<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10392
-------------------------------------------------------
U.S. Bioscience, Inc.
- ------------------------------------------------------------------------------
(Exact name of Registrant as specified on its charter)
Delaware 23-2460100
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Tower Bridge, One Hundred Front St. West Conshohocken PA 19428
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(610) 832-0570
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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
-- --
As of November 12, 1997, there were 24,207,700 shares of common stock
outstanding.
-1-
<PAGE>
U.S. BIOSCIENCE, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I-Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Changes in Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Part II-Other Information
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
-2-
<PAGE>
U.S. BIOSCIENCE, INC.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,102,100 $ 13,054,800
Investments 32,490,000 23,621,800
Accounts receivable, net 3,285,800 1,926,200
Interest receivable 414,000 220,700
Inventories 2,621,700 2,592,000
Other 1,092,200 1,620,400
-------------- --------------
Total current assets 62,005,800 43,035,900
Property, plant and equipment at cost, less accumulated depreciation 5,393,200 6,075,200
-------------- --------------
Total assets $ 67,399,000 $ 49,111,100
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation and related payroll taxes payable $ 1,623,700 $ 1,717,700
Accrued clinical grants payable 2,473,100 1,611,600
Accrued product manufacturing costs payable 426,600 747,300
Accrued marketing costs payable 861,200 448,500
Accrued professional fees payable 804,600 658,000
Line of credit 579,600 664,600
Current maturities of long-term debt 740,400 732,200
Accounts payable and other accrued liabilities 5,050,200 2,329,700
-------------- --------------
Total current liabilities 12,559,400 8,909,600
Long-term liabilities:
Long-term debt, net of current maturities 1,325,300 1,845,400
Other long-term liabilities 1,770,000 1,461,800
-------------- --------------
Total long-term liabilities 3,095,300 3,307,200
-------------- --------------
Total liabilities 15,654,700 12,216,800
Stockholders' equity:
Preferred stock, $.005 par value-5,000,000 shares authorized;
none issued _ _
Common stock, $.01 par value-50,000,000 shares authorized; 24,194,700
shares issued and outstanding at September 30, 1997, and 22,879,900 shares
issued and outstanding at December 31, 1996 241,900 228,800
Additional paid-in capital 169,840,600 151,244,400
Deficit accumulated during the development stage (117,864,000) (114,617,200)
Foreign currency translation adjustment (489,000) 48,200
Unrealized gain (loss) on investments 14,800 (9,900)
-------------- --------------
Total stockholders' equity 51,744,300 36,894,300
-------------- --------------
Total liabilities and stockholders' equity $ 67,399,000 $ 49,111,100
============= =============
</TABLE>
See accompanying notes.
-3-
<PAGE>
U.S. BIOSCIENCE, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED PERIOD MAY 7, 1987
SEPTEMBER 30 SEPTEMBER 30 (INCEPTION)
------------------------ ------------------------ THROUGH
1997 1996 1997 1996 SEPTEMBER 30, 1997
----------- ----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Net sales $ 3,476,700 $ 1,785,100 $ 9,621,200 $ 8,430,300 $ 45,559,600
Net investment income 808,500 538,600 2,049,600 1,801,900 29,434,900
Licensing, royalty and other income 226,700 4,331,500 11,571,300 5,094,100 44,654,100
----------- ----------- ----------- ----------- -------------
4,511,900 6,655,200 23,242,100 15,326,300 119,648,600
Expenses:
Cost of sales 1,207,300 563,000 3,109,100 2,259,000 12,591,200
Selling, general and administrative costs 3,328,900 2,015,800 11,156,400 8,968,000 101,081,200
Research and development costs 3,741,000 3,569,200 12,092,100 9,387,100 111,638,500
Provision for litigation - - - - 10,165,000
Interest expense 40,700 61,300 131,300 490,700 2,036,700
----------- ----------- ----------- ----------- -------------
8,317,900 6,209,300 26,488,900 21,104,800 237,512,600
----------- ----------- ----------- ----------- -------------
Net income / (loss) $(3,806,000) $ 445,900 $(3,246,800) $(5,778,500) $(117,864,000)
=========== =========== =========== =========== =============
Net income / (loss) per common outstanding share $ (0.16) $ 0.02 $ (0.14) $ (0.26)
=========== =========== =========== ===========
Weighted average number of common shares outstanding 24,157,800 22,781,900 23,759,600 22,251,400
=========== =========== =========== ===========
</TABLE>
See accompanying notes.
