<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 March 31, 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 May 7, 1997, there were 24,104,488 shares of common stock outstanding.
Page 1 of 17 sequentially
numbered pages
-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 2. Changes in Securities 14
Item 4. Submission of Matters to a Vote of Securities Holders 14
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>
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26,715,000 $ 13,054,800
Investments 27,618,200 23,621,800
Accounts receivable, net 1,417,400 1,926,200
Interest receivable 416,500 220,700
Inventories 2,811,800 2,592,000
Other 1,618,800 1,620,400
--------------- --------------
TOTAL CURRENT ASSETS 60,597,700 43,035,900
Property, plant and equipment at cost, less accumulated depreciation 5,630,900 6,075,200
--------------- --------------
TOTAL ASSETS $ 66,228,600 $ 49,111,100
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation and related payroll taxes payable $ 974,900 $ 1,717,700
Accrued clinical grants payable 1,965,400 1,611,600
Accrued product manufacturing costs payable 696,300 747,300
Accrued marketing costs payable 564,500 448,500
Accrued professional fees payable 551,900 658,000
Line of credit 609,100 664,600
Current maturities of long-term debt 742,600 732,200
Accounts payable and other accrued liabilities 5,846,500 2,329,700
--------------- --------------
TOTAL CURRENT LIABILITIES 11,951,200 8,909,600
Long-term liabilities:
Long-term debt, net of current maturities 1,704,400 1,845,400
Other long-term liabilities 1,570,400 1,461,800
--------------- --------------
TOTAL LONG-TERM LIABILITIES 3,274,800 3,307,200
--------------- --------------
TOTAL LIABILITIES 15,226,000 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; 24,104,500
shares issued and outstanding at March 31, 1997, and 22,879,900 shares
issued and outstanding at December 31, 1996 241,000 228,800
Additional paid-in capital 169,364,200 151,244,400
Deficit accumulated during the development stage (118,277,700) (114,617,200)
Foreign currency translation adjustment (293,300) 48,200
Unrealized loss on investments (31,600) (9,900)
--------------- --------------
TOTAL STOCKHOLDERS' EQUITY 51,002,600 36,894,300
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 66,228,600 $ 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 PERIOD MAY 7, 1987
------------------
MARCH 31, (INCEPTION)
---------
THROUGH
1997 1996 MARCH 31, 1997
---- ---- --------------
<S> <C> <C> <C>
REVENUES:
Net sales $ 2,638,400 $ 2,962,600 $ 38,576,800
Net investment income 503,800 683,900 27,889,100
Licensing, royalty and other income 1,067,900 180,000 34,150,700
-------------- ----------- -------------
4,210,100 3,826,500 100,616,600
EXPENSES:
Cost of sales 827,900 873,500 10,310,000
Selling, general and administrative costs 3,354,800 3,291,800 93,279,600
Research and development costs 3,641,300 2,764,600 103,187,700
Provision for litigation - - 10,165,000
Interest expense 46,600 329,800 1,952,000
-------------- ----------- ------------
7,870,600 7,259,700 218,894,300
-------------- ----------- ------------
NET LOSS $ (3,660,500) $ (3,433,200) $ (118,277,700)
============== =========== ============
NET LOSS PER COMMON SHARE $ (0.16) $ (0.16)
============== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 23,267,700 21,413,000
============== ===========
</TABLE>
See accompanying notes.
