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 September 30, 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 12 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
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As of October 25, 2003, there were 18,252,771 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 14
Part II - Other Information 15
Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2003 2003
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ASSETS (unaudited) (audited)
Current assets
Cash and cash equivalents $7,013,946 $7,929,686
Restricted cash 290,000 290,000
Deferred costs 22,727 22,727
Accounts receivable 25,000 25,000
Other Assets 303,556 105,976
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Total current assets 7,655,229 8,373,389
Property and equipment, net 45,429 49,265
Intangible assets, net 15,465,946 15,779,399
Goodwill 3,902,705 3,902,705
Security deposits 79,111 79,111
Other long term assets 45,177 126,869
Deferred costs 219,129 224,937
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Total assets $ 27,412,726 $ 28,535,675
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 150,892 $ 411,392
Accrued expenses 1,083,699 730,722
Accrued dividends payable 1,232,856 1,009,146
Deferred revenue 113,636 113,636
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Total current liabilities 2,581,083 2,264,896
Deferred revenue-long term 1,095,644 1,124,685
Deferred tax liability 6,183,476 6,317,702
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Total liabilities 9,860,203 9,707,283
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Stockholders' equity
Preferred stock - $0.001 par value; 5,920,000 shares authorized 5,464 5,917
and 5,464,150 and 5,916,966 shares issued and outstanding at
September 30, 2003 and June 30, 2003 respectively (liquidation
preference $16,392,450)
Common stock - par value $0.01; 50,000,000 shares authorized 18,203 17,123
and 18,202,771 and 17,122,739 shares issued and outstanding at
September 30, 2003 and June 30, 2003, respectively
Additional paid-in capital 48,850,968 47,304,449
Accumulated deficit (31,474,458) (28,651,443)
Accumulated other comprehensive income 152,346 152,346
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Stockholders' equity 17,552,523 18,828,392
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Total liabilities and stockholders' equity $ 27,412,726 $ 28,535,675
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The accompanying notes are an integral part of these statements.
Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended
September 30,
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2003 2002
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(unaudited) (unaudited)
Licensing and royalty revenue $ 54,041 $ 209,091
Research and development contract revenue 775,000 -
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Total Revenue 829,041 209,091
Costs and expenses
Research and development 803,900 519,867
Selling, general and administrative (including stock based
compensation of $1,284,646 and $97,500 for the three months
ended September 30, 2003 and 2002, respectively). 2,438,088 1,144,756
Depreciation and amortization 339,621 332,338
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Total costs and expenses 3,581,609 1,996,961
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Loss from operations (2,752,568) (1,787,870)
Interest income (expense)
Interest and finance charges - (325,000)
Interest income 19,037 48,411
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Net loss before income tax benefit (2,733,531) (2,064,459)
Income tax benefit 134,226 152,100
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Net loss (2,599,305) (1,912,359)
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Cumulative preferred stock dividend (223,710) (221,278)
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Net loss available to common stockholders $(2,823,015) $ (2,133,637)
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Basic and diluted net loss per share of common stock $(0.16) $ (0.12)
Weighted average shares used in
computing basic and diluted
net loss per share 17,188,295 16,887,786
The accompanying notes are an integral part of these statements.
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Bioenvision, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
September 30,
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2003 2002
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(unaudited) (unaudited)
Cash flows from operating activities
Net loss $ (2,599,305) $ (1,912,359)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 339,621 332,338
Financing charges - noncash - 325,000
Deferred tax benefit (134,226) (152,100)
Compensation costs - shares and warrants issued to nonemployees 569,763 97,500
Compensation costs -re-pricing of options 714,883 -
Changes in assets and liabilities
Deferred costs 5,808 92,045
Deferred revenue (29,041) (184,091)
Accounts payable (260,500) 275,401
Other current assets (197,580) (84,685)
Other long term assets 81,692 (168,177)
Accounts Receivable - 25,000
Accrued dividends payable - 221,278
Other accrued expenses and liabilities 352,977 (523,400)
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Net cash used in operating activities (1,155,908) (1,656,250)
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Cash flows from investing activities
Purchase of intangible assets (22,332) -
Capital expenditures - (9,350)
Restricted cash - (290,000)
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Net cash used in investing activities (22,332) (299,350)
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Cash flows from financing activities
Proceeds from issuance of common stock 262,500 -
Net decrease in cash and equivalents (915,740) (1,955,600)
Cash and equivalents, beginning of period 7,929,686 12,882,521
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Cash and equivalents, end of period $ 7,013,946 $ 10,926,920
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The accompanying notes are an integral part of these statements.