-4-
<PAGE>
U.S. BIOSCIENCE, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, PERIOD MAY 7, 1987
------------------------------- (INCEPTION)
THROUGH
1997 1996 SEPTEMBER 30, 1997
------------ ------------- ------------------
<S> <C> <C> <C>
Change in Cash and Cash Equivalents
Cash flows provided by (used in) operating activities:
Net loss $ (3,246,800) $ (5,778,500) $ (117,864,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 878,500 854,000 5,931,500
Compensation element of stock option grants - - 5,303,400
Loss (gain) on investments 24,600 (4,600) 172,700
Amortization of debenture interest - 154,300 198,700
Change in accounts receivable (1,359,600) 299,700 (3,285,600)
Change in interest receivable (193,300) (72,800) (414,000)
Change in inventories (140,900) (844,400) (2,799,100)
Change in other current assets 503,600 824,000 (1,069,000)
Change in current liabilities 405,600 (5,406,300) 7,703,500
Provision in litigation - - 10,000,000
Change in other long-term liabilities 308,200 253,300 1,769,900
-------------- ------------- ----------------
Total adjustments 426,700 (3,942,800) 23,512,000
-------------- ------------- ----------------
Net cash provided by (used in) operating activities (2,820,100) (9,721,300) (94,352,000)
Cash flows provided by (used in) investing activities:
Proceeds from investments matured and sold 73,807,500 36,314,500 3,231,424,100
Purchase of investments (82,675,700) (33,337,200) (3,264,067,000)
Purchase of property, plant and equipment (823,200) (1,002,800) (11,714,600)
-------------- ------------- ----------------
Net cash provided by (used in) investing activities (9,691,400) 1,974,500 (44,357,500)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock and private placement of securities 21,441,100 191,900 149,937,300
Proceeds from exercise of stock options 704,900 826,900 8,179,900
Proceeds from loan - - 3,219,100
Proceeds from line of credit - - 768,100
Repayment of long-term debt (434,300) (518,700) (1,338,200)
-------------- ------------- ----------------
Net cash provided by (used in) financing activities 21,711,700 500,100 160,766,200
Effect of exchange rate changes on cash (152,900) (27,800) 45,400
-------------- ------------- ----------------
Net increase (decrease) in cash and cash equivalents 9,047,300 (7,274,500) 22,102,100
Cash and cash equivalents-beginning of period 13,054,800 41,618,800 -
-------------- ------------- ----------------
Cash and cash equivalents-end of period $ 22,102,100 $ 34,344,300 $ 22,102,100
============== ============ ================
Supplemental cash flow disclosure:
Interest paid to affiliates - - $ 1,005,800
Interest paid 122,500 429,500 $ 1,000,900
Subordinate debentures and accrued interest converted to common stock - $ 16,841,700 $ 16,841,700
</TABLE>
See accompanying notes.
-5-
<PAGE>
U.S. BIOSCIENCE, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD MAY 7, 1987 (INCEPTION) THROUGH SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK CLASS B STOCK
-------------------- ----------------- TOTAL
NUMBER NUMBER ADDITIONAL ACCUM- STOCK-
OF OF PAID-IN ULATED OTHER HOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY EQUITY
---------- -------- -------- ------- ------------ ------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of shares for initial cash
contribution of capital ($.01 per
share of common stock and $.005
per share of Class B Stock) 4,500,000 $ 45,000 500,000 $ 5,000 $ 1,000,000 $ - $ - $ 1,050,000
Net loss for the period May 7,
1987 (Inception) through
December 31, 1987 - - - - - (1,030,500) - (1,030,500)
---------- -------- -------- ------- ------------ ------------- --------- ------------
Balance at December 31, 1987 4,500,000 45,000 500,000 5,000 1,000,000 (1,030,500) - 19,500
Net loss for the year ended
December 31, 1988 - - - - - (1,556,800) - (1,556,800)
---------- -------- -------- ------- ------------ ------------- --------- ------------
Balance at December 31, 1988 4,500,000 45,000 500,000 5,000 1,000,000 (2,587,300) - (1,537,300)
Proceeds from exercise of stock
options 1,300 - - - 400 - - 400
Compensation related to stock
options - - - - 305,900 - - 305,900
Issuance of shares ($12.00 per
share, less costs) 1,250,000 12,500 - - 14,061,400 - - 14,073,900
Conversion of class B stock to
common stock 500,000 5,000 (500,000) (5,000) - - - -
Net loss for the year ended
December 31, 1989 - - - - - (5,743,300) - (5,743,300)
---------- -------- -------- ------- ------------ ------------- --------- ------------
Balance at December 31, 1989 6,251,300 62,500 - - 15,367,700 (8,330,600) - 7,099,800
Proceeds from exercise of stock
options 142,900 1,400 - - 143,500 - - 144,900
Compensation related to stock
