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| BDSI > SEC Filings for BDSI > Form 10-Q on 19-Nov-2008 | All Recent SEC Filings |
19-Nov-2008
Quarterly Report
The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included elsewhere in this Form 10-Q. This discussion contains certain forward-looking statements that involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth herein and elsewhere in this Form 10-Q.
For the three months ended September 30, 2008 compared to the three months ended September 30, 2007
Royalty Revenues. For the three-month periods ended September 30, 2008 and 2007, we reported $0.005 million and $0.02 million, respectively, in royalty revenue from a related company.
Research and consulting Revenues. For the three-month periods ended September 30, 2008 and 2007, we reported $0.01 million and $0.0, respectively, in research and consulting revenues from third-party sources.
Research and Development. Research and development expenses of approximately $2.1 million and $3.3 million were incurred during the three-month periods ended September 30, 2008 and 2007, respectively. These aforementioned amounts included $0.05 million and $1.0 million, respectively, paid to a contract research organization, which was a shareholder. Our scientific staff continued to work toward increased development and application of our BEMA™ and Bioral® technologies and other drug-related areas. Research and development expenses generally include salaries for key scientific personnel, research supplies, facility rent, lab equipment depreciation and a portion of overhead operating expenses and other costs directly related to the development and application of the BEMA™ and Bioral® drug delivery technologies. The decrease in expense during the three months ended September 30, 2008 compared to September 30, 2007 is primarily due to the higher level of work involved in the OnsolisTM product development in the prior year prior to submission of our OnsolisTM NDA in October 2007.
General and Administrative Expenses. General and administrative expenses of approximately $1.8 million and $2.4 million were incurred in the three-month periods ended September 30, 2008 and 2007, respectively. These expenses are principally composed of legal and professional fees, patent costs, and other costs including office supplies, conferences, travel costs, salaries, and other business development costs. We recorded stock based compensation of $0.6 million and $0.7 million during the three-months ended September 30, 2008 and 2007, respectively. The decrease in the three-month period ended September 30, 2008 is primarily due to lower Bema Fentanyl Marketing costs, which are the responsibility of Meda, and lower Legal fees.
Interest Income (expense). Interest expense for the periods ended September 30, 2008 and 2007 was principally related to amortization of deferred loan costs and notes payable discount amortization, net of interest earnings on invested cash.
Financing Expense, related party. Financing expense for the three-month period ended September 30, 2007 was warrant expense associated with the termination of a royalty rights agreement previously granted as part of a financing transaction whereby the Company issued a warrant to HCG II to purchase 475,000 shares of Common Stock at $5.55 per share. No such financing expense occurred during the same period in 2008.
Derivative Gain (Loss). Derivative gain (loss) during 2008 and 2007 is related to the adjustment of related derivative liabilities to fair value. Fair value adjustments relate primarily to fluctuations in our stock price. These derivatives relate to warrants and certain embedded instruments associated with previous financings (see Note 7 to the condensed consolidated financial statements).
Income Taxes. We have recognized a $2.0 million deferred tax benefit related to the loss incurred for the three months ended September 30, 2008. This is based upon the expectation that it is more likely than not that we will have taxable income for the year ended December 31, 2008 primarily due to approximately $30.0 million of revenues which are currently deferred for financial reporting purpose will become taxable in 2008, notwithstanding our financial accounting with regard to this item. Therefore since the 2008 loss to date is not expected to offset the taxable income, a deferred tax asset is being recorded for the tax benefit of the current loss.
For the Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
Royalty Revenues. For the nine-month periods ending September 30, 2008 and 2007, we reported $0.04 million and $0.06 million, respectively, of royalty revenue from a related company.
Research and consulting Revenues. For the nine-month periods ended September 30, 2008 and 2007, we reported $0.1 million and $0.03, respectively, in research and consulting revenues from third-party sources.
