FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
Commission File # 0-24875
BIOENVISION, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 13-4025857
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State or other jurisdiction IRS
of incorporation or organization Employer ID No.
509 Madison Avenue Suite 404 New York, N.Y. 10022
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(Address of principal executive offices)
(Issuer's Telephone Number) (212) 750-6700
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve months (or such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes____X______ No
As of January 20, 2004, there were 19,106,045 shares of the issuer's common
stock, par value $.001 per share (the "Common Stock") outstanding.
Traditional Small Business Disclosure Format (Check One): YES [ ] No [X]
C O N T E N T S
Page
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Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition or Plan of Operation 9
Item 4. Controls and Procedures 13
Part II - Other Information 14
Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2003 2003
----------- ------
ASSETS (unaudited) (audited)
Current assets
Cash and cash equivalents $6,969,539 $7,929,686
Restricted cash 290,000 290,000
Deferred costs 1,758,499 22,727
Accounts receivable 25,000 25,000
Other assets 242,603 105,976
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Total current assets 9,285,641 8,373,389
Property and equipment, net 41,593 49,265
Intangible assets, net 15,135,084 15,779,399
Goodwill 3,902,705 3,902,705
Security deposits 79,111 79,111
Other long term assets 32,728 126,869
Deferred costs 213,321 224,937
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Total assets $28,690,183 $28,535,675
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $150,892 $411,392
Accrued expenses 1,012,870 730,722
Accrued dividends payable 1,421,413 1,009,146
Deferred revenue 3,585,181 113,636
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Total current liabilities 6,170,356 2,264,896
Deferred revenue-long term 1,066,604 1,124,685
Deferred tax liability 6,049,125 6,317,702
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Total liabilities 13,286,085 9,707,283
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Stockholders' equity
Preferred stock - $0.001 par value; 5,920,000 shares 5,440 5,917
authorized and 5,440,000 and 5,916,966 shares issued and
outstanding at December 31, 2003 and June 30, 2003,
respectively (liquidation preference $16,320,000)
Common stock - par value $0.001; 50,000,000 shares 19,092 17,123
authorized and 19,091,535 and 17,122,739 shares issued and
outstanding at December 31, 2003 and June 30, 2003,
respectively
Additional paid-in capital 48,664,049 47,304,449
Accumulated deficit (33,436,828) (28,651,443)
Accumulated other comprehensive income 152,346 152,346
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Stockholders' equity 15,404,099 18,828,392
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Total liabilities and stockholders' equity $28,690,183 $28,535,675
---------- ==========
The accompanying notes are an integral part of these financial statements.
Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Six months ended
December 31, December 31,
----------------- ---------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
Licensing and royalty revenue $82,495 $209,091 $136,536 $418,182
Research and development contract revenue - - 775,000 -
------- ------- -------- -------
Total revenue 82,495 209,091 911,536 418,182
Costs and expenses
Research and development 746,921 322,481 1,550,821 842,348
Selling, general and administrative 919,342 548,231 3,357,430 1,692,988
(includes stock based compensation
income(expense) of $186,055 and $(325,000)
for the three months ended December 31,
2003 and 2002, respectively, and
$(1,098,592) and $(422,500) for the six
months ended December 31, 2003 and 2002,
respectively)
Depreciation and amortization 340,248 334,683 679,869 667,021
------- ------- ------- -------
Total costs and expenses 2,006,511 1,205,395 5,588,120 3,202,357
--------- --------- --------- ---------
Loss from operations (1,924,016) (996,304) (4,676,584) (2,784,175)
Interest income (expense)
Interest and finance charges - - - (325,000)
Interest income 15,852 40,768 34,889 89,179
------ ------ ------ ------
Net loss before income tax benefit (1,908,162) (955,536) (4,641,695) (3,019,996)
Income tax benefit 134,351 152,100 268,577 304,200
------- ------- ------- -------
Net loss (1,773,811) (803,436) (4,373,118) (2,715,796)
----------- --------- ----------- -----------
Cumulative preferred stock dividend (188,557) (221,279) (412,267) (442,557)
--------- --------- --------- ---------
Net loss available to common stockholders $(1,962,368) $(1,024,715) $(4,785,385) $(3,158,353)
=========== =========== =========== ===========
Basic and diluted net loss per share of
common stock $(0.11) $(0.06) $(0.27) $(0.19)
====== ====== ====== ======
Weighted average shares used in computing 18,439,234 16,887,786 17,850,814 16,887,786
basic and diluted net loss per share ========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
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Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
December 31,
------------------------------
2003 2002
----------- ----------
(unaudited) (unaudited)
Cash flows from operating activities
Net loss $(4,373,118) $(2,715,796)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 679,869 667,021
Deferred tax benefit (268,577) (304,200)
Compensation costs - shares and warrants issued 444,683 422,500
to nonemployees
Compensation costs - re-pricing of options 653,908 -
Changes in assets and liabilities
Deferred costs (1,724,156) 184,091
Deferred revenue 3,413,464 (368,181)
Accounts payable (260,500) 58,218
Other current assets (136,627) (56,767)
Other long term assets 94,141 (79,111)
Other accrued expenses and liabilities 282,148 (664,497)
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Net cash used in operating activities (1,194,765) (2,856,722)
----------- -----------
Cash flows from investing activities
Purchase of intangible assets (27,882) (67,787)
Capital expenditures - (48,860)
Restricted cash - (290,000)
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Net cash used in investing activities (27,882) (406,647)
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Cash flows from financing activities
Proceeds from issuance of common stock 262,500 -
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Net decrease in cash and equivalents (960,147) (3,263,369)
Cash and equivalents, beginning of period 7,929,686 12,882,521
--------- ----------
Cash and equivalents, end of period $6,969,539 $9,619,152
========= =========
Supplemental disclosure of cash flow information
Cash paid during the period for Interest paid $ - $ -
Supplemental disclosure of non cash investing and
financing activities
The accompanying notes are an integral part of these financial statements.
