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BGMD > SEC Filings for BGMD > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Form 10-K for BG MEDICINE, INC.


18-Mar-2013

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following in conjunction with the "Selected Financial Data" and our consolidated financial statements and the related notes thereto that appear elsewhere in this Annual Report on Form 10-K. In addition to historical information, the following discussion and analysis includes forward looking information that involves risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward looking statements as a result of many factors, including those discussed under "Risk Factors" contained in Item 1A of this Annual Report on Form 10-K.

Overview

We are a diagnostics company focused on the development and commercialization of novel cardiovascular diagnostic tests to address significant unmet medical needs, improve patient outcomes and contain healthcare


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costs. We are currently commercializing two diagnostic tests, the first of which is the BGM Galectin-3 test, which is available in the United States for use as an aid in assessing the prognosis of patients diagnosed with chronic heart failure and in Europe for use as an aid in assessing the prognosis of patients diagnosed with chronic heart failure or acute heart failure, and for screening individuals in the general adult population who are at risk for developing new-onset heart failure. Our second diagnostic test is the CardioSCORE TM test, which is designed to identify individuals at high risk for near-term, significant cardiovascular events, such as heart attack and stroke, and is available in Europe. We are also developing CardioSCORE as an aid in the assessment of near-term risk for cardiovascular death due to acute atherothrombosis.

During the periods covered by this Management's Discussion and Analysis, we have evolved from a research and development company to a commercial diagnostics company. Our transition to a commercial organization began with the FDA 510(k) clearance of our first diagnostic product, the BGM Galectin-3 test, in November 2010. To support this transition, in 2012, we realigned our senior leadership team with our commercial mission. The transition was substantially completed in the fourth quarter of 2012 with the elimination of research and development activities no longer core to our commercial strategy. In addition, during the period covered by this Management's Discussion and Analysis, we became a publicly traded company after completing the initial public offering of our common stock in February 2011.

Critical Accounting Policies and Significant Judgments and Estimates

Our management's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates based on historical experience and make various assumptions, which we believe to be reasonable under the circumstances, which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

A summary of our significant accounting policies is contained in the notes to our audited consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. We consider our revenue recognition accounting policies to be critical to the understanding of the results of our operations.

Revenue Recognition

Revenue is recognized when the following criteria have been met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and risk of loss has passed; (iii) the seller's price to the buyer is fixed or determinable; and
(iv) collectability is reasonably assured.

Product Revenue

In the United States, we sell our products through supply agreements with laboratory testing services and diagnostic testing distributors and directly to hospitals and clinics. We recognize revenue as products are shipped based on FOB shipping point terms when title passes to customers. We negotiate credit terms on a customer-by-customer basis and products are shipped at an agreed-upon price.

In international markets, we sell our products to an international distributor, which subsequently resells the products to hospitals and clinics. We have an agreement with the distributor which provides that title and risk of loss pass to the distributor upon shipment of the products to the distributor. Revenue is recognized upon shipment of products to the distributor as the products are shipped based on FOB shipping point terms.


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Revenue is recorded net of taxes collected from customers that are remitted to governmental authorities, with the collected taxes recorded as current liabilities until remitted to the relevant government authority.

We do not currently provide an allowance for doubtful accounts or sales returns as we have not experienced any credit losses, and returns are only allowed for defects in workmanship or packaging.

Service Revenue

Our revenue has historically been generated through research initiatives and collaborations and biomarker discovery and analysis services agreements. The services we provide under these agreements typically include the integrated analysis of preclinical and/or clinical samples to identify biomarkers related to disease mechanisms. In some cases, we have retained certain intellectual property rights to the biomarkers identified in the course of these arrangements. The revenue arrangements have a stated term and we have no obligations or ongoing commitments after the specified term of the arrangement.

Revenue generated from collaborations and initiatives include revenue from research services and technology licensing agreements. Under these arrangements, we are contractually obligated to provide research services and project oversight and administration. The rights to the results of the research, including any intellectual property developed, are licensed to all the members of the collaboration at the inception of the arrangement. We have accounted for all deliverables, which include the research services, oversight and administration and the rights to the intellectual property developed, as a single unit of accounting as there is no standalone value to the individual elements. We consider the terms and conditions of each agreement and recognize revenues based upon a proportional performance methodology. This methodology involves recognizing revenue over the term of the agreement, as underlying research costs are incurred, and measured on the basis of input measures such as labor or instrument hours expended. We believe that these input measures approximate the output measures as the costs incurred are directly proportional to the services that are being provided. We make adjustments, if necessary, to the estimates used in its calculations as work progresses and as such changes are known. The principal costs under these agreements are for personnel and instrumentation expenses to conduct research and development but also include costs for materials and other direct and indirect items necessary to complete the research under these agreements. Actual results may vary from our estimates.

