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

Show all filings for BIOSPECIFICS TECHNOLOGIES CORP

Form 10-Q for BIOSPECIFICS TECHNOLOGIES CORP


9-Nov-2012

Quarterly Report


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

The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Report, and is qualified by reference to them.

Overview

We are a biopharmaceutical company involved in the development of an injectable collagenase for multiple indications. We are a party to the Auxilium Agreement, our development and license agreement with Auxilium for injectable collagenase (which Auxilium has named XIAFLEX® (collagenase clostridium histolyticum)) for clinical indications in Dupuytren's contracture, Peyronie's disease and frozen shoulder (adhesive capsulitis). Auxilium has an option to acquire additional indications that we may pursue, including cellulite, for which we have granted Auxilium the right to initiate early development studies at its cost, and human and canine lipoma. Auxilium is currently selling XIAFLEX in the U.S. for the treatment of Dupuytren's contracture. Auxilium has an agreement with Pfizer pursuant to which Pfizer has marketing rights for XIAPEX® (the EU trade name for collagenase clostridium histolyticum) for Dupuytren's contracture and Peyronie's disease in Europe and certain Eurasian countries through April 24, 2013. In addition, Auxilium has an agreement with Asahi pursuant to which Asahi has the right to commercialize XIAFLEX for the treatment of Duputyren's contracture and Peyronie's disease in Japan. Auxilium also has an agreement with Actelion pursuant to which Actelion has the right to commercialize XIAFLEX for the treatment of Duputyren's contracture and Peyronie's disease in Canada, Australia, Brazil and Mexico. Actelion was granted a Notice of Compliance (approval) by Health Canada for XIAFLEX for the treatment of Dupuytren's contracture in adults with a palpable cord in Canada.

Pursuant to the DFB Agreement, we continue to receive earn-out payments based on the sales of Santyl. Our right to receive earn-out payments with respect to the marketed topical product sold to DFB expires in June 2013, but earn-out payments for second generation collagenase products, if any, continue indefinitely.

Operational Highlights

On November 7, 2012, Auxilium announced that it has submitted a sBLA to the FDA for XIAFLEX for the potential treatment of Peyronie's disease. Auxilium has requested Priority Review designation for the sBLA and expects to hear back from the FDA regarding that designation within approximately 60 days from the filing date. Under Prescription Drug User Fee Act guidelines, if Priority Review designation is granted for the submission, the FDA's goal for completing the Priority Review is six months from the date of receipt. Adrian Adams, Chief Executive Officer and President of Auxilium, noted in Auxilium's announcement that the sBLA submission "'is a significant regulatory milestone for XIAFLEX and Auxilium and further demonstrates our strong commitment to addressing unmet medical needs by potentially providing patients with the only FDA-approved biologic therapy to treat this devastating disease'". He added that Auxilium believes that "'if approved by the FDA for the treatment of Peyronie's disease, XIAFLEX has the clinical profile to become a potential breakthrough option in a therapeutic area that currently has limited treatment options'".

Also on November 7, 2012, Auxilium and Pfizer announced that they have amended their collaboration agreement for the development, commercialization and supply of XIAPEX for the treatment of Dupuytren's contracture and the potential treatment of Peyronie's disease in the European Union and certain other European and Eurasian countries to include a mutual termination date of April 24, 2013. After the termination date, rights to commercialize XIAPEX and responsibility for regulatory activities for XIAPEX in these countries will revert to Auxilium. Adrian Adams stated in the announcement that "'Auxilium remains committed to addressing the unmet needs of adult Dupuytren's contracture patients in the EU, and we now have the strategic flexibility to evaluate all of our options for the continuing commercialization of XIAPEX for the treatment of Dupuytren's contracture and for gaining approval for XIAPEX for the treatment of Peyronie's disease in the EU and other specified markets'".


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In a September 5, 2012 press release, we announced a safety update following 30 months of post-approval use in the U.S. of XIAFLEX for the treatment of adult Dupuytren's contracture patients with a palpable cord. As reported by Auxilium, after approximately 27,000 injections were administered to approximately 21,000 patients in the U.S., there was no clinically meaningful change in the nature of events expected relative to the clinical trial safety profile.

