<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, 1999
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 8, 1999 there were 27,606,400 shares of common stock outstanding.
Page 1 of 19 sequentially
numbered pages
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<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 Stockholders' Equity 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Part II - Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
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<PAGE>
U.S. BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,846,500 $ 6,771,000
Investments 11,442,200 18,114,200
Accounts receivable, net of allowances of $727,000 in
both 1999 and 1998 4,157,600 1,729,600
Interest receivable 20,600 29,400
Inventories 3,439,500 2,873,200
Other 1,538,400 707,100
---------------- ---------------
Total current assets 29,444,800 30,224,500
Investments in long-term securities 31,579,700 17,063,700
Property, plant and equipment at cost, less accumulated depreciation 5,162,200 5,433,700
---------------- ---------------
Total assets $ 66,186,700 $ 52,721,900
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accrued compensation and related payroll taxes payable $ 1,839,000 $ 1,183,000
Accrued clinical grants payable 4,923,100 4,167,100
Accrued product manufacturing costs payable 797,700 795,400
Accrued marketing costs payable 459,600 390,300
Accrued professional fees payable 1,028,400 1,478,500
Line of credit 769,900 849,300
Current maturities of long-term debt 168,800 645,800
Accounts payable and other accrued liabilities 1,780,700 2,035,100
---------------- ---------------
Total current liabilities 11,767,200 11,544,500
Long-term liabilities:
Long-term debt, net of current maturities 400,000 522,600
Other long-term liabilities 1,888,400 1,921,600
---------------- ---------------
Total long-term liabilities 2,288,400 2,444,200
---------------- ---------------
Total liabilities 14,055,600 13,988,700
Stockholders' equity:
Preferred stock, $.005 par value-5,000,000 shares authorized;
none issued --- ---
Common stock, $.01 par value-50,000,000 shares authorized; 27,562,300
shares issued at September 30, 1999, and 24,363,200 shares
issued at December 31, 1998 275,600 243,600
Additional paid-in capital 193,505,000 170,645,100
Deferred compensation (378,000) ---
Accumulated deficit (140,157,000) (131,580,200)
Accumulated other comprehensive loss (866,300) (430,700)
---------------- ---------------
52,379,300 38,877,800
Less cost of treasury stock - 23,900 and 13,600 shares respectively (248,200) (144,600)
---------------- ---------------
Total stockholders' equity 52,131,100 38,733,200
---------------- ---------------
Total liabilities and stockholders' equity $ 66,186,700 $ 52,721,900
================ ==============
</TABLE>
See accompanying notes.
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<PAGE>
U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1999 1998 1999 1998
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Net sales $ 6,460,600 $ 5,890,800 $ 18,050,500 $ 14,312,900
Net investment income 736,400 669,500 2,119,300 2,116,200
Licensing, royalty and other income 318,300 213,400 3,851,200 5,797,500
------------- ------------- ------------- ------------
7,515,300 6,773,700 24,021,000 22,226,600
Expenses:
Cost of sales 1,487,900 1,649,900 4,048,300 4,231,600
Selling, general and administrative costs 3,931,200 3,106,600 11,077,300 10,136,400
Research and development costs 5,709,300 4,435,200 17,396,200 13,467,200
Interest expense 22,400 38,000 76,000 119,900
------------- ------------- ------------- ------------
11,150,800 9,229,700 32,597,800 27,955,100
------------- ------------- ------------- ------------
Net loss $ (3,635,500) $ (2,456,000) $ (8,576,800) $ (5,728,500)
============= ============= ============= ============
Basic and diluted loss per common share $ (0.13) $ (0.10) $ (0.32) $ (0.24)
Weighted average number of common shares outstanding
Basic and Diluted 27,416,300 24,335,200 26,922,700 24,290,200
</TABLE>
See accompanying notes.