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BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(Unaudited)
NOTE A - Description of Business
Bioenvision, Inc. ("Bioenvision" or the "Company") is an emerging
biopharmaceutical company whose primary business focus is the development and
distribution of drugs to treat cancer. The Company has a broad range of products
and technologies under development, but its two lead drugs are Clofarabine and
Modrenal(R). Modrenal(R)is approved for marketing in the U.K. for advanced
breast cancer. The Company's plan is to bring Modrenal(R) into the United States
to perform further clinical trials and to access the U.S. market. Most of the
Company's other drugs are now in clinical trials in various stages of
development.
NOTE B - Interim Financial Statements
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all the adjustments (consisting only of normal
recurring accruals) necessary to present fairly the consolidated financial
position as of December 31, 2003 and the consolidated results of operations for
the three months and six months ended December 31, 2003 and 2002, and cash flows
for the six months ended December 31, 2003 and 2002.
The condensed consolidated balance sheet at June 30, 2003 has been derived from
the audited financial statements at that date, but does not include all the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. For further information,
refer to the audited consolidated financial statements and footnotes thereto
included in the Form 10-KSB filed by the Company for the year ended June 30,
2003.
The condensed consolidated results of operations for the three months and six
months ended December 31, 2003 and 2002 are not necessarily indicative of the
results to be expected for any other interim period or for the full year.
NOTE C - Stock Based Compensation
At December 31, 2003, the Company has stock based compensation plans which are
described more fully in the Company's annual report on Form 10-KSB for the year
ended June 30, 2003. As permitted by SFAS No. 123, "Accounting for Stock Based
Compensation," the Company accounts for stock based compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees." Compensation expense for stock
options issued to employees is based on the difference on the date of grant,
between the fair value of the Company's stock and the exercise price of the
option. Under APB 25, no stock based employee compensation cost is reflected in
reported net loss, as all options granted to employees have an exercise price
equal to the market value of the underlying common stock at the date of grant.
For the three months and six months ended December 31, 2003, the Company
recognized stock based employee compensation income (expense) of $61,000 and
$(654,000), respectively, as a result of the March 31, 2003 re-pricing of
380,000 options granted to an employee pursuant to the terms of his employment
contract.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling Goods or Services,"
as amended by EITF No. 00-27. Under EITF No. 96-18, where the fair value of the
equity instrument is more reliably measurable than the fair value of services
received, such services will be valued based on the fair value of the equity
instrument. The Company expects to continue applying the provisions of APB
Opinion No. 25 for equity issuances to employees.
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The following table illustrates the effect on net loss and loss per share as if
the fair value based method had been applied to all outstanding and unvested
awards in each period.
Three months ended Six months ended
December 31, December 31,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss available to common stockholders, $(1,962,368) $(1,024,714) $(4,785,385) $(3,158,352)
as reported ----------- ----------- ----------- -----------
Deduct: Total stock based employee $ (244,992) $(793,594) $ (489,983) $(1,587,188)
compensation expense determined under fair --------- --------- --------- -----------
value based method for all awards; net of
related tax effects
Pro forma net loss (2,207,360) (1,818,308) (5,275,368) (4,745,540)
Loss per share
Basic and diluted - as reported $ (0.11) $ (0.06) $ (0.27) $ (0.19)
Basic and diluted - pro forma $ (0.12) $ (0.11) $ (0.30) $ (0.28)
The fair value of options at the date of grant was established using the
Black-Scholes model with the following assumptions:
Three months ended Six months ended
December 31, December 31,
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Expected life (years) 4 4 4 4
Risk free interest rate 3.00% 3.00% 3.00% 3.00%
Expected volatility 80.00% 80.00% 80.00% 80.00%
Expected dividend yield 0.00 0.00 0.00 0.00
NOTE D - Net Loss Per Share
Basic net loss per share is computed using the weighted average number of common
shares outstanding during the periods. Diluted net loss per share is computed
using the weighted average number of common shares and potentially dilutive
common shares outstanding during the periods. Options and warrants to purchase
14,269,543 and 6,234,544 shares of common stock have not been included in the
calculation of net loss per share for the three months and six months ended
December 31, 2003 and 2002, respectively, as their effect would have been
anti-dilutive.
NOTE E - License And Co-Development Agreements
Clofarabine
The Company has a license from Southern Research Institute ("SRI"), Birmingham,
Alabama, to develop and market purine nucleoside analogs which, based on
third-party studies conducted to date, may be effective in the treatment of
leukemia and lymphoma. The lead compound of these purine-based nucleosides is
known as Clofarabine. The Company is developing Clofarabine initially for the
treatment of pediatric and adult leukemias, lymphomas and solid tumors.
In August 2003, SRI granted the Company an irrevocable, exclusive option to
make, use and sell products derived from the technology in Japan and Southeast
Asia. The Company intends to convert the option to a license upon sourcing an
appropriate co-marketing partner to develop these rights in such territory.