In an August 27, 2012 press release, we announced the presentation of additional data from the Phase III clinical program of XIAFLEX for the treatment of Peyronie's disease conducted by Auxilium and known as IMPRESS (The Investigation for Maximal Peyronie's Reduction Efficacy and Safety Studies). These data were presented at two oral presentations at the Sexual Medicines Society of North America/International Society for Sexual Medicine Joint Annual Meeting on August 27 and 29, 2012 in Chicago, IL. These data highlighted the psychological severity of Peyronie's disease, which currently has no FDA-approved pharmaceutical therapy and complemented the positive top-line Phase III results from the two IMPRESS clinical trials reported in June 2012.

In a July 30, 2012 press release, Auxilium announced positive top-line data from its open-label phase IIIb trial evaluating XIAFLEX for the treatment of adult Dupuytren's contracture patients with multiple palpable cords. Auxilium enrolled 60 patients at eight sites throughout the U.S. and Australia. In the third quarter of 2012, Auxilium initiated a larger study with XIAFLEX for the concurrent treatment of multiple palpable cords that, if successful, may allow the Company to seek FDA approval and expansion of the Dupuytren's label. Auxilium expects topline results in the first half of 2014.

Also in the third quarter of 2012, Auxilium completed enrollment in its cellulite phase Ib, Frozen Shoulder phase IIa and phase IV Dupuytren's retreatment clinical trials. Auxilium expects top-line data from these XIAFLEX studies in the fourth quarter of 2012, first quarter of 2013 and fourth quarter of 2013, respectively.

In a July 9, 2012 press release, Auxilium and Actelion announced that Auxilium was granted a Notice of Compliance (approval) by Health Canada for XIAFLEX for the treatment of Dupuytren's contracture in adults with a palpable cord in Canada. Under the terms of the Collaboration Agreement between Actelion and Auxilium, Actelion received exclusive rights to commercialize XIAFLEX for the treatment of Dupuytren's contracture and Peyronie's disease in Canada, Australia, Brazil and Mexico upon receipt of the respective regulatory approvals. Pursuant to the Collaboration Agreement, Auxilium intends to transfer regulatory sponsorship of the dossier to Actelion and Actelion will be primarily responsible for the applicable regulatory and commercialization activities for XIAFLEX in Canada and, upon approval, in the remainder of these countries. Actelion expects to make XIAFLEX available to patients in Canada in the first half of 2013.

Outlook

Currently, we generate revenue from two primary sources: in connection with the DFB Agreement and in connection with the Auxilium Agreement. Under the DFB Agreement, our right to receive earn-out payments with respect to the marketed topical product sold to DFB expires in June 2013, but earn-out payments for second generation collagenase products, if any, continue indefinitely. Under the Auxilium Agreement, we receive sublicense income, royalties, milestones and mark-up on cost of goods sold payments related to the sale and approval of XIAFLEX/XIAPEX as described above.

Significant Risks

We are dependent to a significant extent on third parties, and our principal licensee, Auxilium, may not be able to continue successfully commercializing XIAFLEX for Dupuytren's contracture, successfully develop XIAFLEX for additional indications, obtain required regulatory approvals, manufacture XIAFLEX at an acceptable cost, in a timely manner and with appropriate quality, or successfully market products or maintain desired margins for products sold, and as a result we may not achieve sustained profitable operations.


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Critical Accounting Policies, Estimates and Assumptions

The preparation of unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are based on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The information at September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to state fairly the financial information set forth herein. The December 31, 2011 balance sheet amounts and disclosures included herein have been derived from the Company's December 31, 2011 audited consolidated financial statements. The interim results are not necessarily indicative of results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the unaudited consolidated financial statements for the period ended March 31, 2012 and June 30, 2012 included in the Company's Quarterly Reports on Form 10-Q filed with the SEC and the audited consolidated financial statements for year ended December 31, 2011 included in the Company's Annual Report on Form 10-K filed with the SEC. While our significant accounting policies are described in more detail in the notes to our unaudited consolidated financial statements, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our unaudited consolidated financial statements. Actual results have differed in the past, and may differ in the future, from our estimates and could impact our earnings in any period during which an adjustment is made.