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BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE A - Description of Business
Bioenvision, Inc. ("Bioenvision" or the "Company") is an emerging
biopharmaceutical company whose primary business focus is the acquisition,
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
U.S. 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 September 30, 2003 and the consolidated results of operations for
the three months ended September 30, 2003 and 2002, and cash flows for the three
months ended September 30, 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 of America 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 ended
September 30, 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 September 30, 2003, the Company has stock based compensation plans which are
described more fully in the Company's annual report on Form 10-K 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 quarter ended September 30, 2003, the Company recognized stock based
employee compensation costs of $714,883 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 123 and Emerging Issues Task Force 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 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 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.
Quarter Ended September 30, 2003
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Net loss available to common stockholders, as reported $(2,823,015)
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Deduct: Total stock based employee compensation
expense determined under fair value based method
for all awards; net of related tax effects (986,100)
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Pro forma net loss $(3,094,232)
Loss per share
Basic and diluted - as reported $ (0.16)
Basic and diluted - pro forma $ (0.18)
The fair value of options at the date of grant was established using the
Black-Scholes model with the following assumptions:
Quarter Ended September 30, 2003
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Expected life (years) 4.00
Risk free interest rate 3.00%
Expected volatility 80%
Expected dividend yield 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
15,574,543 and 5,234,544 shares of common stock have not been included in the
calculation of net loss per share for the quarters ended September 30, 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 plans to develop Clofarabine initially for the
treatment of leukemia and lymphoma and to study its potential role in treatment
of 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, ILEX is required to pay all
development costs in the United States and Canada, and 50% of approved
development costs worldwide outside the U.S. 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
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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.
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 November 2003.
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 month 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 Bioenvisions global requirements for Clofarabine-API. Subject to
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certain circumstances, this agreement will expire on the fifth anniversary date
of the first regulatory approval of Clofarabine drug product.
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 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 month prior written notice.
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 entered into a letter agreement with ILEX
pursuant to which the Company will collaborate with ILEX to co-develop an oral
formulation for clofarabine; the rights and related costs of which will be
shared equally.
Deferred revenue
As of September 30, 2003, the Company had fully amortized the deferred revenue
related to the contract with ILEX. The Company had been amortizing the deferred
revenue, and recognizing revenues ratably, on a straight-line basis concurrent
with certain development activities described in the contract, through December
2002. As of September 30, 2003, the Company reported deferred revenue of
$1,209,280 related to the payment received by the Company of $1.25 million from
Dechra upon execution of the agreement with Dechra. The Company is recognizing
the initial payment to revenues on a straight-line basis over the term of the
license agreement through May 2014.
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 September 30, 2003, the Company has
deferred costs of $241,856.
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. Compensation expense
recognized as a result of this re-pricing amounted to $714,883 for the quarter
ended September 30, 2003.
On December 31, 2002 the Company issued 200,000 options to purchase 200,000
shares of common stock to a consultant to the Company. The options have an
exercise price of $2.00 and vest ratably over a three-year period on each
anniversary date. Compensation expense of $56,666 was recorded as consulting
fees for the three months ended September 30, 2003.
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.
In September, 2003 certain preferred stockholders converted an aggregate of
452,516 preferred shares into 905,032 shares of the Company's common stock.
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.
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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 and 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 No. 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 November 2002, the EITF reached a consensus on issue No. 00-21 "Accounting
for Revenue Arrangements with Multiple Deliverables." This issue provides
guidance on when and how to separate elements of an arrangement that may involve
the delivery or performance of multiple products, services and rights to use
assets into separate units of accounting. The guidance in the consensus is
effective for revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The transition provision allows either prospective
application or a cumulative effect adjustment upon adoption. The effect of the
adoption of this statement is immaterial to the Company.
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.
NOTE J- Subsequent Events
In October 2003, the Company, through its wholly-owned subsidiary, Bioenvision
Limited, entered into an Employment Agreement with Mr. Hugh S. Griffith,
pursuant to which Mr. Griffith continues to serve in his capacity as Commercial
Director (Europe) of the Company. Under this contract, the term is six months,
with automatic six-month extensions thereafter unless either party provides
written notice to the contrary. The employment agreement provides for an initial
base salary of (pound)120,000 per annum, a bonus as determined by the Board of
Directors, health insurance and other benefits currently or in the future
provided to employees of the Company or its subsidiaries. In addition, Mr.