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<PAGE>
U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Change in Cash and Cash Equivalents
Cash flows provided by (used in) operating activities:
Net (loss) income $ (8,576,800) $ (5,728,500)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation 755,400 655,600
Compensation element of stock option grants and awards 196,900 ---
Change in accounts receivable (2,428,000) (526,200)
Change in interest receivable 8,800 90,400
Change in inventories (607,300) 246,400
Change in other current assets (825,800) 337,700
Change in current liabilities 865,300 450,400
Change in other long-term liabilities (33,200) 84,600
------------- --------------
Total adjustments (2,067,900) 1,338,900
------------- --------------
Net cash provided by (used in) operating activities (10,644,700) (4,389,600)
Cash flows provided by (used in) investing activities:
Proceeds from investments matured and sold 79,118,100 29,371,400
Purchase of investments (86,976,600) (29,767,000)
Purchase of property, plant and equipment (897,000) (498,200)
------------- --------------
Net cash provided by (used in) investing activities (8,755,500) (893,800)
Cash flows provided by (used in) financing activities:
Proceeds from issuance of common stock and private placement of securities 19,969,100 5,000
Purchase of treasury stock (103,600) ---
Proceeds from exercise of stock options 2,347,900 527,300
Proceeds from line of credit --- 1,600
Repayment of long-term debt (556,100) (560,100)
------------- --------------
Net cash provided by (used in) financing activities 21,657,300 (26,200)
Effect of exchange rate changes on cash (181,600) (74,100)
------------- --------------
Net increase (decrease) in cash and cash equivalents 2,075,500 (5,383,700)
Cash and cash equivalents-beginning of period 6,771,000 26,569,400
------------- --------------
Cash and cash equivalents-end of period $ 8,846,500 $ 21,185,700
============ =============
Supplemental cash flow disclosure:
Interest paid $ 51,200 $ 84,100
</TABLE>
See accompanying notes.
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<PAGE>
U.S. BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- ADDITIONAL
NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 22,879,900 $ 228,800 $ 151,244,400 $ (114,617,200)
Proceeds from exercise of stock options 149,300 1,500 728,800 ---
Compensation related to stock options --- --- 40,000 ---
Issuance of shares ($18.256 per shares, less costs) 1,178,900 11,800 17,892,000 ---
Conversion of warrants --- --- 600 ---
Comprehensive loss:
Net loss for the year ended December 31, 1997 --- --- --- (7,909,100)
Foreign currency translation adjustment --- --- --- ---
Unrealized gain (loss) on investments --- --- --- ---
Comprehensive loss
---------- --------- ------------- --------------
Balance at December 31, 1997 24,208,100 $ 242,100 $ 169,905,800 $ (122,526,300)
Proceeds from exercise of stock options 154,800 1,500 694,200 ---
Compensation related to stock options --- --- 40,000 ---
Treasury stock --- --- --- ---
Conversion of warrants 300 --- 5,100 ---
Comprehensive loss:
Net loss for the year ended December 31, 1998 --- --- --- (9,053,900)
Foreign currency translation adjustment --- --- --- ---
Unrealized gain (loss) on investments --- --- --- ---
Comprehensive loss
---------- --------- ------------- --------------
Balance at December 31, 1998 24,363,200 $ 243,600 $ 170,645,100 $ (131,580,200)
Proceeds from exercise of stock options 476,700 4,800 2,343,100 ---
Issuance of shares ($7.44 per shares, less costs) 2,686,700 26,900 19,942,200 ---
Treasury stock --- --- --- ---
Deferred compensation resulting
from grant of stock options and stock awards 35,700 300 534,600 ---
Compensation expense relating to stock options and awards --- --- 40,000 ---
Comprehensive loss:
Net loss for the nine months ended September 30, 1999 --- --- --- (8,576,800)
Foreign currency translation adjustment --- --- --- ---
Unrealized gain (loss) on investments --- --- --- ---
Comprehensive loss
---------- --------- ------------- --------------
Balance at September 30, 1999 (Unaudited) 27,562,300 $ 275,600 $ 193,505,000 $ (140,157,000)
========== ========= ============= ==============