Research and Development. Research and development expenses of approximately $8.5 million and $9.6 million were incurred during the respective nine-month periods ended September 30, 2008 and 2007. These aforementioned amounts included $0.6 million and $4.1 million, respectively, paid to a contract research organization that was a stockholder of the Company. Our scientific staff continued to work toward increased development and application of our BEMA™ and Bioral® technologies and other drug-related areas. Research and development expenses generally include salaries for key scientific personnel, research supplies, facility rent, lab equipment depreciation and a portion of overhead operating expenses and other costs directly related to the development and application of the BEMA™ and Bioral® drug delivery technologies. The decrease in expense during the nine-months ended September 30, 2008 compared to September 30, 2007 is primarily due to the higher level of work involved in the OnsolisTM product development in the prior year prior to submission of our OnsolisTM NDA in October 2007.
General and Administrative Expenses. General and administrative expenses of approximately $5.9 million and $4.7 million were incurred in the nine-month periods ended September 30, 2008 and 2007, respectively. These expenses are principally composed of legal and professional fees, patent costs, and other costs including office supplies, conferences, travel costs, salaries, and other business development costs. We recorded stock based compensation of $1.98 million and $0.9 million during the nine months ended September 30, 2008 and 2007, respectively. The increase in the three-month period ended September 30, 2008 is primarily due to stock compensation.
Interest Expense, Net. Interest expense for the periods ended September 30, 2008 and 2007 was principally related to amortization of deferred loan costs and notes payable discount amortization, net of interest earnings on invested cash. The relatively high level of expense in 2007 resulted from the write-off of deferred loan costs associated with the principal reduction on the Laurus debt conversions, as Laurus exercised its right to convert the debt to Common Stock.
Financing Expense, related party. Financing expense for the nine-month period ended September 30, 2007 was warrant expense associated with the termination of a royalty rights agreement
previously granted as part of a financing transaction whereby we issued a warrant to HCG II to purchase 475,000 shares of Common Stock at $5.55 per share. No such financing expense occurred during the same period in 2008.
Derivative Gain (Loss). Derivative gain (loss) during 2008 and 2007 is related to the adjustment of derivative liabilities to fair value. These derivatives relate to warrants and certain embedded instruments associated with previous financings (see Note 7 to the financial statements).
Income Taxes. We have recognized a $4.0 million deferred tax benefit related to the loss incurred for the nine months ended September 30, 2008. This is based upon the expectation that it is more likely than not that we will have taxable income for the year ended December 31, 2008 due to approximately $30.0 million of revenues which are currently deferred for financial reporting purpose will become taxable in 2008, notwithstanding our financial accounting with regard to this item. Therefore since the 2008 loss to date is not expected to offset the taxable income, a deferred tax asset is being recorded for the tax benefit of the current loss.
Financial Terms of our License, Development and Supply Agreements with Meda AB
We entered into license, development and supply agreements with Meda in September 2007 and August 2006 to develop and commercialize Onsolis™ in the United States, Mexico and Canada (memorialized in the Meda U.S. Agreements) and in certain countries in Europe (memorialized in the Meda EU Agreements), respectively. The Meda Agreements have license terms which commence on the date of first commercial sale in each respective territory and end on the earlier of the entrance of a generic product to the market or upon expiration of the patents, which begin to expire in January 2017.
Up-front and Product Development Milestone Payments
Upon signing the Meda U.S. Agreements, we received a non-refundable up-front payment of $30.0 million. We will also receive the following non-refundable payments from Meda when and if we achieve the specific product development milestones:
• $15.0 million upon the receipt of approval from the FDA for Onsolis™.
• $15.0 million upon the earlier of the first commercial sale of Onsolis™ in the United States, Mexico or Canada or when we have made available the launch supply product inventory of Onsolis™.
Upon signing the Meda EU Agreements, we received a non-refundable up-front payment of $2.5 million. In March 2008 we received an additional $2.5 million upon completion of the initial Phase III clinical trials of Onsolis™. We will also receive the following non-refundable payments from Meda when and if we achieve the specific product development milestones:
• $2.5 million upon the initial Governmental Approval of the product in an EU country included in the Meda EU agreements.
• $2.5 million upon the first commercial sale of Onsolis™ in the EU Territory.
