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BGMD > SEC Filings for BGMD > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for BG MEDICINE, INC.

Form 10-Q for BG MEDICINE, INC.


9-Aug-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 commercial stage company that is focused on the development and delivery of diagnostic solutions to aid in the clinical management of heart failure and related disorders. We currently have 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. The 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. Currently, our focus is on the adoption and commercialization of the galectin-3 test.

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. We believe that our galectin-3 test provides physicians with meaningful information that may lead to more clinically- and cost-effective management of heart failure patients. The test is available in two versions, a microtiter plate version, which we refer to as the microplate version, and automated immunoassay versions, which we refer to as the automated versions. The microplate version 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. The automated versions are available in Europe as an aid in assessing the prognosis of patients diagnosed with chronic heart failure.

Microplate Version

A microplate version of the BGM Galectin-3 test received 510(k) clearance from the U.S. Food and Drug Administration, or FDA, in late 2010 for use in patients with chronic heart failure who are at increased risk for hospitalizations or death based on elevated levels of galectin-3. The test is commercially available in the United States, as well as in Europe under a CE Mark, which was obtained in October 2009. This microplate version of our test is being marketed in the United States through several regional and national laboratory testing facilities.

In the United States, the payment rate at which the microplate version of the BGM Galectin-3 test is reimbursed by the Centers for Medicare and Medicaid Services, or CMS, is $17.80 per test. This payment rate was assigned by CMS under a new, analyte-specific Current Procedural Terminology, or CPT, code, which took effect on January 1, 2013 for the 2013 fee schedule. We are requesting a higher payment rate from CMS for the 2014 fee schedule, though there can be no assurance that we will be successful in obtaining a higher rate. We expect a decision by the end of the year.

In 2012, we revised our commercial strategy to speed the adoption and increase the sales of the microplate version of the BGM Galectin-3 test by focusing on the increasingly urgent need for hospitals to reduce their rates of unplanned patient readmissions, in response to new guidelines from CMS that went into effect on October 1, 2012. The guidelines seek to reduce the number of unplanned readmissions by imposing financial penalties on hospitals and other healthcare providers if reductions in readmission rates are not made. Because it has been demonstrated that heart failure patients with elevated levels of galectin-3 are two-to-three times


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more likely than other heart failure patients to be readmitted to the hospital within 30 days of discharge, we believe that identifying these high-risk patients through galectin-3 testing is a potentially valuable and cost-effective tool in hospitals' strategies to reduce unplanned 30-day readmissions.

Also as part of our revised strategy, we converted our field sales force from an awareness- and education-focused organization into one with a sales mission and growth strategy. Our new field sales force will focus initially on promoting galectin-3 testing at a core group of hospitals with higher-than-average readmission rates, which are at risk of incurring significant financial penalties due to the new CMS rules. In addition, as part of our revised strategy, we contemplated opening our own clinical laboratory certified under the Clinical Laboratory Improvement Amendments, or CLIA, in order to increase sales of the microplate version of the BGM Galectin-3 test and other cardiovascular diagnostic tests we may offer in the future. We have since re-evaluated that decision and decided to focus our investments on efforts to increase the adoption of our galectin-3 tests in the United States and Europe rather than opening a CLIA lab.

Automated Versions

We have partnered with four leading diagnostic instrument manufacturers that are developing automated instrument versions of our galectin-3 test, which we expect will result in broader customer acceptance and clinical adoption of our galectin-3 test. To execute this element of our commercialization strategy, we have entered into worldwide license, development and commercialization agreements with Abbott Laboratories, or Abbott, Alere Inc., or Alere, bioMérieux SA, or bioMérieux, and Siemens Healthcare Diagnostics Inc., or Siemens, for the development of our galectin-3 test on their automated instruments, including point-of-care instruments, which are utilized within hospitals and other medical organizations. We believe that through these four partners we will have broad access to major segments of the diagnostics market, including hospital laboratories, private laboratories, reference laboratories and physician office laboratories, due to the widespread coverage of our partners' installed bases. Under the agreements, our partners are responsible for developing and commercializing the tests and we are responsible for furthering clinical awareness and developing the market for galectin-3 testing. In addition, these agreements contain provisions that, under certain circumstances, entitle our partners to reduce the royalty amounts payable to us on the sales of their tests in amounts that are subject to negotiation by us and our respective partners.