options - - - - 269,000 - - 269,000
Issuance of shares ($18.00 per
share, less costs) 2,012,500 20,200 - - 33,009,700 - - 33,029,900
Net loss for the year ended
December 31, 1990 - - - - - (4,924,900) - (4,924,900)
---------- -------- -------- ------- ------------ ------------- --------- ------------
Balance at December 31, 1990 8,406,700 84,100 - - 48,789,900 (13,255,500) - 35,818,500
Proceeds from exercise of stock
options 250,300 2,500 - - 3,349,600 - - 3,352,100
Compensation related to stock
options - - - - 1,038,900 - - 1,038,900
Issuance of shares ($57.00 per
share, less costs) 1,150,000 11,500 - - 61,444,300 - - 61,455,800
Issuance of shares for a 2 for 1
stock dividend 9,807,000 98,000 - - (98,000) - - -
Net loss for the year ended
December 31, 1991 - - - - - (6,540,100) - (6,540,100)
---------- -------- -------- ------- ------------ ------------- --------- ------------
Balance at December 31, 1991 19,614,000 196,100 - - 114,524,700 (19,795,600) - 94,925,200
Proceeds from exercise of stock
options 132,200 1,400 - - 1,336,400 - - 1,337,800
Compensation related to stock
options - - - - 1,452,400 - - 1,452,400
Net loss for the year ended
December 31, 1992 - - - - - (20,225,800) - (20,225,800)
---------- -------- -------- ------- ------------ ------------- --------- -----------
Balance at December 31, 1992 19,746,200 197,500 - - 117,313,500 (40,021,400) - 77,489,600
Proceeds from exercise of stock
options 53,300 500 - - 614,300 - - 614,800
Compensation related to stock
options - - - - 906,900 - - 906,900
Net loss for the year ended
December 31, 1993 - - - - - (40,629,600) - (40,629,600)
Foreign currency translation
adjustment - - - - - - (291,800) (291,800)
---------- -------- -------- ------- ------------ ------------- --------- ------------
Balance at December 31, 1993 19,799,500 198,000 - - 118,834,700 (80,651,000) (291,800) 38,089,900
Proceeds from exercise of stock
options 37,600 400 - - 404,900 - - 405,300
Class Action Settlement 548,200 5,500 - - 7,753,200 - 7,758,700
Compensation related to stock
options - - - - 1,330,300 - - 1,330,300
Net loss for the year ended
December 31, 1994 - - - - - (24,041,000) - (24,041,000)
Foreign currency translation
adjustment - - - - - - 395,700 395,700
---------- -------- -------- ------- ------------ ------------- --------- ------------
Balance at December 31, 1994 20,385,300 203,900 - - 128,323,100 (104,692,000) 103,900 23,938,900
Proceeds from exercise of stock
options 101,400 1,000 - - 359,900 - - 360,900
Class Action Settlement - - - - 2,241,200 - - 2,241,200
Proceeds from private placement
of securities 560,100 5,600 - - 2,233,500 - - 2,239,100
Net loss for the year ended
December 31, 1995 - - - - - (237,800) - (237,800)
Foreign currency translation
adjustment - - - - - - 245,600 245,600
---------- -------- -------- ------- ------------ ------------- --------- ------------
Balance at December 31, 1995 21,046,800 210,500 - - 133,157,700 (104,929,800) 349,500 28,787,900
Proceeds from exercise of stock
options 255,500 2,500 - - 1,256,300 - - 1,258,800
Conversion of warrants 200 - - - 4,500 - - 4,500
Conversion of debentures 1,577,400 15,800 - - 16,825,900 - - 16,841,700
Net loss for the year ended
December 31, 1996 - - - - - (9,687,400) - (9,687,400)
Foreign currency translation
adjustment - - - - - - (301,300) (301,300)
Unrealized gain/(loss) on
investments - - - - - - (9,900) (9,900)
---------- -------- -------- ------- ------------ ------------- --------- ------------
Balance at December 31, 1996 22,879,900 228,800 - - 151,244,400 (114,617,200) 38,300 36,894,300
Proceeds from exercise of stock
options 135,900 1,300 - - 703,700 - - 705,000
Issuance of shares ($18.256 per
share, less costs) 1,178,900 11,800 - - 17,892,000 - - 17,903,800
Conversion of warrants - - - - 500 - - 500
Net loss for the nine months
ended September 30, 1997 - - - - - (3,246,800) - (3,246,800)
Foreign currency translation
adjustment - - - - - - (537,200) (537,200)
Unrealized gain/(loss) on
investments - - - - - - 24,700 24,700
---------- -------- -------- ------- ------------ ------------- --------- ------------
Balance at September 30, 1997
(Unaudited) 24,194,700 $241,900 - $ - $169,840,600 $(117,864,000) $(474,200) $ 51,744,300
========== ======== ======== ======= ============ ============= ========= ============
</TABLE>
See accompanying notes.
-6-
<PAGE>
U.S. BIOSCIENCE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
The company is a pharmaceutical company specializing in the development and
commercialization of products for patients with cancer and allied diseases. For
accounting purposes, the company is considered a "development stage enterprise."