Revenue Recognition. We recognize revenues from product sales when there is persuasive evidence that an arrangement exists, title passes, the price is fixed and determinable, and payment is reasonably assured. We currently recognize revenues resulting from the licensing, sublicensing and use of our technology and from services we sometimes perform in connection with the licensed technology.

We enter into product development licenses, and collaboration agreements that may contain multiple elements, such as upfront license and sublicense fees, milestones related to the achievement of particular stages in product development and royalties. As a result, significant contract interpretation is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a multiple-element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how the aggregate contract value should be allocated among the deliverable elements and when to recognize revenue for each element.

We recognize revenue for delivered elements only when the fair values of undelivered elements are known, when the associated earnings process is complete and, to the extent the milestone amount relates to our performance obligation, when our licensee confirms that we have met the requirements under the terms of the agreement, and when payment is reasonably assured. Changes in the allocation of the contract value between various deliverable elements might impact the timing of revenue recognition, but in any event, would not change the total revenue recognized on the contract. For example, nonrefundable upfront product license fees, for product candidates for which we are providing continuing services related to product development, are deferred and recognized as revenue over the development period.

Milestones, in the form of additional license fees, typically represent nonrefundable payments to be received in conjunction with the achievement of a specific event identified in a contract, such as completion of specified clinical development activities and/or regulatory submissions and/or approvals. We believe that a milestone represents the culmination of a distinct earnings process when it is not associated with ongoing research, development or other performance on our part. We recognize such milestones as revenue when they become due and payment is reasonably assured. When a milestone does not represent the culmination of a distinct earnings process, we recognize revenue in a manner similar to that of an upfront product license fee.

Royalty/ Mark-up on Cost of Goods Sold / Earn-Out Revenue

For those arrangements for which royalty, mark-up on cost of goods sold or earn-out payment information becomes available and collectability is reasonably assured, we recognize revenue during the applicable period earned. For interim quarterly reporting purposes, when collectability is reasonably assured but a reasonable estimate of royalty, mark-up on cost of goods sold or earn-out payment revenues cannot be made, the royalty, mark-up on cost of goods sold or earn-out payment revenues are generally recognized in the quarter that the applicable licensee provides the written report and related information to us.

Under the Auxilium Agreement, we do not participate in the selling, marketing or manufacturing of products for which we receive royalties and a mark-up of the cost of goods sold revenues. The royalty and mark-up on cost of goods sold revenues will generally be recognized in the quarter that Auxilium provides the written reports and related information to us, that is, royalty and mark-up on cost of goods sold revenues are generally recognized one quarter following the quarter in which the underlying sales by Auxilium occurred. The royalties payable by Auxilium to us are subject to set-off for certain patent costs.


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Under the DFB Agreement, pursuant to which we sold our topical collagenase business to DFB, we have the right to receive earn-out payments in the future based on sales of certain products. Generally, under the DFB Agreement we would receive payments and a report within ninety (90) days from the end of each calendar year after DFB has sold the royalty-bearing product. Currently, DFB is providing us earn-out reports on a quarterly basis.

Consulting and Technical Assistance Services. We recognize revenues from consulting and technical assistance contracts primarily as a result of the DFB Agreement. Consulting revenues are recognized ratably over the term of the contract. The consulting and technical assistance obligations to DFB expired during March 2011.

Reimbursable Third Party Development Costs. We accrued patent expenses for research and development that are reimbursable by us under the Auxilium Agreement. We capitalize certain patent costs related to estimated third party development costs that are reimbursable under the Auxilium Agreement. In August 2011, through the amendment and restatement of our development and license agreement with Auxilium, we have clarified the rights and responsibilities of the joint development of XIAFLEX. We resolved what had been an on-going dispute with Auxilium concerning the appropriate amount of creditable third party development expenses related to the lyophilization of the injection formulation and certain patent expenses for research and development costs that are reimbursable under the Auxilium Agreement. We agreed and have reimbursed Auxilium by offsetting future royalties payable for the amount invoiced us for third party development costs related to the development of the lyophilization of the injection formulation. We do not expect any additional third party development cost related to the lyophilization of the injection formulation.