Payments received on uncompleted long-term contracts may be greater than incurred costs and estimated earnings and have been recorded as deferred revenues in the accompanying consolidated balance sheets. Payments received prior to commencement of a contract are recorded as customer deposits.

Results of Operations

Comparison of the Years Ended December 31, 2012 and 2011

Revenues

Our revenues from inception to date have been generated primarily through research initiatives and collaborations and biomarker discovery and analysis services. Our revenue has tended to be concentrated, with a limited number of large customers generating a significant percentage of revenue in any given year. Our current revenue is primarily derived from the sales of our BGM galectin-3 tests.


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                                      Year ended December 31,          % Increase
                                      2012               2011          (Decrease)
                                          (in thousands)
      Total Revenues
      Product                     $      2,570       $        451              470 %
      Service
      HRP initiative / BioImage            235              1,096              -79 %
      Sponsored Research                    10                 87              -89 %

      Service                              245              1,183              -79 %

      Total Revenues              $      2,815       $      1,634               72 %

Total revenues increased by 72%, or $1.2 million, to $2.8 million in 2012 from $1.6 million in 2011.

Product revenue is comprised solely of sales of the microplate version of our BGM Galectin-3 test and increased in 2012 by $2.1 million, to $2.6 million from $451,000 in 2011. This growth resulted from increased sales to our regional and national reference laboratory provider customers. In 2012, our top three customers accounted for approximately 92% of our galectin-3 test sales, of which our single largest customer accounted for 81% of our galectin-3 test sales. During 2012, we increased our laboratory providers from three to seven, including expansion into China. Because of concentration in the number of our laboratory providers, the timing of orders from these customers may fluctuate significantly from month to month and quarter to quarter.

As a result of the increase in the number of our laboratory providers throughout 2012, along with focusing our internal sales force on hospitals at risk of incurring penalties imposed by CMS for high hospital readmission rates and the launch of automated versions of the galectin-3 test under CE mark by two of our automated partners, we anticipate our product revenues will increase in 2013.

Service revenue decreased by 79%, or $938,000, to $245,000 in 2012 from $1.2 million 2011 primarily due to the winding down of remaining program activities under our HRP initiative, as the collaboration has met its objectives and revenue is not expected to extend beyond 2013.

Cost of Product Revenue

Our cost of product revenue consists of expenses related to the BGM Galectin-3 test. These expenses include the contract-manufacturing of the tests, freight and royalty expenses payable to the licensor of certain intellectual property relating to galectin-3 based on revenues generated from sales of the test. Cost of product revenue excludes depreciation and amortization included in operating expenses below.

                                     Year ended December 31,          % Increase
                                    2012                2011          (Decrease)
                                         (in thousands)
       Cost of Product Revenue
       Product                   $       841         $       172              389 %
       Gross Margin                      67%                 62%                5 %

Cost of product revenue increased by $669,000, to $841,000 in 2012 as compared to $172,000 in 2011. The increase in cost of product revenue was commensurate with the increase in product revenue from increased sales of the BGM Galectin-3 test and royalty expenses.

The gross margin percentage improvement in 2012 resulted from improvement in the sales mix between laboratory providers and distributors.


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Cost of Service Revenue

Our cost of service revenue to date consists primarily of expenses incurred to support our initiatives, collaborative research and development agreements and biomarker discovery and analysis services agreements. These expenses include outside services and internal personnel costs, laboratory consumables, license fees and overhead expenses. Cost of service revenue excludes depreciation and amortization included in operating expenses below.

                                      Year ended December 31,          % Increase
                                     2012                2011          (Decrease)
                                          (in thousands)
      Cost of Service Revenue
      HRP initiative / BioImage   $       109         $       412              -74 %
      Sponsored Research                    7                  35              -80 %

      Cost of Service Revenue     $       116         $       447              -74 %

Cost of service revenue decreased by 74%, or $331,000, to $116,000 in 2012 as compared to $447,000 in 2011. The decrease in the cost of service revenue is primarily attributable to the reduced activity from the HRP initiative and $125,000 adjustment in research and development accruals.

Operating Expenses



                                           Year ended December 31,         % Increase
                                             2012             2011         (Decrease)
                                                (in thousands)
   Operating Expenses
   Research and Development Expenses     $      7,582       $   7,998               -5 %
   Sales and Marketing Expenses                 9,451           5,293               79 %
   General and Administrative Expenses          7,553           5,209               45 %

   Operating Expenses                    $     24,586       $  18,500               33 %

Research and Development Expenses

Historically, we have incurred research and development expenses in connection with our internal biomarker discovery and development efforts. Our research and development expenses consist primarily of direct personnel costs, fees for consultants and outside services, laboratory consumables and overhead expenses. We use consultants and outside services to provide expertise or services which we do not have. In the fourth quarter of 2012, we implemented a strategic reorganization to eliminate our early stage biomarker discovery activities in order to re-focus our resources on building additional commercialization capabilities. Therefore, our research and development expenses in 2013 are expected to consist primarily of costs incurred in connection with our product development efforts.