Through September 30, 1997, the company's revenues have been derived principally
from product sales of Hexalen(R), Neutrexin(R), and Ethyol(R), licensing fees
for rights to develop and market certain products principally in the United
States, and investment income. Expenses incurred have been primarily for the
development of its drug and related therapies, marketing and sales activities,
and corporate organizational and administrative activities.
At the company's annual stockholders meeting on April 22, 1996, the
company's stockholders approved a 1 for 2 reverse stock split effected April 23,
1996. Accordingly all references to the number of shares and per share amounts
included in the financial statements and related notes thereto, reflect the 1
for 2 reverse stock split.
2. SIGNIFICANT ACCOUNTING POLICIES
Unaudited Information - The financial information for the three and nine
month periods ended September 30, 1997 and 1996, and the period from May 7, 1987
(inception) through September 30, 1997 included herein is unaudited. The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles applicable to interim periods.
Such information includes all adjustments, consisting of adjustments of a normal
and recurring nature, which, in the opinion of the company, are necessary for a
fair presentation of the company's consolidated financial position and the
results of its operations and cash flows.
Principles of Consolidation - The consolidated financial statements include
the accounts of U.S. Bioscience, Inc. and its wholly owned subsidiaries, USB
Pharma B.V., and USB Pharma Ltd. All significant intercompany accounts and
transactions are eliminated in consolidation.
Pervasiveness of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Inventories - Inventories are stated at the lower of cost (first in, first
out) or fair value. Inventories consist of:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials $1,041,700 $ 850,500
Work-in-process 1,331,100 1,121,500
Finished goods 248,900 620,000
---------- ----------
Total $2,621,700 $2,592,000
========== ==========
</TABLE>
-7-
<PAGE>
Property, Plant and Equipment - Buildings, furniture, equipment, and
leasehold improvements are stated at cost less accumulated depreciation and
amortization. Buildings, furniture and equipment are depreciated by the
straight-line method over their useful lives. Leasehold improvements are
depreciated by the straight-line method over the shorter of their useful lives
or the life of the lease. All assets are depreciated under accelerated methods
for federal income tax purposes. Property, plant and equipment consists of:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Land, buildings, and leasehold improvements $1,874,300 $2,071,900
Equipment, furniture and fixtures 9,290,500 9,079,700
Accumulated depreciation (5,771,600) (5,076,400)
-------------- ------------
Property, plant and equipment, net $5,383,200 $6,075,200
============== ============
</TABLE>
Long-Term Debt - Long-term debt consists of:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
<S> <C> <C>
MELF Equipment Loan $ 198,900 $ 252,800
Mortgage Loan 493,500 589,400
Term Loan 1,250,000 1,700,000
Capital Lease Obligations 123,400 35,400
-------------- ------------
2,065,700 2,577,600
Less Current Portion 740,400 732,200
-------------- ------------
Long-Term Debt $1,325,300 $1,845,400
============== ============
</TABLE>
Stockholders' Equity - On February 4, 1997, the company entered into a
Stock Purchase Agreement with ALZA Corporation ("ALZA"), the company's
co-promotion partner in the United States, whereby ALZA agreed to purchase
1,178,882 shares of Common Stock (the "Shares") from the company in a private
placement at a purchase price of $18.256 per share. The company is investing a
portion of the proceeds in programs supporting Ethyol, the company's
cytoprotective agent, which is distributed in the United States by ALZA under a
distribution and co-promotion agreement. In connection with this transaction,
ALZA represented to the company, among other things, that the Shares were being
acquired for ALZA's own account and not with a view toward sale or distribution,
and agreed not to make any disposition of the Shares prior to March 24, 1998.
The purchase and sale of the Shares were consummated in accordance with the
Stock Purchase Agreement on March 24, 1997 for an aggregate purchase price of
approximately $21.5 million cash to the company. No underwriters were involved
in the sale and no underwriting discounts or commissions were paid.
The foregoing information should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Financial Statements and Notes to Financial Statements
included in the company's Annual Report on Form 10-K for the year ended December
31, 1996. Operating results for the three and nine month periods ended September
30, 1997 are not necessarily indicative of the results that may be obtained in
any other interim period or the entire year.
-8-
<PAGE>
U.S. BIOSCIENCE, INC.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
This report on Form 10-Q contains forward-looking statements concerning
the business and financial conditions of the company, which are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those anticipated in any forward-looking statements. Factors
that could cause such differences include, but are not limited to, the success
of the company and its collaborative partners in marketing, manufacturing
and selling the company's products, the availability of adequate funds for
the company's operations, the success of the company in obtaining timely
regulatory approvals to market its potential products in the United States
and other major markets, the success of the company in obtaining rights
to new compounds for commercial development, policies relating to product
pricing and reimbursement levels in the markets where the company's products
are or may be commercialized, technological change and competition, the
incidence of diseases for which the company's products are indicated, the
product liability risks associated with being the manufacturer or seller
of pharmaceutical products, and the company's reliance on its key personnel
and collaborative partners.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements on pages 3 to 8. At the company's annual stockholders meeting
on April 22, 1996, the company's stockholders approved a 1 for 2 reverse
stock split effected April 23, 1996. Accordingly all references to the number
of shares and per share amounts included in this quarterly report reflect
the 1 for 2 reverse stock split.