Griffith received options to purchase 300,000 shares of the Company's common
stock, par value $.001 per share, at an exercise price of $1.45, which vest in
equal installments on the first, second and third anniversary of the date of the
agreement.
In October 2003, the Company, through its wholly-owned subsidiary, Bioenvision
Limited, entered into an Employment Agreement with Mr. Ian Abercrombie, pursuant
to which Mr. Abercrombie continues to serve in his capacity as Sales
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Manager (Europe) of the Company. Under this contract, the term is six months,
with automatic six-month extensions thereafter unless either party provides
written notice to the contrary. The employment agreement provides for an initial
base salary of (pound)75,000 per annum, a bonus as determined by the Board of
Directors, health insurance and other benefits currently or in the future
provided to employees of the Company or its subsidiaries. In addition, Mr.
Abercrombie received options to purchase 50,000 shares of the Company's common
stock, par value $.001 per share, at an exercise price of $1.29 which vest in
equal installments on the first and second anniversary of the date of the
agreement.
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 effecting 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 acquisition, 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.
Although we have commenced marketing one of our lead products, Modrenal(R), and
intend to continue to develop Clofarabine, and our existing platform
technologies and commercializing products derived from such technologies, a key
element of our business strategy is to continue to acquire, obtain licenses for,
and 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.
We plan to continue to use a major portion of the proceeds of the May 2002
private placement to initiate clinical trials of Clofarabine in Europe. The
emphasis will be on the use of Clofarabine in the treatment of refractory acute
leukemia in children and adults. The drug has received orphan drug designation
in Europe.
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 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. We
now plan to perform additional clinical trials with the two lead products
related to this technology.
Clofarabine
Based on third party studies conducted to date, we believe that Clofarabine is
effective in the treatment of leukemia and lymphoma. To expedite the
commercialization Clofarabine, we have entered into a co-development agreement
with ILEX Oncology, Inc. ("ILEX") under which Phase II clinical trials of
Clofarabine are currently being conducted. The combination of the Phase II
trials in acute leukemia at M.D. Anderson Cancer Center and other leading cancer
centers in the U.S. 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 United States Food and Drug
Administration recently indicated that it would review clofarabine for the
treatment of
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BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
refractory or relapsed ALL in children more quickly than normal after having
granted "fast track" status to clofarabine. "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 rather than the normal 12 month review period.
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. Management believes that the "fast track"
designation may also result in our more expeditiously gaining marketing approval
for clofarabine for the treatment of refractory or relapsed ALL.
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 MD 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 acute lymphocytic leukemia (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 U.S. and are planned to commence in Europe later
this year. 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 4 weeks. In this context, a response, or partial
response, has largely the same meaning, except that the bone marrow may still
contain more than 5% but less than 25% blast cells (leukemic cells).
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 UK 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 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). We intend to seek regulatory approval for
Modrenal(R) in the United States as salvage therapy for hormone-sensitive breast
cancer. 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 trails 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. Furthermore, our management currently intends to price
Modrenal(R) in such a manner as to make treatment with Modrenal(R)
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BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
compare very favorably, on a price basis, with the cost of treatment with the
existing drugs used for second line or third line therapy. We believe that this
should result in cost benefits for physicians, patients and health-care systems.
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. Our management believes that we have
the opportunity to become a leading oncology-focused pharmaceutical company in
the next five years if we successfully bring our two lead drugs to market. We
anticipate that revenues derived from the two lead drugs will permit us to
further develop the twelve other products and potential products currently in
our development portfolio. We currently plan to have as many as twelve products
at market by the end of 2006. 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 acquire, obtain licenses for, and
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 U.S., 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 the marketing and development rights to
modrestane, solely with respect to animal health applications, in the United
States and Canada, to Dechra. 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 and 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.
We may not be successful in addressing these risks. If we were 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
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BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
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 four
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 acquire, obtain licenses for, and 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 $829,041 and $209,091 for the three-month
period ended September 30, 2003 and 2002, respectively. The increase is
primarily attributable to the payment received from our co-development partner,
ILEX, of $775,000, which represented a reimbursement of Research and Development
costs incurred through August 31, 2003.
Research and development costs for the three-months ended September 30, 2003 and
2002 were $ 803,900 and $ 519,867, respectively, an increase of $284,033. This
increase is primarily attributable to the increase in drug development
activities related to clorfarabine and modrenal European development in the
three months ended September 30, 2003.
