U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
X Annual report under Section 13 or 15(d) of the Securities
----- Exchange Act of 1934. For the fiscal year ended June 30, 2004.
OR
----- Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
________________ to ________________.
Commission File Number: 0-18299
BIOENVISION, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 13-4025857
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
509 Madison Avenue
Suite 404
New York, New York 10022
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 750-6700
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $0.001
par value
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 for 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
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $3,102,214.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the last price at which the stock was sold, as of September 16,
2004, was $223,271,190. The number of shares of common stock outstanding as of
September 16, 2004 was 28,597,172.
Part III incorporates information by reference from the issuer's definitive
proxy statement to be filed with the Commission within 120 days after the close
of the registrant's fiscal year.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
PART I
Except for historical information contained herein, this annual report
on Form 10-KSB contains forward-looking statements within the meaning of the
Section 21E of the Securities and Exchange Act of 1934, as amended, which
involve certain risks and uncertainties. Forward-looking statements are included
with respect to, among other things, the Company's current business plan,
"Factors that May Effect our Business", and Managements Discussion and Analysis
of Results of Operations". These forward-looking statements are identified by
their use of such terms and phrases as "intends," "intend," "intended," "goal,"
"estimate," "estimates," "expects," "expect," "expected," "project,"
"projected," "projections," "plans," "anticipates," "anticipated," "should,"
"designed to," "foreseeable future," "believe," "believes" and "scheduled" and
similar expressions. The Company's actual results or outcomes may differ
materially from those anticipated. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statement was made. The Company undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Item 1. Description of Business
Bioenvision is an emerging biopharmaceutical company. Our primary
business focus is the development and distribution of drugs to treat cancer. We
have a broad range of products and technologies under development, but our two
lead drugs are clofarabine and Modrenal(R).
We believe that our two lead products have the following competitive
advantages over existing products at market:
Modrenal(R) (emerging endocrine Clofarabine (purine nucleoside
resistance technology) anti-metabolite technology)
o Novel mode of action on estrogen o Next generation,
receptors halogenated-purine nucleoside
o Increases estrogen binding to analogue, designed to overcome
ER(beta) resulting in decreased the limitations and incorporate
cancer cell proliferation the best qualities of both
o 35% overall clinical benefit fludarabine (Fludara(R)) and
rate in multi-center clinical cladribine (Leustatin(R)).
trial: meta-analysis of 714 o Multiple Mechanisms of Action:
patients with advanced o Potent inhibition of DNA
progressive post-menopausal synthesis and repair
breast cancer (active in dividing cancer
o 55% clinical benefit rate in cells).
patients who have become o Induces apoptotic (cell
resistant to tamoxifen therapy death) pathway (active in
o Phase II clinical trial non-dividing cancer cells).
commenced in prostate cancer in o Potent ability to kill cancer
Q3 of calendar 2004 cells in a wide range of cell
o Phase II pre-menopausal breast lines, including leukemia,
cancer trial commencing Q3 of non-small cell lung, colon,
calendar 2004 melanoma, ovarian, renal,
o Phase II neo-adjuvent, prostate, pancreatic and breast
pre-operative breast cancer cancer lines.
study commencing Q3 of calendar o Significant clinical benefit
2004 demonstrated in both pediatric
o Phase IV post-menopausal breast and adult leukemias:
cancer trial commencing Q3 of o Overall response rates in
calendar 2004 relapsed/refractory
o Mutual recognition filings to be pediatric acute leukemias
made in large European markets of between 26% and 31%.
by Q2 of calendar 2005 o Overall response rates in
o Product reformulation to be relapsed/refractory adult
completed by Q1 of calendar acute myeloid leukemia
2005 (AML) and chronic myeloid
leukemia in blast crisis
(CML-BP) of between 55%
and 64%.
o Solid tumor studies initiated with
both the oral and intravenous
formulations of clofarabine.
-1-
Products and Technologies
PRODUCT PIPELINE
MARKETING RIGHTS
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CANDIDATE TARGET INDICATION STATUS U.S. EX-U.S.
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Clofarabine DNA, Mitochondria Hematologic Cancers Phase II completed ILEX(1) Bioenvision(2)
or ongoing
DNA, Solid Tumors Phase I (IV) ILEX(1) Bioenvision(2)
Mitochondria
DNA, Solid tumors Phase I (oral) ILEX(1) Bioenvision(2)
Mitochondria
Modrenal(R) Estrogen Breast Cancer Phase IV,II Bioenvision Bioenvision
receptor beta
Prostate Cancer Phase II Bioenvision Bioenvision
Velostan Cancer cell Bladder cancer Phase I Bioenvision Bioenvision
proliferation
Virostat Viral replication Hepatitis C, Phase II Bioenvision Bioenvision
WNV
OLIGON Antimicrobial Catheter related At Market Bioenvision, Bioenvision,
sepsis Edwards(3)
Gene Therapy Myosin enhancer Hypoalbuminemia, Bioenvision
liver failure
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(1) ILEX Oncology, Inc. sub-licenses marketing rights in the U.S. and
Canada in cancer indications only. Bioenvision maintains the
clofarabine marketing rights in the U.S. and Canada for all other
disease indications, including autoimmune diseases.
(2) Bioenvision maintains an exclusive, irrevocable option to
manufacture, market and distribute clofarabine in Japan and
Southeast Asia in all indications and maintains the right to
manufacture, market and distribute clofarabine in all other areas of
the world outside of the U.S. and Canada.
(3) Bioenvision has licensed the marketing rights for certain vascular
access catheters to Edwards Lifesciences.
Anti-Cancer Product Portfolio
-----------------------------
Our anti-cancer product portfolio includes: three products, Modrenal(R)
(trilostane), clofarabine and Velostan(R) (l-gossypol), which are used or which
may have clinical utility in a wide variety of cancers; and one Gene Therapy
technology platform, which may be useful in several indications.
Clofarabine
We have the exclusive right to manufacture, market and distribute
clofarabine for all human applications in all areas of the world except Japan
and Southeast Asia. We have an exclusive, irrevocable option to manufacture,
market and distribute clofarabine in Japan and Southeast Asia. In the U.S. and
Canadian cancer market, we sublicensed the right to manufacture, market and
distribute clofarabine to ILEX Oncology, Inc. We maintain the right to
manufacture, market and distribute clofarabine in the U.S. and Canada in all
non-cancer indications, including auto-immune diseases, e.g. multiple sclerosis.
We maintain our exclusive rights until the last to expire of the patents used or
useful in our development and marketing efforts, which we expect to occur in
March 2021.
