As a percentage of revenues, marketing and sales expense increased
to approximately 21.6% from 16.5% for the second quarter of 1999. 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 the timing of marketing, advertising,
promotional and market research activities, which had resulted in a $1,303,000,
or 28.6%, decrease in the first quarter of 2000 compared to the first quarter of
1999. As discussed above, marketing and sales expenses for the first half of
2000 increased only $247,000, or 3%, over the first half of 1999.
ROYALTIES. Royalties were $264,000 in the three months ended June 30,
2000, as compared to $396,000 in the three months ended June 30, 1999. These
expenses consist primarily of royalties to entities from which the Company
licensed certain of its products and to the Chief Scientist. The decrease was
primarily the result of the Company not making sales of Delatestryl to Gentiva
in the quarter, which resulted in no royalties being due to the licensor of the
product.
INCOME TAXES. Provision for income taxes for the three months ended
June 30, 2000 was $2,843,000, representing approximately 34.2% of income before
income taxes as compared to $2,104,000, or 29.2% of income before income taxes,
in the comparable quarter last year. The increase in the effective tax rate in
the second quarter of 2000 compared to the second quarter of 1999 was primarily
due to the substantial reduction of certain research and experimental tax
credits available in prior years. The Company's consolidated tax rate differs
from the statutory rate because of Israeli tax benefits, tax credits and similar
items which reduce the tax rate.
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EARNINGS PER COMMON SHARE. The Company had approximately 2.2 million
and 3.7 million additional basic and diluted weighted average shares
outstanding, respectively, for the three month period ended June 30, 2000, as
compared to the same period in 1999. The increased number of basic shares was
primarily the result of the issuance, subsequent to June 30, 1999, of shares
upon the exercise of options. The increase in the number of diluted shares was
the result of the increased number of shares outstanding, as well as 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 second quarter of 2000, which average fair market value was higher than in
the second quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital at June 30, 2000 was $129,980,000 as
compared to $119,456,000 at December 31, 1999.
The cash flows of the Company have fluctuated significantly due to the
impact of net income, 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 decreased
by $2,109,000 and $1,021,000 in the six months ended June 30, 2000 and 1999,
respectively.
Net cash provided by operating activities was $12,897,000 and
$35,660,000 in the six months ended June 30, 2000 and 1999, respectively. Net
income was $6,948,000 and $9,106,000 in the same periods, respectively. In the
six months ended June 30, 2000 net cash provided by operating activities was
greater than net income mainly due to an increase in other current liabilities
of $2,807,000, a decrease in receivables of $1,409,000, depreciation and
amortization of $1,467,000 and an increase in accounts payable of $1,019,000
partially offset by an increase in inventory of $1,258,000. In the six months
ended June 30, 1999 net cash provided by operating activities was greater than
net income primarily because of a decrease in receivables of $22,177,000,
deferred income taxes at $2,770,000 and depreciation and amortization at
$1,692,000.
Net cash used in investing activities was $22,197,000 and $37,929,000
in the six months ended June 30, 2000 and 1999, respectively. Net cash used in
investing activities included capital expenditures of $4,393,000 and $8,629,000
in these periods, respectively, primarily for the new manufacturing facility.
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 $7,191,000 and $1,248,000
in the six months ended June 30, 2000 and 1999, respectively, which are net
proceeds from issuances of Common Stock as a result of exercise of stock
options.
In April 1999, the Company purchased a manufacturing facility in Israel
for approximately $6,250,000. The Company will initially locate its production
activities for FIBRIMAGEJ 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 in the first half of 2001. The Company
expects it will cost approximately $40,000,000 to complete the production
facility (excluding the cost of purchasing the facility), of which approximately
$13,000,000 had been expended through June 30, 2000. The Company had commitments
of $20,156,000 outstanding at June 30, 2000 related to completion of this
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 9% in 1998
and 1% in 1999, while the Shekel was devalued by
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approximately 18% and less than 1%, respectively, in these periods. In the six
months ended June 30, 2000 the consumer price index increased at the rate of
approximately 0.4% while the Shekel's value in relation to the U.S. dollar
increased by approximately 1.7%. 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 in 1998, but an increase in these costs
in U.S. dollar terms in 1999 and in the first half of 2000. 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.
In June 2000 Bio-Technology General (Israel) Ltd., the Company's
wholly-owned subsidiary ("BTG-Israel"), entered into a $20,000,000 revolving
credit facility with Bank Hapoalim B.M. to finance a portion of the cost of
completing its new production facility. Short-term borrowing under the facility
are due 12 months from the date of borrowing and long-term borrowings are due
five years from the date of borrowing. Loans under the facility bear interest at
the rate of LIBOR plus 0.5% in the case of short-term borrowings and LIBOR plus
1% in the case of long-term borrowings. Amounts repaid under the facility can be
reborrowed. The credit facility is secured by the assets of BTG-Israel and has
been guaranteed by the Company. At June 30, 2000 the Company had no borrowings
outstanding under the facility.
The Company believes that its remaining cash resources as of June 30,
2000, 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.
NEW ACCOUNTING STANDARDS
Historically, the Company has immediately recognized as contract
fees all nonrefundable fees received in connection with license and
distribution agreements. In December 1999, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition
in Financial Statements" ("SAB 101"), which provides guidance related to
revenue recognition issues. The effective date for SAB 101, which was
originally scheduled for the first quarter of 2000 and then postponed to the
second quarter of 2000, has recently been postponed to the fourth quarter of
2000. If SAB 101 becomes effective as currently proposed, the Company expects
that it will be required to defer non-refundable license fees recorded in
prior years and recognize the related revenue over future periods. As a
result, the Company expects to report a change in accounting policy with
respect to revenue recognition in connection with the implementation of SAB
101 during the fourth quarter of 2000. The change in accounting policy will
be reflected as of January 1, 2000 to give effect to the cumulative impact
from all prior periods. Further, the quarter of the year 2000 will be
restated to give effect to the new accounting policy's impact on the current
year. The Company is currently evaluating what impact the adoption of SAB 101
will have on its financial condition and results of operations, and there can
be no assurance that such impact will not be material.
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PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
BTG is currently in a dispute with Serono Laboratories, Inc. ("Serono")
relating to a 1998 co-promotion agreement with respect to Serono's
recombinant human growth hormone product, Saizen7. Serono is contesting
BTG's termination of that agreement in 1999 and asserting that a
non-compete provision, which BTG maintains will expire in mid-2000 if
it is applicable at all, should continue until April 30, 2002. In March
2000, BTG filed a lawsuit in New Jersey to confirm BTG's position on
these issues. Serono has commenced an action against BTG in
Massachusetts to enforce the agreement. The New Jersey court denied
Serono's motion to dismiss and enjoined Serono from pursuing its action
in Massachusetts. The New Jersey court also denied BTG's motion for
summary judgment.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
<TABLE>
<S> <C>
10.1 Intention letter for granting credit, dated March 22, 2000, between Bank
Hapoalim B.M. and Bio-Technology General (Israel) Ltd.
10.2 Unlimited guaranty of Bio-Technology General Corp. in favor of Bank
Hapoalim B.M.
27 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K:
None
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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
---------------------------------------
Vice President-Finance and
Chief Financial Officer,
Principal Financial and Accounting
Officer
Dated: August 10, 2000
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