Selling ,general and administrative expenses (including stock based compensation
of $1,284,646 and $97,500 for the three months ended September 30, 2003 and
September 30, 2002, respectively) for the three-months ended September, 2003 and
2002 were $2,438,088 and $1,144,756 respectively, an increase of $1,293,332. The
increase is primarily attributable to the Company's increased sales and
marketing activities since the May 2002 financing, the option re-pricing, the
Company's re-constituting its wholly-owned subsidiary, Bioenvision, Ltd. as a
fully operational sales and marketing subsidiary, salaries of newly-added
employees, rent both at the Company's new principal executive offices in New
York, New York and new rental facility for its sales and marketing subsidiary in
Edinburgh, Scotland, travel expenses, insurance costs and other customary costs
associated with our becoming an operating company.
Depreciation and amortization expense for the three-month period ended September
30, 2003 was $339,621 compared to the three-month period ended September 30,
2003 of $332,338. The increase in amortization is related to the amortization of
certain intangible assets acquired by the Company in connection with its
acquisition of Pathagon.
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.
On September 30, 2003, we have cash and cash equivalents of $7,013,946 and
working capital of $5,074,146 which management believes will be sufficient to
continue currently planned operations over the next 12 months. Although we do
not currently intend to raise any additional funds for the next 12 months, we
can not 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.
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BIOENVISION, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION - CONTINUED
Further, a key element of our business strategy is to continue to acquire,
obtain licenses for, and 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 12 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 September 30, 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
September 30, 2005. The Company is a party to an additional month-to-month lease
agreement for its subsidiary, Bioenvision, Ltd.
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
In October 2003, the Company, through its wholly-owned subsidiary, Bioenvision
Limited, entered into an Employment Agreement with Mr. Hugh S. Griffith,
pursuant to which Mr. Griffith continues to serve in his capacity as Commercial
Director (Europe) of the Company. Under this contract, the term is six months,
with automatic six-month extensions thereafter unless either party provides
written notice to the contrary. The employment agreement provides for an initial
base salary of (pound)120,000 per annum, a bonus as determined by the Board of
Directors, health insurance and other benefits currently or in the future
provided to employees of the Company or its subsidiaries. In addition, Mr.
Griffith received options to purchase 300,000 shares of the Company's common
stock, par value $.001 per share, at an exercise price of $1.45 per share, which
vest in equal installments on the first, second and third anniversary of the
date of the agreement.
In October 2003, the Company, through its wholly-owned subsidiary, Bioenvision
Limited, entered into an Employment Agreement with Mr. Ian Abercrombie, pursuant
to which Mr. Abercrombie continues to serve in his capacity as Sales Manager
(Europe) of the Company. Under this contract, the term is six months, with
automatic six-month extensions thereafter unless either party provides written
notice to the contrary. The employment agreement provides for an initial base
salary of (pound)75,000 per annum, a bonus as determined by the Board of
Directors, health insurance and other benefits currently or in the future
provided to employees of the Company or its subsidiaries. In addition, Mr.
Abercrombie received options to purchase 50,000 shares of the Company's common
stock, par value $.001 per share, at an exercise price of $1.29 per share, which
vest in equal installments on the first and second anniversary of the date of
the agreement.
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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-Q was made under the
supervision and with the participation of the Company's management, including
its Chief Executive Officer and Chief Financial Officer. Based upon this
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that as of the end of the period covered by this Quarterly Report
on Form 10-Q the Company's disclosure controls and procedures (a) are effective
to ensure that information required to be disclosed by the Company in reports
filed or submitted under the Exchange Act is timely recorded, processed,
summarized and reported and (b) include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in reports filed or submitted under the Exchange Act is accumulated and
communicated to the Company's management, including its Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes in Internal Controls
There was no 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
-14-
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.
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.
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
10.1 Employment Agreement, made effective as of October 23,
2002, by and between Bioenvision Limited and Hugh S.
Griffith.
10.2 Employment Agreement, made effective as of January 6, 2003,
by and between Bioenvision Limited and Ian Abercrombie.
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-
-16-
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: November 14, 2003 By: /s/ Christopher B. Wood M.D.
----------------------------
Christopher B. Wood M.D.
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2003 By: /s/ David P. Luci
-----------------
David P. Luci
Director of Finance and General Counsel
(Principal Accounting Officer)
EXHIBIT INDEX
Exhibit No.
10.1 Employment Agreement, made effective as of October 23,
2002, by and between Bioenvision Limited and Hugh S.
Griffith.
10.2 Employment Agreement, made effective as of January 6, 2003,
by and between Bioenvision Limited and Ian Abercrombie.
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.