To facilitate the development of Clofarabine, the Company entered into a
co-development agreement with ILEX Oncology, Inc. ("ILEX") in March 2001. Under
the terms of the co-development agreement, the Company granted ILEX an option to
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market Clofarabine in the United States and Canada. ILEX is required to pay all
development costs in the United States and Canada, and 50% of approved
development costs worldwide outside the United States and Canada (excluding
Japan and Southeast Asia). The Company also granted Ilex an option to purchase
$1 million of Common Stock after completion of the pivotal Phase II clinical
trial, and ILEX has an additional option to purchase $2 million of Common Stock
after the filing of a new drug application in the United States for the use of
Clofarabine in the treatment of lymphocytic leukemia. The exercise price per
share for each option is determined by a formula based around the date of
exercise. Under the co-development agreement, ILEX also pays royalties to
Southern Research Institute based on certain milestones. Also, the Company is
obligated to pay milestones and royalties to Southern Research Institute in
respect to Clofarabine sales outside the United State and Canada. On September
12, 2003, ILEX paid the Company $775,000 in respect of Research and Development
costs incurred by the Company for European drug development through August 31,
2003.
On December 30, 2003, the Company converted ILEX's option to a sublicense and
ILEX paid the Company $3.5 million constituting an acceleration of milestone
payments required pursuant to the co-development agreement. Further, ILEX agreed
to pay an additional $2 million upon filing an NDA and a further $2 million six
months thereafter. Pursuant to the original co-development agreement, ILEX was
obligated to pay the Company $2.5 million upon completion of the pivotal phase
II clinical trials; an additional $500,000 on filing an NDA for acute leukemias;
and an additional $4.5 million within twelve months thereafter.
Modrenal(R)
The Company holds an exclusive license, until the expiration of existing and new
patents related to modrenal, to market modrenal in major international
territories, and an agreement with a United Kingdom company to co-develop
modrenal for other therapeutic indications. Management believes that modrenal
currently is manufactured by third-party contractors in accordance with good
manufacturing practices. The Company has no plans to establish its own
manufacturing facility for modrenal, but will continue to use third-party
contractors.
Anti-Estrogen Prostate. The Company has received Institutional Review Board
approval from the Massachusetts General Hospital for a Phase II study of
trilostane for the treatment of androgen independent prostate cancer. The study
will be conducted by The Dana Faber Cancer Institute and currently is intended
to commence in February 2004.
Operational Developments
In April 2003, the Company entered into an exclusive license agreement with
CLL-Pharma ("CLL"), pursuant to which CLL has agreed to perform certain
development works and studies to create a new formulation of modrenal in the
form of a soft gel capsule. CLL intends to use its proprietary MIDDS-patented
technology to perform this service on behalf of the Company. This new
formulation, once in hand, will allow the Company to apply for necessary
authorization, as required by applicable European health authorities, to sell
modrenal throughout Europe. The Company paid and capitalized $175,000 related to
development costs over an eighteen month period.
In May 2003, the Company entered into a sub-license agreement with Dechra
Pharmaceuticals, plc ("Dechra"), pursuant to which Dechra has been granted a
sub-license for all of Bioenvision's rights and entitlements to market and
distribute modrenal in the United States and Canada solely in connection with
animal health applications. Subject to certain circumstances, this agreement
expires upon expiration of the last patent related to modrenal or the completion
of the last royalty set forth in the agreement. The Company received a payment
of $1.25 million upon execution of this agreement and may receive up to an
additional $3.75 million upon the achievement by Dechra of certain milestones
set forth in the agreement.
In May 2003, the Company entered into a master services agreement with
Penn-Pharmaceutical Services Limited ("Penn"), pursuant to which Penn has agreed
to label, package and distribute clofarabine on behalf of and at the Company's
request. The services to be performed by Penn also include regulatory support
and the manufacture, quality control, packaging and distribution of proprietary
medicinal products including clinical trials supplies and samples. Subject to
certain circumstances, the term of this agreement is twelve months and renews
for subsequent twelve month periods unless either party tenders notice of
termination upon no less than three months prior written notice.
In June 2003, the Company entered into a supply agreement with Ferro-Pfanstiehl
Laboratories ("Ferro"), pursuant to which Ferro has agreed to manufacture and
supply 100% of Bioenvision's global requirements for Clofarabine-API. Subject to
certain circumstances, this agreement will expire on the fifth anniversary date
of the first regulatory approval of Clofarabine drug product.
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In June 2003, the Company entered into a development agreement with Ferro,
pursuant to which Ferro agreed to perform certain development activities to
scale up, develop, finalize, and supply CTM and GMP supplier qualifications of
the API-Clofarabine. Subject to certain circumstances, this agreement expires
upon the completion of the development program. The development agreement is
milestone based and payments are to be paid upon completion of each milestone.
If Ferro has not completed the development agreement by December 2007, the
development agreement will automatically terminate without further action by
either party. The Company paid and capitalized $50,000 related to development
costs.
In August 2003, the Company entered into an amendment to the co-development
agreement with Stegram Pharmaceuticals plc ("Stegram"), pursuant to which, in
pertinent part, the Company succeeded to Stegram the United Kingdom marketing
rights to modrenal.
In August 2003, SRI granted the Company an irrevocable, exclusive option to
make, use and sell products derived from clofarabine in Japan and Southeast
Asia. The Company intends to convert the option to a license upon sourcing an
appropriate co-marketing partner to develop these rights in such territory.
In September 2003, the Company and ILEX entered into an amendment to the
co-development agreement, pursuant to which the Company collaborated with ILEX
to co-develop an oral formulation for clofarabine; the rights and related costs
of which will be shared equally.