-4-
<PAGE>
U.S. BIOSCIENCE, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, PERIOD MAY 7, 1987
---------------------------
(INCEPTION)
THROUGH
1997 1996 MARCH 31, 1997
--------------- -------------- -----------------
<S> <C> <C> <C>
Change in Cash and Cash Equivalents
Cash flows from operating activities:
Net loss $ (3,660,500) $ (3,433,200) $ (118,277,700)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 298,700 274,700 5,351,700
Compensation element of stock option grants - - 5,303,400
Loss (gain) on investments 30,400 (1,100) 178,500
Amortization of debenture interest - 270,000 198,700
Change in accounts receivable 508,800 (799,500) (1,417,200)
Change in interest receivable (195,800) (57,000) (416,500)
Change in Inventories (272,500) (142,800) (2,930,700)
Change in other current assets (13,900) 5,573,500 (1,586,500)
Change in current liabilities (309,300) (92,800) 6,988,600
Provision for litigation - - 10,000,000
Change in other long-term liabilities 108,600 126,100 1,570,300
--------------- --------------- -----------------
Total adjustments 155,000 5,151,100 23,240,300
--------------- --------------- -----------------
Net cash provided by (used in) operating activities (3,505,500) 1,717,900 (95,037,400)
Cash flows from investing activities:
Proceeds from investments matured and sold 40,681,800 9,874,900 3,198,298,400
Purchase of investments (44,730,300) (8,899,100) (3,226,121,600)
Purchase of property, plant and equipment (267,400) (158,800) (11,158,800)
--------------- --------------- -----------------
Net cash provided by (used in) investing activities (4,315,900) 817,000 (38,982,000)
Cash flows from financing activities:
Proceeds from issuance of common stock and private
placement of securities 21,440,800 - 149,937,000
Proceeds from exercise of stock options 227,800 334,600 7,702,800
Proceeds from loan - - 3,219,100
Proceeds from line of credit - - 768,100
Repayment of long-term debt (79,400) (179,900) (983,300)
--------------- --------------- -----------------
Net cash provided by (used in) financing activities 21,589,200 154,700 160,643,700
Effect of exchange rate changes on cash (107,600) (538,400) 90,700
--------------- --------------- -----------------
Net increase in cash and cash equivalents 13,660,200 2,151,200 26,715,000
Cash and cash equivalents-beginning of period 13,054,800 41,618,800 0
--------------- --------------- -----------------
Cash and cash equivalents-end of period $ 26,715,000 $ 43,770,000 $ 26,715,000
=============== =============== =================
Supplemental cash flow disclosure:
Interest paid to affiliate - - $ 1,005,800
Interest paid $ 47,600 $ 331,700 $ 926,000
Subordinated debentures and accrued interest
converted to common stock - $ 7,495,000 $ 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 MARCH 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK CLASS B STOCK ADDITIONAL
------------ -------------
NUMBER OF NUMBER OF PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ----------- ----------- ---------- ------------
<S> <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 1,000,000 $ 5,000 $ 1,000,000
Net loss for the period May 7, 1987 (inception)
through December 31, 1987 - - - - -
---------- ----------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1987 4,500,000 45,000 1,000,000 5,000 1,000,000
Net loss for the year ended December 31, 1988 - - - - -
---------- ----------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1988 4,500,000 45,000 1,000,000 5,000 1,000,000
Proceeds from exercise of stock options 1,300 - - - 400
Compensation related to stock options - - - - 305,900
Issuance of shares ($12.00 per share, less costs) 1,250,000 12,500 - - 14,061,400
Conversion of class B stock to common stock 500,000 5,000 (1,000,000) (5,000) -
Net loss for the year ended December 31, 1989 - - - - -
---------- ----------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1989 6,251,300 62,500 - - 15,367,700
Proceeds from exercise of stock options 142,900 1,400 - - 143,500
Compensation related to stock options - - - - 269,000
Issuance of shares ($18.00 per share, less costs) 2,012,500 20,200 - - 33,009,700
Net loss for the year ended December 31, 1990 - - - - -
---------- ----------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1990 8,406,700 84,100 - - 48,789,900