Currently, a New Drug Application (NDA) has been filed with FDA for
approval of clofarabine in the U.S. in pediatric acute leukemias. Further, we
submitted a Common Technical Document, the European equivalent of a NDA, with
European Medicines Evaluation Agency (EMEA) in July 2004 for European approval
of clofarabine in pediatric acute leukemias. Because clofarabine received "fast
track" designation by FDA, an FDA opinion is expected by the end of Q4 calendar
2004 or early January 2005. Further, we expect an opinion from the
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EMEA by Q2 of calendar 2005. As indicated in the previous paragraph, ILEX has
the rights to market clofarabine in the cancer market in the U.S. and Canada and
we would receive a royalty on U.S. and Canadian annual net sales.
In Europe, we facilitated an Investigator Sponsored Trial (IST) of
clofarabine, as first line therapy for older adult patients with Acute Myeloid
Leukemia (AML). The IST was closed to recruitment in August 2004 ahead of
schedule due to the studies' objective response rates having been exceeded.
Building upon these results, the European, Pivotal Phase II study of
clofarabine, as a first-line treatment for older adult patients, newly diagnosed
with AML, has been initiated and we expect to complete the Pivotal Phase II
trial by mid 2005.
Additionally, clofarabine is currently being evaluated in several Phase
II clinical trials for a range of hematological cancers. Both the intravenous
and oral formulations are also being evaluated in Phase I clinical trials for a
variety of solid tumors.
Clofarabine has received orphan drug status in the U.S. and in Europe,
which provides ten years of marketing exclusivity in Europe and seven years of
marketing exclusivity in the U.S. Further, in August 2004, FDA granted a
six-month extension of the marketing exclusivity for clofarabine in the
pediatric acute leukemia indication (ALL and AML) as an incentive to increase
therapeutic research in children.
ILEX is obligated to pay us royalties on U.S. and Canadian annual net
sales of clofarabine on a sliding scale from 5.25% to 11.25%. The minimum
royalty of 5.25% applies to annual net sales of up to $30 million per year and
the maximum 11.25% royalty rate applies to annual net sales at or above $500
million per year. SRI receives royalties on the same scale of US and Canadian
annual net sales from 3.5% to 7.5% from each of Bioenvision and ILEX. We pay
royalties on our European annual net sales to each of SRI and ILEX in the amount
of 3.5% to 7.5% on the same scale as applies to the ILEX royalty payment
obligations noted above. ILEX also is responsible for 50% of our research and
development costs associated with clofarabine development in the Territory
(worldwide outside of Japan and Southeast Asia) other than the US and Canada. We
are entitled to offset any royalties otherwise due to ILEX if ILEX fails to
reimburse us for all of its 50% share of clofarabine research and development
costs outside the U.S. and Canada.
Under the terms of the agreement with Southern Research Institute, we
were granted the exclusive worldwide license, excluding Japan and Southeast
Asia, to make, use and sell products derived from the technology in all human
applications 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. The current projected
expiration date of the license is March 2021. Together with ILEX, we currently
are developing clofarabine for the treatment of leukemia, lymphoma and solid
tumors.
In August 2003, SRI granted us an irrevocable, exclusive option to
make, use and sell clofarabine in Japan and Southeast Asia for all human
applications. 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 Q4 calendar 2003 and Q1 calendar 2004, we and ILEX jointly developed
an oral formulation for clofarabine, the rights and related costs to which we
share equally with ILEX. Clofarabine has demonstrated good oral bioavailability
in clinical testing performed to date.
Pre-clinical and clinical testing of clofarabine demonstrated that the
drug has anti-tumor activity against a range of human and animal cancers,
including hematological malignancies and several solid tumors. Approximately 420
cancer patients have participated in clinical testing to date. Results from
clinical studies indicate that clofarabine may be an effective treatment for
relapsed acute leukemias in adult and pediatric patients, as well as acute
leukemias in adult and pediatric patients that have become resistant, or
refractory, to prior treatments. According to researchers at 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
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
pediatric acute leukemias are currently ongoing in the U.S. and 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. In this context, a response, or partial
response, has largely the same meaning, except that the bone marrow may still
contain more than five percent but less than 25% blast cells (leukemic cells).
CRp means, in this context, complete clearance of all leukemic cells from the
blood in the absence of platelet recovery. In the U.S., Pivotal Phase II
Clinical Trials were completed for the treatment of relapsed or refractory acute
leukemia in children and a NDA was filed with the FDA in March 2004, based upon
the results of 70 patients enrolled in these two trials. In August of 2004,
clinical data on an additional cohort of 14 patients was submitted to the FDA
and of the aggregate
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ALL group (n=49), a 31% overall response rate was achieved (6 CRs, 4CRps and
5PRs) and of the aggregate AML group (n=35), a 26% overall response rate was
achieved (1CRp and 8PRs).
Clofarabine appears to attack cancer cells in at least four ways:
(1) damaging DNA in cancer cells;
(2) preventing DNA repair by damaged cancer cells;
(3) damaging the cancer cell's important control structures--the
mitochondria; and
(4) initiating the process of programmed cell death (apoptosis) in
cancer cells.
Clofarabine combines many of the favorable properties of the two most
commonly used nucleoside analog drugs, fludarabine(R) and cladribine(R), but has
several-fold greater potency, when compared to fludarabine(R), at damaging the
DNA of leukemia cells. Clofarabine appears to achieve this greater potency by a
process of breaking DNA chains and inhibiting an important enzyme,
ribonucleotide reductase. Clofarabine distinguishes itself from other drugs by
its broader activity; in particular, the manner in which it damages the cells
mitochondria and initiates the process of (apoptosis). (See Blood 2000; volume
96, page 3537).
Purine Nucleoside--Solid Tumor. In pre-clinical and Phase I clinical
tests, clofarabine has shown anti-tumor activity against several human cancers,
including cancers of the colon, kidney and prostate, as well as its action
against leukemic cells. This activity against solid tumors distinguishes
clofarabine from other drugs in its class which have shown relatively little
activity against solid tumors. We intend to develop clofarabine as a potential
drug for the treatment of certain solid tumors, such as colon and prostate
cancer. The development strategy for clofarabine as a solid tumor agent will run
in conjunction with the program for hematological cancers, but is expected to
take longer to complete clinical trials and will require a different marketing
approach. Currently, we anticipate the initial Phase I clinical trials for
clofarabine in solid tumors will be completed by end of Q4 calendar 2004.
Cancer of the colon is one of the most common cancers in the Western
world with approximately 200,000 new cases in the United States each year.
Surgery is the most successful treatment for the primary tumor. Once the cancer
has spread the results of chemotherapy are disappointing and long-term survival
figures have changed very little in the past 50 years. There is a great need for
an effective chemotherapeutic agent to treat this disease, and a huge market
potential exists for any drug that can induce tumor regression in patients with
metastatic colon cancer. Prostate cancer affects 181,000 new patients in the
United States each year. Initial treatment is directed at hormonal control of
the disease, but in the event control is not achieved, chemotherapy usually is
required. We intend to develop clofarabine, or a derivative of clofarabine, as a
potential drug for the treatment of advanced colon and prostate cancer.