Research and development expenses decreased by 5%, or $416,000, to $7.6 million in 2012 as compared to $8.0 million in 2011. The decrease is primarily attributable to the elimination of biomarker discovery research activities in the fourth quarter of 2012.

Sales and Marketing Expenses

Selling expenses consist primarily of costs related to commercialization activities for the BGM Galectin-3 test. In 2012, we had two small dedicated teams of cardiovascular clinical liaisons, or CVCLs, that focused on the education of key opinion leaders and promoting the science and utility of our tests with physicians, laboratories,


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payers and other stakeholders, in the United States and Europe. We expect increases in our selling and marketing expenses as we continue to conduct selling and marketing activities, with the assistance of a dedicated sales team that we are in the process of building, for the market development and commercialization of our products.

Sales and marketing expenses increased by 79%, or $4.2 million, to $9.5 million in 2012 as compared to $5.3 million in 2011. The increased expenditures of $4.2 million were primarily due to the increased activities from the United States and Europe CVCL expenses of $1.8 million, medical education programs of $805,000, post-marketing research studies of $178,000, trade show activities of approximately $520,000, and marketing promotional materials of $475,000, which were associated with the commercialization support for the BGM Galectin-3 test.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related expenses, occupancy expenses, and expenses related to operating as a public company. These expenses include legal and regulatory costs, directors' and officers' insurance premiums, investor relation services, and accounting and financial reporting expenses. We expect that our general and administrative expenses will increase as we expand our business operations to accommodate new product offerings and add commercial infrastructure.

General and administrative expenses increased by 45%, or $2.3 million, to $7.6 million in 2012 compared to $5.2 million in 2011. This increase is due primarily to senior management severance and recruitment costs, legal expenses and non-cash stock compensation expenses.

Interest Income and Expense

Interest income decreased by 29%, or $9,000, to $22,000 in 2012 as compared to $31,000 in 2011. The decrease was primarily due to lower interest rates on lower account balances. Interest expense increased $1.0 million to $1.1 million in 2012 as compared to 2011. Interest expense for 2012 was comprised of cash interest and amortization of debt issuance costs associated with our February 2012 term loan facility of $838,000 and $245,000, respectively.

Comparison of the Years Ended December 31, 2011 and 2010

Revenues



                                       Year ended December 31,        % Increase
                                        2011              2010        (Decrease)
                                           (in thousands)
        Total Revenues
        Product                     $         451       $      11            4000 %
        Service
        HRP initiative / BioImage           1,096             640              71 %
        Sponsored Research                     87             168             -48 %

        Service                             1,183             808              46 %

        Total Revenues              $       1,634       $     819             100 %

Revenues increased by 100%, or $815,000 to $1.6 million in 2011 from $819,000 in 2010. This increase is primarily due to product revenue from sales of the microplate version of our BGM galectin-3 test and a fee recognized in exchange for granting access to certain HRP initiative study samples and related data.


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Cost of Revenue

Cost of Product Revenue



                                      Year ended December 31,         % Increase
                                     2011                2010         (Decrease)
                                          (in thousands)
        Cost of Product Revenue
        Product                   $       172         $         4            4200 %
        Gross Margin                      62%                 64%              -2 %

Cost of product revenue increased by $168,000 to $172,000 in 2011 from 2010. The increase was associated with the increased sales of our galectin-3 test, freight and royalty expense payable to the licensor of certain intellectual property relating to galectin-3 based on revenues generated from sales of the test.

Product gross margin percentage was 62% in 2011, compared to 64% in 2010.

Cost of Service Revenue

                                      Year ended December 31,          % Increase
                                     2011                2010          (Decrease)
                                          (in thousands)
      Cost of Service Revenue
      HRP initiative / BioImage   $       412         $       697              -41 %
      Sponsored Research                   35                  85              -59 %

      Cost of Service Revenue     $       447         $       782              -43 %

Cost of service revenue decreased by 43%, or $335,000, to $447,000 in 2011 from 2010. The reduction in cost of service revenue was primarily attributable to the reduced activity from the HRP initiative and other sponsored research agreements.