<CAPTION>
ACCUMULATED
OTHER TOTAL
TREASURY DEFERRED COMPREHENSIVE STOCKHOLDERS'
STOCK COMPENSATION (LOSS) EQUITY
---------- ------------- ------------- -------------
<S> <S> <C> <C> <C>
Balance at December 31, 1996 $ --- $ --- $ 38,300 $ 36,894,300
Proceeds from exercise of stock options --- --- --- 730,300
Compensation related to stock options --- --- --- 40,000
Issuance of shares ($18.256 per shares, less costs) --- --- --- 17,903,800
Conversion of warrants --- --- --- 600
Comprehensive loss:
Net loss for the year ended December 31, 1997 --- --- --- (7,909,100)
Foreign currency translation adjustment --- --- (663,100) (663,100)
Unrealized gain (loss) on investments --- --- 27,000 27,000
------------
Comprehensive loss (8,545,200)
---------- ----------- ------------- ------------
Balance at December 31, 1997 $ 0 $ 0 $ (597,800) $ 47,023,800
Proceeds from exercise of stock options --- --- --- 695,700
Compensation related to stock options --- --- --- 40,000
Treasury stock (144,600) --- --- (144,600)
Conversion of warrants --- --- --- 5,100
Comprehensive loss:
Net loss for the year ended December 31, 1998 --- --- --- (9,053,900)
Foreign currency translation adjustment --- --- 185,100 185,100
Unrealized gain (loss) on investments --- --- (18,000) (18,000)
------------
Comprehensive loss (8,886,800)
---------- ----------- ------------- ------------
Balance at December 31, 1998 $ (144,600) $ --- $ (430,700) $ 38,733,200
Proceeds from exercise of stock options --- --- --- 2,347,900
Issuance of shares ($7.44 per shares, less costs) --- --- --- 19,969,100
Treasury stock (103,600) --- --- (103,600)
Deferred compensation resulting
from grant of stock options and stock awards --- (534,900) --- ---
Compensation expense relating to stock options and awards --- 156,900 --- 196,900
Comprehensive loss:
Net loss for the nine months ended September 30, 1999 --- --- --- (8,576,800)
Foreign currency translation adjustment --- --- (421,100) (421,100)
Unrealized gain (loss) on investments --- --- (14,500) (14,500)
------------
Comprehensive loss (9,012,400)
---------- ----------- ------------- ------------
Balance at September 30, 1999 (Unaudited) $ (248,200) $ (378,000) $ (866,300) $ 52,131,100
========== ========== ============ ============
</TABLE>
See accompanying notes.
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<PAGE>
U.S. BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Business -- The company is a pharmaceutical company specializing in the
development and commercialization of products for patients with cancer and
allied diseases. Through September 30, 1999, the company's revenues have been
derived principally from product sales of Ethyol(R), NeuTrexin(R), and
Hexalen(R), licensing and distribution fees for rights to develop and market
certain products principally in the United States, payments for achieving
certain clinical development milestones and investment income. Expenses incurred
have been primarily for the development of its drugs and related therapies,
marketing and sales activities, and corporate and administrative activities.
Unaudited Information -- The financial information for the three and nine
month periods ended September 30, 1999 and 1998, 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 Limited. All significant intercompany accounts
and transactions are eliminated in consolidation.
Use of Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. 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:
September 30, December 31,
1999 1998
------------- ------------
Raw materials $1,141,000 $1,086,900
Work-in-process 1,862,200 1,014,700
Finished goods 436,300 771,600
------------- ------------
Total $3,439,500 $2,873,200
============= ============
Property, Plant and Equipment -- Buildings, equipment and furniture and
fixtures are depreciated by the straight-line method over their useful lives for
financial reporting purposes and under accelerated methods for federal income
tax purposes. Leasehold improvements are depreciated by the straight-line method
over the shorter of their useful lives or the life of the lease for financial
reporting purposes and under an accelerated method for federal income tax
purposes.