Modrenal(R)
We have the exclusive right to market and distribute Modrenal(R)
(trilostane) throughout the world for all human applications. Our exclusive
license expires upon the last to expire of the patents used or useful in
connection with the marketing of Modrenal(R). Given that we have new patent
applications filed, which are subject to issuance, we expect the last of our
underlying patents to expire in 2020.
Modrenal(R) is currently at market in the United Kingdom for the
treatment of women with advanced, post menopausal breast cancer who have
relapsed on prior endocrine therapy. We currently have a small commercial team
selling and marketing Modrenal(R) in the United Kingdom, and we record revenues
accordingly. In the U.S., Modrenal(R) is in Phase II clinical studies in
prostate cancer, and in Q4 calendar 2004, we intend to commence a Phase IV study
in post-menopausal breast cancer, a Phase II study in pre-menopausal breast
cancer and a neo-adjuvent, pre-operative breast cancer study, in each case, in
the U.K. In Europe, in the large commercial markets outside of the U.K., we
intend to file for mutual recognition for approval of Modrenal(R) on a
country-by-country basis by Q2 of calendar 2005. Each such approval, if granted,
would be based upon Modrenal's(R) approval in the U.K. for advanced
post-menopausal breast cancer. The Company anticipates such approval would be
granted within nine to twelve months following each such filing, but grant of
such approval is entirely within the control of the individual regulatory
authorities.
Modrenal(R) has been extensively studied in controlled trials in the
United States, Europe and Australia, and almost 800 patients with breast cancer
have been treated with Modrenal(R). Of these 800 patients, 87 of them
4
were given the drug in the United States as part of an FDA-approved trial. Its
anti-tumor activity has been well documented and the drug has been shown to
produce tumor response rates (i.e. arrest the growth of the tumor) of up to 55%
in women with hormone-sensitive breast cancer. In a sub-set analysis of the
clinical trial data, patients with hormone-sensitive breast cancer who had
responded to one or more hormonal therapies were given Modrenal(R) upon relapse
of the cancer. The response rate was above 40% in this group of patients. This
compares very favorably to currently marketed aromatase inhibitors and other
agents, such as herceptin, given as second line therapy. Furthermore,
Modrenal(R) has an acceptable side-effect profile. On the basis of these data,
Modrena(R)l was granted a product license in the United Kingdom for the
treatment of post-menopausal breast cancer. Modrenal(R) is currently
manufactured by third-party contractors in accordance with good manufacturing
practices. We have no plans to establish our own manufacturing facility for
Modrenal(R), but will continue to use third-party contractors.
Our marketing launch for Modrenal(R) occurred in May 2003 in the United
Kingdom for use in the treatment of advanced post-menopausal breast cancer. We
also intend to seek regulatory approval for Modrenal(R) in the United States as
salvage therapy for hormone-sensitive breast cancers and hormone independent
prostate cancers, but this strategy is dependent upon the results of the ongoing
clinical trials and the resource capability of the Company. The ongoing clinical
trials in breast cancer with Modrenal target patients that have
hormone-sensitive cancers and have become refractory to prior hormone
treatments, such as Tamoxifen(R) or any of the aromatase inhibitors. The results
of 11 clinical trails to date, with a total of 783 patients tested, in the
United States, Europe and Australia with Modrenal(R) show 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 selective estrogen
receptor modulators, or SERMs, and aromatase inhibitors. In the view of several
clinicians and investigators familiar with Modrenal's(R) mode of action,
Modrenal(R) is most effective in certain specific patient types, such as those
who have become Tamoxifen(R)-refractory. The ongoing Phase II clinical trial of
Modrenal in prostate cancer in the U.S. targets patients who have become
androgen independent and have a rising PSA level.
Non-Cancer Product Portfolio
----------------------------
Our non-cancer product portfolio is as follows:
OLIGON(R) Technology
With the acquisition of Pathagon in February 2002, we acquired patents,
technology and technology patents relating to OLIGON(R) anti-infective
technology, and have licensed rights from Oklahoma Medical Research Foundation
to the use of thiazine dyes, including methylene blue, for other anti-infective
uses.
The OLIGON(R) technology is based on the antimicrobial properties of
silver ions. The broad spectrum activity of silver ions against bacteria,
including antibiotic-resistant strains, has been known for decades. OLIGON(R)
materials have application in a wide range of devices and products, including
vascular access devices, urology catheters, pulmonary artery catheters and
thoracic devices, renal dialysis catheters, orthopedic devices and several other
medical and consumer product applications. One application of the OLIGON(R)
technology has been licensed to a third party, which is currently marketing the
technology in its line of short-term vascular access catheters.
Six U.S. patents for the OLIGON(R) technology have been granted and
additional patents have been filed. In addition, patents have been filed in
Europe, Canada and Japan.
The OLIGON(R) technology specifically targets hospital-acquired
infections which are occurring on an ever-increasing rate. Hospital-acquired
infections were the eleventh leading cause of death in 2000 and related
treatment costs to the health care industry exceeded $5.5 billion. Infection
rates are comparable in Europe and even higher in developing countries.
According to the U.S. Center for Disease Control, the U.S. healthcare system
spends an estimated $5 billion per year treating hospital-acquired infections
resulting from medical devices, approximately 87% of which is spent just on the
treatment of infections caused by infected catheters. OLIGON(R) devices will be
marketed as next generation products into large existing markets.
Methylene Blue Technology
We have licensed from Oklahoma Medical Research Foundation the rights
to use a range of thiazine dyes, the most well known of which is methylene blue,
for the in vitro and in vivo inactivation of pathogens in biological fluids.
Methylene blue, especially when irradiated by light, acts by preventing
replication of nucleic acid (DNA and RNA) in pathogens. Currently, we do not
derive any revenues from its commercial use.
5
Blood transfusions are required to treat a variety of medical
conditions and, to meet that need, over 90 million blood donations occur each
year. Of these, approximately 39 million donations occur in North America,
Western Europe and Japan. Methylene blue is currently used in several European
countries to inactivate pathogens in fresh frozen plasma (FFP). We intend to
work closely with international blood collection agencies to maximize the value
of our intellectual property position.
Gene Therapy Technology
Our product portfolio also includes a variety of gene therapy products
which, we believe, may offer advancements in the field of cancer treatment and
may have additional applications in certain non-cancer diseases such as
diabetes, cystic fibrosis and other auto-immune disorders. Pursuant to a
co-development agreement with the Royal Free and University College Medical
School and a Canadian biotechnology company, we are developing gene vector
technologies which, based on pre-clinical research and early Phase I clinical
trials, we believe have potential in a wide array of clinical conditions. To
date, the technology has undergone small-scale clinical testing with the albumin
and thrombopoietin genes. The results showed the technology is capable of
producing a prolonged elevation in serum albumin levels in cancer and cirrhosis
patients with hypo-albuminemia, a serious physiological disorder. We believe
this has considerable market potential since low albumin levels are considered
to be very dangerous consequences of many diseases, including cirrhosis and
liver cancer.