Operations for the nine months ended September 30, 1997, consisted
primarily of activities relating to the promotion of Ethyol(R) in the United
States with co-promotion partner ALZA Corporation ("ALZA"), the marketing
of Hexalen(R) and NeuTrexin(R) in the United States, continuing clinical
trials of Ethyol and NeuTrexin and product development of Ethyol, NeuTrexin,
AZQ and FddA, business development activities in the United States, Europe
and Japan and the award to the company by the National Cancer Institute
of a contract for shelf life studies of certain clinical drug formulations.
The company also completed during the first quarter of 1997 the sale
of 1,178,882 shares of the company's common stock to ALZA Corporation at
a purchase price of $18.256 per share for an aggregate investment of
$21,521,700. The purchase price was 120% of the average closing price of
U.S. Bioscience, Inc. shares as traded on the AMEX for the 10 days preceding
the date of the agreement. The company is investing a portion of the proceeds
in programs supporting Ethyol.
The company received United States Food and Drug Administration ("FDA")
approval of it's New Drug Application ("NDA") for Ethyol in December 1995
for use in ovarian cancer and an accelerated approval for use in non-small
cell lung cancer in March 1996 and the company began co-promotion of the
product with ALZA in April 1996. The company has also received regulatory
approval for Ethyol in several European countries, and received approval
to expand the labeled indication in July 1996. The company's marketing partner
for European territories is Scherico Ltd. ("Scherico"), an affiliate of
Schering-Plough Corporation. Ethyol was approved by Canadian regulatory
authorities in late April 1996, where Eli Lilly is the company's marketing
partner.
-9-
<PAGE>
The company believes that its expenditures for research and development,
marketing and administration, capital equipment and facilities will continue
to exceed revenues as a result of (i) further clinical trials aimed at label
expansion and regulatory approvals for Ethyol and NeuTrexin, (ii) the marketing
of Hexalen, NeuTrexin and Ethyol in the United States, (iii) expansion
of clinical and preclinical testing of drug compounds, including expanded
indications for existing drugs and (iv) further product development and
enhancement of manufacturing and analytical capabilities.
Results of Operations
Three months ended September 30, 1997
Product sales increased to $3,476,700 in the three months ended September
30, 1997 as compared to $1,785,100 in the prior year period, as increases
in Ethyol sales to the company's distribution partners, ALZA and
Schering-Plough reflect continued worldwide sales growth. Sales of Hexalen,
the company's ovarian cancer treatment, approximate prior year period levels,
while sales of NeuTrexin continue to be adversely affected, the company
believes, by the decline in the incidence and severity of Pneumocystis carinii
pneumonia ("PCP") due to improvements in treatment for human immunodeficiency
virus (HIV) and the prophylactic treatment of patients at risk for PCP.
Net investment income increased to $808,500 in the third quarter of
1997 as compared to $538,600 in the corresponding 1996 period due to higher
interest income resulting from the larger average portfolio balance resulting
from the funds raised in the ALZA stock purchase completed in the first
quarter of 1997.
Licensing, royalty and other income declined to $226,700 for the three
month period ended September 30, 1997 from $4,331,500 in the prior year
period due the accrual in the third quarter of 1996 of a $4.2 million payment
from Scherico pursuant to an amendment to the 1993 distribution agreement
between the company and Scherico for Ethyol in Europe.
Cost of sales, which consists of product manufacturing, testing,
distribution and royalty expenses, increased as a percentage of sales in
the three month period ended September 30, 1997, due principally to product
mix, notably increased sales of Ethyol to the company's distribution partners.
Selling, general and administrative costs for the third quarter of
1997 increased to $3,328,900 from $2,015,800 in the corresponding 1996 period.
The 1996 period includes a $892,000 reversal of accrued expenses made pursuant
to the amendment of the Scherico distribution agreement for Ethyol in Europe.
Excluding this item, expenses increased $421,100 primarily as a result of
higher marketing expenditures of $279,700 and higher personnel costs of
$196,900.
Research and development costs for the three month period ended September
30, 1997 increased to $3,741,000 from $3,569,200 in the third quarter of
1996. The increase is due to higher payments for clinical studies of $155,700
and higher personnel and travel costs of $183,300 reflecting the company's
phase III clinical trials of Ethyol for use in radiation therapy and for
broadened uses in chemotherapy and for clinical trials of NeuTrexin for
use in colorectal cancer. In addition, the company incurred higher expenditures
for preclinical and product development activities during the third quarter
of approximately $374,900 related primarily to Ethyol, AZQ and FddA. These
increases were partly offset by greater capitalization of manufacturing
related overhead expenditures.