We deferred the $35.0 million of up-front payments and first product development milestone payment related to the Meda EU Agreements. We will also defer recognition of the $35.0 million of product development milestone payments, when and if received, until the commencement of the license
term which occurs on the date of the first commercial sale of Onsolis™ in the respective territories. Assuming we achieve the remaining product development milestones, we will recognize approximately $58.2 million and $9.7 million of the up-front and milestone payments on the dates of first commercial sale in the United States, Mexico and Canada and in certain countries in Europe, respectively. The remaining deferred revenue of approximately $2.1 million, which is associated with our obligation to participate in joint committees with Meda and perform certain other services, will be recognized as the services are rendered over the remaining terms of the agreements.
Research and Development Services to be provided to Meda
The Meda U.S. Agreements provide that we will perform research and development activities for the Onsolis™ product to be sold in the United States, Mexico and Canada as follows:
• We are responsible for all research and development expenses related to the development of Onsolis™ for the use on cancer patients through the date the product is approved by the FDA. We have incurred total product development expense associated with this product of approximately $34.0 million from January 2005 through September 30, 2008.
• We will provide, if requested, research and development services relating to changing or expanding the labeling of Onsolis™ for the treatment of breakthrough cancer pain and Meda is responsible for these expense associated with these services. We will not provide any services of this nature until after we have received product approval from the FDA.
• We will provide research and development services related to Phase IV clinical trials of Onsolis™ for the treatment of breakthrough cancer pain in alternate types of cancer patients and the expense will be borne by Meda in full. We will not provide any services of this nature until we have received product approval from the FDA.
• We will provide, if necessary, services in connection with additional clinical trials required by regulatory authorities relating to Onsolis™ for treatment of breakthrough cancer pain and Meda is responsible for full reimbursement of these expenses. We will not incur any expenses of this nature until after we have received product approval from the FDA.
• Meda is responsible for all expenses we incur related to the development of Onsolis™ for the non-cancer indication. At this time, we have not initiated any clinical trials of Onsolis™ for the treatment of breakthrough pain in non-cancer patients. We began incurring expenses related to the initial administration of these trials in the first quarter of 2008. We have provided services of approximately $1.0 million through September 30, 2008, all of which have been or will be paid by Meda. The non-cancer research and development revenues to-date have been deferred and will be recognized on the date of first commercial sale of the product in the United States, Mexico and Canada.
The Meda EU Agreements provide that we will perform research and development activities for the Onsolis™ product to be sold in certain countries in Europe. Meda is responsible for all research and development expenses related to the development of Onsolis™ for the use on cancer patients through the date the product is approved by regulatory authorities in a country in the Europe territory. We have provided services of approximately $0.8 million through September 30, 2008, all of which have been or will be paid by Meda. The EU research and development revenues to-date have been deferred and will be recognized on the date of first commercial sale of the product in a country in the Europe territory.
Product Supply Revenue
The Meda Agreements provide that we will be the exclusive supplier of the Onsolis™ product to Meda for sales in the United States, Mexico, Canada and certain countries in Europe. Per the agreements, we can manufacture or have manufactured the product supply and Meda is required to pay us our fully-burdened cost of the product.
Product Royalty Revenue and Commercialization Milestone Payments
Meda is obligated to pay us a royalty based on a percentage of the net sales revenue from the sale of Onsolis™ in the United States, Mexico, Canada and certain countries in Europe, net of the product supply price. We expect to begin recognizing product royalty revenue in the second quarter ended June 30, 2009, reflecting the commencement of commercial sales of Onsolis™ in the United States, Mexico and Canada.
The Meda Agreements also require Meda to pay us up to an additional aggregate of $30.0 million of commercialization milestone payments conditioned upon the achievement of specified targets for annual net sales revenue from Onsolis™ in the United States and Canada.
Liquidity and Capital Resources
From inception through November 2008, we financed our operations primarily from the private sales of our convertible preferred stock, convertible debt and common stock, our public offering in 2002 and follow-on public offering in 2005, exercise of options, various strategic and licensing agreements (including the CDLA and our Meda Agreements), NIH grants, bank financing, and through the sale of a royalty stream asset.