Cytostatic Technology
We have acquired a license to develop a distinct group of compounds
that we believe could play an important role in controlling the rate of growth
of cancer cells. In some cancers, such as cancer of the bladder and skin, drugs
that stop cell growth (cytostatics) can be as effective as drugs that kill the
cell by direct toxicity (cytotoxics). The cytostatic drugs we are developing are
believed to work by blocking cell division and reversing the malignant process
in the cancer cell. The first compound is a drug derived from a naturally grown
plant, which has been widely tested for a variety of clinical indications. The
results of this testing have been published in the medical literature. In
particular, the drug has shown efficacy against certain cancers by, it is
believed, preventing cell division and promoting cell differentiation. The
isomer is more active and, we believe, less toxic, than the racemic compound,
and the planned Phase I trial will be conducted with the optical isoform.
We plan to develop more potent analogs and to study their role in the
process of cell differentiation and the prevention of the spread of cancer
cells. The first compound derived from this technology is currently approved for
a Phase I clinical trial at a leading United Kingdom cancer center.
Animal Health Products
We also have one animal health product, Veteryl(R), at market in the
United Kingdom for the treatment of Cushing's disease in dogs. In November 2001,
we granted to Arnolds Ltd., a major distributor of animal products in the United
Kingdom, the right to market the drug for a six-month trial period, after which
time, if the results were satisfactory to Arnolds, we would enter into a
licensing arrangement whereby Arnolds would pay royalties to us on sales from
April 2002 onward. During the trial period, Arnolds posted more than $400,000 of
sales of the drug. Arnolds has licensed the drug from us for sale in the United
Kingdom market in consideration of a payment of a 5% royalty on sales.
Separately, in May 2003, we granted to Dechra Pharmaceuticals, PLC, an affiliate
of Arnolds Ltd., the exclusive right to market the drug in the United States for
$5.5 million of total consideration (including milestone payments) and a royalty
of 2%-4% of annual net sales.
Patents and Proprietary Rights
Our success will depend, in part, upon our ability to obtain and
enforce protection for our products under United States and foreign patent laws
and other intellectual property laws, preserve the confidentiality of our trade
secrets and operate without infringing the proprietary rights of third parties.
Our policy is to file patent applications in the United States and/or foreign
jurisdictions to protect technology, inventions and improvements to our
inventions that are considered important to the development of our business.
Also, we will rely upon trade secrets, know-how, continuing technological
innovations and licensing opportunities to develop a competitive position.
Through our current license agreements, we have acquired the right to
utilize the technology covered by several issued patents and patent
applications, as well as additional intellectual property and know-how that
could be the subject of further patent applications in the future. We evaluate
the desirability of seeking patent or other forms of protection for our products
in foreign markets based on the expected costs and relative benefits of
6
attaining this protection. There can be no assurance that any patents will be
issued from any applications or that any issued patents will afford adequate
protection to us. Further, there can be no assurance that any issued patents
will not be challenged, invalidated, infringed or circumvented or that any
rights granted thereunder will provide competitive advantages to us. Parties not
affiliated with us have obtained or may obtain United States or foreign patents
or possess or may possess proprietary rights relating to our products. There can
be no assurance that patents now in existence or hereafter issued to others will
not adversely affect the development or commercialization of our products or
that our planned activities will not infringe patents owned by others.
As a result of the licenses described above, we are the exclusive
licensee or sublicensee of three United States patents expiring in 2005, 2008
and 2014 relating to compounds, pharmaceutical compositions and methods of use
encompassing clofarabine. We have also filed two United States patent
applications relating to the use of clofarabine in autoimmune diseases. Although
the composition of matter patents to trilostane have expired, we are the
exclusive licensee of several United States and foreign patent applications
relating to the use of trilostane alone or in combination with anticancer agents
and the exclusive licensee to a manufacturing process patent for trilostane.
We could incur substantial costs in defending ourselves in infringement
suits brought against us or any of our licensors or in asserting any
infringement claims that we may have against others. We could also incur
substantial costs in connection with any suits relating to matters for which we
have agreed to indemnify our licensors or distributors. An adverse outcome in
any litigation could have a material adverse effect on our business and
prospects. In addition, we could be required to obtain licenses under patents or
other proprietary rights of third parties. No assurance can be given that any of
these licenses would be made available on terms acceptable to us, or at all. If
we are required to, and do not obtain any required licenses, we could be
prevented from, or encounter delays in, developing, manufacturing or marketing
one or more of our products.
We also rely upon trade secret protection for our confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets or disclose this
technology or that we can meaningfully protect our trade secrets.
It is our policy to require our employees, consultants, members of the
Scientific Advisory Board and parties to collaborative agreements to execute
confidentiality agreements upon the commencement of employment or consulting
relationships or a collaboration with us. These agreements provide that all
confidential information developed or made known during the course of the
relationship with us is to be kept confidential and not disclosed to third
parties except in specific circumstances. In the case of employees, the
agreements provide that all inventions resulting from work performed for us,
utilizing our property or relating to our business and conceived or completed by
the individual during employment shall be our exclusive property to the extent
permitted by applicable law.
Sales and Marketing
We intend to establish strategic partnerships for the marketing, sales
and distribution of our products in certain countries in Europe. As of the date
of this annual report on Form 10-KSB, we have one such arrangement in place with
Ilex for the co-development and marketing of one of our initial lead products,
clofarabine, and another arrangement with Edwards Lifesciences for the marketing
of short-term vascular access catheters using the OLIGON(R) technology. We have
also engaged in our own marketing and sales efforts in connection with the
marketing and sale of Modrenal(R) in the United Kingdom and upon regulatory
authorities' granting mutual recognition with which we intend to apply during
calendar 2004 and 2005, throughout Europe. However, in order to market any of
our products effectively, we would need to establish a much more integrated
marketing and sales force with technical expertise and distribution capability
or contract with other pharmaceutical and/or health care companies with
distribution systems and direct sales forces.
Our marketing policy will be to generate awareness of our products and
target the two key audiences for our products - doctors and patients. Medical
education will be a priority, with the use of peer-opinion leaders, clinical
trials at major centers, satellite symposia and conferences, product advertising
in specific scientific journals and trained sales personnel. Patient education
is carefully controlled and is important to our marketing approach. Patient
education is particularly important because Modrenal(R), our first product for
which we have obtained regulatory approval (in the United Kingdom) for marketing
for use in a type of cancer treatment, is effective for patients with
post-menopausal breast cancer, one of the most common cancers in women. In
particular, the drug is approved as follow-on treatment for patients who have
previously responded to hormonal therapy.