Proceeds from exercise of stock options 250,300 2,500 - - 3,349,600
Compensation related to stock options - - - - 1,038,900
Issuance of shares ($57.00 per share, less costs) 1,150,000 11,500 - - 61,444,300
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 - - - - -
---------- ----------- ----------- ---------- ------------
BALANCE AT DECEMBER 1991 19,614,000 196,100 - - 114,524,700
Proceeds from exercise of stock options 132,200 1,400 - - 1,336,400
Compensation related to stock options - - - - 1,452,400
Net loss for the year ended December 31, 1992 - - - - -
---------- ----------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1992 19,746,200 197,500 - - 117,313,500
Proceeds from exercise of stock options 53,300 500 - - 614,300
Compensation related to stock options - - - - 906,900
Net loss for the year ended December 31, 1993 - - - - -
Foreign currency translation adjustment - - - - -
---------- ----------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1993 19,799,500 198,000 - - 118,834,700
Proceeds from exercise of stock options 37,600 400 - - 404,900
Class action settlement 548,200 5,500 - - 7,753,200
Compensation related to stock options - - - - 1,330,300
Net loss for the year ended December 31, 1994 - - - - -
Foreign currency translation adjustment - - - - -
---------- ----------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1994 20,385,300 203,900 - - 128,323,100
Proceeds from exercise of stock options 101,400 1,000 - - 359,900
Class action settlement - - - - 2,241,200
Proceeds from private placement of securities 560,100 5,600 - - 2,233,500
Net loss for the year ended December 31, 1995 - - - - -
Foreign currency translation adjustment - - - - -
---------- ----------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1995 21,046,800 210,500 - - 133,157,700
Proceeds from exercise of stock options 255,500 2,500 - - 1,256,300
Conversion of warrants 200 - - - 4,500
Conversion of debentures 1,577,400 15,800 - - 16,825,900
Net loss the year ended December 31, 1996 - - - - -
Foreign currency translation adjustment - - - - -
Unrealized loss on investments - - - - -
---------- ----------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 1996 22,879,900 $ 228,800 - $ - $151,244,400
Proceeds from exercise of stock options 45,700 400 - - 227,400
Conversion of warrants - - - - 400
Issuance of shares ($18.256 per share, less costs) 1,178,900 11,800 - - 17,892,000
Net loss for the three months ended March 31, 1997 - - - - -
Foreign currency translation adjustment - - - - -
Unrealized loss on investments - - - - -
---------- ----------- ----------- ---------- ------------
BALANCE AT MARCH 31, 1997 24,104,500 $ 241,000 - $ - $169,364,200
========== =========== =========== ========== ============
<CAPTION>
TOTAL STOCK-
ACCUMULATED OTHER HOLDERS'
DEFICIT EQUITY EQUITY
----------- ---------- ------------
<S> <C> <C> <C>
Issuance of shares for initial cash contribution
of capital ($.01 per share of common stock
and $.005 per share of Class B stock) $ - $ - $ 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 (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 (2,587,300) - (1,537,300)
Proceeds from exercise of stock options - - 400
Compensation related to stock options - - 305,900
Issuance of shares ($12.00 per share, less costs) - - 14,073,900
Conversion of class B stock to common stock - - -
Net loss for the year ended December 31, 1989 (5,743,300) - (5,743,300)
----------- ---------- ------------
BALANCE AT DECEMBER 31, 1989 (8,330,600) - 7,099,600
Proceeds from exercise of stock options - - 144,900
Compensation related to stock options - - 269,000
Issuance of shares ($18.00 per share, less costs) - - 33,029,900
Net loss for the year ended December 31, 1990 (4,924,900) - (4,924,900)
----------- ---------- ------------
BALANCE AT DECEMBER 31, 1990 (13,255,500) - 35,618,500
Proceeds from exercise of stock options - - 3,352,100
Compensation related to stock options - - 1,038,900
Issuance of shares ($57.00 per share, less costs) - - 61,455,800
Issuance of shares for a 2 for 1 stock dividend - - -
Net loss for the year ended December 31, 1991 (6,540,100) - (6,540,100)
----------- ---------- ------------
BALANCE AT DECEMBER 1991 (19,795,600) - 94,925,200
Proceeds from exercise of stock options - - 1,337,800
Compensation related to stock options - - 1,452,400