Europe - In January 2013, bioMérieux obtained a CE Mark in Europe for an automated version of the BGM Galectin-3 test and launched the test in Europe. bioMérieux is distributing its VIDAS® Gal-3 test through its VIDAS® immunoassay platform. In addition, Abbott obtained a CE mark in April 2013 and launched an automated version of the BGM Galectin-3 test in several European countries. Abbott is offering the ARCHITECT®Galectin-3 assay on its ARCHITECT® immunoassay platform.

United States - Fujirebio, on behalf of Abbott, is the first of our automated partners to have filed for 510(k) regulatory clearance of an automated version of the test in the United States. Fujirebio is developing the test for use on Abbott's ARCHITECT® immunochemistry instrument platform. Fujirebio submitted its 510(k) to the FDA in July 2012 and received a letter from the FDA requesting additional information on various matters, including the geographic composition of the patient cohort that provided the blood samples used to support the
510(k). Due to the nature of the additional information requested and the time required to address the FDA's questions, Fujirebio was unable to submit a complete response to the FDA by the FDA-designated February 25, 2013 deadline and withdrew the submission. A new 510(k) submission is expected to be submitted by the end of 2013.

2013 Market Development Achievements

During the second quarter of 2013, the Company achieved two noteworthy market development milestones in the United States. First, the Trenton Health Team, a community health improvement collaborative located in Trenton, New Jersey, adopted galectin-3 testing for identification of chronic heart failure patients who are at risk for re-hospitalization. Second, the BGM Galectin-3 test was recognized for its ability to predict adverse outcomes, including rehospitalization, in the American College of Cardiology Foundation and American Heart Association (ACCF/AHA) Guideline for the Management of Heart Failure (2013 Edition).

BGM Galectin-3 for Assessment of Risk of Developing New-Onset Heart Failure

We have evaluated our galectin-3 test for an additional indication, which would expand the intended use for the BGM Galectin-3 test to identify individuals in the general adult population who do not currently have heart failure, but who are at increased risk for developing heart failure in the future based on elevated levels of galectin-3.

Europe - In May 2012, we obtained a CE Mark in Europe for the BGM Galectin-3 test for this additional indication.

United States - In May 2012, we submitted a 510(k) to the FDA for this additional indication of the BGM Galectin-3 test. In July 2012, we received a letter from the FDA regarding our 510(k) that requested additional information, including information regarding our clinical validation study, the Framingham Heart Study, and additional analytical study data. We submitted our response to the FDA in November 2012, but based on our dialogue with the FDA, the nature of the additional information requested and the


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time required to address the FDA's questions regarding various matters including the age of the blood samples used to support our 510(k), we allowed the 510(k) to expire on the January 23, 2013 deadline for submitting our response to the FDA. We are currently focusing our resources on the adoption and commercial success of our galectin-3 test in the United States and Europe. In so doing, we have redirected further effort and investment from obtaining 510 (k) approval of this additional indication in the United States to galectin-3 test adoption and revenue growth.

CardioSCORE Test

Our second product is the CardioSCORE test, a biomarker-based blood test designed as an aid in the assessment of near-term risk for significant cardiovascular events, such as heart attack and stroke. The test is used to identify patients at risk for atherothrombotic cardiovascular disease, commonly known as vulnerable plaque and is a proprietary in vitro diagnostic multivariate index assay that measures the levels of seven protein biomarkers in blood, and integrates the results to yield a single numerical score that is related to an individual's cardiovascular risk. Our development work to date suggests that CardioSCORE is an improved diagnostic test compared to conventional risk factor-based approaches, such as the Framingham Risk Score. The CardioSCORE test uses laboratory instrumentation and reagents that are available commercially.

