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BDSI > SEC Filings for BDSI > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for BIODELIVERY SCIENCES INTERNATIONAL INC

Form 10-Q for BIODELIVERY SCIENCES INTERNATIONAL INC


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 Quarterly Report and in the Company's other filings with the Securities and Exchange Commission (the "SEC"). See "Cautionary Note Regarding Forward Looking Statements" below.

For the three months ended September 30, 2012 compared to the three months ended September 30, 2011

Product Royalty Revenues. We recognized $2.7 million in product royalty revenue during the three months ended September 30, 2011 under our license agreement with Meda. There was no product royalty revenue during the three months ended September 30, 2012.

Contract Revenues. We recognized $0.05 million and $0.004 million during the three months ended September 30, 2012 and 2011, respectively, in contract revenue related to previously deferred amounts under our license agreement with Meda.

Cost of Product Royalties. We recognized $0.4 million and $1.5 million during the three months ended September 30, 2012 and 2011, respectively, in cost of product royalties. This includes not only manufacturing costs, but also royalty costs owed to CDC V, LLC ("CDC") and NB Athyrium LLC ("Athyrium"). We are required to pay royalties to CDC under a Clinical Development and License Agreement entered into in 2005 (as amended, the "CDLA") pursuant to which a predecessor to CDC provided funds for the development of ONSOLIS ®. Athyrium subsequently acquired certain rights to such royalties from CDC.

Research and Development Expenses. During the three months ended September 30, 2012 and 2011, research and development expenses totaled $12.5 million and $6.2 million, respectively. The increase in 2012 research and development expenses can be attributed primarily to an increase in expenditures associated with the preparation for our BEMA® Buprenorphine clinical trials as required under our agreement with Endo as well as costs associated with our BEMA® Buprenorphine/Naloxone product candidate. As part of the efforts related to the Endo agreement during the second quarter of 2012, we entered into a terminable contract research organization agreement associated with such clinical trials, which agreement accounted for a material portion of the increased expenditures. Our scientific staff continues to work toward development and application of our BEMA® delivery technology, particularly with respect to ONSOLIS®, BEMA® Buprenorphine and BEMA®Buprenorphine/Naloxone. Funding of this research in 2012 and 2011 was obtained through contract revenue, deferred license revenue, a private placement stock offering, exercise of options by employees and directors and sales of securities. Research and development expenses generally include compensation for scientific personnel, manufacturing equipment depreciation and a portion of overhead operating expenses and other costs directly related to the development and application of our BEMA ® drug delivery technology.

General and Administrative Expenses. During the three months ended September 30, 2012 and 2011, general and administrative expenses totaled $3.0 million and $2.6 million, respectively. General and administrative costs include accounting and management wages and other employee compensation costs, legal and professional fees, office supplies, travel costs, compensation costs, consulting fees and business development costs. The increase in general and administration expenses can be primarily attributed to stock compensation expense, which was $0.7 million and $0.6 million for the three months ended September 30, 2012 and 2011, respectively.

Interest Income. During the three months ended September 30, 2012 and 2011 we had interest income of $0.09 million and $0.06 million, respectively.

Derivative loss. Our derivative liability consists of free standing warrants measured at their fair market value, using the Black-Scholes method. During the three months ended September 30, 2012, our stock price increased, which is one of the largest components of the Black Scholes calculation. As a result, our warrant liability also increased, resulting in a $3.3 million non-cash charge to income. Also included was a $0.3 million non-cash charge from a warrant we hold to purchase 2 million shares of Biovest International, Inc., a related party ("Biovest"). During the three months ended September 30, 2011 our share price declined, resulting in a derivative liability decrease of $2.6 million. This resulted in a corresponding derivative gain. This gain was offset by a $0.1 million loss on the value of our Biovest warrant.

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

Product Royalty Revenues. We recognized $2.7 million in product royalty revenue during the nine months ended September 30, 2011 under our license agreement with Meda. There was no product royalty revenue during the nine months ended September 30, 2012.


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Research Revenues. We recognized $0.01 million and $0.2 million of revenue related to a research and development agreement with Meda during the nine months ended September 30, 2012 and 2011, respectively.

Contract Revenues. We recognized $45 million from Endo during the nine months ended September 30, 2012 in contract revenue related to our license agreement with Endo , consisting of a non-refundable up-front license payment of $30.0 million and a milestone payment of $15.0 million related to a patent extension which granted an additional seven years of exclusivity. We also recognized $0.1 million and $0.01 million during the nine months ended September 30, 2012 and 2011, respectively, in contract revenue related to previously deferred amounts under our license agreement with Meda.