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<PAGE>
Property, plant and equipment consists of:
September 30, December 31,
1999 1998
------------- ------------
Land, buildings, and leasehold $ 1,934,500 $ 2,034,900
improvements
Equipment, furniture and fixtures 10,502,200 10,131,200
Accumulated depreciation (7,274,500) (6,732,400)
------------- ------------
Property, plant and equipment, net $ 5,162,200 $ 5,433,700
============= ============
Long-term Debt -- Long-term debt consists of:
September 30, December 31,
1999 1998
------------- ------------
MELF Equipment Loan $ 50,700 $ 106,900
Mortgage Loan 384,100 456,000
Term Loan 50,000 500,000
Capital Lease Obligations 84,000 105,500
------------- ------------
$568,800 $1,168,400
Less Current Portion 168,800 645,800
------------- ------------
Long-Term Debt $400,000 $ 522,600
============= ============
Accumulated Other Comprehensive Loss -- The components of other
comprehensive loss consist of:
<TABLE>
<CAPTION>
Unrealized Gain /
Currency (Loss) on
Translation Available-for-Sale
Adjustment Securities Total
----------- ------------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1996 $ 48,200 ($9,900) $ 38,300
Currency translation adjustment (663,100) 0 (663,100)
Unrealized gain on investments 0 27,000 27,000
----------- ------------------ ------------
Balance at December 31, 1997 (614,900) 17,100 (597,800)
Currency translation adjustment 185,100 0 185,100
Unrealized (loss) on investments 0 (18,000) (18,000)
----------- ------------------ ------------
Balance at December 31, 1998 (429,800) (900) (430,700)
Currency translation adjustment (421,100) 0 (421,100)
Unrealized gain on investments 0 (14,500) (14,500)
----------- ------------------ ------------
Balance at September 30, 1999 $(850,900) $(15,400) $(866,300)
=========== ================== ============
</TABLE>
-8-
<PAGE>
Segment Disclosures -- The company operates in only one "dominant segment,"
as substantially all of its consolidated revenues, losses and assets are derived
and utilized in the development and commercialization of pharmaceutical products
used in the treatment of cancer. The company had sales revenue from two major
customers which accounted for the following percentages of total net sales
revenue during the three and nine month periods ended September 30:
Three Months ended Nine Months ended
September 30, September 30,
------------------- ------------------
1999 1998 1999 1998
--------- -------- --------- -------
Customer 1 51% 41% 53% 37%
Customer 2 24% 21% 21% 21%
A summary by geographic area of revenues from customers and net
income/(loss) for the three and nine month periods ending September 30, and
identifiable assets as of the dates indicated, are as follows:
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30, September 30,
------------------------ --------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues from customers:
United States $ 4,840,800 $ 4,742,900 $14,129,200 $16,437,700
International 1,938,100 1,361,300 7,772,500 3,672,700
----------- ----------- ----------- ------------
$ 6,778,900 $ 6,104,200 $21,901,700 $20,110,400
=========== =========== =========== ===========
Net income / (loss):
United States $(3,441,900) $(1,703,600) $(7,495,300) $(3,426,800)
International (193,600) (752,400) (1,081,500) (2,301,700)
----------- ----------- ----------- ------------
$(3,635,500) $(2,456,000) $(8,576,800) $(5,728,500)
=========== =========== =========== ===========
</TABLE>
September 30, December 31,
1999 1998
------------- ------------
Identifiable assets:
United States $59,783,500 $47,516,800
International 6,403,200 5,205,100
----------- -----------
$66,186,700 $52,721,900
=========== ===========
Additionally, all information in this quarterly report 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 Consolidated
Financial Statements included in the company's Annual Report on Form 10-K for
the year ended December 31, 1998. Operating results for the three and nine month
periods ended September 30, 1999 are not necessarily indicative of the results
that may be obtained in any other interim period or the entire year.
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<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 prospects 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, those discussed in this
quarterly report and those discussed in the company's annual report on Form 10-K
for the fiscal year ended December 31, 1998 (including, without limitation, in
the section of Item 1 entitled "Risk Factors"). As a result, the reader is
cautioned not to rely on these forward-looking statements.
The following discussion also should be read in conjunction with the
Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements on pages 3 to 9.
Operations for the nine months ended September 30, 1999 consisted primarily
of activities relating to the promotion of Ethyol(R) (amifostine) in the United
States with co-promotion partner ALZA Corporation ("ALZA"), the promotion and
marketing of Hexalen(R) (altretamine) and NeuTrexin(R) (trimetrexate
glucuronate) in the United States, the expansion of the company's sales force,
continuing clinical trials and regulatory activities for Ethyol, NeuTrexin and
lodenosine (FddA), product development activities for lodenosine, Ethyol and
NeuTrexin, and business development activities in the United States and Europe.
The company also completed, during the first quarter of 1999, a $20 million
equity placement with three venture capital funds (see "Liquidity and Capital
Resources" below.)
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 further clinical trials aimed at label expansion
and regulatory approvals for Ethyol and NeuTrexin, the marketing of Hexalen,
NeuTrexin and Ethyol in the United States, the furtherance of product
development activities and the enhancement of manufacturing and analytical
capabilities.
Results of Operations
Three months ended September 30, 1999
Product sales increased to $6,460,600 for the three months ended September
30, 1999 as compared to $5,890,800 in the prior year period. Sales of Ethyol,
the company's cytoprotective product, increased due to higher sales revenue
received from both ALZA, the company's distribution partner in the United
States, and Schering-Plough, the company's European distribution partner. Sales
of NeuTrexin, the company's anti-folate, and Hexalen, the company's ovarian
cancer therapy, were lower than the prior year period. The company believes that
sales of NeuTrexin and Hexalen, in the United States, were negatively affected
during the third quarter by transitional factors relating to the assumption of
full responsibility for promotion of these products in the United States by the
company.