7
If the trials of trilostane in prostate cancer prove successful, we
will have a drug for treating a cancer found in approximately 180,000 men each
year in the United States. We will work with patient help organizations to
inform the lay public through consumer journals and television.
Manufacturing
We do not have and do not intend to establish any internal product
testing, manufacturing or distribution capabilities. Our strategy is to enter
into collaborative arrangements with other companies for the clinical testing,
manufacture and distribution of the products. Manufacturers of our products will
be subject to Good Manufacturing Practices prescribed by the FDA or other rules
and regulations prescribed by foreign regulatory authorities.
Research and Development
In developing new products, we consider a variety of factors including:
(i) existing or potential marketing opportunities for these products; (ii) our
capability to arrange for these products to be manufactured on a commercial
scale; (iii) whether or not these products complement our existing products;
(iv) the opportunities to leverage these products with the development of
additional products; and (v) the ability to develop co-marketing relationships
with pharmaceutical and/or other companies with respect to the products. We
intend to fund future research and development activities at a number of medical
and scientific centers in Europe and the United States. Costs related to these
activities are expected to include: clinical trial expenses; drug production
costs; salaries and benefits of scientific, clinical and other personnel; patent
protection costs; analytical and other testing costs; professional fees; and
insurance and other administrative expenses. We currently have three scientists
currently working on a full-time basis who are involved in research and
development activities. We have spent approximately $4,883,000 and $1,689,000 on
research and development activities in 2004 and 2003, respectively.
Government Regulation
The FDA and comparable regulatory agencies in state and local
jurisdictions and in foreign countries impose substantial requirements upon the
clinical development, manufacture and marketing of pharmaceutical products.
These agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our drug delivery products.
The process required by the FDA under the new drug provisions of the
Federal Food, Drug and Cosmetics Act before our products may be marketed in the
United States generally involves the following:
o pre-clinical laboratory and animal tests;
o submission to the FDA of an investigational new drug application,
or IND, which must become effective before clinical trials may
begin;
o adequate and well-controlled human clinical trials to establish the
safety and efficacy of the proposed pharmaceutical in our intended
use;
o submission to the FDA of a new drug application; and
o FDA review and approval of the new drug application.
The testing and approval process requires substantial time, effort, and
financial resources and we cannot be certain that any approval will be granted
on a timely basis, if at all.
Pre-clinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as animal studies to assess the
potential safety and efficacy of the product. The results of the pre-clinical
tests, together with manufacturing information and analytical data, are
submitted to the FDA as part of an IND, which must become effective before we
may begin human clinical trials. The IND automatically becomes effective 30 days
after receipt by the FDA, unless the FDA, within the 30-day time period, raises
concerns or questions about the conduct of the trials as outlined in the IND and
imposes a clinical hold. In such a case, the IND sponsor and the FDA must
resolve any outstanding concerns before clinical trials can begin. There is no
certainty that pre-clinical trials will result in the submission of an IND or
that submission of an IND will result in FDA authorization to commence clinical
trials.
8
Clinical trials involve the administration of the investigational
product to human subjects under the supervision of a qualified principal
investigator. Clinical trials are conducted in accordance with protocols that
detail the objectives of the study, the parameters to be used to monitor safety
and the efficacy criteria to be evaluated. Each protocol must be submitted to
the FDA as part of the IND. Further, each clinical study must be conducted under
the auspices of an independent institutional review board at the institution
where the study will be conducted. The institutional review board will consider,
among other things, ethical factors, the safety of human subjects and the
possible liability of the institution.
Human clinical trials are typically conducted in three sequential
phases which may overlap:
o PHASE I: The drug is initially introduced into healthy human
subjects or patients and tested for safety, dosage tolerance,
absorption, metabolism, distribution and excretion;
o PHASE II: Studies are conducted in a limited patient population to
identify possible short term adverse effects and safety risks, to
determine the efficacy of the product for specific targeted
diseases and to determine dosage tolerance and optimal dosage;
o PHASE III: Phase III trials are undertaken to further evaluate
clinical efficacy and to further test for safety in an expanded
patient population, often at geographically dispersed clinical
study sites. Phase III or IIb/III trials are often referred to as
pivotal trials, as they are used for the final approval of a
product.
In the case of products for life-threatening diseases such as cancer,
the initial human testing is often conducted in patients with disease rather
than in healthy volunteers. Since these patients already have the targeted
disease or condition, these studies may provide initial evidence of efficacy
traditionally obtained in Phase II trials and so these trials are frequently
referred to as Phase I/II trials. We cannot be certain that we will successfully
complete Phase I, Phase II or Phase III testing of our product candidates within
any specific time period, if at all. Furthermore, we, the FDA, the institutional
review board or the sponsor may suspend clinical trials at any time on various
grounds, including a finding that the subjects or patients are being exposed to
an unacceptable health risk.
The results of product development, pre-clinical studies and clinical
studies are submitted to the FDA as part of a new drug application for approval
of the marketing and commercial shipment of the product. The FDA may deny a new
drug application if the applicable regulatory criteria are not satisfied or may
require additional clinical data. Even if the additional data is submitted, the
FDA may ultimately decide that the new drug application does not satisfy the
criteria for approval. Once issued, the FDA may withdraw product approval if
compliance with regulatory standards for production and distribution is not
maintained or if safety problems occur after the product reaches the market. In
addition, the FDA requires surveillance programs to monitor approved products
which have been commercialized, and the agency has the power to require changes
in labeling or to prevent further marketing of a product based on the results of
these post-marketing programs.
The FDA has a Fast Track program intended to facilitate the development
and expedite the review of drugs that demonstrate the potential to address unmet
medical needs for treatment of serious or life-threatening conditions. Under
this program, if the FDA determines from a preliminary evaluation of clinical
data that a fast track product may be effective, the FDA can review portions of
a new drug application for a Fast Track product before the entire application is
complete, and undertakes to complete its review process within six months of the
filing of the new drug application. The FDA approval of a Fast Track product can
include restrictions on the product's use or distribution such as permitting use
only for specified medical procedures or limiting distribution to physicians or
facilities with special training or expertise. The FDA may grant conditional
approval of a product with Fast Track status and require additional clinical
studies following approval.
Satisfaction of FDA requirements or similar requirements of state,
local and foreign regulatory agencies typically takes several years and the
actual time required may vary substantially, based upon the type, complexity and
novelty of the pharmaceutical product. Government regulation may delay or
prevent marketing of potential products for a considerable period of time and
impose costly procedures upon our activities. Success in pre-clinical or early
stage clinical trials does not assure success in later stage clinical trials.
Data from pre-clinical and clinical activities is not always conclusive and may
be susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. Even if a product receives regulatory approval, the
approval may be significantly limited to specific indications. Further, even
after the FDA approves a product, later discovery of previously unknown problems
with a product may result in restrictions on the product or even complete
withdrawal of the product from the market.