Cost of Product Royalties. We recognized $1.1 million and $1.4 million during the nine months ended September 30, 2012 and 2011, respectively, in cost of product royalties. This includes both manufacturing costs and product royalty costs owed to CDC and Athyrium.

Research and Development Expenses. During the nine months ended September 30, 2012 and 2011, research and development expenses totaled $23.8 million and $17.6 million, respectively. The increase in 2012 research and development expenses can be attributed primarily to an increase in expenditures associated with the preparation for our BEMA® Buprenorphine clinical trials as required under our agreement with Endo as well as costs associated with our BEMA® Buprenorphine/Naloxone product candidate. Our scientific staff continues to work toward development and application of our BEMA® delivery technology, particularly with respect to ONSOLIS ®, BEMA® Buprenorphine and BEMA®Buprenorphine/Naloxone. Funding of this research in 2012 and 2011 was obtained through contract revenue, deferred license revenue, a private placement stock offering, exercise of options by employees and directors and sales of securities. Research and development expenses generally include compensation for scientific personnel, manufacturing equipment depreciation and a portion of overhead operating expenses and other costs directly related to the development and application of our BEMA ® drug delivery technology.

General and Administrative Expenses. During the nine months ended September 30, 2012 and 2011, general and administrative expenses totaled $8.0 million and $6.3 million, respectively. General and administrative costs include accounting and management wages and other employee compensation costs, legal and professional fees, office supplies, travel costs, consulting fees and business development costs. The increase in general and administration expenses can be attributed to stock compensation expense, legal fees, compensation increases and increases in various other professional services in conjunction with the large new clinical trials underway this year.

Interest Income. During the nine months ended September 30, 2012 and 2011 we had interest income of $0.2 million and $0.1 million, respectively.

Derivative loss. Our derivative liability consists of free standing warrants measured at their fair market value, using the Black-Scholes method. During the nine months ended September 30, 2012, our stock price increased, which is one of the largest component of the Black Scholes calculation. As a result, our warrant liability also increased, resulting in an $8.7 million non-cash charge. In addition, there was a $0.2million decrease in the fair market value of a warrant we hold to purchase 2 million shares of Biovest. During the nine months ended September 30, 2011 our stock price decreased and the fair value of the related warrant liability declined by $3.8 million, resulting in a corresponding derivative gain. This gain was partially offset by a $0.8 million loss in the fair value of our Biovest warrant.

Liquidity and Capital Resources

Since inception, we have financed our operations principally from the sale of equity securities, proceeds from short-term borrowings or convertible notes, funded research arrangements, revenue and cash flow generated as a result of our worldwide license and development agreements with Meda regarding ONSOLIS® and revenue and cash flow generated as a result of our January 2012 agreement with Endo regarding our BEMA® Buprenorphine product candidate. We intend to finance our research and development, commercialization efforts and our working capital needs from existing cash, royalty revenue, new sources of financing, licensing and commercial partnership agreements and, potentially, through the exercise of outstanding Common Stock options and warrants to purchase Common Stock.

In February 2012, our universal shelf registration statement pursuant to which we could issue up to $50 million of our securities from time to time and subject to certain conditions was scheduled to expire. In January 2012, we filed a renewal of our shelf registration statement which registered up to $40 million of our securities for potential future issuance. Such registration statement was declared effective on February 24, 2012 and will expire in February 2015 unless it is renewed prior to such expiration.

On May 21, 2012, we announced receipt of a pre-launch milestone payment of $2.5 million from Meda in conjunction with the first country registration and pricing approval for BREAKYL™ (tradename for ONSOLIS® in the EU). This $2.5 million milestone payment has been recorded as deferred revenue and will be recorded as contract revenue at the time of commercial launch in EU. A


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final milestone payment related to the EU of $2.5 million was paid at the time of commercial launch, which was October 2012. BREAKYL™ will be commercialized in the EU by Meda. As such, a total of $16.5 million of previously deferred revenue will be recorded as contract revenues in the fourth quarter of 2012 related to the EU agreement with Meda.

At September 30, 2012, we had cash and cash equivalents of approximately $31.3 million. We generated $19.7 million of cash from operations during the nine months ended September 30, 2012. As of September 30, 2012, we had stockholders' equity of $11.0 million versus $4.1 million at December 31, 2011. In January 2012, we received and recognized as contract revenues a $30 million, upfront non-refundable payment related to our definitive license and development agreement with Endo to license, develop, manufacture, market and sell our BEMA ® Buprenorphine product candidate. In addition, in May 2012, we received and recognized as contract revenues an additional $15 million milestone payment from Endo due to our achievement of a certain intellectual property-related milestone. This $45 million in cash is anticipated to be used in its entirety to fund our clinical research with respect to this product. As such, our existing cash, even with the aforementioned $45 million payments, together with other expected cash inflows from other milestones and royalties, are anticipated by management to be sufficient to fully fund our planned level of operations into the second quarter of 2013. Included in this estimation are costs of between $0.6 million and $0.8 million that we expect will be incurred in connection with the reformulation of ONSOLIS ®. Certain planned expenditures are discretionary and could be deferred if we are required to do so to fund critical operations.