On December 30, 2003, the Company converted ILEX's option to a sublicense and
ILEX paid the Company $3.5 million constituting an acceleration of milestone
payments required pursuant to the co-development agreement. Further, ILEX agreed
to pay an additional $2 million upon filing an NDA and a further $2 million six
months thereafter. Pursuant to the original co-development agreement, ILEX was
obligated to pay the Company $2.5 million upon completion of the pivotal phase
II clinical trials; an additional $500,000 on filing an NDA for acute leukemias;
and an additional $4.5 million within twelve months thereafter. These
non-refundable fees that were received pursuant to license and other
collaborative agreements where the Company has continuing involvement are
recorded as deferred revenue and recognized over the estimated service period.
The related costs paid to SRI were also deferred and are being amortized over
the same service period.
Deferred revenue
As of December 31, 2003, the Company reported deferred revenue of $4,651,785.
This amount is comprised of a payment received by the Company of $1.25 million
received from Dechra, as well as a payment of $3.5 million from ILEX. The
Company is recognizing the payments on a straight line basis over the terms of
the agreements through May 2014 and August 2004, respectively.
Deferred Costs
Deferred costs represent amounts that became due and payable upon the Company's
execution of co-development and sub-licensing agreements. Since the revenue
related to these agreements is to be realized over the life of the agreement,
the Company has deferred the related costs. The Company amortizes such costs
ratably, on a straight-line basis. As of December 31, 2003, the Company has
deferred costs of $1,971,820.
NOTE F - Equity Transactions
In June 2002, the Company granted options to David Luci to purchase 380,000
shares of common stock at an exercise price of $1.95 per share, which equaled
the stock price on the date of grant. Of this amount 50,000 options vested on
June 28, 2002 and the remaining 330,000 options vest ratably over a three-year
period on each anniversary date. On March 31, 2003, the Company entered into an
Employment Agreement with Mr. Luci, pursuant to which, among other things, the
exercise price for all of the 380,000 options were changed to $0.735 per share,
which equaled the stock price on that date. In addition, the Company issued an
additional 120,000 options at an exercise price of $.735 per share which vest
immediately. As a result of the repricing of all of the 380,000 options, the
Company will remeasure the intrinsic value of these options at the end of each
reporting period and will record a charge for compensation expense to the extent
the vested portion of the options are in the money. For the three months and six
months ended December 31, 2003, the Company recognized stock based compensation
income (expense) of $61,000 and $(654,000).
During the three months ended March 31, 2003, the Company also issued 20,000
options to another employee to purchase 20,000 shares of common stock at an
exercise price of $1.42 per share. Of this amount, 10,000 options vest on
January 9, 2004 and the remaining 10,000 options will vest on January 9, 2005.
-7-
During the three months ended December 31, 2003, the Company issued options to
another employee to purchase 25,000 shares of common stock at an exercise price
of $3.53 per share. Of this amount, 12,500 options vest on November 11, 2004 and
the remaining 12,500 will vest on November 11, 2005.
During the three and six months ended December 31, 2003, certain holders of
476,666 shares of the Company's preferred stock converted such shares into
953,332 shares of the Company's common stock. In addition, during the three and
six months ended December 31, 2003, certain holders of the Company's warrants
converted an aggregate of 175,000 warrants into 175,000 shares of the Company's
common stock. The Company received an aggregate $262,500, as payment for the
conversion price with respect to the foregoing conversions. During the three and
six month periods ended December 31, 2003, certain holders of options to
purchase an aggregate of 1,080,000 shares of the Company's common stock were
exercised pursuant to the cashless exercise feature available to such option
holders and the Company issued 790,464 shares of its common stock in accordance
therewith.
NOTE G - Related Party Transactions
On November 16, 2001, we entered into an engagement letter with SCO Capital,
pursuant to which SCO would act as our financial advisor. In connection with the
engagement letter, we issued a warrant to purchase 100,000 shares of common
stock at an exercise price of $1.25 per share, subject to certain anti-dilution
adjustments. The warrants expire five years from the date of issuance. The
issuance of these shares was capitalized as deferred financing costs and was
amortized over a twelve-month period.
In connection with securing a credit facility with SCO Capital, we issued
warrants to purchase 1,500,000 shares of our common stock at an exercise price
of $1.25 per share, subject to certain anti-dilution adjustments. The warrants
expire five years from the date of issuance. The credit facility with SCO
Capital was terminated in May 2002 at which time the Company received a payoff
letter evidencing such termination.
On February 5, 2002, we completed the acquisition of Pathagon Inc. Affiliates of
SCO Capital owned 82% of Pathagon prior to the acquisition. In connection
therewith, on February 1, 2002, we issued 7,000,000 shares of common stock to
the former stockholders of Pathagon Inc.
NOTE H - New Accounting Pronouncements
In January 2003, the FASB issued interpretation No. 46, "Consolidation of
Variable Interest Entities--An Interpretation of ARB No. 51" ("FIN 46"), which
addresses consolidation of variable interest entities. FIN 46 expands the
criteria for consideration in determining whether a variable interest entity
should be consolidated by a business entity, and requires existing
unconsolidated variable interest entities (which include, but are not limited
to, Special Purpose Entities, or SPE's) to be consolidated by their primary
beneficiaries if the entities do not effectively disburse risks among parties
involved. This interpretation applies immediately to variable interest entities
created after January 31, 2003 and variable interest entities in which an
enterprise obtains any interest after that date. It applies in the first fiscal
year or interim period ending after December 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The adoption of FIN 46 is not expected to have a
material impact on the results of operation or financial position of the
Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
The objective of SFAS 150 is to establish standards for how an issuer classifies
and measures certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 is effective for financial instruments entered
into or modified after May 31, 2003 and for existing financial instruments after
July 1, 2003. Adoption of SFAS 150 did not have a material impact on the results
of operations or financial position of the Company.
