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| BDSI > SEC Filings for BDSI > Form 10-Q on 3-Nov-2009 | All Recent SEC Filings |
3-Nov-2009
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 Quarterly Report. 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 and in the Company's other filings with the Securities and Exchange Commission (the "SEC").
For the three months ended September 30, 2009 compared to the three months ended September 30, 2008
Royalty Revenues. For the three-month periods ended September 30, 2009 and 2008, the Company recorded $0.002 million and $0.004 million, respectively, in royalty revenue from a related company.
Research fees/consulting. For the three-month periods ended September 30, 2009 and 2008, the Company recorded zero and $0.01 million, respectively, in research and development services.
Research and Development. Research and development expenses of approximately $4.4 million and $2.1 million were incurred during the three-month periods ended September 30, 2009 and 2008, respectively. These aforementioned amounts included zero and $0.008 million, respectively, paid to a contract research organization, which organization was, until the third quarter of 2008, a stockholder of the Company. The increase in expenses from 2008 to 2009 resulted from costs associated with the Company's clinical development program for its pipeline product candidates, some of which are reimbursed by Meda. The Company's 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.
General and Administrative Expenses. General and administrative expenses of approximately $3.4 million and $1.8 million were incurred in the three-month periods ended September 30, 2009 and 2008, 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. The increase from 2008 to 2009 was primarily related to employee bonus payments recorded in 2009 and stock-based compensation. The 2009 bonus payments were based on 2008 achievements that supported the FDA approval of ONSOLIS™. Such bonus amounts were, however, not determined and approved until 2009 and, accordingly, were not accrued in 2008. Bonuses for 2009 (to be paid in 2010) that were determined and approved were accrued in 2009. Furthermore, severance payments were recorded and made in connection with the closing of the Newark, New Jersey laboratory.
Interest Income (expense). Interest income (expense) for the periods ended September 30, 2009 and 2008 was principally composed of interest expense incurred on notes payable, net of interest earnings on invested cash.
Derivative Gain (Loss). Derivative gain (loss) during 2009 and 2008 is related to the adjustment of related derivative liabilities to fair value. These derivatives relate to warrants and certain embedded instruments associated with previous financings (see Note 4 to the condensed consolidated financial statements). The derivative gain in 2009 is due to the Company's stock price decrease during the three months ended September 30, 2009, which triggers non-cash income and an associated decrease in the derivative liability.
Income Taxes. During the three months ended September 30, 2009, the Company recognized a $0.2 million deferred tax benefit based upon the loss incurred and temporary timing differences through September 30, 2009. During the three months ended September 30, 2008, the Company recognized a $2.0 million deferred tax benefit based upon the expectation that it was more likely than not that there would be taxable income for the year ended December 31, 2008 because, notwithstanding the Company's financial accounting with regard to this item, approximately $30.0 million of revenue which was deferred for financial reporting purposes became taxable in 2008. Deferred revenues that will be recognized and taxable in the fourth quarter of 2009 will be substantially offset by the Company's net operating loss carry-forward.
For the Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008
Royalty Revenues. During the nine-month periods ending September 30, 2009 and 2008, we recorded $0.01 million and $0.04 million, respectively, of royalty revenue from a related company.
Research fees/consulting. During the nine-month periods ending September 30, 2009 and September 30, 2008, we recorded zero and $0.1 million, respectively, of research and development services.
Research and Development. Research and development expenses of approximately $8.2 million and $8.5 million were incurred during the respective nine-month periods ended September 30, 2009 and 2008. These amounts included zero and $0.4 million, respectively, paid to a contract research organization that was, until the third quarter of 2008, a stockholder of the Company. The increase in expenses from 2008 to 2009 was minimal for the nine-month period, but included costs associated with the Company's clinical development program for its pipeline product candidates, some of which are reimbursed by Meda, while in the prior year most of the research and development was associated with ONSOLIS™. 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.