Net loss for the year ended December 31, 1992 (20,225,800) - (20,225,800)
----------- ---------- ------------
BALANCE AT DECEMBER 31, 1992 (40,021,400) - 77,489,600
Proceeds from exercise of stock options - - 614,800
Compensation related to stock options - - 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 (80,651,000) (291,800) 38,089,900
Proceeds from exercise of stock options - - 405,300
Class action settlement - - 7,758,700
Compensation related to stock options - - 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 (104,692,000 103,900 23,938,900
Proceeds from exercise of stock options - - 360,900
Class action settlement - - 2,241,200
Proceeds from private placement of securities - - 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 (104,929,800) 349,500 28,787,900
Proceeds from exercise of stock options - - 1,258,800
Conversion of warrants - - 4,500
Conversion of debentures - - 16,841,700
Net loss the year ended December 31, 1996 (9,687,400) - (9,687,400)
Foreign currency translation adjustment - (301,300) (301,300)
Unrealized loss on investments - (9,900) (9,900)
----------- ---------- ------------
BALANCE AT DECEMBER 31, 1996 $(114,617,200) $ 38,300 $ 36,894,300
Proceeds from exercise of stock options - - 227,800
Conversion of warrants - - 400
Issuance of shares ($18.256 per share, less costs) - - 17,903,800
Net loss for the three months ended March 31, 1997 (3,660,500) - (3,660,500)
Foreign currency translation adjustment - (341,500) (341,500)
Unrealized loss on investments - (21,700) (21,700)
----------- ---------- ------------
BALANCE AT MARCH 31, 1997 $(118,277,700) $ (324,900) $ 51,002,600
=========== ========== ============
</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 March 31, 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 drugs 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 month
period ended March 31, 1997 and 1996, and the period from May 7, 1987
(inception) through March 31, 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>
March 31, December 31,
1997 1996
---------- -------------
<S> <C> <C>
Raw materials $ 995,200 $ 850,500
Work-in-process 1,341,500 1,121,500
Finished goods 475,100 620,000
---------- ----------
Total $2,811,800 $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>
March 31, December 31,
1997 1996
----------- --------------
<S> <C> <C>
Land, buildings, and leasehold improvements $1,934,100 $2,071,900
Equipment, furniture and fixtures 8,956,900 9,079,700
Accumulated depreciation (5,260,100) (5,076,400)
----------- ------------
Property, plant and equipment, net $5,630,900 $6,075,200
=========== ============
</TABLE>
LONG-TERM DEBT - Long-term debt consists of:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- --------------
<S> <C> <C>
MELF Equipment Loan $ 234,900 $ 252,800
Mortgage Loan 529,400 589,400
Term Loan 1,550,000 1,700,000
Capital Lease Obligations 132,700 35,400
---------- -----------
$2,447,000 $2,577,600
Less Current Portion 742,600 732,200
---------- -----------
Long-Term Debt $1,704,400 $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 will invest 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 was 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.
Additionally, all 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 month period ended March 31, 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 three months ended March 31, 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 will invest 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 lung cancer in
March, 1996 and the company began co-promotion of the product with co-promotion
partner ALZA in April 1996 concurrent with the commercial availability of Ethyol
in the U.S. market.
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, Scherico
Ltd. ("Scherico"), an affiliate of Schering-Plough Corporation, has launched
Ethyol in Germany, the United Kingdom, France, Spain, Austria, Portugal, Greece,
Finland, Switzerland and The Netherlands, and plans to begin sales in other
European countries when regulatory approvals and, if necessary,
-9-
<PAGE>
local pricing and reimbursement approvals, are received. Ethyol was approved by
Canadian regulatory authorities in late April 1996, where Eli Lilly has
marketing rights to the product, and launched Ethyol during the third quarter of
1996.