9
Any products manufactured or distributed under FDA clearances or
approvals are subject to pervasive and continuing regulation by the FDA,
including record-keeping requirements and reporting of adverse experiences with
the products. Drug manufacturers and their subcontractors are required to
register with the FDA and state agencies, and are subject to periodic
unannounced inspections by the FDA and state agencies for compliance with good
manufacturing practices, which impose procedural and documentation requirements
upon manufacturers and their third party manufacturers
We are subject to numerous other federal, state and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or
potentially hazardous substances. We may incur significant costs to comply with
such laws and regulations now or in the future. In addition, we cannot predict
what adverse governmental regulations may arise from future United States or
foreign governmental action.
We also are subject to foreign regulatory requirements governing human
clinical trials and marketing approval for pharmaceutical products which we sell
outside the United States. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely from country to
country. Whether or not we obtain FDA approval, we must obtain approval of a
product by the comparable regulatory authorities of foreign countries before
manufacturing or marketing the product in those countries. The approval process
varies from country to country and the time required for these approvals may
differ substantially from that required for FDA approval. We cannot assure you
that clinical trials conducted in one country will be accepted by other
countries or that approval in one country will result in approval in any other
country. For clinical trials conducted outside the United States, the clinical
stages generally are comparable to the phases of clinical development
established by the FDA.
Competition
Product Development
The pharmaceutical industry is characterized by rapidly evolving
technology and intense competition. Many companies of all sizes, including a
number of large pharmaceutical companies as well as several specialized
biotechnology companies, are developing cancer drugs similar to ours. There are
products on the market that will compete directly with the products that we are
seeking to develop. In addition, colleges, universities, government agencies and
other public and private research institutions will continue to conduct research
and are becoming more active in seeking patent protection and licensing
arrangements to collect license fees, milestone payments and royalties in
exchange for license rights to technologies that they have developed, some of
which may directly compete with our technologies. These companies and
institutions also compete with us in recruiting qualified scientific personnel.
Many of our competitors have substantially greater financial, research and
development, human and other resources than we do. Furthermore, large
pharmaceutical companies have significantly more experience than we do in
preclinical testing, human clinical trials and regulatory approval procedures.
Our competitors may develop safer or more effective products than ours, obtain
patent protection or intellectual property rights that limit our ability to
commercialize products, or commercialize products more quickly than we can.
We expect technology developments in our industry to continue to occur
at a rapid pace. Commercial developments by our competitors may render some or
all of our potential products obsolete or non-competitive, which would
materially harm our business and financial condition.
Employees
As of June 30, 2004, we had nine full-time employees and four dedicated
professionals, three of which are contracted to an academic institution. Of
these, three are in management, two are in sales/marketing, four are in
administration and four are in research and development. We believe our
relationships with our employees are satisfactory.
Corporate History
We were incorporated as Express Finance, Inc. under the laws of the
State of Delaware on August 16, 1996, and changed our name to Ascott Group, Inc.
in August 1998 and further to Bioenvision, Inc. in December 1998, at which time
the Company merged with Bioenvision, Inc, a development stage Company primarily
engaged in the research and development of products and technologies for the
treatment of cancer.
10
On February 1, 2002, we completed the acquisition of Pathagon Inc., the
successor in interest to Bridge Blood Technologies L.L.C., d/b/a Pathagon, a
non-public company focused on the development of novel anti-infective products
and technologies. Pathagon's principal products, OLIGON(R) and methylene blue,
are ready for market. Affiliates of SCO Capital Partners LLC, formerly our
financial advisor and consultant, owned 82% of Pathagon prior to the
acquisition. We acquired 100% of the outstanding shares of Pathagon in exchange
for 7,000,000 shares of our common stock. The acquisition has been accounted for
as a purchase business combination in accordance with SFAS 141. With the
acquisition, we added rights to OLIGON(R) and methylene blue to our product
portfolio.
Factors that May Affect Our Business
You should carefully consider the following risks before you decide to
buy our common stock. Our business, financial condition or operating results may
suffer if any of the events described in the following risk factors actually
occur. All known risks are presented in this annual report on Form 10-KSB. These
risks may adversely affect our business, financial condition or operating
results. If any of the events we have identified occur, the trading price of our
common stock could decline, and you may lose all or part of the money you paid
to buy our common stock.
The price of our common stock is likely to be volatile and subject to wide
fluctuations
The market price of the securities of biotechnology companies has been
especially volatile. Thus, the market price of our common stock is likely to be
subject to wide fluctuations. For the twelve month period ended September 16,
2004, our closing stock price has ranged from a high of $11.75 to a low of
$3.00. If our revenues do not grow or grow more slowly than we anticipate, or,
if operating or capital expenditures exceed our expectations and cannot be
adjusted accordingly, or if some other event adversely affects us, the market
price of our common stock could decline. In addition, if the market for
pharmaceutical and biotechnology stocks or the stock market in general
experiences a loss in investor confidence or otherwise fails, the market price
of our common stock could fall for reasons unrelated to our business, results of
operations and financial condition. The market price of our stock also might
decline in reaction to events that affect other companies in our industry even
if these events do not directly affect us. In the past, companies that have
experienced volatility in the market price of their stock have been the subject
of securities class action litigation. If we were to become the subject of
securities class action litigation, it could result in substantial costs and a
diversion of management's attention and resources.
Certain events could result in a dilution of your ownership of our common stock
As of June 30, 2004, we had 28,316,163 shares of common stock
outstanding, 3,341,666 shares of Series A Convertible Preferred Stock
outstanding which are currently convertible into 6,683,332 shares of common
stock and common stock equivalents, including warrants and stock options,
convertible or exercisable into 13,674,242 shares of our common stock. The
exercise and conversion prices of the common stock equivalents range from $0.74
to $8.25 per share. We have also reserved for issuance an aggregate of 3,000,000
shares of common stock for a stock option plan for our employees. Historically,
from time to time, we have awarded our common stock to officers of the Company,
in lieu of cash compensation, although we do not expect to do so in the future.
As of June 30, 2004, (i) we have 37,750,699 shares of common stock registered
under the Securities Act on Form SB-2 and (ii) the sale of shares of common
stock underlying 4,500,000 options are registered under the Securities Act on
Form S-8. The future resale of these shares and shares underlying stock options
and warrants will result in a dilution to your percentage ownership of our
common stock and could adversely affect the market price of our common stock.
The terms of our Series A Convertible Preferred Stock include
antidilution protection upon the occurrence of sales of our common stock below
certain prices, stock splits, redemptions, mergers and other similar
transactions. If one or more of these events occurs the number of shares of our
common stock that may be acquired upon conversion or exercise would increase. If
converted or exercised, these securities will result in a dilution to your
percentage ownership of our common stock. The resale of many of the shares of
common stock which underlie these options and warrants are registered under this
prospectus and the sale of such shares may adversely affect the market price of
our common stock.