Cost of sales, which consists of product manufacturing, testing,
distribution and royalty expenses, decreased despite the increase in sales due
to lower product manufacturing costs, which reflects increased factory
throughput, lower active drug substance costs, tight controls on expenses, a
favorable exchange rate between the
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<PAGE>
Dutch Guilder and the U.S. Dollar and increased revenues from purchases of
Ethyol by ALZA. As a percentage of sales, cost of sales in the three month
period ended September 30, 1999, declined to 23% of product sales from 28% in
the prior year period, due to the factors mentioned previously.
Selling, general and administrative costs for the third quarter of 1999
increased to $3,931,200 from $3,106,600 in the corresponding 1998 period. The
$824,600 increase is principally due to personnel and travel expenses incurred
in connection with the expansion of the company's sales force for the company's
assumption of full promotional responsibility for NeuTrexin and Hexalen in the
United States. Approximately $400,000 of the total increase in selling, general
and administrative costs relate to these expenses, the remainder of the increase
relates to higher promotional spending for NeuTrexin and Hexalen of $317,000.
Research and development costs for the three months ended September 30,
1999 increased to $5,709,300 from $4,435,200 in the third quarter of 1998. The
$1,274,100 increase principally resulted from $1,083,100 in clinical
expenditures related to the company's Phase II study of lodenosine (FddA), a
nucleoside reverse transcriptase inhibitor, which began in late 1998. In
addition, the increase reflects approximately $450,400 in higher clinical
consulting costs related to the continuation of several Phase III clinical
trials investigating the use of Ethyol in radiation therapy and with various
chemotherapeutic regimens and the use of NeuTrexin as an additional agent in the
treatment of colorectal cancer.
The net loss for the three months ended September 30, 1999 was $3,635,500
or $0.13 basic and diluted net loss per common share as compared to a loss of
$2,456,000 or $0.10 basic and diluted net loss per common share in the 1998
period.
Nine months ended September 30, 1999
Product sales increased to $18,050,500 for the nine months ended September
30, 1999 as compared to $14,312,900 in the prior year period. Sales of Ethyol
increased due to higher sales revenue received from both ALZA, the company's
U.S. distribution partner, and Schering-Plough, the company's distribution
partner in Europe. Sales of NeuTrexin and Hexalen were both lower than the prior
year period. The company believes that sales of NeuTrexin and Hexalen were
negatively affected during the third quarter by transitional factors relating to
the assumption of full responsibility for promotion of these products in the
United States by the company.
Licensing, royalty and other income was $3,851,200 in the first nine
months of 1999 as compared to $5,797,500 in the 1998 period principally due to a
$5 million payment received from ALZA in the first quarter of 1998 for the
achievement of a clinical milestone for the development of the use of Ethyol in
conjunction with radiation therapy. This compares to a $3 million payment
received in May 1999 from Schering-Plough for achieving an approval for the use
of Ethyol in association with standard fractionated radiation therapy to protect
against acute and late xerostomia in head and neck cancer.
Cost of sales, which consists of product manufacturing, testing,
distribution and royalty expenses, decreased slightly in the first nine months
of 1999 despite the increase in sales. As a percentage of sales, cost of sales
in the nine month period ended September 30, 1999, declined to 22% of product
sales from 30% in the prior year period, due principally to improved margins on
Ethyol product revenues received from ALZA and lower product manufacturing
costs, which reflects increased factory throughput, lower active drug substance
costs, tight controls on expenses and a favorable exchange rate between the
Dutch Guilder and the U.S. Dollar.
Selling, general and administrative costs for the first nine months of 1999
increased to $11,077,300 from $10,136,400 in the first nine months of 1998. The
$940,900 increase is principally due to recruiting and staffing
-11-
<PAGE>
expenses incurred in connection with the recent expansion of the company's sales
force which represents approximately $850,000 of the total increase and higher
corporate and public relations costs of $258,000. These increases are partly
offset by savings of approximately $350,000 in administrative personnel costs
resulting from the 1998 reorganization of several senior management positions.
