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BGMD > SEC Filings for BGMD > Form 10-K on 27-Mar-2014All Recent SEC Filings

Show all filings for BG MEDICINE, INC.

Form 10-K for BG MEDICINE, INC.


27-Mar-2014

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 developing and commercializing diagnostic products that may be used to help guide the care and management of patients who suffer from heart failure and related disorders.

Our BGM Galectin-3 Test is our first FDA cleared and CE Marked diagnostic product. It is currently available as a blood test in the United States and the EU. Our BGM Galectin-3 Test was included in the 2013 American College of Cardiology Foundation and the American Heart Association Guideline for the Management of Heart Failure.

We market and sell our BGM Galectin-3 Test kits to health care clinical laboratories, hospitals, and health care providers. We hope to accelerate the clinical and commercial adoption of galectin-3 testing by generating, publishing and publicizing data derived from clinical research studies that have incorporated our BGM Galectin-3 Test and by expanding our BGM Galectin-3 Test's indications for use. We have entered into licensing agreements with leading diagnostic instrument manufacturers to develop and commercialize galectin-3 assays that will be performed on automated platforms that have been incorporated into routine practice in laboratories throughout the world.

We are developing a pipeline of diagnostic products by leveraging our intellectual property and the mining of data generated from a patient cohort and specimen repository to which we have exclusive access for the development of diagnostic products. Among the products in development is our 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.

During the periods covered by this Management's Discussion and Analysis of Financial Condition and Results of Operations, 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. The transition was substantially completed in the first half of 2013 with the elimination of research and development activities no longer core to our commercial strategy. In addition, we became a publicly traded company after completing the initial public offering of our common stock in February 2011.


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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 Revenues

We sell our products through supply agreements with laboratory testing services and diagnostic testing distributors and directly to hospitals and clinics. We recognize revenue when products are received by customers, at which time both title and risk of loss have passed to the customers. We negotiate credit terms on a customer-by-customer basis and products are shipped at an agreed-upon price.

Revenues are 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. Freight costs billed to customers are recorded as revenue.

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.

Service Revenues

Our revenues have historically been generated through initiatives, 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. During the periods covered by this Management's Discussion and Analysis of Financial Condition and Results of Operations, service revenues are primarily attributable to the activities from the HRP initiative, for which all revenue has been recorded as of December 31, 2013. We do not expect to record service revenues in 2014 or beyond.

Revenues 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


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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, 2013 and 2012

Product revenues

Our product revenues are primarily derived from sales of our 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.

Service revenues

Our service revenues have historically been generated through initiatives, 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. Service revenues are primarily attributable to the activities from the HRP initiative, for which all revenue has been recorded as of December 31, 2013. We do not expect to record service revenue in 2014 or beyond.

                                Years ended December 31,
                                 2013               2012          % Increase
                                     (in thousands)
            Total revenues
            Product          $      3,683       $      2,570               43 %
            Service                   390                245               59 %

            Total revenues   $      4,073       $      2,815               45 %

Total revenues increased by 45%, or $1.3 million, to $4.1 million in 2013 from $2.8 million in 2012.

Product revenues are comprised primarily of sales of our BGM Galectin-3 Test and increased in 2013 by $1.1 million, to $3.7 million from $2.6 million in 2012. The increase in product revenues in 2013 results primarily from increased sales volume from our largest specialty cardiovascular laboratory provider and from third-party clinical research studies. The growth in product revenues in 2013 primarily reflects domestic sales of the BGM-Galectin-3 Test. We have not yet recorded significant royalties from sales of Abbott or bioMérieux's automated galectin-3 assays.


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In 2013 and 2012, our top three customers accounted for approximately 83% and 92%, respectively, of our galectin-3 test sales, of which our single largest customer accounted for 74% and 81%, respectively. Because of concentration in the number of our customers, the timing of orders of our galectin-3 test may fluctuate significantly from month to month and quarter to quarter.