In January 2005, we signed a definitive licensing agreement with Sigma-Tau Pharma for the application of our Bioral® nanocochleate delivery technology to formulate up to four proprietary pharmaceutical compounds currently under development by Sigma-Tau Pharma. Simultaneously with this licensing agreement, we entered into a stock purchase agreement with, and received a non-refundable upfront payment of $0.25 million from another Sigma Tau-related entity. This upfront payment was made in consideration of unregistered shares of our common stock priced at $4.25 a share. The stock purchase agreement with Sigma-Tau provides for the acquisition by Sigma-Tau, upon the occurrence of specified developmental milestones associated with the license, of additional unregistered shares of our common stock, up to an aggregate potential of $1.5 million worth of such shares. Such additional unregistered shares will be issued at the lesser of: (i) $4.25 and (ii) the average of the closing trade price of our Common Stock for the ten (10) trading days through and including the applicable payment date, with an absolute floor $3.38 per share. In January 2007, under our development agreement with Sigma Tau, we were paid a milestone payment of $0.25 million for which we issued 73,964 shares of Common Stock at $3.38. Sigma-Tau, through other holding entities, is currently a stockholder of our Company. In addition to the milestone payments, we will receive a royalty on future sales of each of the four products which may arise from the encochleated compounds.
In March 2007, we entered into a $1.9 million financing with CDC. This financing involved a one-year, 10.25% loan from CDC and a warrant to purchase 1 million shares of our common stock with an exercise price of $3.80. On March 12, 2008, we repaid the loan in full plus interest due to CDC.
In August 2006 and September 2007, we received up-front non-refundable payments in connection with our license, development and supply agreements with Meda of $2.5 million and $30.0 million, respectively.
At September 30, 2008, we had cash of approximately $2.0 million and investments of an additional $0.4 million. The adequacy of cash for our operations and continued research is dependent on, among other things, licensing and milestone payments from Meda of approximately $35.0 million expected to be received by the Company in 2009, and additional equity or debt financing opportunities that we are able to negotiate in the coming year. We used $8.8 million of cash for operations for the nine months ended September 30, 2008. This resulted from a net loss of $9.2 million (which included a derivative gain of $1.8 million), offset by stock-based compensation of $1.97 million, a decrease in our related party accounts receivable (primarily Meda) of $0.01 million and a decrease in our accounts payable and accrued liabilities of $1.7 million. We received a $2.5 million additional up-front payment from Meda in connection with our EU license in March 2008, which was recorded as deferred revenue, and received research and development services reimbursements from Meda of $1.4 million which is recorded as deferred revenue.
We have incurred significant net losses and negative cash flows from operations since our inception. As of September 30, 2008, we had a stockholders' deficit of $25.9 million, versus $18.8 million at December 31, 2007.
We anticipate that cash used in operations and our investment in facilities will continue beyond our BEMA™ Fentanyl agreements with Meda, as we research, develop, and, potentially, manufacture and commercialize additional drug formulations with our BEMA™ and Bioral®technologies. While we believe further application of our BEMA™ and Bioral® cochleate technologies to other drugs will result in license agreements with additional pharmaceutical manufacturers, our plan of operations for the foreseeable future will be to develop additional products with our BEMA™ technology and further develop our Bioral® cochleate technology for use in a limited number of applications. Such focus will not be on the marketing, production or sale of FDA approved products.
Until FDA approval, we are required under our Meda Agreements to pay certain chemistry, manufacturing and control and clinical and regulatory costs associated with the BEMA™ Fentanyl NDA, as well as manufacturing and packaging equipment costs for Onsolis™. The Meda Agreements require all pre-launch marketing and commercialization costs for Onsolis™ to be paid by Meda, as well as all required clinical costs associated with Onsolis™ after FDA approval. Meda will pay for costs of Phase III-b and Phase IV studies which, although not required as part of our Onsolis™ NDA, may be done to support the program with additional market data. In addition, Meda is paying for the development costs for BEMA™ Fentanyl in non-cancer breakthrough pain.
The recent worldwide financial and credit crisis has strained investor liquidity and contracted credit markets. If this environment continues or worsens, it may make the future cost of raising funds through the debt or equity markets more expensive or make those markets unavailable at a time when the Company requires additional financial investment. If we are unable to attract additional funds it may adversely affect our ability to achieve our development and commercialization goals, which could have a material and adverse effect on our business, results of operations and financial condition.