Europe - In December 2012, we obtained a CE Mark for the CardioSCORE test, which will enable us to market the test in Europe and other countries that recognize CE Mark. We had expected to launch the CardioSCORE test initially in Europe, through one or more specialty laboratory partners, in the first half of 2013. As a result of our decision to focus our efforts on increasing the adoption and sales of our galectin-3 test, we have decided to redirect investments from a launch of the CardioSCORE test in Europe to support our galectin-3 efforts. We may move forward with a European launch in test markets, when and if appropriate partnership opportunities arise.

United States - In December 2011, we submitted a 510(k) to the FDA in order to obtain regulatory clearance to market the CardioSCORE test in the United States as an aid in the assessment of near-term risk for significant cardiovascular events, such as heart attack and stroke. The FDA requested additional information, but due to the time involved in responding to the FDA's request for additional information, we withdrew the 510(k) on August 8, 2012. Since that time, we have been working on an independent medical review of the CardioSCORE clinical study results in accordance with FDA's feedback. In addition, we plan to modify the proposed intended use of CardioSCORE to an aid in assessment of near-term risk of cardiovascular mortality. Our medical review also includes the assessment of sample stability and the evaluation of other technical issues raised by the FDA, as well as an independent adjudication of clinical trial end-points. We expect completion of the medical review by the end of 2013. Results from the review will then guide our regulatory, commercial and investment strategy for CardioSCORE.

2013 Other Significant Events

NASDAQ Notice for Failure to Satisfy a Continued Listing Rule or Standard

On May 14, 2013, we were notified that for the preceding 30 consecutive business days, our Market Value of Listed Securities, or MVLS, had closed below the minimum requirement for continued listing on The NASDAQ Global Market. The notice has no immediate effect on the listing of our common stock and our common stock continues to trade on The NASDAQ Global Market under the symbol "BGMD" at this time.

In accordance with the applicable NASDAQ Listing Rule, we have a grace period of 180 calendar days, or until November 11, 2013, to regain compliance with the rule. Compliance can be achieved automatically and without further action if our MVLS closes at $50,000,000 or more for at least 10 consecutive business days at any time during the 180-day compliance period.

If we do not regain compliance by November 11, 2013, NASDAQ will notify us that our common stock will be subject to delisting. If we receive a notice of delisting, we would then be entitled to appeal the NASDAQ Staff's determination to a NASDAQ Listing Qualifications Panel and request a hearing. We are currently considering available options to resolve the listing deficiency and to regain compliance. There can be no assurance that we will be able to regain compliance with The NASDAQ Global Market listing requirements.

Another option available to the Company is to apply to transfer the listing of its common stock to The NASDAQ Capital Market. To qualify, the Company would need to satisfy the listing requirements for that market, which are lower than the requirements for The NASDAQ Global Market on which the common stock currently trades.


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New Facility Lease

On June 10, 2013, we entered into a lease agreement for our corporate headquarters. We intend to move our corporate headquarters to the new facility on August 19, 2013. We will lease space in the new facility for an initial term of five years and four months, with an option to renew for one additional five-year term at the then prevailing market rental rate.

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. Other than disclosed herein, there have been no material changes to those policies during the six months ended June 30, 2013.

Revenue Recognition

The Company has determined that risk of loss on product shipments does not transfer to its customers until product is received by its customers. Accordingly, the Company has changed its revenue recognition policy, and now recognizes revenue when product shipments are received by customers. This change in policy was not material to the Company's financial position or results of operations for the quarter ended June 30, 2013. There were no revenue deferrals related to product shipments at June 30, 2013 since all shipments were received by customers prior to quarter end.

Results of Operations

Comparison of the three months ended June 30, 2013 and 2012

Revenues

Our product revenues are primarily derived from sales of the BGM Galectin-3 test. Our product revenues have tended to be concentrated with a small number of laboratory providers generating a significant percentage of our revenues in any given reporting period. As a result, 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 June 30, 2013 and 2012:

                                Three Months Ended June 30,
                                                         Variance             %
                                                         Increase          Increase
                           2013             2012        (Decrease)        (Decrease)
                              (in thousands)
       Total Revenues
       Product          $       972       $    566     $        406                72 %

       Service                   34             56              (22 )             (39 %)

       Total Revenues   $     1,006       $    622     $        384                62 %

The increase in product revenues in 2013 results primarily from increased volume from our largest specialty cardiovascular laboratory provider and from increased purchases relating to third party clinical studies. The growth in product revenues in 2013 primarily reflects domestic sales of the BGM Galectin-3 test.