As a result of the increase in our CMS reimbursement rate from $17.80 in 2013 to $30.01 in 2014, an expanding network of laboratories offering galectin-3 testing and the launch of automated versions of the galectin-3 test under CE mark by two of our automated partners, we anticipate that our product revenues will increase in 2014.

Service revenues increased by 59%, or $145,000, to $390,000 in 2013 from $245,000 in 2012. The increase in service revenues was primarily due to the close out of program activities under our HRP initiative. There is no further revenue to recognize under this project as of December 31, 2013; and accordingly, we do not expect to record service revenues in 2014 or beyond.

Product costs

Our product costs consist of expenses related to our BGM Galectin-3 Test. These expenses include the contract-manufacturing of the tests, the medical device excise tax, 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. Product costs exclude depreciation and amortization included in operating expenses below.

                         Years ended December 31,         %  Increase
                           2013              2012          (Decrease)
                              (in thousands)
Product costs          $       1,247       $     841                48%

Product gross margin             66%             67%               (1%)

Product costs increased by $406,000, to $1.2 million in 2013 as compared to $841,000 in 2012. The increase in product costs was commensurate with the increase in product revenue from increased sales of the BGM Galectin-3 Test and royalty expenses.

The decrease in product gross margin by one percentage point in 2013 resulted primarily from the medical device excise tax, which was effective beginning January 1, 2013.

Service costs

Our service costs 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.

Years ended December 31, 2013 2012 % Increase

(in thousands)

Service costs $ 142 $ 116 22 %

Service costs increased by 22%, or $26,000, to $142,000 in 2013 as compared to $116,000 in 2012. The increase in service costs is attributable to the closeout of the activity in the HRP initiative. The Company does not expect to incur service costs in 2014 and beyond.


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Operating expenses

                                     Years ended December 31,
                                      2013               2012          % Decrease
                                          (in thousands)
     Operating expenses
     Research and development     $      3,735       $      7,582              (51 %)
     Selling and marketing               6,193              9,451              (34 %)
     General and administrative          7,130              7,553               (6 %)

     Operating expenses           $     17,058       $     24,586              (31 %)

Research and development

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.

Research and development expenses decreased by 51%, or $3.9 million, to $3.7 million in 2013 as compared to $7.6 million in 2012. The decrease is primarily attributable to decreased biomarker discovery research costs of $3.0 million resulting from a strategic reorganization initiated in the fourth quarter of 2012 and completed in the first half of 2013 to eliminate our early stage biomarker discovery activities in order to re-focus our resources on building additional commercialization capabilities, the completion of an automated version of our galectin-3 test in collaboration with a partner and costs of $0.8 million relating to the completion of the CardioSCORE medical review and adjudication process.

Selling and marketing

Selling and marketing expenses consist primarily of costs related to supporting commercialization activities associated with our BGM Galectin-3 Test. In 2013, we built a dedicated sales team for the market development and commercialization of our BGM Galectin-3 Test.

Selling and marketing expenses decreased by 34%, or $3.3 million, to $6.2 million in 2013 as compared to $9.5 million in 2012. The decreased expenditures of $3.3 million were primarily due to the transition of our sales efforts in the United States from a contract cardiovascular clinical liaison group to a dedicated internal BGM Galectin-3 Test sales team, and the refocusing of our marketing activities from market education to commercialization.

General and administrative

General and administrative expenses consist primarily of personnel-related expenses, allocated occupancy costs, and expenses related to operating as a public company. These expenses include legal and regulatory costs, directors' and officers' insurance premiums, investor relations services, and accounting and financial reporting expenses.

General and administrative expenses decreased by 6%, or $423,000, to $7.1 million in 2013 compared to $7.6 million in 2012. This decrease is due primarily to a decrease in compensation related charges and travel, partially offset by an increase in professional services and facilities-related cost allocations.