General and Administrative Expenses including Stock-based Compensation. General and administrative expenses of approximately $6.4 million and $5.9 million were incurred in the nine-month periods ended September 30, 2009 and 2008, 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. The increase from 2008 to 2009 was primarily related to employee bonus payments recorded in 2009 and stock-based compensation. The 2009 bonus payments were based on 2008 achievements that supported the FDA approval of ONSOLIS™. Such bonus amounts were, however, not determined and approved until 2009 and, accordingly, were not accrued in 2008. Bonuses for 2009 (to be paid in 2010) that were determined and approved were accrued in 2009. Furthermore, severance payments were recorded and made in connection with the closing of the Newark, New Jersey laboratory.
Interest Expense Net. Interest expense for the periods ended September 30, 2009 and 2008 was principally composed of interest expense for amortization of deferred loan costs and notes payable discount amortization, net of interest earnings on invested cash.
Derivative Gain (Loss). Derivative gain (loss) during 2009 and 2008 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). The increase in the derivative loss is due to the increase in the Company's stock price during the nine months ended September 30, 2009, which triggers a non-cash expense and an associated increase in the derivative liability.
Income Taxes. During the nine months ended September 30, 2009, the Company recognized a $0.2 million deferred tax benefit based upon the loss incurred and temporary timing differences through September 30, 2009. During the nine months ended September 30, 2008, the Company recognized a $2.0 million deferred tax benefit based upon the expectation that it was more likely than not that there would be taxable income for the year ended December 31, 2008 because, notwithstanding the Company's financial accounting with regard to this item, approximately $30.0 million of revenue which was deferred for financial reporting purposes became taxable in 2008. Deferred revenue that will be recognized and taxable in the fourth quarter of 2009 will be substantially offset by the Company's net operating loss carry-forward.
Liquidity and Capital Resources
Background
We have incurred significant net losses and negative cash flows from operations since our inception. As of September 30, 2009, we had stockholders' deficit of $41.2 million, versus $33.6 million at December 31, 2008.
Since our inception through October 2009, we have financed our operations primarily from the private sales of our convertible preferred stock, convertible debt, Common Stock and Common Stock warrants, our public offering in 2002 and follow-on public offering in 2005, exercise of options, various strategic and licensing agreements (including a clinical development agreement with CDC and our Meda Agreements), grants, bank financing, and through the sale of a royalty stream asset.
In January 2009, we filed a universal shelf registration for up to $50 million of our securities which was declared effective by the SEC and under which can publicly offer our securities over a three year period based on certain terms and conditions to be determined at the time we decide if and when it is prudent to utilize the shelf registration.
In July 2009, we received $26.8 million from Meda, which consisted of $11.8 million for the approval of ONSOLIS™ and $15.0 million for the production of launch supplies.
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. In March 2008 we received a milestone payment of $2.5 million in connection with our Meda EU Agreements. In January 2009 we received $6.0 million from Meda, which consisted of a $3.0 million advance against the $15.0 million approval milestone and $3.0 million for expansion of the Meda EU license.
During the nine months ended September 30, 2009, we received approximately $5.1 million in proceeds from warrant exercises and $0.3 million in proceeds from stock option exercises.
At September 30, 2009, we had cash and cash equivalents of approximately $25.9 million. The adequacy of cash for our operations and continued research is dependent on, among other things,
licensing and milestone payments, and additional equity or debt financing
opportunities that we are able to negotiate in the coming year. We generated
$22.3 million of cash from operations in the nine-months ended September 30,
2009. This principally resulted from: (1) a net loss of $21.8 million, which
included and was offset by net non-cash charges of $9.7 million ($7.4 million
derivative loss associated with fair value of outstanding warrants; $1.7 million
stock based compensation; $0.6 million of depreciation and amortization);
(2) aforementioned milestone payments from Meda, along with reimbursements for
research and development expenses totaling $35.0 million; and (3) reduction of
our accounts payable and accrued liabilities of $2.2 million. In accordance with
our revenue recognition policy, costs associated with non-cancer breakthrough
pain and BREAKYL™ are expensed in the accompanying financial statements, while
the associated reimbursement from Meda is treated as deferred revenue until the
products are approved and we have the first commercial sale.