As the result of our market development activities and the entry of automated galectin-3 testing in the EU from both bioMerieux and Abbott, interest in galectin-3 in Europe is increasing, although it has not yet translated into significant revenue. Galectin-3 testing is receiving increased support from select European opinion leaders amid growing European awareness of the potential to use galectin-3 for assessment of heart failure patients prior to hospital admission.

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 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 June 30, 2013 and 2012:

                                Three Months Ended June 30,
                                                         Variance            %
                                                         Increase         Increase
                          2013            2012          (Decrease)       (Decrease)
                             (in thousands)
       Product Costs
       Product          $    353        $    196       $        157               80 %
       Product Margin         64 %            65 %                                (1 %)

The increase in product costs is primarily the result of BGM Galectin-3 test revenue growth. The product margin decreased slightly due primarily to the medical device excise tax, which was effective at the beginning of 2013.

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 costs exclude 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 June 30, 2013 and 2012:

                               Three Months Ended June 30,
                                                       Variance             %
                                                       Increase          Increase
                          2013          2012          (Decrease)        (Decrease)
                            (in thousands)
         Service Costs
         Service         $    34       $    56       $        (22 )             (39 %)

Service costs are primarily attributable to the activities from the HRP initiative, which is winding down due to the completion of the collaboration. Service margins are zero since revenues are recognized only as costs are incurred and reported to the Company by its collaborator partners.

Operating Expenses

The following table summarizes our operating expenses for the three months ended
June 30, 2013 and 2012:



                                                     Three Months Ended June 30,
                                                                              Variance
                                                                              Increase         % Increase
                                               2013            2012          (Decrease)        (Decrease)
                                                  (in thousands)

Operating Expenses
Research and Development Expenses            $   1,117        $ 2,133       $     (1,016 )             (48 %)
Selling and Marketing Expenses                   1,782          1,960               (178 )              (9 %)
General and Administrative Expenses              2,269          2,364                (95 )              (4 %)

Total Operating Expenses                     $   5,168        $ 6,457       $     (1,289 )             (20 %)

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 that we do


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not have. In 2013, our research and development expenses consist primarily of costs incurred for product development efforts. We provide assistance to Abbott, bioMerieux and Siemens relative to their efforts to gain FDA clearance for their automated assays for galectin-3. 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 $1.0 million resulted from decreased biomarker discovery research costs of $0.7 million, decreased project costs resulting from the completion of both an automated version of our galectin-3 test in collaboration with a partner and various CardioSCORE clinical projects of $0.2 million, and a decrease in patent related legal costs of $0.1 million.

Selling and Marketing Expenses

Selling and marketing expenses consist primarily of costs related to commercialization activities in the U.S. and Europe for both the microplate and automated versions of the 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.

Selling 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, and the refocusing of our marketing activities from market education to commercialization efforts. In the second quarter of 2013, the internal BGM Galectin-3 sales team grew by two members bringing the total to six members.

General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related expenses, allocated occupancy costs, directors' and officers' insurance premiums, and professional services, including legal, audit and other financial reporting and compliance costs.

General and administrative expenses decreased primarily due to a decrease in compensation related charges and travel, partially offset by an increase in facilities related cost allocations.

Other Income and Expense

The following table summarizes other income (expense) for the three months ended
June 30, 2013 and 2012:



                                                       Three Months Ended June 30,
                                                                                  Variance
                                                                                  Increase         % Increase
                                               2013              2012            (Decrease)        (Decrease)
                                                   (in thousands)
Other income (expense)

Interest Income/Other Income                         7                18                 (11 )             (61 %)
Interest Expense                                  (295 )            (324 )                29                (9 %)

Total other income (expense)                 $    (288 )       $    (306 )      $         18                (6 %)

Other income (expense) consists primarily of interest expense related to our $10.0 million term loan.

. . .

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