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BGMD > SEC Filings for BGMD > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for BG MEDICINE, INC.


10-May-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto that appear elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2012. 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" in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2012, as supplemented by the risk factors discussed under "Risk Factors" in Part II, Item 1A. of this Quarterly Report on Form 10-Q.

Our Business

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 costs. We are currently commercializing two diagnostic tests, the first of which is the BGM Galectin-3® test, a novel assay for measuring galectin-3 levels in blood plasma or serum for use as an aid in assessing the prognosis of patients diagnosed with heart failure. Our second diagnostic test is the CardioSCORE™ test, which is designed to identify individuals at high risk for near-term, significant cardiovascular events, such as heart attack and stroke. We have chosen to focus our business on blood-based tests due to the ease and low cost of access to evaluable samples for testing and the opportunity for repeat sampling to monitor changes in a patient's medical condition. We believe that our diagnostic tests will provide clinicians with improved information to better detect and characterize disease states and that this information may enable physicians to achieve better patient outcomes and contain healthcare costs through, for example, earlier diagnosis, segmentation based on underlying disease processes, more accurate prognosis, more personalized treatment selection or monitoring of disease based on disease activity.

BGM Galectin-3 test

Galectin-3, a member of the galectin family of proteins, is a biomarker that has been shown to play an important role in heart failure. Heart failure is a condition caused by a combination of diseases or factors that damage or overwork the heart muscle, resulting in its inability to pump blood efficiently to meet the requirements of other body organs. This condition often leads to serious medical complications and is a leading cause of death. According to the American Heart Association, heart failure affects an estimated 5.1 million Americans, with approximately 670,000 new cases occurring each year. The prevalence and incidence of heart failure in Europe are similar and the European Society of Cardiology estimates that among the 51 countries it represents, there are at least 15 million individuals diagnosed with heart failure. In the United States alone, heart failure is expected to cost the healthcare system an estimated $32 billion in 2013.

The BGM Galectin-3 test 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. We and our partners are also actively engaged in expanding the availability and intended uses of the BGM Galectin-3 test in the United States, Europe and other countries throughout the world.

CardioSCORE test

According to the American Heart Association, an estimated 82.6 million American adults (approximately 1 in 3) have one or more types of cardiovascular disease and it is the leading cause of death in the United States. Between 2012 and 2030, total direct medical costs of cardiovascular disease are projected to triple, from $309 billion to $834 billion. Most major cardiovascular events occur in individuals with low or intermediate risk profiles according to traditional risk factor-based approaches recommended in the United States and Europe. For example, in the Framingham Heart Study, the Physicians' Health Study, the Women's Health Study and the Northwick Park Heart Study, more than 75% of all coronary events occurred in individuals inaccurately categorized as low or intermediate risk and who, consequently, may not have been offered optimal preventive therapy.

The CardioSCORE test is used to identify patients at elevated risk for near term major cardiovascular events and death. The CardioSCORE test is a proprietary in vitro diagnostic multi-analyte assay that measures the levels of multiple biomarkers in blood, and integrates the results to yield a single numerical score that is related to an individual's near-term risk. Our development work indicates that the CardioSCORE test has the potential to offer significant improvement over conventional risk factor-based assessments, such as the Framingham Risk Score, to measure an individual's risk for major cardiovascular events and death. We expect to launch the CardioSCORE test in Europe in 2013.


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2013 Commercial Highlights

In January 2013, bioMérieux obtained a CE Mark in Europe for an automated version (VIDAS ® Gal-3) of the BGM Galectin-3 test and is executing a phased launch of the test in Europe and in certain other territories that recognize the CE Mark. bioMérieux is offering the test on its VIDAS® immunoassay platform. In addition, Abbott has obtained a CE Mark and launched its automated version of the test (ARCHITECT®Galectin-3 assay) in Europe in April 2013. The test was developed to run on Abbott's ARCHITECT®immunochemistry platform.

Critical Accounting Policies and Significant Judgments and Estimates

A summary of our significant accounting policies is contained in the notes to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2012. There have been no material changes to those policies during the three months ended March 31, 2013.

Results of Operations

Comparison of the three months ended March 31, 2013 and 2012

Revenues

Our current revenues are primarily derived from sales of the BGM Galectin-3 test. Our revenues have tended to be concentrated with a limited number of large customers generating a significant percentage of our revenues in any given year. 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.