-10-
<PAGE>
Interest expense decreased to $40,700 for the third quarter of 1997 from
$61,300 in the prior year first quarter due to lower outstanding debt balances,
reduced interest rates and favorable exchange movements affecting debt held by
the company's wholly-owned subsidiary in The Netherlands.
The net loss for the three months ended September 30, 1997 was $3,806,000
or $0.16 loss per common share as compared to net income of $445,900 or $0.02
per common share in the 1996 period. The 1996 period included the favorable
impact of the $4.2 million accrual and the $892,000 expense reversal made
pursuant to the amendment to the company's 1993 European distribution agreement
for Ethyol.
Nine months ended September 30, 1997
Product sales increased to $9,621,200 in the nine month period ended
September 30, 1997 as compared to $8,430,300 in the prior year period due to an
increase in Ethyol revenues from the company's major distribution partners, ALZA
and Scherico, wich were partly offset by lower sales of NeuTrexin and Hexalen in
the United States. Ethyol revenue growth is attributable to the increasing trade
sales levels in the United States and Europe and the effects of an amendment to
the agreement with Scherico undertaken in September 1996. The company believes
that sales of NeuTrexin continued to be adversely affected by a decline in the
incidence and severity of Pneumocystis carinii pneumonia ("PCP") due to
improvements in treatment for human immunodeficiency virus (HIV) and the
prophylactic treatment of patients at risk for PCP. Sales of Hexalen have been,
the company believes, negatively affected by competitive pressures.
Net investment income increased to $2,049,600 in the nine month period
ended September 30, 1997 as compared to $1,801,900 in the corresponding 1996
period due to higher interest income resulting from the larger average portfolio
balance resulting from the funds raised in the ALZA stock purchase completed in
the first quarter of 1997.
Licensing, royalty and other income increased to $11,571,300 for the nine
month period ended September 30, 1997 from $5,094,100 in the prior year period
due principally to the receipt of a $10 million milestone payment from ALZA for
meeting a clinical development milestone in connection the company's Phase III
randomized trial of Taxol, carboplatin and Ethyol, the company's cytoprotective
agent, in patients with advanced non-small cell lung cancer. The company also
received, in early 1997, a payment from Scherico relating to Ethyol product
development.
Cost of sales, which consists of product manufacturing, testing,
distribution and royalty expenses, increased as a percentage of sales in the
nine month period ended September 30, 1997, due principally to product mix,
notably, increased sales of Ethyol to the company's distribution partners.
Selling, general and administration costs for the first nine months of 1997
increased to $11,156,400 from $8,968,000 in the corresponding 1996 period. The
$2,188,400 increase is principally due to a $700,000 provision for the
reorganization of the company's European clinical research program and a
$974,400 increase in promotional spending. The remaining $514,000 increase is
principally the net result of increased personnel costs of $997,100 being partly
offset by a decrease in corporate and insurance expenses $314,100, a decrease in
legal and consulting costs of $80,200 and a decrease in travel related
expenditures of $62,800.
Research and development costs for the nine month period ended September
30, 1997 increased to $12,092,100 from $9,387,100 in the first nine months of
1996. The $2,705,000 increase is principally due to increased payments for
clinical studies and related supplies of $1,075,600, higher personnel related
costs of $764,700 and travel expenses of $232,000, reflecting primarily the
company's phase III clinical trials of Ethyol
-11-
<PAGE>
for use in radiation therapy and for broadened uses in chemotherapy and for
clinical trials of NeuTrexin for use in colorectal cancer. In addition the
company incurred higher expenditures for preclinical and product development
activities during the first half of 1997 of approximately $860,600 related
to several of its products, notably Ethyol, AZQ and FddA.
Interest expense decreased to $131,300 for the first nine months of
1997 from $490,700 in the prior year due principally to the conversion to
equity, in early 1996, of the company's entire $16.5 million convertible
debenture issue.
The net loss for the nine months ended September 30, 1997 was $3,246,800
or $0.14 loss per common share as compared to a loss of $5,778,500 or $0.26
loss per common share in the 1996 period. The 1997 period included a $10
million milestone payment from ALZA.
Liquidity and Capital Resources
Since its inception in 1987, the company has financed operations
principally through the sale of equity capital, issuance of unsecured and
secured debt, investment income, sales of its drug products, Hexalen, NeuTrexin
and Ethyol, and revenues received through distribution and sublicense
agreements. As of September 30, 1997, the company's cash and investments
totaled $54,592,100. The company's investment portfolio consists of securities
issued by the U.S. Government or its agencies and investment grade corporate
debt instruments.