Additional capital will likely be required to support commercialization efforts for ONSOLIS ® (including commercial launch in Europe which occurred in October 2012), clinical development programs for BEMA ® Buprenorphine (the scale of which is being governed by the requirements of our agreement with Endo), planned development of BEMA® Buprenorphine/Naloxone product candidate and other potential products or technologies, as well as general working capital. Based on product development timelines and agreements with our existing development and commercialization 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.

Additionally, the worldwide financial and credit crisis that began in 2008 and has fluctuated to the present time has strained investor liquidity and contracted credit markets. During the nine months ending September 30, 2012, the financial and credit crisis did not directly nor materially impact us. However, if this environment continues, fluctuates 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 development and commercialization goals, which could have a material and adverse effect on the business, results of operations and financial condition.

Also, product development timelines agreements with our development partners and, 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 will be required to raise additional capital, which may be available to us through a variety of sources, including:

• public equity markets;

• private equity financings;

• commercialization agreements and collaborative arrangements;

• sale of product royalty;

• grants and new license revenues;

• bank loans;

• equipment financing;

• public or private debt; and

• exercise of existing warrants and options.

Readers are cautioned that additional funding, capital or loans (including, without limitation, milestone or other payments from potential commercialization agreements) 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 drug formulations or potential markets, any of which could have a material adverse effect on us, our financial condition and our results of operations in 2012 and beyond. To the extent that additional capital is raised through the sale of equity or convertible debt securities or exercise of warrants and options, the issuance of such securities would result in ownership dilution to existing stockholders.


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If we are unable to attract additional funds on commercially acceptable terms, 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.

Contractual Obligations and Commercial Commitments

Our contractual obligations as of September 30, 2012 are as follows:



                                                                  Payments Due by Period
                                                         Less than                                       More than
                                          Total           1 year         1-3 years       3-5 years        5 years
Operating lease obligations            $    288,739     $   111,300     $   177,439     $        -      $        -
Employment agreements                       817,141         817,141              -               -               -
Minimum royalty expenses*                11,250,000       1,500,000       3,000,000       3,000,000       3,750,000

Total contractual cash obligations**   $ 12,355,880     $ 2,428,441     $ 3,177,439     $ 3,000,000     $ 3,750,000

* Minimum royalty expenses represent a contractual floor that we are obligated to pay CDC and Athyrium regardless of actual sales.

** Endo has worldwide rights to market, upon FDA approval, our BEMA® Buprenorphine product. Under our agreement with Endo, among other deliverables, we are required to conduct and pay for certain specific clinical trials and, in connection with such specific trials, provide clinical trial materials, as outlined in a mutually agreed development plan. The costs for such trials and materials will depend on the size and scope of the specified trials. The Endo agreement does not specify minimums in terms of the cost of the trials, but does provide for a cost sharing arrangement under which we will be responsible for a material amount of such costs, up to a certain threshold, whereupon Endo will be responsible for a significantly less amount of such costs (if any are incurred), up to second threshold amount, and thereafter, costs (if any are incurred) will be shared equally by us and Endo.

Off-Balance Sheet Arrangements

As of September 30, 2012, we had no off-balance sheet arrangements.

Effects of Inflation

We do not believe that inflation has had a material effect on our financial position or results of operations. However, there can be no assurance that our business will not be affected by inflation in the future.

Critical Accounting Policies

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 annually in December 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, 2012 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, 2012 was $6.4 million, net of accumulated amortization of $4.5 million. We begin amortizing capitalized intangibles on their date of acquisition.

Impairment Testing

The FASB issued ASU 2011-08, "Testing Goodwill for Impairment". The update allows us to qualitatively assess whether the fair value of a reporting unit is less than its carrying amount, and is effective for fiscal years beginning after December 15, 2011. We perform this analysis in conjunction with our annual impairment test described below.

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.


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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.

There were no impairment charges during the nine months ended September 30, 2012 or 2011.

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 our 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 and assets 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 previously discussed except contractual lives of the derivative instruments are utilized rather than expected option terms as previously discussed.

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