The following table summarizes our total revenues for the three months ended March 31, 2013 and 2012:

                                 Three Months Ended March 31,
                                                           Variance            %
                                                           Increase        Increase
                           2013            2012           (Decrease)      (Decrease)
                              (in thousands)
        Total Revenues
        Product          $     820       $     416       $        404              97 %

        Service                 68              64                  4               6 %

        Total Revenues   $     888       $     480       $        408              85 %

The increase in product revenues in 2013 reflects increased volume from our laboratory providers. In 2013, six reference laboratories ordered our product compared to three in 2012. Service revenue decreased primarily due to the winding down of remaining program activities under our HRP initiative, as the collaboration has met its objectives.

Product Costs

Our product costs include contract-manufacturing for the BGM Galectin-3 test, freight, and revenue based royalty expenses for certain galectin-3 in-licensed intellectual property. In 2013, we became subject to excise taxes due to the galectin-3 test being classified as a taxable medical device. The excise tax is now being included in product costs.

Product costs exclude depreciation and amortization, which are included in operating expenses.


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The following table provides information with respect to our product costs and product margins for the three months ended March 31, 2013 and 2012:

                                Three Months Ended March 31,
                                                           Variance            %
                                                           Increase        Increase
                          2013             2012           (Decrease)      (Decrease)
                             (in thousands)
       Product Costs
       Product          $    280         $    147        $        133              90 %
       Product Margin         66 %             65 %                                 1 %

The increase in product costs is comparable with increased BGM Galectin-3 test revenues.

The product margin increased due to a more favorable sales mix between laboratory providers and our distributor, and higher average selling prices.

Service Costs

Our service costs to date consist 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. Service cost excludes depreciation and amortization, which is included in operating expenses.

The following table provides information with respect to our service costs for the three months ended March 31, 2013 and 2012:

                                Three Months Ended March 31,
                                                           Variance            %
                                                           Increase        Increase
                          2013              2012          (Decrease)      (Decrease)
                              (in thousands)
        Service Costs
        Service         $      68         $      64       $         4               6 %

Service costs are primarily attributable to the activities from the HRP initiative.


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Operating Expenses

The following table summarizes our operating expenses for the three months ended
March 31, 2013 and 2012:



                                                    Three Months Ended March 31,
                                                                             Variance
                                                                             Increase          % Increase
                                                2013           2012         (Decrease)         (Decrease)
                                                  (in thousands)
Operating Expenses
Research and Development Expenses            $    1,376       $ 2,980      $     (1,604 )              -54 %
Sales and Marketing Expenses                      2,144         2,904              (760 )              -26 %
General and Administrative Expenses               1,821         1,885               (64 )               -3 %

Total Operating Expenses                     $    5,341       $ 7,769      $     (2,428 )              -31 %

Research and Development Expenses

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 2013, our research and development expenses consist primarily of costs incurred for product development efforts. In 2012, our research and development expenses were related to our internal biomarker discovery and development efforts, as well as product development efforts.

Research and development expenses decreased primarily from the elimination of biomarker discovery research activities in the fourth quarter of 2012. The reduction of $1.6 million resulted from biomarker discovery research labor costs and noncash compensation expenses of $802,000, and completion of an automated version of our galectin-3 test in collaboration with a partner and completion of various CardioSCORE clinical projects of $777,000.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of costs related to commercialization activities for the BGM Galectin-3 test. In 2012, we had two dedicated teams of contract cardiovascular clinical liaisons, or CVCLs, that focused on the education of key opinion leaders and promoted the science and utility of our tests with physicians, laboratories, payers and other stakeholders, in the United States and Europe. In the fourth quarter of 2012, we eliminated the U.S. CVCLs and began to develop our own dedicated U.S. sales team, while keeping the contracted European CVCL structure.

Sales and marketing expenses decreased primarily due to the redeployment in the U.S. from a contract CVCLs structure to a dedicated internal BGM Galectin-3 test sales team, our refocusing of marketing activities to commercialization efforts from market education and the 2012 restructuring of senior management resulting in a reduction of noncash compensation expense. In 2013, the internal BGM Galectin-3 sales team grew by two bringing the total up to four.