During the first nine months of 1997, net cash used in operations amounted
to $2,820,100 principally reflecting the net effect of the factors discussed
above under "Results of Operations." Until such time as the company receives
significantly increased revenues, the company's cash position will continue
to be reduced due principally to expenditures in research, clinical
development, product development, marketing and selling and administrative
activities. Failure to achieve significant sales from the company's currently
approved products and to obtain additional regulatory approvals on products
currently in development will have a material adverse effect on the company.
The level of future product sales will depend on several factors, including
product acceptance, market penetration, competitive products, the incidence
and severity of diseases and side effects for which the company's products
are indicated, the performance of the company's licensees and distributors,
and the healthcare and reimbursement system existing in each market where
the company's products are or may become commercially available.
On March 24, 1997, the company completed the sale to ALZA of 1,178,882
shares of the company's Common Stock for gross consideration of $21,521,700.
The company believes its current cash and investments and anticipated revenues
from product sales and other sources, will be sufficient to cover the company's
anticipated level of cash requirements for a period in excess of three years.
However, the company's funding requirements may change due to numerous factors,
including but not limited to, sales of the company's products, clinical
development costs, manufacturing costs, reimbursement policies, regulatory
and intellectual property requirements, capital expenditures and other factors
as discussed herein. The company is hopeful that its products will, in the
near future, generate sufficient sales to provide the cash resources required
to fund its operations, although no assurance can be given that they will
do so. The company is also hopeful that it will in the future receive further
regulatory approvals and that such approvals will increase sales. However,
no assurance can be given that further regulatory approvals will be obtained
in a timely manner, if ever, or that the return on product sales will be
sufficient to cover operating expenses or that the company will have adequate
financial resources to commercialize its products.
-12-
<PAGE>
To meet its capital requirements, the company may from time to time
seek to access public or private financing markets by issuing debt, common
or preferred stock, warrants or other securities, either separately or in
combination. The company may also seek additional funding through corporate
collaborations or other financing vehicles, potentially including "off-balance
sheet" financing through partnerships or corporations. There can be no
assurance that such financings will be available at all or on terms acceptable
to the company. In addition, market reaction to any such financings may
adversely affect the price of the company's outstanding securities or debt.
The company's net capital expenditures were $823,200 for the nine month
period ended September 30, 1997 and total $11,714,600 since inception. In
April 1993, the company purchased a sterile products production facility
in The Netherlands. Validation work and pilot production on this new facility
were completed in 1995. The facility received regulatory approval for product
manufacture and distribution from the Dutch regulatory authority in June
1994 to manufacture the company's products for distribution in the European
Community, and the facility was approved by the FDA to manufacture NeuTrexin
for the U.S. market in May 1995 and to manufacture Ethyol for the U.S. market
in December 1996. The manufacturing facilities of the company and its third
party suppliers used to produce its products are required to continually
comply with all applicable FDA requirements and those of regulatory authorities
in other countries, including Good Manufacturing Practices, and are subject
to inspection by governmental agencies to determine compliance with those
requirements. There can be no assurance that the manufacturing facilities
for the company's products will comply with applicable requirements. A mortgage
loan of approximately $680,000 relating to the company's facility in The
Netherlands was obtained in May 1994. The purchase price for this facility
was $2,250,000 and approximately $3,582,000 in capital improvements have
been made since its purchase to make the facility operational and expand
its production capacity. Further capital expenditures, estimated at $300,000,
are planned during the remainder of 1997.
The company's future liquidity and capital requirements are dependent
upon several factors, including, but not limited to: its success in generating
significant revenues from sales; the performance of its sublicensees and
distributors under sublicense and distribution arrangements for sales of
its products; the time and cost required to manufacture and market its
products; the time and cost required for clinical development of products
to obtain regulatory approvals, including expanded labeling for its products
which are already commercially available; obtaining the rights to additional
commercially viable compounds; competitive technological developments;
additional government-imposed regulation and control; and changes in healthcare
systems which affect reimbursement, pricing or availability of drugs and
market acceptance of drugs.
The above factors may also affect realization of certain assets currently
held by the company, principally investments in plant, equipment and inventory.
In 1995, Scherico, an affiliate of Schering-Plough Corporation and
the company's European distributor for Ethyol, launched Ethyol in several
European markets where regulatory approvals had been received. Under the
terms of its original agreement with Scherico, the company was to share
in operating profits/losses generated from marketing and sales of Ethyol
in Germany, the United Kingdom, Spain, Italy and France for a period of
up to two years from November 23, 1994. The company paid its share of the
1995 operating losses ($4.2 million) in April 1996 and had accrued $892,000
during the first nine months of 1996 for its estimated share of operating
losses through the period. In September 1996, an amendment to this agreement
was executed pursuant to which, retroactive to January 1, 1996, Scherico
began to purchase Ethyol from the company at a price based on a percentage
of in-market net sales and the company no longer participates in operating
profits/losses previously shared by the parties. Scherico paid the company
a total of $6.2 million under the amendment in the fourth quarter of 1996.