We invested $2.2 million in 2008 in special equipment we will require for packaging ONSOLIS™, which together with $0.7 million expended in 2007 and final payments of $0.6 million in 2009 has resulted in total cost of the equipment of $3.5 million, which we may seek to finance in the future.
On October 6, 2009, we announced our award of a $1.3 million grant from the Walter Reed Army Institute of Research to support the clinical study of the Company's Bioral Amphotericin B product candidate in the treatment of Cutaneous Leishmaniasis. We expect this to be funded over the next year.
Discussion of Plans for Sources and Uses of Capital
We anticipate that cash used in operations and potential investments we may make in personnel and infrastructure will continue beyond our ONSOLIS™ agreements with Meda as we research, develop, and, potentially, manufacture and commercialize additional pharmaceutical products that utilize our BEMA® (transmucosal delivery) and Bioral® (drug encochleation) delivery technologies. While we believe further application of our BEMA® and Bioral® technologies to other drugs has the potential to result in license agreements with manufacturers of generic and over-the-counter drugs, our plan of operations for the foreseeable future will be focused on further development of our BEMA® and Bioral® technologies for use in a limited number of pharmaceutical applications.
Prior to the FDA approval of ONSOLIS™, we were required under our U.S. Meda agreements to pay certain chemistry, manufacturing and control, as well as clinical and regulatory costs associated with the New Drug Application ("NDA") for ONSOLIS™. We were also required to incur manufacturing and packaging equipment costs for ONSOLIS™. However, our agreements with Meda provide that all pre-launch marketing and commercialization costs for ONSOLIS™ are to be paid by Meda, as well as any required post-FDA approval amendments or changes to risk assessment and mitigation programs and clinical costs associated with ONSOLIS™. Meda will pay for costs of Phase 3-b and Phase 4 studies which, although not required as part of our NDA, may be done to support the program with additional market data.
Pursuant to the Meda U.S. Licensing Agreements, in July 2009 we received additional milestone payments of $26.8 million in connection with FDA approval of, and satisfactory preparation of launch supplies for, ONSOLIS™ in the U.S. and expect to receive $5.0 million from Meda in connection with the commercial launch of BREAKYL™ in Europe. ONSOLIS™ will be marketed as BREAKYL™ in Europe.
Our existing cash and cash equivalents are estimated by our management to be sufficient to finance our planned operations (namely, the advancement of our principal product candidates, BEMA® Buprenorphine and Bioral®Amphotericin B) through 2010. This estimation does not take into
consideration cash that we may receive in the form of milestone or similar payments should we enter into a commercialization agreement for BEMA ® Buprenorphine during 2010. No assurances can be given, however, that we will be able to enter into such an agreement.
Also, in the third quarter of 2009, we began pre-clinical development of an additional BEMA ®-based product candidate, BEMA® Granisetron, a potential treatment for nausea and vomiting. Our current plan is to commence Phase I clinical trials for this product candidate in the first quarter of 2010, which will require us to expend funds. We also intend to commence clinical development of a fourth potential BEMA® product, BEMA® Triptan, a potential treatment for migraines, in the second half of 2010.
As such, and notwithstanding our receipt of the July 2009 $26.8 million milestone payment from Meda, we may require additional capital to fund our general working capital, to support the commercial launch of ONSOLIS™ and for the pre-clinical and clinical development programs for the aforementioned products in our pipeline, the scale of which will be dependent in part on the performance of ONSOLIS™ in the marketplace and the resulting royalties to which we will be entitled and on the results from our clinical studies for each of these products, all of which are uncertain. Our need for additional capital to fund our operations going forward will be even greater should we be unable to generate funds in 2010 from a commercialization agreement for BEMA ® Buprenorphine.