In May 2003, the Emerging Issues Task Force ("EITF") reached a consensus on EITF
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"). EITF 00-21 provides guidance on how to determine when an arrangement
that involves multiple revenue-generating activities or deliverables should be
divided into separate units of accounting for revenue recognition purposes, and
if this division is required, how the arrangement consideration should be
allocated among the separate units of accounting. The guidance in the consensus
is effective for revenue arrangements entered into in quarters beginning after
June 15, 2003. The adoption of EITF 00-21 did not impact the Company's
consolidated financial position or results of operations, but could affect the
timing or pattern of revenue recognition for future collaborative research
and/or license agreements.
-8-
NOTE I - Litigation
On April 1, 2003, RLB Capital, Inc. filed a complaint against the Company in the
Supreme Court of the State of New York (Index No. 601058/03). The Complaint
alleges a breach of contract by the Company and demands judgment against the
Company for $112,500 and warrants to acquire 75,000 shares of the Company's
common stock. The Company submitted its Verified Answer on June 25, 2003 and, in
pertinent part, denied RLB's allegations and asserted counterclaims based on
negligence. In September 2003, the Company filed a motion for summary judgment
and RLB filed its response on October 27, 2003. On November 12, 2003, the
Supreme Court granted the motion for summary judgment and the complaint was
dismissed. No assurance can be given that RLB will not appeal the court's
decision, but management does not believe that any resulting judgment or
settlement would have a material adverse effect on the Company, its financial
position or results of operations. The Company maintains its counter claim
against RLB Capital, which it intends to pursue.
On December 19, 2003, the Company filed a complaint against Dr. Deidre Tessman
and Tessman Technology Ltd. in the Supreme Court of the State of New York,
County of New York (Index No. 03-603984). An amended complaint alleges, among
other things, breach of contract and negligence by Tessman and Tessman
Technology and demands judgment against Tessman and Tessman Technology in an
amount to be determined by the Court. Neither Tessman nor Tessman Technology has
submitted an answer to the amended complaint to date, although Tessman and
Tessman Technology have removed the action to the United States District Court
for the Southern District of New York.
BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
The information set forth in this Quarterly Report on Form 10-QSB including,
without limitation, that contained in this Item 2, Management's Discussion and
Analysis or Plan of Operation, contains forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Actual results may
differ materially from those projected in the forward-looking statements as a
result of certain risks and uncertainties set forth in this report. Although
management believes that the assumptions made and expectations reflected in the
forward-looking statements are reasonable, there is no assurance that the
underlying assumptions will, in fact, prove to be correct or that actual future
results will not be different from the expectations expressed in this report.
The following discussion and analysis of significant factors affecting the
Company's operating results, liquidity and capital resources and should be read
in conjunction with the accompanying financial statements and related notes.
Overview
We are an emerging biopharmaceutical company with a primary business focus on
the development and distribution of drugs to treat cancer. We have acquired
development and marketing rights to a portfolio of six platform technologies
developed over the past 15 years from which a range of products have been
derived and additional products may be developed in the future. We commenced
marketing one of our lead products, Modrenal(R), and intend to continue to
develop Clofarabine in Europe and seek a partner to develop Clofarabine in Japan
and Southeast Asia. Further, we intend to continue to develop our other products
and technologies that we believe offer unique market opportunities and/or
complement our existing product lines. Once a product or technology has been
launched into the market for a particular disease indication, we plan to work
with numerous collaborators, both pharmaceutical and clinical, in the oncology
community to extend the permitted uses of the product to other indications. In
order to market our products effectively, we intend to develop marketing
alliances with strategic partners and may co-promote and/or co-market in certain
territories.
We have used a major portion of the proceeds of the May 2002 private placement
to initiate clinical trials of Clofarabine in Europe. The initial emphasis will
continue to be on the use of Clofarabine in the treatment of refractory acute
leukemia in children and adults. We intend to seek label extensions in several
indications, including chronic leukemias, lymphomas and solid tumors. The drug
has received orphan drug designation in Europe for the treatment of refractory
acute leukemia (ALL and AML). With respect to Modrenal(R), we intend in 2004 to
conduct Phase II and Phase IV studies in breast cancer in Europe to expand the
market potential for Modrenal(R) and to initiate Phase II studies in the United
States in prostate cancer.
We plan to identify licensing partners for OLIGON(R) and to continue developing
new aspects of the technology. We also plan to continue development of
methlylene blue and other products in our pipeline.
With respect to our gene therapy technology, we have completed laboratory
research which confirms proof of principal of our gene therapy technology and
has added to the pre-clinical data which will be important for any subsequent
regulatory
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BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
submission. This laboratory research was required to allow the Company and the
research departments of the relevant universities assisting with this technology
to file patents for which the Company has licensing rights.