-13-
<PAGE>
In April of 1996, ALZA and the company launched Ethyol in the United
States. ALZA has exclusive rights to market the product in the United States for
five years and is responsible for sales and marketing. The company's U.S. sales
force is co-promoting the product with ALZA during this period. After the
initial five-year period, ALZA has an option to extend its exclusive rights for
one year. At the end of ALZA's exclusive period, all U.S. marketing rights to
Ethyol will revert to the company, and ALZA will receive payments from the
company for ten years (nine if the option is exercised) based on in-market net
sales of the product. ALZA paid the company an up-front payment and initial
distribution fee totaling $20 million under the Ethyol agreement and an
additional clinical development milestone payment of $10 million in July 1997.
The agreement provides for $5 million in additional distribution fees to be paid
to the company during 1998 subject to the achievement of certain milestones
related to the company's clinical development of Ethyol.
As the company sells Ethyol to its partners, Scherico and ALZA, in
quantities which may or may not correspond to the product's resale to the
pharmaceutical trade, the company's sales may fluctuate from period to period
dependent upon the timing of its partners' delivery requirements and sales to
the pharmaceutical trade as well as the levels of inventory they stock and
maintain. Sales of Ethyol are also affected by the other factors relating to
product sales noted elsewhere in this section on liquidity and capital
resources.
The company has been unprofitable since its inception and expects to incur
additional operating losses until such time as substantial sales are realized
and further regulatory approvals are obtained, although the initial distribution
fees from ALZA did bring the company close to a break-even position for calendar
1995. In addition, the company reported net earnings in two recent periods: the
third quarter of 1996 as a result of non-recurring items relating to the
September 1996 amendment to its agreement with Scherico noted herein, and, the
second quarter and first half of 1997 due to the $10 million milestone payment
made by ALZA. As the company continues its commercialization, research and
development activities, losses are expected to continue and may fluctuate from
period to period. There can be no assurance that the company will achieve
significant revenues or profitable operations. For the period from May 7, 1987
(inception) through September 30, 1997, the company had an accumulated deficit
of $117,864,000.
-14-
<PAGE>
PART II - Other Information
Item 1. Legal Proceedings
On February 28, 1996, Ichthyol Gesellschaft Cordes, Hermanni
& Co. filed a complaint for refrain, information and damages with the Regional
Court of Hamburg against U.S. Bioscience, Inc. on the grounds of trademark
infringement in respect of the use of the trademark "Ethyol" in Germany.
On April 29, 1996, U.S. Bioscience filed a reply to plaintiff's complaint
stating U.S. Bioscience's position that the trademark "Ethyol" does not
infringe plaintiff's trademark rights in the trademark "Ichthyol" nor the
plaintiff's firm right in the slogan "Ichthyol." The suit was dismissed
on January 29, 1997, by the Regional Court of Hamburg and the plaintiff
has filed an appeal against the judgment rendered in favor of U.S. Bioscience,
Inc. Oral arguments for the appeal are expected to be scheduled in the first
half of 1998. It is not possible to evaluate how the case will be decided
on appeal.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
27 Financial Data Schedule
b. There were no reports on Form 8-K filed during the
quarter ended September 30, 1997.
-15-
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
U.S. BIOSCIENCE, INC.
Date: November 13, 1997 By: /s/ Robert I. Kriebel
-----------------------------
Robert I. Kriebel
Executive Vice President and
Chief Financial Officer
-16-
<PAGE>
U.S. BIOSCIENCE, INC.
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
-------------
Exhibit No. Page
- ----------- ----
27 Financial Data
-17-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS OF U.S.
BIOSCIENCE, INC. FOR THE PERIOD(S) INDICATED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 22,102,100
<SECURITIES> 32,490,000
<RECEIVABLES> 3,587,800
<ALLOWANCES> 302,000
<INVENTORY> 2,621,700
<CURRENT-ASSETS> 62,005,800
<PP&E> 11,164,800
<DEPRECIATION> 5,771,600
<TOTAL-ASSETS> 67,399,000
<CURRENT-LIABILITIES> 12,559,400
<BONDS> 3,095,300
0
0
<COMMON> 241,900
<OTHER-SE> 51,502,400
<TOTAL-LIABILITY-AND-EQUITY> 67,399,000
<SALES> 9,621,200
<TOTAL-REVENUES> 23,242,100
<CGS> 3,109,100
<TOTAL-COSTS> 26,357,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 131,300
<INCOME-PRETAX> (3,246,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,246,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,246,800)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
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