Moreover, we may consume available resources more rapidly than currently anticipated and we may also be faced with unanticipated spending requirements, resulting in the need for additional funding.
Should additional funding be required to advance our business for these or any other reasons, we will explore a variety of sources, including:
• public equity markets (including use of our universal shelf registration statement);
• private equity financings;
• collaborative arrangements;
• grants and new license revenues;
• bank loans;
• equipment financing;
• public or private debt; and
• exercise of existing warrants.
We may also opportunistically seek funding (even if cash on hand is deemed to be adequate to support planned operations) if factors such as our public share price or the demand for our securities from potential investors make such funding desirable.
However, 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 we require 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.
Readers are cautioned that additional capital under any of the aforementioned circumstances may be unavailable 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 product candidates or potential markets, any of which could have a material adverse effect on us, our financial condition, our results of operations and our stock price in 2010 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.
Valuation of Goodwill and Intangible Assets
Our intangible assets include goodwill, product rights, and licenses, all of which are accounted for based on GAAP related to Goodwill and Other Intangible Assets. Accordingly, goodwill is not amortized but is tested at least annually for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assets with limited useful lives are amortized using the straight-line method over their estimated period of benefit, ranging from eleven to thirteen years. Our carrying value of goodwill at September 30, 2009 was $2.715 million.
We amortize intangibles with limited useful lives based on their expected useful lives and look to a number of factors for such estimations, including the longevity of our license agreements or the underlying patents. Our carrying value of other amortizing intangible assets at September 30, 2009 was $7.3 million, net of accumulated amortization of $2.1 million. We begin amortizing capitalized intangibles on their date of acquisition.
Impairment Testing
Our goodwill impairment testing is calculated at the reporting unit level. Our annual impairment test, which is performed in December, has two steps. The first identifies potential impairments by comparing the fair value of the reporting unit with its carrying value. If the fair value exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the carrying value exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied fair value of goodwill is less than the carrying amount, a write-down is recorded. No goodwill impairment charges have resulted from this analysis for 2009 or 2008.
In accordance with generally accepted accounting principles related to the impairment of long-lived assets other than goodwill (our other amortizing intangibles), impairment exists if the sum of the future estimated undiscounted cash flows related to the asset is less than the carrying amount of the intangible asset or to its related group of assets. In that circumstance, then an impairment charge is recorded for the excess of the carrying amount of the intangible over the estimated discounted future cash flows related to the asset.
In making this assessment, we predominately use a discounted cash flow model derived from internal budgets in assessing fair values for our impairment testing. Factors that could change the result of our impairment test include, but are not limited to, different assumptions used to forecast future net sales, expenses, capital expenditures, and working capital requirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the estimated undiscounted cash flows is susceptible to future changes in market conditions, and when unfavorable, can adversely affect our original estimates of fair values. In the event that our management determines that the value of intangible assets have
become impaired using this approach, we will record an accounting charge for the amount of the impairment. No impairment charges have been recorded to other amortizing intangibles in either 2009 or 2008.
Stock-Based Compensation and other stock based valuation issues (derivative accounting)
We account for stock-based awards to employees and non-employees in accordance with generally accepted accounting principles related to share based payments, which provides for the use of the fair value based method to determine compensation for all arrangements where shares of stock or equity instruments are issued for compensation. Fair values of equity securities issued are determined by management based predominantly on the trading price of the Company's Common Stock. The values of these awards are based upon their grant-date fair value. That cost is recognized over the period during which the employee is required to provide the service in exchange for the award. We use the Black-Scholes options-pricing model to determine the fair value of stock option and warrant grants. We also use the Black Scholes option pricing model as the primary basis for valuing our derivative liabilities at each reporting date (both embedded and free-standing derivatives). The underlying assumptions used in this determination are primarily the same as are used in the determination of stock-based compensation discussed in the previous paragraph except contractual lives of the derivative instruments are utilized rather than expected option terms as discussed in the previous paragraph.
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