Research and development costs for the nine months ended September 30, 1999
increased to $17,396,200 from $13,467,200 in the first nine months of 1998. The
$3,929,000 increase principally resulted from expenditures related to the
company's Phase II study of lodenosine (FddA) and from higher drug product
formulation expenses, also related to lodenosine, totaling $4,483,000. In
Addition, the increase reflects approximately $1,214,800 in higher personnel and
consulting costs related to the continuation of several Phase III clinical
trials investigating the use of Ethyol in radiation therapy and with various
chemotherapeutic regimens and the use of NeuTrexin as an additional agent in the
treatment of colorectal cancer. These increases are partly offset by a decrease
of $1,726,500 in clinical supplies and grant expenditures which are incurred
during the enrollment and treatment phases of Phase III trials. In addition, the
1998 first quarter included a provision of approximately $1 million for
consulting and severance payments related to internal reorganization activities.
The net loss for the nine months ended September 30, 1999 was $8,576,800 or
$0.32 basic and diluted net loss per common share as compared to a loss of
$5,728,500 or $0.24 basic and diluted net loss per common share in the 1998
period. The smaller loss for the 1998 period is principally attributable to the
$5 million milestone payment from ALZA noted above.
Liquidity and Capital Resources
Since its inception in 1987, the company has financed operations
principally through the sale of equity capital, the issuance of unsecured and
secured debt, sales of its drug products, Hexalen, NeuTrexin and Ethyol,
investment income and revenues received through distribution and sublicense
agreements. As of September 30, 1999, the company's cash and investments totaled
$51,868,400. 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 1999, net cash used in operations amounted
to $10,644,700 reflecting the net effect of the factors discussed above under
"Results of Operations" less non-cash charges of $952,300 and a net working
capital increase of $2,987,000, principally due to increased accounts receivable
reflective of the timing of and the increase in product sales levels. Until such
time as the company receives significantly increased revenues, the company's
cash position will continue to be reduced due to expenditures in clinical
research, product development, marketing, 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 would 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 or
used, the performance of the company's licensees and distributors, and the
health care and reimbursement systems existing in markets where the company's
products are, or may become, commercially available.
In January 1999, the company entered into a $20,000,000 stock purchase
agreement with a group of private investors lead by Domain Partners IV L.P., a
leading health care venture capital fund, and Proquest Investments L.P., an
oncology focused venture capital fund. Pursuant to the agreement, the company
issued to the investors 2,686,728 shares of Common Stock at a price of $7.44 per
share and warrants, exercisable for three years, to purchase 537,346 additional
shares of Common Stock at an exercise price of $11.17 per share. The shares were
purchased at the average closing price of the company's Common Stock for the 30-
day period ending
-12-
<PAGE>
January 26, 1999. The warrant exercise price is a 50% premium over that 30-day
average closing price. Except in certain change of control situations, the
agreement calls for the investors to hold the purchased securities for at least
one year.
The company invests its cash in a variety of financial instruments,
principally securities issued by the U.S. Government and its agencies,
investment grade corporate debt, and money market instruments. These investments
are denominated in U.S. dollars. Investments in both fixed rate and floating
rate interest-earning instruments carry a degree of interest rate risk. Fixed
rate securities may have their fair market value adversely impacted due to rises
in interest rates, while floating rate securities may produce less income than
expected if interest rates fall. At September 30, 1999, a majority of the
company's investments were in floating rate instruments. The company does not
expect changes in interest rates to have a material impact on the results of
operations.
The company believes its current cash and investments coupled with
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, acquisition of new products and/or technologies, new
clinical development initiatives, 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 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 $897,000 for the nine month
period ended September 30, 1999. A majority of the company's plant, property and
equipment are located at the company's manufacturing facility located in
Nijmegen, The Netherlands. Further capital expenditures, estimated at $175,000
are planned during the remainder of 1999.
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.
-13-
<PAGE>
The above factors may also affect realization of certain assets currently
held by the company, principally investments in plant, equipment and inventory.
As the company sells Ethyol to its distribution partners, ALZA and
Schering-Plough, 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 same
factors noted elsewhere in this section on liquidity and capital resources. The
company is hopeful that the commercialization of Ethyol in the United States and
Europe will be successful. However, no assurances can be given that the company
will achieve meaningful revenues under its agreements with ALZA and
Schering-Plough or its other distribution arrangements.