Operating Expenses



                                           Year ended December 31,         % Increase
                                             2011             2010         (Decrease)
                                                (in thousands)
   Operating Expenses
   Research and Development Expenses     $      7,998       $   6,539               22 %
   Sales and Marketing Expenses                 5,293           3,788               40 %
   General and Administrative Expenses          5,209           4,312               21 %

   Operating Expenses                    $     18,500       $  14,639               26 %

Research and Development Expenses

Research and development expenses increased by 22%, or $1.5 million, to $8.0 million in 2011 from $6.5 million in 2010. The increase was primarily due to activity associated with our internal biomarker discovery and development efforts, primarily related to our CardioSCORE program and our galectin-3 automated platform programs.


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Sales and Marketing Expenses

Sales and marketing expenses increased by 40%, or $1.5 million, to $5.3 million in 2011 as compared to $3.8 million in 2010. The increase was primarily due to medical education programs and personnel-related costs associated with market development for the BGM galectin-3 test.

General and Administrative Expenses

General and administrative expenses increased by 21%, or $897,000 to $5.2 million in 2011 from $4.3 million in 2010. The increase was primarily due to expenses related to being a public company, including legal and regulatory costs, director's and officers' insurance premiums, and accounting and financial reporting expense.

Interest Income and Expense

Interest income in 2011 increased by $26,000 to $31,000 from $5,000 in 2010 due to higher cash balances as a result of proceeds from our initial public offering. Interest expense and other financing costs for 2011 decreased by $2.7 million to $89,000 from $2.8 million in 2010. Interest expense and other financing costs in the year ended December 31, 2010 were comprised of the non-cash expenses arising from the issuance of warrants for the convertible debt and term loans of $2.7 million, as well as cash interest from the term loans of $111,000.

Liquidity and Capital Resources

Sources of Liquidity

Our primary sources of liquidity include our cash balances, sales of our equity securities, product revenue from sales of the BGM Galectin-3 test, and service revenue from our research initiatives and collaborations and biomarker discovery and analysis services agreements, which we wound down in the fourth quarter of 2012. As of December 31, 2012, we had $12.8 million of cash, $390,000 of restricted cash from funding received under the HRP initiative, and working capital of $6.3 million.

Prior to our initial public offering in February 2011, our primary sources of liquidity were funds generated from our sale of shares of our preferred stock, debt financings, and cash receipts from our research and development collaborations and service agreements.

In 2011, we closed our initial public offering of 5,750,000 shares of our common stock. The net offering proceeds received by us, after deducting underwriting discounts and commissions and expenses incurred in connection with the offering, were approximately $34.8 million.

In 2012, we entered into a secured term loan facility with General Electric Capital Corporation and Comerica Bank and a term loan in the aggregate principal amount of $10.0 million was funded upon the closing of the transaction.

Over the period covered by this Management Discussion and Analysis, we have recognized product revenues of approximately $3.0 million and service revenues related to research and development initiatives and collaborations of approximately $2.2 million. From inception to date, service revenues have totaled approximately $48.3 million; however, we do not expect these revenues in 2013 and beyond to be significant.

In January 2013, we closed a follow-on underwritten public offering of 6,900,000 shares of our common stock, which included the sale of 900,000 shares pursuant to the underwriters' over-allotment option. The net offering proceeds received by us, after deducting underwriting discounts and commissions and expenses incurred in connection with the offering, were approximately $12.8 million.


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Also, in January 2013, we entered into a common stock purchase agreement with Aspire Capital Fund, LLC, or Aspire Capital. Pursuant to the purchase agreement, Aspire Capital has committed to purchase up to $12 million, subject to certain limitations, of our common stock from time to time as directed by us over the next two years at prices based on prevailing market prices over a period preceding each sale. We may initiate sales to Aspire after the SEC declares a registration statement relating to the transaction effective.

Net Cash Flows



                                                 Year Ended December 31,                              Change
Summary Cash Flow Information             2012            2011            2010           2012 vs 2011         2011 vs 2010
                                                                          (in thousands)
Net cash (used in) provided by:
Operating activities                    $ (21,333 )     $ (14,966 )     $ (11,416 )     $       (6,367 )     $       (3,550 )
Investing activitites                         (85 )           (93 )         1,975                    8               (2,068 )
Financing activities                       10,330          36,508           3,523              (26,178 )             32,985

Net (decrease) increase in cash and
cash equivalents                          (11,088 )        21,449          (5,918 )            (32,537 )             27,367

Cash and cash equivalents               $  12,786       $  23,874       $   2,425       $      (11,088 )     $       21,449

Years Ended December 31, 2012 and 2011

Net cash used in operating activities increased $6.4 million to $21.3 million compared to $15.0 million of cash used in operating activities in 2011. The principal use of cash in operating activities was primarily due to increased . . .

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