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 and accounting and financial reporting expenses.

General and administrative expenses decreased primarily due to the gain on the sale of biomarker lab equipment.


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Other Income and Expense

The following table summarizes other income (expense) for the three months ended
March 31, 2013 and 2012:



                                                      Three Months Ended March 31,
                                                                                 Variance
                                                                                 Increase          % Increase
                                               2013              2012           (Decrease)         (Decrease)
                                                   (in thousands)
Other income (expense)
Non-cash consideration associated with
stock purchase agreement                     $    (329 )       $      -         $      (329 )              100 %
Interest Income/Other Income (expense)               7               (10 )               17               -170 %
Interest Expense                                  (289 )            (153 )             (136 )               89 %

Total other income (expense)                 $    (611 )       $    (163 )      $      (448 )              275 %

Other income (expense) increased by $448,000, primarily from entering into a common stock purchase agreement with Aspire Capital and a full quarter of interest expense in 2013 on our $10.0 million term loan.

Non-cash consideration associated with the stock purchase agreement of $329,000 represents the fair value of 132,743 shares of common stock as a commitment fee in connection with the Common Stock Purchase Agreement with Aspire Capital.

Liquidity and Capital Resources

Sources of Liquidity

Our primary sources of liquidity have included our cash balances, sales of our equity securities, product revenue from sales of the BGM Galectin-3 test, and service revenue from the HRP initiative. As of March 31, 2013, we had $21.1 million of cash, $322,000 of restricted cash under the HRP initiative and working capital of $13.4 million.

Follow-on Underwritten Public Offering:

On January 30, 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.

Common Stock Purchase Agreement with Aspire Capital:

On January 24, 2013, we entered into a Common Stock Purchase Agreement ("Purchase Agreement") with Aspire Capital Fund, LLC ("Aspire") to purchase, at our option, up to an aggregate of $12.0 million of shares of our common stock over a two-year term. Under the Agreement, we initially issued 132,743 shares of our common stock as a commitment fee. Our sales to Aspire will be made subject to market conditions, in light of our capital needs and under various limitations contained in the Purchase Agreement.

Over the term of the Purchase Agreement, we have two ways to elect to sell common stock to Aspire on any business day we select: (1) through a regular purchase of up to 100,000 shares at prices based on the market price of our common stock prior to the time of each sale, and (2) through a volume weighted average price, or VWAP, purchase of a number of shares up to 30% of the volume traded on the purchase date at a price equal to the lesser of the closing sale price or 95% of the VWAP for such purchase date.

We agreed not to sell shares to Aspire under the Purchase Agreement for a period of six months following the date we entered into the Purchase Agreement. We also entered into a Registration Rights Agreement with Aspire, which provides, among other things, that we will register shares issued to them and to be sold to them.

Secured Term Loan Facility:

In February 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. The term loan accrues interest at a rate of 8% per annum plus the higher of (a) the 3-month LIBOR rate or (b) 1.25%. Interest only payments will be made for the first twelve months of the loan term. Principal payments commenced in March 2013 and principal and interest payments continue through maturity at September 2015. The interest rate, in effect at March 31, 2013 was 9.25%. At March 31, 2013, the Company had $9.7 million outstanding under the term loan.


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In May 2013, the Company amended its loan and security agreement to allow for a three month deferral of principal amortization beginning May 1, 2013 and to allow for up to an additional three months of deferral based on the Company meeting minimum liquidity requirements, as defined in the amendment, on the first day of July, August and September of 2013.

Net Cash Flows

Cash provided by (used in) operating, investing and financing activities for the
three months ended March 31, 2013 and 2012 is summarized as follows:



                                                    Three Months Ended March 31,
    Summary Cash Flow Information                 2013           2012         Change
    Net cash (used in ) provided by:
    Operating activities                        $  (4,235 )    $ (5,722 )    $  1,487
    Investing activities                               80           (82 )         162
    Financing activities                           12,465         9,882         2,583

    Net increase in cash and cash equivalents       8,310         4,078         4,232

    Cash and cash equivalents                   $  21,096      $ 27,952      $ (6,856 )

Three Months Ended March 31, 2013 and 2012

Net cash used in operating activities decreased primarily due to lower product development costs, resulting from the completion of an automated version of our galectin-3 test and certain CardioSCORE clinical projects, and lower BGM Galectin-3 test launch activities.