As of September 30, 2012 our net reimbursable third party patent costs accrual was approximately $90,000.

Receivables and Deferred Revenue. Accounts receivable as of September 30, 2012 is approximately $3.2 million, which consists of approximately $2.1 million due from DFB in accordance with the earn-out under the DFB Agreement and approximately $1.1 million in royalties and mark-up on costs of goods sold due from Auxilium in accordance with the terms of the Auxilium Agreement. Deferred revenue of $0.4 million consist of licensing fees related to the cash payments received under the Auxilium Agreement in prior years and amortized over the expected development period of certain indications for XIAFLEX.

Royalty Buy-Down. On March 31, 2012, we entered into an amendment to our existing agreement, dated August 27, 2008, related to our future royalty obligations for Peyronie's disease. The amendment enables us to buy down a portion of our future royalty obligations in exchange for an initial cash payment of $1.5 million and five additional cash payments payable upon the occurrence of a milestone event.

As of September 30, 2012, we have capitalized $2.75 million related to this agreement which will be amortized over approximately five years beginning on the date of the first commercial sale of XIAFLEX for the treatment of Peyronie's disease, which represents the period estimated to be benefited using the straight-line method. In accordance with Accounting Standards Codification 350, Intangibles, Goodwill and Other, the Company amortizes intangible assets with finite lives in a manner that reflects the pattern in which the economic benefits of the assets are consumed or otherwise used up. If that pattern cannot be reliably determined, the assets are amortized using the straight-line method.

Stock Based Compensation. Under ASC 718, we estimate the fair value of our employee stock awards at the date of grant using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions. The most significant assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of an award. Expected volatility is based on the historical volatility of our common stock. When establishing an estimate of the expected term of an award, we consider the vesting period for the award, our historical experience of employee stock option exercises (including forfeitures) and the expected volatility. As required under the accounting rules, we review our valuation assumptions at each grant date and, as a result, we are likely to change our valuation assumptions used to value future employee stock-based awards granted, to the extent any such awards are granted.


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Further, ASC 718 requires that employee stock-based compensation costs be recognized over the requisite service period, or the vesting period, in a manner similar to all other forms of compensation paid to employees. The allocation of employee stock-based compensation costs to each operating expense line are estimated based on specific employee headcount information at each grant date and estimated stock option forfeiture rates and revised, if necessary, in future periods if actual employee headcount information or forfeitures differ materially from those estimates. As a result, the amount of employee stock-based compensation costs we recognize in each operating expense category in future periods may differ significantly from what we have recorded in the current period.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

Revenues

Product Revenues, net

Product revenues include the sales of the collagenase for laboratory use recognized at the time it is shipped to customers. We had a small amount of revenue from the sale of collagenase for laboratory use. For the three months ended September 30, 2012 and 2011 product revenues were $3,378 and $1,683, respectively. This increase was primarily related to the amount of material required to perform testing and additional research by our customers.

Royalties

Royalties consist of royalties and the mark-up on cost of goods sold under the Auxilium Agreement and earn-out revenues associated with the DFB Agreement. Total royalty, mark-up on cost of goods sold and earn-out revenues for the three month period ended September 30, 2012 were $2.3 million as compared to $1.8 million in the 2011 period, an increase of $0.5 million or 27%. Royalty and the mark-up on cost of goods sold revenues recognized under the Auxilium Agreement were $1.5 million for the 2012 period compared to $1.1 million in the 2011 period. The increase of $0.4 million was due to increased net sales of XIAFLEX during 2012 reported to us by Auxilium.

We receive earn-out revenues from DFB under the earn-out payment provision of the DFB Agreement after certain net sales levels are achieved. Revenues recognized under the DFB Agreement were $0.8 million in each of the three month periods ended September 30, 2012 and 2011.