Our existing cash and cash equivalents are believed by our management to be sufficient to finance planned basic operations (minimal research and development activities beyond those covered under our Meda and other related agreements), debt repayment obligations and capital expenditures through the fourth quarter of 2008.
Under the Meda Agreements, we expect to receive additional payments aggregating $30.0 million upon FDA approval and launch of Onsolis™, for which we had a Prescription Drug User Fee Act ("PDUFA") date of August 31, 2008. On August 28, 2008 we announced receipt of a Complete Response letter from the FDA regarding our NDA for Onsolis™. The FDA has requested that the Company make modifications to the submitted risk management program. All aspects of the review were complete and no deficiencies were noted in chemistry, manufacturing and controls, nonclinical, or clinical efficacy/safety. We will submit the requested information in the fourth quarter of 2008 and anticipate a first half of 2009 FDA approval. The FDA requested conversion of the risk minimization action plan (RiskMAP) submitted as part of the NDA for ONSOLIS™ into a Risk Evaluation and Mitigation Strategy (REMS). REMS is a new term for a strategy and plan aimed at ensuring the benefits of a drug outweigh its risks. The REMS requested of us is believed to be the result of the FDA's recent experience with other high-potency opioid products and the new authority granted under the Food and Drug Administration Amendment Act (FDAAA) enacted in March of 2008. This followed our submission of our Onsolis™ NDA in October 2007. We expect to incur minimal additional research and development expense in order to complete the FDA REMS requirements.
However, there can be no assurances that we will receive FDA approval or the timing of such approval, if received. Additional capital will be required in order to proceed with our support of the commercial launch of Onsolis™, clinical development programs for other products in our pipeline, such as BEMA™ Buprenorphine and Bioral® Amphotericin B (the scale of which is dependent in part on the success of Onsolis™ and on the results from our Phase I studies for each of these products), and for general working capital. Based on product development timelines and agreements with our development partners, the ability to scale up or reduce personnel and associated costs are factors considered throughout the product development life cycle. Available resources may be consumed more rapidly than currently anticipated, resulting in the need for additional funding. Accordingly, we anticipate that we may be required to raise additional capital through a variety of sources, including:
• public equity markets;
• private equity financings;
• collaborative arrangements;
• grants and new license revenues;
• bank loans;
• equipment financing
• public or private debt; and
• exercise of existing warrants.
There can be no assurance that additional capital will be available on favorable terms, if at all. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain technologies and drug formulations or potential markets, either of which could have a material adverse effect on us, our financial condition and our results of operations in 2008 and beyond. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities would result in ownership dilution to existing stockholders.
Critical Accounting Policies
Revenue Recognition
Meda License, Development and Supply Agreements:
We recognize revenue associated with the Meda Agreements in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition"(SAB 104), Emerging Issues Task Force Issue No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent" (EITF 99-19), and EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" (EITF 00-21). Our deliverables under the Meda Agreements, including our related rights and obligations, contractual cash flows and performance periods, are more fully described in Note 6 to the accompanying financial statements.
Based on our assessment upon inception of each arrangement, all deliverables of the Meda Agreements have been accounted for as one combined unit of accounting and as such, all cash payments from Meda (upfront payments and product development research and development services revenue) related to these deliverables have been recorded as deferred revenue.
Upon delivery of the license rights to Meda (date of first commercial sale in each territory), we will recognize revenue associated with the license and the research and development services rendered related to development of the Onsolis™ product through the date of FDA and other governmental approval delivered to Meda. A portion of the upfront payments will be attributed to our continuing obligation to participate in joint committees with Meda and to provide certain other specified services and this revenue will be recognized as services are provided through expiration of the license agreements.
Research and development services revenue associated with the non-cancer indication and further development of the first indication for treatment of breakthrough cancer pain of the Onsolis™ product which have been performed prior to the commencement of the license term has been deferred and will be recognized upon delivery of the license rights to Meda. Services provided subsequent to commencement of the license term will be recognized when the services are performed, if all other revenue recognition criteria are met. Based on the guidance of EITF 99-19, we have determined that it is acting as a principal under the Meda Agreements and, as such, will record these amounts on a gross . . .
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