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 development and enhancement of
manufacturing and analytical capabilities.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
Product sales declined to $2,638,400 in the three months ended March 31,
1997 as compared to $2,962,600 in the prior year period, as increased sales of
Ethyol, the company's cytoprotective product, to the company's domestic and
international distribution partners were offset by declines in the sales of
Hexalen and NeuTrexin in the United States. The company believes that the
reduction in sales of these two products was due, in part, to the promotional
emphasis placed on Ethyol since its launch in the United States with
co-promotion partner ALZA in April 1996. In addition, the company believes that
competitive pressures continued to have a negative impact on sales Hexalen. The
company further 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.
Net investment income decreased to $503,800 in the first quarter of 1997 as
compared to $683,900 in the corresponding 1996 period due to lower interest
income resulting from the smaller average portfolio balance. Funds raised in the
ALZA stock purchase were received late in the first quarter and therefore did
not materially affect the first quarter average investable balance.
Licensing, royalty and other income increased to $1,067,900 for the three
month period ended March 31, 1997 from $180,000 in the prior year period due
principally to the receipt of a milestone payment from an affiliate of
Schering-Plough Corporation for additional regulatory approvals of Ethyol in
Europe and a payment relating to the development of a new crystalline dosage
form of Ethyol.
Cost of sales, which consists of product manufacturing, testing,
distribution and royalty expenses, decreased due to the decrease in sales. As a
percentage of sales, cost of sales in the three month period ended March 31,
1997, increased to 31% from 29% in the prior year period due principally to
product mix, notably the reduction in Hexalen sales.
Selling, general and administrative costs for the first quarter of 1997
increased marginally to $3,354,800 from $3,291,800 in the corresponding 1996
period. The $63,000 increase is principally due to higher personnel expenses of
$380,900, which were partly offset by reductions in marketing expenditures of
$218,900 and legal costs of $64,100.
Research and development costs for the three months ended March 31, 1997
increased to $3,641,300 from $2,764,600 in the first quarter of 1996.
The increase is principally due to increased payments for clinical
-10-
<PAGE>
studies of $500,200, higher personnel costs of $139,900 and travel expenses of
$58,700, all 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.
Interest expense decreased to $46,600 for the first quarter of 1997 from
$329,800 in the prior year first quarter due to the conversion to equity, in
early 1996, of the company's entire $16.5 million convertible debenture issue.
The net loss for the three months ended March 31, 1997 was $3,660,500 or
$0.16 loss per common share as compared to $3,433,200 or $0.16 loss per common
share in the 1996 period.
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 March 31, 1997, the company's cash and investments totaled
$54,333,200. 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 quarter of 1997, net cash used in operations amounted to
$3,505,500 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
generated 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,
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 meaningful cash resources, 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.
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
-11-
<PAGE>
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 $267,400 for the quarter ended
March 31, 1997 and total $11,158,800 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 $3,257,000
in capital improvements have been made since its purchase to make the facility
operational and expand its production capacity. Further capital expenditures,
estimated at $540,000, 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, 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 six months of 1996 for its estimated share of operating losses through
the period. In September 1996, the Scherico Amendment 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
Scherico Amendment in the fourth quarter of 1996.
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 will be responsible for sales and marketing. The company's U.S.
sales force will co-promote 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
-12-
<PAGE>
period, all U.S. marketing rights to Ethyol will revert to the company, and ALZA
will receive payments from the company for ten years based on in-market net
sales of the product. ALZA paid the company an up-front payment and initial
distribution fee totaling $20 million and the agreement provides for $15 million
in additional distribution fees to be paid to the company during the next few
years based on 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 distribution fees
from ALZA Corporation did bring the company close to a break-even position for
calendar 1995 and the company reported net earnings in the third quarter of
1996 as a result of non-recurring items relating to the Scherio Amendment noted
herein. 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 March 31, 1997, the company had an accumulated deficit of $118,277,700.
-13-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable
Item 2. Changes in Securities.