Clofarabine
Based on clinical studies conducted to date, we believe that Clofarabine is
effective in the treatment of leukemia and lymphoma. To expedite the
commercialization of Clofarabine, we have entered into a co-development
agreement with ILEX Oncology, Inc. ("ILEX") under which pivotal Phase II
clinical trials of Clofarabine have been conducted. The combination of the Phase
II trials in acute leukemia at M.D. Anderson Cancer Center and other leading
cancer centers in the United States and Europe and the encouraging results from
the Phase I, early Phase II studies and current Phase II studies lead us to be
enthusiastic for the prospects of Clofarabine reaching the market, possibly as
soon as the third quarter of calendar year 2004. The U.S. Food and Drug
Administration recently indicated that it would review clofarabine for the
treatment of refractory or relapsed acute lymphocytic leukemia ("ALL") in
children under the "fast track" provision. "Fast track" status means that the
FDA will start reviewing clinical trial data even before the entire New Drug
Application ("NDA") is complete. The FDA could complete its review within six
months.
We believe the set of clinical data from the current Phase II clinical trials
could serve as the basis for a marking application, which we believe could be
filed as early as April 2004.
Further, Southern Research Institute, which granted us the exclusive worldwide
license, excluding Japan and Southeast Asia, to make, use and sell products
derived from the clofarabine technology for a term expiring on the date of
expiration of the last patent covered by the license (subject to earlier
termination under certain circumstances), and to utilize technical information
related to the technology to obtain patent and other proprietary rights to
products developed by us and by Southern Research Institute from the technology,
recently granted us an irrevocable, exclusive option to make, use and sell
products derived from the clofarabine technology in Japan and Southeast Asia. We
intend to convert the option to a license upon sourcing an appropriate
co-marketing partner to develop these rights in Japan and Southeast Asia.
In January 2002, the European orphan drug application for use of Clofarabine to
treat acute leukemia in adults was approved. The drug has also been granted
orphan drug status in the United States.
Extensive preclinical and mechanistic studies have provided much of the
rationale for the rapidly advancing Clofarabine clinical development program.
Published data and information presented at recent scientific meetings suggest
that Clofarabine has broader anti-cancer activity, and may be more potent than
other currently marketed purine analogues such as Fludara(R) (fludarabine) and
Leustatin(R) (cladribine).
Preliminary results from ongoing clinical studies indicate that Clofarabine may
be an effective treatment for acute leukemias in adult and pediatric patients
that have become resistant, or refractory, to prior treatment. According to
researchers at the M.D. Anderson Cancer Center, interim Phase II study results
showed that 45% of adults with acute myelogenous leukemia ("AML") achieved a
complete remission ("CR") rate, and ALL patients achieved a 20% CR rate when
treated with Clofarabine as a single agent. Data from a separate Phase I
dose-escalation study demonstrated a 25% CR rate, and an overall response rate
of 40%, in children with acute leukemias who were refractory to previous
therapy. Trials in adult and pediatric acute leukemias are currently ongoing in
the United States and have commenced in Europe. Complete remission, in this
context, means complete clearance of all leukemic cells from the blood and
normalization of the blood count, sustained for a period of more than four
weeks.
Modrenal(R)
We launched Modrenal(R), in May 2003 in the United Kingdom, where we obtained
regulatory approval for its use in the treatment of post-menopausal breast
cancer. In August 2003, pursuant to an amendment to our co-development agreement
with Stegram Pharmaceuticals plc ("Stegram"), we obtained the right to market
Modrenal(R) in the United Kingdom and have succeeded to Stegram's existing
revenue streams from U.K. sales.
Our management believes that Modrenal(R) works by a unique action, as compared
with other commercially available drugs, to treat post-menopausal breast cancer.
We believe that Modrenal(R) alters the way in which the female hormone,
estrogen, binds to the hormone receptor on the cell in a previously unrecognized
fashion. In particular, it changes the manner in which
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BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
the hormone acts on a newly identified second estrogen receptor, ER beta
("ER(beta)"). Modrenal(R) is the first drug to be commercially available in a
new class of agents that specifically target ER(beta). This would target
patients that have hormone-sensitive cancers and have become resistant, or
refractory, to prior hormone treatments, such as Tamoxifen(R) or aromatase
inhibitors. We believe that the potential market for Modrenal(R), based upon the
sales of currently available drugs for hormonal therapy for breast cancers, is
in excess of $1.8 billion of sales per annum worldwide. The results of extensive
clinical trials to date with Modrenal(R) illustrate that it is at least as
effective in second line or third line treatment of advanced breast cancer as
the currently available hormonal treatments, such as the SERM's and aromatase
inhibitors, and more effective than these agents in certain specific patient
types, such as those who have become Tamoxifen(R) refractory.
Company Status
We have made significant progress in developing our product portfolio over the
past twelve months, and have multiple products in clinical trials. We have
incurred losses during this emerging stage. We anticipate that revenues derived
from the two lead drugs will permit us to further develop our other products and
potential products currently in our development portfolio. We have commenced
marketing one of our lead products, Modrenal(R), and we intend to continue
developing our existing platform technologies with a primary business focus on
drugs to treat cancer, and commercializing products derived from such
technologies. A key element of our business strategy is to continue to develop
new technologies and products that we believe offer unique market opportunities
and/or complement our existing product lines. As a result of the acquisition of
Pathagon Inc., in February 2002, we have several anti-infective technologies.
These include the OLIGON(R) technology, an advanced biomaterial that has been
approved for certain indications by the FDA in the United States, and is being
sold by a product co-development partner, and the use of thiazine dyes, such as
methylene blue, which are used for in vitro and in vivos inactivation of
pathogens (viruses, bacteria and fungus) in biological fluids. It is not the
Company's strategy to sell devices or to expand into the anit-infective market
per se, but the technology obtained in the Pathagon acquisition has specific
application for support of the cancer patient and oncology treatment. We have
had discussions with potential product co-development partners from time to
time, and plan to continue to explore the possibilities for co-development and
sub-licensing in order to implement our development plans.