Net cash provided by investing activities increased due to the sale of biomarker research lab equipment.

Net cash provided by financing activities increased due to the net proceeds received from our $12.8 million follow-on public offering, which was partially offset by the commencement of principal amortization under our term loan of $333,000, which was subsequently amended to provide an additional three months of deferral. In 2012, we received net proceeds of $9.7 million upon entering into our term loan.

Funding Requirements

We expect to devote substantial resources to continue our focus on the development and commercialization of our novel cardiovascular diagnostics tests:
the BGM Galectin-3® test and the CardioSCORETM test.

During the three months ended March 31, 2013, we incurred a net loss totaling $5.4 million and used cash in operating activities totaling $4.2 million. We expect to continue to incur losses and use cash in operating activities during 2013 and beyond.

Based on our current operating plan, we believe that our existing cash and cash equivalents and the availability of up to $12.0 million under our common stock purchase agreement with Aspire Capital, along with our forecasted revenue growth are expected to be sufficient to fund our operations through 2015.

Our forecast of the period of time through which our financial resources will be adequate to support our operations, the cost to develop and commercialize our products are forward-looking statements and involve risks and uncertainties, and actual results could vary materially and negatively as a result of a number of factors, including the factors discussed in the "Risk Factors" section contained in Item 1A of our Annual Report on Form 10-K for year ended December 31, 2012, as supplemented by the risk factors discussed under "Risk Factors" in Part II, Item 1A. of this Quarterly Report on Form 10-Q . We have based these estimates on assumptions that may prove to be incorrect, and we could utilize our available capital resources sooner than we currently expect.

Our future liquidity and capital funding requirements will depend on numerous factors, including:

• the revenue generated by sales of our cardiovascular diagnostic tests;

• the rate of progress and cost of our commercialization activities;


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• the outcome, costs and timing of seeking and regulatory clearance for our product candidates and for additional indications for existing products;

• the success of our development efforts;

• the expenses we incur in marketing and selling our products;

• the emergence and effect of competing or complementary products;

• our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;

• our need and ability to hire additional management and scientific and medical personnel;

• our need to implement additional internal systems and infrastructure, including financial and reporting systems; and

• the terms and timing of any collaborative, licensing or other arrangements that we have or may establish.

Contractual Obligations and Commitments

There have been no material changes to our contractual obligations and commitments set forth under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations and Commitments" in our Annual Report on Form 10-K for the year ended December 31, 2012.

Certain Factors That May Affect Future Results of Operations

The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains such "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve known and unknown risks, uncertainties and other important factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

• our estimates of future performance, including the commercialization and sales of the microplate and automated versions of our galectin-3 test, other indications for our galectin-3 test and our CardioSCORE test;

• our ability to successfully market, commercialize and achieve widespread market penetration for our cardiovascular diagnostic tests;

• our ability to conduct the clinical studies required for regulatory clearance or approval and to demonstrate the clinical benefits and cost-effectiveness to support commercial acceptance of our products;

• the timing, costs and other limitations involved in obtaining regulatory clearance or approval for any of our products;

• the potential benefits of our cardiovascular diagnostic tests over current medical practices or other diagnostics;

• willingness of third-party payers to reimburse for the cost of our tests;

• estimates of market sizes and anticipated uses of our cardiovascular diagnostic tests;

• our ability to enter into collaboration and distribution agreements with respect to our cardiovascular diagnostic tests and the performance of our partners under such agreements;

• our ability to obtain and maintain intellectual property protections for our products and operate our business without infringing upon the intellectual property rights of others;

• the expected timing, progress or success of our development and commercialization efforts;

• our ability to successfully obtain sufficient and appropriate blood samples for our validation tests in support of our regulatory filings for our cardiovascular tests;

• our ability to obtain additional financing on terms acceptable to us;

• the success of competing cardiovascular diagnostic tests that are or become available;

• regulatory developments in the United States and other countries in which we sell or plan to sell our tests;

• the performance of our third-party suppliers and the manufacturer of our galectin-3 tests;

• our ability to service the principal and interest amounts payable under our secured term loan facility; and

• our estimates regarding anticipated operating losses, future revenue, . . .

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