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 will invest 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 was 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 description is qualified by reference to the
company's Current Report on Form 8-K dated February 3, 1997, including the
exhibits thereto, as filed with the Securities and Exchange Commission on
February 10, 1997.
The company claims exemption from registration under Section 4(2)
of the Securities Act of 1933, as amended, based upon the facts described, or
incorporated by reference, above.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
On April 24, 1997 the company held its annual meeting of
stockholders. At the meeting, the stockholders voted on the election of the nine
members of the company's Board of Directors. The votes "FOR" and "WITHHELD" for
each candidate were as follows:
<TABLE>
<CAPTION>
Number of Votes Number of Votes
Name of Nominee FOR Nominee WITHHELD from Nominee
---------------------------------------------------------------------------
<S> <C> <C>
Robert L. Capizzi 19,874,058 465,785
Paul Calabresi 19,875,807 464,036
C. Boyd Clarke 19,878,616 461,227
Robert I. Kriebel 19,878,862 460,981
Douglas J. MacMaster 19,875,247 464,596
Allen Misher 19,877,140 462,703
Philip S. Schein 19,877,276 462,567
Ellen V. Sigal 19,872,250 462,593
Betsey Wright 19,859,836 480,007
</TABLE>
At the meeting the stockholders also voted on a proposed amendment to
the company's 1992 Stock Option Plan increasing the number of shares of Common
Stock for which options may be granted pursuant to
-14-
<PAGE>
the plan from 1,750,000 shares of Common Stock to 2,850,000 shares and
increasing the maximum number of options that any individual optionee may
receive in any one year from options for 150,000 shares to options for 300,000
shares. The votes "FOR", "AGAINST" and "ABSTAIN" as well as the "BROKER
NON-VOTES" were as follows:
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTAIN BROKER NON-VOTES
--------- ------------- ------- ----------------
<S> <C> <C> <C>
15,473,765 3,920,743 143,228 532,107
</TABLE>
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
10.20 U.S. Bioscience, Inc. Non-Executive Stock
Option Plan, as amended (incorporated by
reference to Exhibit 4.2 to the company's
Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on May
9, 1997)
10.32 U.S. Bioscience, Inc. 1992 Stock Option
Plan, as amended (incorporated by reference
to Exhibit 4.3 to the company's Registration
Statement on Form S-8 filed with the
Securities and Exchange Commission on May 9,
1997)
27 Financial Data Schedule
b. The company has filed the following report since the
beginning of the quarter ended March 31, 1997:
Date of Report Items Covered
-------------- -------------
February 3, 1997 5 and 7
-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: May 13, 1996 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
- ---------- ----
10.20 U.S. Bioscience, Inc. Non-Executive Stock Option Plan
(incorporated by reference to Exhibit 4.2 to the
company's Registration Statement on Form S-8 filed with
the Securities and Exchange Commission on May 9, 1997)
10.32 U.S. Bioscience, Inc. 1992 Stock Option Plan (incorporated
by reference to Exhibit 4.3 to the company's Registration
Statement on Form S-8 filed with the Securities and Exchange
Commission on May 9, 1997)
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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 26,715,000
<SECURITIES> 27,618,200
<RECEIVABLES> 1,719,100
<ALLOWANCES> 301,700
<INVENTORY> 2,811,800
<CURRENT-ASSETS> 60,597,700
<PP&E> 10,891,000
<DEPRECIATION> 5,260,100
<TOTAL-ASSETS> 66,228,800
<CURRENT-LIABILITIES> 11,951,200
<BONDS> 3,274,800
0
0
<COMMON> 241,000
<OTHER-SE> 50,761,600
<TOTAL-LIABILITY-AND-EQUITY> 66,228,600
<SALES> 2,638,400
<TOTAL-REVENUES> 4,210,100
<CGS> 827,900
<TOTAL-COSTS> 7,824,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,600
<INCOME-PRETAX> (3,660,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,660,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,660,500)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