In addition, we believe that some of our products may have applications in
treating non-cancer conditions in humans and in animals. Those conditions are
outside our core business focus and we do not presently intend to devote a
substantial portion of our resources to addressing those conditions. In May
2003, we entered into a Sub-License Agreement with Dechra Pharmaceuticals, plc
("Dechra"), pursuant to which Bioenvision sub-licensed to Dechra the marketing
and development rights to modrestane, solely with respect to animal health
applications, in the United States and Canada. We received $1.25 million in
cash, together with future milestone and royalty payments which are contingent
upon the occurrence of certain events. We intend to continue to try to exploit
these types of opportunities as they arise.
You should consider the likelihood of our future success to be highly
speculative in light of our limited operating history, as well as the limited
resources, problems, expenses, risks and complications frequently encountered by
similarly situated companies. To address these risks, we must, among other
things:
o satisfy our future capital requirements for the implementation of our
business plan;
o commercialize our existing products;
o complete development of products presently in our pipeline and obtain
necessary regulatory approvals for use;
o implement and successfully execute our business and marketing strategy to
commercialize products;
o establish and maintain our client base;
o continue to develop new products and upgrade our existing products;
o respond to industry and competitive developments; and
o attract, retain, and motivate qualified personnel.
-11-
BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
We may not be successful in addressing these risks. If we are unable to do so,
our business prospects, financial condition and results of operations would be
materially adversely affected. The likelihood of our success must be considered
in light of the development cycles of new pharmaceutical products and
technologies and the competitive and regulatory environment in which we operate.
Results of Operations
We have acquired development and marketing rights to a portfolio of six platform
technologies developed over the past fifteen years, from which a range of
products have been derived and additional products may be developed in the
future. Although we intend to commence marketing our lead product, Modrenal
(TM), and to continue developing our existing platform technologies and
commercializing products derived from such technologies, a key element of our
business strategy is to continue to develop new technologies and products that
we believe offer unique market opportunities and/or complement our existing
product lines. Once a product or technology has been launched into the market
for a particular disease indication, we plan to work with numerous
collaborators, both pharmaceutical and clinical, in the oncology community to
extend the permitted uses of the product to other indications. In order to
market our products effectively, we intend to develop marketing alliances with
strategic partners and may co-promote and/or co-market in certain territories.
The Company reported revenues of $82,000 and $209,000 for the three month period
ended December 31, 2003 and 2002, respectively. For the six months ended
December 31, 2003 and 2002, the Company reported revenues of $137,000 and
$418,000. Revenues reflect our agreement with our co-development partners and/or
licenses in connection with our platform of drugs and technologies.
Research and development costs for the three months ended December 31, 2003 and
2002 were $747,000 and $322,000, respectively, an increase of $425,000. This
increase is primarily attributable to increased royalty payments under certain
development contracts. Research and development costs for the six months ended
December 31, 2003 and 2002 were $1,551,000 and $842,000, respectively, an
increase of $709,000. The increase reflects royalty payments under certain
development contracts.
Selling, general and administrative expenses for the three months ended December
31, 2003 and 2002 were $919,000 and $548,000, respectively, an increase of
$371,000. The increase is primarily attributable to the Company's increase in
sales and marketing activity. Selling, general and administrative expenses
(including stock based compensation of $1,099,000 and $423,000 for the six
months ended December 31, 2003 and 2002 were $3,357,000 and $1,693,000,
respectively, an increase of $1,664,000. This increase is primarily attributable
to the Company's increased sales and marketing activities since the May 2002
financing, the option re-pricing of 653,908, the Company's re-constituting its
wholly-owned subsidiary, Bioenvision Limited, as a fully operational sales and
marketing subsidiary, salaries of newly-added employees of approximately 65,000,
rent at both Company's new principal executive offices in New York, New York and
new rental facility for its sales and marketing subsidiary in Edinburgh,
Scotland of approximately $20,000, travel expenses, insurance costs and other
customary costs associated with our becoming an operating company.
Depreciation and amortization expense for the three month and six month period
ended December 31, 2003 were $340,000 and $670,000 compared to the three month
and six month period ended December 31, 2002 of $335,000 and $667,000. The
increase in amortization is related to the amortization of certain intangible
assets acquired by the Company.
Liquidity and Capital Resources
We anticipate that we may continue to incur significant operating losses for the
foreseeable future. There can be no assurance as to whether or when we will
generate material revenues or achieve profitable operations. We are actively
seeking strategic alliances in order to develop and market our range of
products.
We received an initial payment from Dechra of $1,250,000 on May 13, 2003 upon
execution of our sub-license agreement with Dechra. This agreement expires upon
expiration of the last patent related to modrenal or the completion of the last
royalty obligation as set forth therein.
-12-
BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
We received a milestone payment from ILEX of $25 million on December 30, 2003,
upon executing an amendment to the co-development agreement. This payment
related to the achievement of a milestone; namely, completion of pivotal phase
II trials. Pursuant to the Company's co-development agreement with SRI, the
Company immediately pays $1.75 million of such milestone payment to SRI.
On December 31, 2003, we have cash and cash equivalents of $6,969,539 and
working capital of $3,115,285, which management believes will be sufficient to
continue currently planned operations over the next twelve months. Although we
do not currently intend to raise any additional funds for the next twelve
months, we cannot ensure additional funds will not be raised during such period
because of the significant scale-up of our operating activities, including
clofarabine development and the launch of modrenal.