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Other income and expense

The following table summarizes other (expense) income for the years ended December 31, 2013 and 2012:

                                               Years ended December 31,
                                                2013               2012             % Decrease
                                                    (in thousands)
Other (expense) income
Non-cash consideration associated with
stock purchase agreement                    $       (329 )       $       -                    -
Interest income/other income                          22                42                (48%)
Interest expense                                  (1,168 )          (1,083 )               (8%)

Total other (expense) income                $     (1,475 )       $  (1,041 )              (42%)

Other (expense) income increased by $0.4 million primarily resulting from a non-cash commitment fee required by our stock purchase agreement with Aspire Capital Fund, LLC, and a full twelve months of interest expense in 2013 on our term loan as we entered into our term loan facility in February 2012.

Comparison of the Years Ended December 31, 2012 and 2011



                                Years ended December 31,          % Increase
                                 2012               2011          (Decrease)
                                     (in thousands)
            Total revenues
            Product          $      2,570       $        451              470 %
            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 revenues are comprised solely of sales 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.

Service revenues decreased by 79%, or $938,000, to $245,000 in 2012 from $1.2 million in 2011 primarily due to the winding down of remaining program activities under our HRP initiative.

Product costs

                                   Years ended December 31,
                                   2012                 2011          % Increase
                                        (in thousands)
        Product costs          $        841         $        172              389 %

        Product gross margin            67%                  62%                5 %

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


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The increase in product gross margin by five percentage points in 2012 resulted from improvement in the sales mix between laboratory providers and distributors.

Service costs

Years ended December 31, 2012 2011 % Decrease

(in thousands)

Service costs $ 116 $ 447 (74 %)

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

Operating expenses

                                     Years ended December 31,          % Increase
                                      2012               2011          (Decrease)
                                          (in thousands)
     Operating Expenses
     Research and development     $      7,582       $      7,998               (5 %)
     Selling and marketing               9,451              5,293               79 %
     General and administrative          7,553              5,209               45 %

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

Research and development

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 was primarily attributable to the elimination of biomarker discovery research activities in the fourth quarter of 2012.

Selling and marketing

Selling 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 contract cardiovascular clinical liaisons 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

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 was due primarily to senior management severance and recruitment costs, legal expenses and non-cash stock compensation expenses.


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Other income and expense

The following table summarizes other (expense) income for the years ended December 31, 2012 and 2011:

                                           Years ended December 31,
                                              2012               2011        % Increase
                                                (in thousands)
Other (expense) income
Interest income/other income (expense)   $           42         $   (8 )             625 %
Interest expense                                 (1,083 )          (89 )           1,117 %

Total other (expense) income             $       (1,041 )       $  (97 )             973 %

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 by $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.

Liquidity and Capital Resources

Sources of Liquidity

Our primary sources of liquidity have included our cash balances, sales of our equity securities, term loan, product revenue from sales of the BGM Galectin-3 Test, and service revenue from the HRP initiative. As of December 31, 2013, we had $7.8 million of cash and working capital of $1.5 million.

Product and Service Revenues

During the fiscal years ended December 31, 2013, 2012 and 2011, we have recognized product revenues of approximately $3.7 million, $2.6 million and $0.5 million, respectively, and service revenues related to research and development initiatives and collaborations of approximately $0.4 million, $0.2 million and $1.2 million, respectively. However, since all revenue under the HRP initiative has been recorded as of December 31, 2013, we do not expect services revenues to continue into 2014 and beyond.

Initial Public Offering

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.

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.


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Common Stock Purchase Agreement with Aspire Capital

On January 24, 2013, we entered into a Common Stock Purchase Agreement, or the Purchase Agreement, with Aspire Capital Fund, LLC, or 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, which expires in May 2015. Under the Purchase 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. At December 31, 2013 our closing stock price was $1.04 per share and during 2013 our stock has traded near and below the $1.00 floor price required by the Purchase Agreement. If in the future, the closing price of our common stock falls below the $1.00 floor price, we would not have access to this facility. We have not yet sold any shares under the Purchase Agreement, which expires in May 2015. . . .

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