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. As the company continues its
commercialization, research and development activities, losses are expected to
continue and may fluctuate from period to period. Although it is the company's
objective to become profitable, there can be no assurance that the company will
achieve significant revenues or profitable operations.
Risks Associated with the Year 2000
The Year 2000 issue is the result of computer programs and embedded
technology (such as microcontrollers in telephones or laboratory equipment) that
use two digits rather than four to define the applicable year. These computer
programs and equipment with this type of embedded technology may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations causing disruptions of normal business
activities, including, among others, a temporary inability to process
transactions and information, send invoices or engage in similar business
activities.
The company is implementing a readiness and remediation plan to address the
Year 2000 issue. The first part of this plan was an inventory of the critical
software systems and embedded technology at each of the company's facilities,
which the company started in the second quarter of 1998 and completed during the
first quarter of 1999. The second part of the plan was a detailed assessment of
the inventory results, which also was completed during the first quarter of
1999. The third part of the plan involves correcting or replacing the company's
software systems and equipment that cannot accurately identify the year 2000.
The last part of the plan is an analysis to determine the extent to which the
systems of the company's major vendors, customers and commercial partners will
be affected by the Year 2000 issue. The company has started work on these last
two phases of the plan and expects that they will be completed during the latter
half of 1999.
The Year 2000 readiness and remediation plan is being conducted by the
company using internal resources. As of September 30, 1999, the company had
spent less than $200,000 fixing Year 2000 issues, including modifying software
systems and replacing equipment, and these expenditures have been expensed or
capitalized by the affected departments within the company in the normal course
of business. The company estimates that the costs of completing its Year 2000
remediation plan will be less than $300,000 and expects to fund these costs from
currently available resources.
The company does not anticipate that addressing the Year 2000 issue for its
internal software systems and equipment will delay the implementation of the
company's other planned information technology projects or have a material
impact on its operations or financial results. However, there can be no
assurance that these costs will not be greater than anticipated, or that
corrective actions undertaken will be completed before any Year 2000
-14-
<PAGE>
problems could occur. The company is currently unable to predict the extent to
which it would be vulnerable to a failure by one or more other companies, such
as its vendors, customers and commercial partners, to remediate Year 2000 issues
on a timely basis. Any such failures could have a material adverse effect on the
company. The company is implementing a plan to increase its inventory levels of
key materials and components for its products during the last half of 1999 and
the first half of 2000. To date the company has not made any other contingency
plans to address Year 2000 risks. Further contingency plans will be developed if
it appears that the company or its key vendors, customers or commercial partners
will not be Year 2000 compliant and that such noncompliance can be expected to
have a material adverse impact on the company's operations. The Audit Committee
of the Board of Directors maintains an ongoing appraisal of the scope, estimated
costs and implementation of the company's Year 2000 remediation plan.
Subsequent Events
On September 22, 1999, MedImmune, Inc. and U.S. Bioscience, Inc. announced
that they have entered into a definitive agreement for MedImmune to acquire the
company Under the terms of the agreement, MedImmune will acquire all of the
company's outstanding shares in a tax-free, stock-for-stock merger that is
intended to be accounted for under the pooling-of-interests method of accounting
for business combinations. The equity value is $474 million or a transaction
value of approximately $422 million (net of cash) based on an average MedImmune
stock price of $106 per share and 29.8 million fully diluted U.S. Bioscience
shares. The exchange ratio will be 0.15 MedImmune shares per U.S. Bioscience
share, subject to adjustment depending on the average closing price of MedImmune
over the 20-day trading period ending three days prior to the U.S. Bioscience
shareholder meeting to consider the merger which is scheduled for November 23,
1999.
If MedImmune's average share price is greater than $140 during this 20-day
period, the exchange ratio shall be $19.10 divided by the average share price.
If MedImmune's average share price is greater than $132, but less than or equal
to $140 the exchange ratio shall be 0.1364. If MedImmune's average share price
is $132 or lower, but more than $120, the exchange ratio will be $18 divided by
MedImmune's average share price. If MedImmune's share price is $100 or lower,
but more than $88, the exchange ratio shall be $15 divided by MedImmune's
average share price, and if the average share price is lower than $88, but more
than $80 the exchange ratio shall be 0.1705. If MedImmune's average share price
is less than $80, U.S. Bioscience may terminate the merger agreement unless
MedImmune delivers a notice to the effect that the exchange ratio shall be
$13.64 divided by the average share price.