Licensing Revenue

Licensing revenue consists of licensing fees, sublicensing fees and milestones. For the three months ended September 30, 2012 and 2011, we recognized total licensing and milestone revenue of approximately $0.1 million in each period. Certain licensing revenues recognized are related to the cash payments received under the Auxilium Agreement in prior years and amortized over the expected development period. Licensing fees revenue recognized for the three months ended September 30, 2012 and 2011 was $0.1 million in each period. Milestone revenue recognized for the three months ended September 30, 2012 and 2011 was $28,500 and zero, respectively. The $28,500 milestone revenue recognized in the 2012 period related to the Notice of Compliance (approval) by Health Canada for XIAFLEX for the treatment of Dupuytren's contracture in adults with a palpable cord in Canada granted to Actelion.

Under current accounting guidance, nonrefundable upfront license fees for product candidates for which we are providing continuing services related to product development are deferred and recognized as revenue over the development period. The remaining balance will be recognized over the respective development periods or when we determine that we have no ongoing performance obligations.

Research and Development Activities and Expenses

Research and development expenses include, but are not limited to, internal costs, such as salaries and benefits, costs of materials, lab expense, facility costs and overhead. Research and development expenses also consist of third party costs, such as medical professional fees, product costs used in clinical trials, consulting fees and costs associated with clinical study arrangements. Research and development expenses were $0.3 million and $0.2 million, respectively, for the three months ended September 30, 2012 and 2011, representing an increase in 2012 of $0.1 million or 31%. This increase in research and development expenses was primarily due to expenses related to our clinical development programs.


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We are currently working to develop XIAFLEX for the treatment of human and canine lipoma. We have designed a placebo controlled randomized study to evaluate the efficacy of XIAFLEX for the treatment of subcutaneous benign lipomas in canines. This single injection study will evaluate 32 dogs randomized 1:1 XIAFLEX to placebo. We initiated this trial in the second quarter of 2012. Also, we have designed a phase II dose escalation clinical study of XIAFLEX for the treatment of human lipomas. This study is a single injection, open label trial and is planned to enroll 14 patients with four dosage groups for the treatment of benign subcutaneous lipomas. We initiated this trial in the second quarter of 2012.

The following table summarizes our research and development expenses related to our clinical development programs.

                 Three Months Ended       Three Months Ended
                 September 30, 2012       September 30, 2011
Program
Canine Lipoma   $            122,638     $             70,563
Human Lipoma    $             26,758     $             33,837

Successful development of drugs is inherently difficult and uncertain. Our business requires investments in research and development over many years, often for drug candidates that may fail during the research and development process. Even if the Company is able to successfully complete the development of our drug candidates, our long-term prospects depend upon our ability and the ability of our partners, particularly with respect to XIAFLEX, to continue to successfully commercialize these drug candidates.

There is significant uncertainty regarding our ability to successfully develop drug candidates in other indications. These risks include the uncertainty of:

· the nature, timing and estimated costs of the efforts necessary to complete the development of our drug candidate projects;

· the anticipated completion dates for our drug candidate projects;

· the scope, rate of progress and cost of our clinical trials that we are currently running or may commence in the future with respect to our drug candidate projects;

· the scope, rate of progress of our preclinical studies and other research and development activities related to our drug candidate projects;

· clinical trial results for our drug candidate projects;

· the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights relating to our drug candidate projects;

· the terms and timing of any strategic alliance, licensing and other arrangements that we have or may establish in the future relating to our drug candidate projects;

· the cost and timing of regulatory approvals with respect to our drug candidate projects; and

· the cost of establishing clinical supplies for our drug candidate projects.

Our current resources and liquidity are sufficient to advance our significant current research and development projects and, Auxilium will have the option to exclusively license the canine and human lipoma indications upon completion of the appropriate opt-in study.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other related costs for personnel, consultant costs, legal fees, investor relations, professional fees and overhead costs. General and administrative expenses were $1.4 million and $1.2 million for the three months ended September 30, 2012 and 2011, respectively, an increase of approximately $0.2 million, or 10%, from 2011. The increase in general and administrative expenses was due to increased legal fees, consulting services and third party royalty fees partially offset by lower stock based compensation.


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Other Income and expense

Other income for the three months ended September 30, 2012 was $8,292 compared to $7,813 in the 2011 period. Other income in both periods consisted of interest earned on our investments.

Income Taxes

Our deferred tax liabilities, deferred tax assets and related valuation . . .

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