11
The provisions of our charter and Delaware law may inhibit potential acquisition
bids that stockholders may believe are desirable, and the market price of our
common stock may be lower as a result
Section 203 of the Delaware corporate statute
We are subject to the anti-takeover provisions of Section 203 of the
Delaware corporate statute, which regulates corporate acquisitions. Section 203
may affect the ability of an "interested stockholder" to engage in certain
business combinations, including mergers, consolidation or acquisitions of
additional shares, for a period of three years following the time that the
stockholder becomes an "interested stockholder". An "interested stockholder" is
defined to include persons owning directly or indirectly 15% or more of the
outstanding voting stock of a corporation. These provisions could discourage
potential acquisition proposals and could delay or prevent a change in control
transaction. They could also have the effect of discouraging others from making
tender offers for our common stock. As a result, these provisions may prevent
our stock price from increasing substantially in response to actual or rumored
takeover attempts. These provisions may also prevent changes in our management.
Issuance of Preferred Stock Without Common Stockholder Approval.
Our charter authorizes our board of director to increase the number of
shares of preferred stock we may issue without approval of common stockholders.
Preferred stock may be issued in one or more series, the terms of which may be
determined without further action by common stockholders. These terms may
include preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications or terms or conditions of
redemption. The issuance of any preferred stock could materially adversely
affect the rights of holders of our common stock, and therefore could reduce its
value. In addition, specific rights granted to future holders of preferred stock
could be used to restrict our ability to merge with, or sell assets to, a third
party. The power of the board of directors to issue preferred stock could make
it more difficult, delay, discourage, prevent or make it more costly to acquire
or effect a change in control, thereby preserving the current stockholders'
control.
We have a limited operating history, which makes it difficult to evaluate our
business and to predict our future operating results
Since our inception, August of 1996, we have been primarily engaged in
organizational activities, including developing a strategic operating plan,
entering into various collaborative agreements for the development of products
and technologies, hiring personnel and developing and testing our products. We
have not generated any material revenues to date. Accordingly, we have no
relevant operating history upon which an evaluation of our performance and
prospects can be made.
We have incurred net losses since commencing business and expect future losses
To date, we have incurred significant net losses, including net losses
of approximately $11,574,000 for the fiscal year ended June 30, 2004. At June
30, 2004, we had an accumulated deficit of approximately $41,082,000. We
anticipate that we may continue to incur significant operating losses for the
foreseeable future. We may never generate material revenues or achieve
profitability and, if we do achieve profitability, we may not be able to
maintain profitability.
Clinical trials for our products will be expensive and may be time consuming,
and their outcome is uncertain, but we must incur substantial expenses that may
not result in viable products
Before obtaining regulatory approval for the commercial sale of a
product, we must demonstrate through pre-clinical testing and clinical trials
that a product candidate is safe and effective for use in humans. Conducting
clinical trials is a lengthy, time-consuming and expensive process. We will
incur substantial expense for, and devote a significant amount of time to
pre-clinical testing and clinical trials. Even with Modrenal(R), which is
approved and marketed by us in the U.K. for the treatment of advanced,
post-menopausal breast cancer, we are conducting a Phase II Clinical Trial in
the U.S. in prostate cancer and a Phase II Clinical Trial in the U.K. for the
treatment of pre-menopausal breast cancer, each of which is a new potential
indication for this approved drug.
Historically, the results from pre-clinical testing and early clinical
trials have often not been predictive of results obtained in later clinical
trials. A number of new drugs have shown promising results in clinical trials,
but subsequently failed to establish sufficient safety and efficacy data to
obtain necessary regulatory approvals. Data obtained from pre-clinical and
clinical activities are susceptible to varying interpretations, which may delay,
limit or
12
prevent regulatory approval. Regulatory delays or rejections may be encountered
as a result of many factors, including changes in regulatory policy during the
period of product development. Regulatory authorities may require additional
clinical trials, which could result in increased costs and significant
development delays. Clofarabine currently is at a pivotal stage of its
development, but many of our other products and technologies are at various less
mature stages of development including l-gossypol for which we have just
commenced a Phase I clinical trial in the U.K. and gene therapy which is
currently in pre-clinical and phase I clinical testing.
Completion of clinical trials for any product may take several years or
more. The length of time generally varies substantially according to the type,
complexity, novelty and intended use of the product candidate. Our commencement
and rate of completion of clinical trials may be delayed by many factors,
including:
o inability of vendors to manufacture sufficient quantities of
materials for use in clinical trials;
o slower than expected rate of patient recruitment or variability
in the number and types of patients in a study;
o inability to adequately follow patients after treatment;
o unforeseen safety issues or side effects;
o lack of efficacy during the clinical trials; or
o government or regulatory delays.
If our development agreement with ILEX does not proceed as planned we may incur
delay in the commercialization of clofarabine, which would delay our ability to
generate sales and cash flow from the sale of Clofarabine
ILEX, and any third party to which ILEX may grant a sublicense or in
any way transfer its obligations, has primary responsibility for conducting
clinical trials and administering regulatory compliance and approval matters in
the United States and Canada pursuant to the terms of our co-development
agreement with ILEX. While there are target dates for completion, that agreement
allows ILEX time to continue working beyond those dates under certain
circumstances. For example, under the co-development agreement, ILEX was
required to complete Pivotal Phase II Trials not later than December 31, 2002,
but ILEX failed to do so. In this situation the co-development agreement
provides that the milestone shall be adjusted such that ILEX receives more time
to complete the pivotal trials if the trials are ongoing at December 31, 2002
and progressing to completion within a reasonable time thereafter. Further, ILEX
was required under the co-development agreement to have filed a New Drug
Application by August 31, 2003, subject to extension if ILEX continues to use
its reasonable efforts to promptly complete the filing after August 31, 2003.
ILEX continued to use its reasonable efforts to complete the filing after August
31, 2003 and in October 2003, Ilex filed the first part of a "rolling NDA" with
the FDA.
If ILEX fails to meet its obligations under the co-development
agreement, we could lose valuable time in developing clofarabine for
commercialization both in the U.S. and in Europe. We can not provide assurance
that ILEX will not fail to meet its obligations under the co-development
agreement. Development of compounds to the stage of approval includes inherent
risk at each stage of development that FDA, in its discretion, will mandate a
requirement not foreseeable by us or by ILEX. There would also be testing delays
if, for example, our sources of drug supply could not produce enough clofarabine
to support the then ongoing clinical trials being conducted. If this were to
occur, it could have a material adverse effect on our ability to develop
clofarabine, obtain necessary regulatory approvals, and generate sales and cash
flow from the sale of clofarabine.
If delays in completion constitute a breach by ILEX or there are
certain other breaches of the co-development agreement by ILEX, then, at our
discretion, the primary responsibility for completion would revert to us, but
there is no assurance that we would have the financial, managerial or technical
resources to complete such tasks in timely fashion or at all.