The Boards of Directors of both MedImmune and U.S. Bioscience have approved
the proposed merger, which is subject to customary conditions, including U.S.
Bioscience stockholder approval. Stockholders of record as of October 22, 1999
will be entitled to vote on the merger at the special meeting of stockholders
scheduled for November 23, 1999.
The merger agreement provides that U.S. Bioscience pay MedImmune a $15
million termination fee and up to $2 million in expenses, under certain
circumstances. In addition, as a condition to entering into the transaction,
MedImmune required the company to grant MedImmune an option to purchase a number
of newly issued shares of U.S. Bioscience common stock equal to 19.9% of the
company's outstanding common stock at an exercise price of $16.50 per share if
any of the events occur that entitle MedImmune to receive the termination fee
under the merger agreement. The stock option agreement limits MedImmune's total
profit under the stock option to $17 million less any termination fee and
expenses it actually receives under the merger agreement. The company
anticipates that the transaction will close in the fourth quarter of 1999.
-15-
<PAGE>
On October 14, 1999, the company announced that it had suspended clinical
testing of lodenosine (FddA). The company's IND is on clinical hold pending
review of additional scientific information regarding serious adverse events
seen during a Phase II clinical trial, including patient deaths.
The Phase II trial was designed to evaluate the efficacy and safety of
three different dosages of lodenosine, a nucleoside reverse transcriptase
inhibitor, in combination with two additional antiretrovirals for the treatment
of HIV-infected adults, compared with a control group. The trial enrolled
approximately 176 patients on lodenosine at 27 clinical centers in three
countries. Effective with the suspension, all patients were discontinued from
lodenosine.
-16-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On February 28, 1996, Ichthyol Gesellschaft Cordes, Hermanni & Co.
("Ichthyol Gesellschaft") 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 Ichthyol
Gesellschaft's complaint stating U.S. Bioscience's position that the trademark
"Ethyol" does not infringe plaintiff's trademark rights in the trademark
"Ichthyol" nor Ichthyol Gesellschaft's firm right in the slogan "Ichthyol." The
suit was dismissed on January 29, 1997, by the Regional Court of Hamburg at
which time Ichthyol Gesellschaft. was given leave to appeal against the judgment
rendered in favor of U.S. Bioscience, Inc. Ichthyol Gesellschaft. filed an
appeal, and a judgment was rendered in favor of U.S. Bioscience in the appellate
proceedings. In January 1999, Ichthyol Gesellschaft filed an appeal on points of
law with the Federal Court of Justice, and in June 1999, Ichthyol Gesellschaft
filed the grounds for the appeal on points of law. In October 1999, the Federal
Court of Justice accepted Ichthyol Gesellschaft's appeal on points of law. U.S.
Bioscience has been advised that it usually takes a year and a half from the
acceptance of such an appeal until a hearing is held, and it is not possible to
predict the decision of the Federal Court of Justice with respect to this
matter.
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. The company filed the following reports since the beginning of
the quarter ended
September 30, 1999:
Date of Report Items Covered
------------------ -----------------
September 21, 1999 5 and 7
October 21, 1999 5 and 7
-17-
<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 11, 1999 By: /s/ Robert I. Kriebel
---------------------------------
Robert I. Kriebel
Executive Vice President and
Chief Financial Officer
-18-
<PAGE>
U.S. BIOSCIENCE, INC.
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
-------------
Exhibit No. Page
- ----------- ----
27 Financial Data
-19-
<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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,846,500
<SECURITIES> 43,021,900
<RECEIVABLES> 4,884,600
<ALLOWANCES> 727,000
<INVENTORY> 3,436,500
<CURRENT-ASSETS> 29,444,800
<PP&E> 12,436,700
<DEPRECIATION> 7,274,500
<TOTAL-ASSETS> 66,186,700
<CURRENT-LIABILITIES> 11,767,200
<BONDS> 2,288,400
0
0
<COMMON> 275,600
<OTHER-SE> 51,855,500
<TOTAL-LIABILITY-AND-EQUITY> 66,186,700
<SALES> 18,050,500
<TOTAL-REVENUES> 24,021,000
<CGS> 4,048,300
<TOTAL-COSTS> 32,521,800
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,000
<INCOME-PRETAX> (8,576,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,576,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,576,800)
<EPS-BASIC> (0.32)
<EPS-DILUTED> (0.32)
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