Further, a key element of our business strategy is to continue to develop new
technologies and products that we believe offer unique market opportunities
and/or complement our existing product lines. We are not presently considering
any such transactions, and we do not presently expect to acquire any significant
assets over the coming twelve month period, but if any such opportunity arises
and we deem it to be in our interests to pursue such an opportunity, it is
possible that additional financing would be required for such a purpose.
The Company has the following commitments as of December 31, 2003:
Payments Due in
Total 2004 2005 2006
Employee Contracts 199,800 199,800 - -
Occupancy Lease 328,300 121,200 166,100 41,000
Total 528,100 321,000 166,100 41,000
In management's opinion, cash flows from operations and borrowing capacity
combined with cash on hand will provide adequate flexibility for funding the
Company's working capital obligations for the next twelve months. However, there
can be no assurance that suitable debt or equity financing will be available for
the Company. The Company has a commitment under its operating lease with the New
York office. The Company leases 3,299 square feet under a lease that expires on
December 31, 2005. The Company is a party to an additional month-to-month lease
agreement for its subsidiary, Bioenvision Limited
The Company is required to accrue for and pay a dividend of 5%, subject to
certain adjustments, on its cumulative Series A Convertible Participating
Preferred Stock. In the event of a voluntary or involuntary liquidation or
dissolution of the Company, before any distribution of assets shall be made to
the holders of the Company's securities which are junior to the preferred stock
(such as the common stock), holders of the preferred stock shall be paid out of
the assets of the Company legally available for distribution to the Company's
stockholders an amount per share equal to the initial original issue price
($3.00) subject to certain adjustments plus all accrued but unpaid dividends on
such preferred stock.
Subsequent Events
On January 20, 2004, the Company appointed Dr. Michael Kauffman to the board of
directors.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of the Company's
"disclosure controls and procedures" (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end
of the period covered by this Quarterly Report on Form 10-QSB was made under the
supervision and with the participation of the Company's management, including
its Chief Executive Officer and Chief Accounting Officer. The Company's
management, including its Chief Executive Officer and Chief Accounting Officer,
does not expect that its disclosure controls and procedures will prevent all
error and all fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control system's
objectives will be met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs.
-13-
Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within the Company have been detected. The inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with its policies or procedures. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
Based upon the evaluation of disclosure controls and procedures, the Chief
Executive Officer and Chief Accounting Officer of the Company have concluded
that, subject to the limitations noted above, the Company's disclosure controls
and procedures were effective to ensure that material information relating to
the Company and the Company's consolidated subsidiaries would be made known to
them by others within those entities to allow timely decisions regarding
required disclosures.
Changes in Internal Controls
There was no significant change in our "internal control over financial
reporting" (as defined in Rule 13a-15(f) under the Exchange Act) that occurred
during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
BIOENVISION, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On April 1, 2003, RLB Capital, Inc. filed a complaint against the Company in the
Supreme Court of the State of New York (Index No. 601058/03). The Complaint
alleges a breach of contract by the Company and demands judgment against the
Company for $112,500 and warrants to acquire 75,000 shares of the Company's
common stock. The Company submitted its Verified Answer on June 25, 2003 and, in
pertinent part, denied RLB's allegations and asserted counterclaims based on
negligence. In September 2003, the Company filed a motion for summary judgment
and RLB filed its response on October 27, 2003. On November 12, 2003, the
Supreme Court granted the motion for summary judgment and the complaint was
dismissed. No assurance can be given that RLB will not appeal the court's
decision, but management does not believe that any resulting judgment or
settlement would have a material adverse effect on the Company, its financial
position or results of operations. The Company maintains its counter claim
against RLB Capital, which it intends to pursue.
On December 19, 2003, the Company filed a complaint against Dr. Deidre Tessman
and Tessman Technology Ltd. in the Supreme Court of the State of New York,
County of New York (Index No. 03-603984). An amended complaint alleges, among
other things, breach of contract and negligence by Tessman and Tessman
Technology and demands judgment against Tessman and Tessman Technology in an
amount to be determined by the Court. Neither Tessman nor Tessman Technology has
submitted an answer to the amended complaint to date, although Tessman and
Tessman Technology have removed the action to the United States District Court
for the Southern District of New York.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
No matter has been submitted to a vote of security holders during the period
covered by this report.
-14-
Item 5. Other information
There is no other information to report that is material to the Company's
financial condition not previously reported.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
3.1 Certificate of Amendment of Certificate of Incorporation, filed January
14, 2004.
31.1 Certification of Christopher B. Wood, Chief Executive Officer, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of David P. Luci, Director of Finance, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Christopher B. Wood , Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of David P. Luci, Director of Finance, pursuant to 18
U.S.C. Section 1350, as adopted pursuant Section 906 of the
Sarbanes-Oxley Act of 2002.
(B) Reports on Form 8-K: None.
-15-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: February 17, 2004 By: /s/ Christopher B. Wood M.D.
----------------------------
Christopher B. Wood M.D.
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: February 17, 2004 By: /s/ David P. Luci
-----------------
David P. Luci
Director of Finance and General Counsel
(Principal Accounting Officer)
EXHIBIT INDEX
Exhibit No.
3.1 Certificate of Amendment of Certificate of Incorporation, filed January 14,
2004.
31.1 Certification of Christopher B. Wood, Chief Executive Officer, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of David P. Luci, Director of Finance, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Christopher B. Wood , Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of David P. Luci, Director of Finance, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.