We have limited experience in developing products and may be unsuccessful in our
efforts to develop products
To achieve profitable operations, we, alone or with others, must
successfully develop, clinically test, market and sell our products. We are
developing clofarabine with ILEX Oncology, our U.S. co-development partner, but
on February 26, 2004, Genzyme announced a merger pursuant to which Genzyme
intends to acquire
13
ILEX in a merger transaction. If this transaction is consummated, no assurance
can be given that the operational and managerial relations with Genzyme will
proceed favorably or that the timeline for development of clofarabine will not
be elongated. If the U.S. regulatory timeline is elongated, this could
materially and adversely affect the European regulatory timeline for the
approval of clofarabine.
With respect to our co-lead drug, Modrenal(R), we currently have an
Investigational New Drug Application filed with FDA to conduct a Phase II
Clinical Trial in the U.S. to determine efficacy of Modrenal(R) in prostate
cancer patients. This Phase II Clinical Trial is being conducted at the Mass
General Hospital in Boston, MA. To our knowledge, Modrenal(R) has not been
tested in this indication in the past and there can be no assurance that
Modrenal(R) will be an effective therapy in prostate cancer. Further, our
long-term drug development objectives for Modrenal(R) include attempting to test
the drug and get approval in the U.S. for treatment of advanced post-menopausal
breast cancer patients. These trials will take significant time and resource and
no assurance can be given that developing the drug in this indication will
result in a U.S. approval for Modrenal(R) in advanced post-menopausal breast
cancer patients.
Generally, most products resulting from our or our collaborative
partners' product development efforts are not expected to be available for sale
for at least several years, if at all. Potential products that appear to be
promising at early stages of development may not reach the market for a number
of reasons, including:
o discovery during pre-clinical testing or clinical trials that the products
are ineffective or cause harmful side effects;
o failure to receive necessary regulatory approvals;
o inability to manufacture on a large or economically feasible scale;
o failure to achieve market acceptance; or
o preclusion from commercialization by proprietary rights of third parties.
Most of the existing and future products and technologies developed by
us will require extensive additional development, including pre-clinical testing
and clinical trials, as well as regulatory approvals, prior to
commercialization. Our product development efforts may not be successful. We may
fail to receive required regulatory approvals from U.S. or foreign authorities
for any indication. Any products, if introduced, may not be capable of being
produced in commercial quantities at reasonable costs or being successfully
marketed. The failure of our research and development activities to result in
any commercially viable products or technologies would materially adversely
affect our future prospects.
Our industry is subject to extensive government regulation and our products
require other regulatory approvals which makes it more expensive to operate our
business
Regulation in General. Virtually all aspects of our business are
regulated by federal and state statutes and governmental agencies in the United
States and other countries. Failure to comply with applicable statutes and
government regulations could have a material adverse effect on our ability to
develop and sell products which would have a negative impact on our cash flow.
The development, testing, manufacturing, processing, quality, safety, efficacy,
packaging, labeling, record-keeping, distribution, storage and advertising of
pharmaceutical products, and disposal of waste products arising from these
activities, are subject to regulation by one or more federal agencies. These
activities are also regulated by similar state and local agencies and equivalent
foreign authorities. In our material contracts with vendors providing any
portion of these types of services, we seek assurances that our vendors comply
and will continue to maintain compliance with all applicable rules and
regulations. This is the case, for example, with respect to our contracts with
Ferro Pfanstiehl and Penn Pharmaceuticals. No assurance can be given that our
most significant vendors will continue to comply with these rules and
regulations.
FDA Regulation. All pharmaceutical manufacturers in the United States
are subject to regulation by the FDA under the authority of the Federal Food,
Drug, and Cosmetic Act. Under the Act, the federal government has extensive
administrative and judicial enforcement powers over the activities of
pharmaceutical manufacturers to ensure compliance with FDA regulations. Those
powers include, but are not limited to the authority to:
o initiate court action to seize unapproved or non-complying products;
14
o enjoin non-complying activities;
o halt manufacturing operations that are not in compliance with current good
manufacturing practices prescribed by the FDA;
o recall products which present a health risk; and
o seek civil monetary and criminal penalties.
Other enforcement activities include refusal to approve product
applications or the withdrawal of previously approved applications. Any
enforcement activities, including the restriction or prohibition on sales of
products marketed by us or the halting of manufacturing operations of us or our
collaborators, would have a material adverse effect on our ability to develop
and sell products which would have a negative impact on our cash flow. In
addition, product recalls may be issued at our discretion or by the FDA or other
domestic and foreign government agencies having regulatory authority for
pharmaceutical product sales. Recalls may occur due to disputed labeling claims,
manufacturing issues, quality defects or other reasons. Recalls of
pharmaceutical products marketed by us may occur in the future. Any product
recall could have a material adverse effect on our revenue and cash flow.
FDA Approval Process. We have a variety of products under development,
including line extensions of existing products, reformulations of existing
products and new products. All "new drugs" must be the subject of an
FDA-approved new drug application before they may be marketed in the United
States. All generic equivalents to previously approved drugs or new dosage forms
of existing drugs must be the subject of an FDA-approved abbreviated new drug
application before they may by marketed in the United States. In both cases, the
FDA has the authority to determine what testing procedures are appropriate for a
particular product and, in some instances, has not published or otherwise
identified guidelines as to the appropriate procedures. The FDA has the
authority to withdraw existing new drug application and abbreviated application
approvals and to review the regulatory status of products marketed under the
enforcement policy. The FDA may require an approved new drug application or
abbreviated application for any drug product marketed under the enforcement
policy if new information reveals questions about the drug's safety or
effectiveness. All drugs must be manufactured in conformity with current good
manufacturing practices and drugs subject to an approved new drug application or
abbreviated application must be manufactured, processed, packaged, held and
labeled in accordance with information contained in the new drug application or
abbreviated application.
The required product testing and approval process can take a number of
years and require the expenditure of substantial resources. Testing of any
product under development may not result in a commercially-viable product.
Further, we may decide to modify a product in testing, which could materially
extend the test period and increase the development costs of the product in
question. Even after time and expenses, regulatory approval by the FDA may not
be obtained for any products we develop. In addition, delays or rejections may
be encountered based upon changes in FDA policy during the period of product
development and FDA review. Any regulatory approval may impose limitations in
the indicated use for the product. Even if regulatory approval is obtained, a
marketed product, its manufacturer and its manufacturing facilities are subject
to continual review and periodic inspections. Subsequent discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on the product or manufacturer, including withdrawal of the product
from the market.
Foreign Regulatory Approval. Even if required FDA approval has been
obtained with respect to a product, foreign regulatory approval of a product
must also be obtained prior to marketing the product internationally. Foreign
approval procedures vary from country to country and the time required for
approval may delay or prevent marketing. In certain instances, we or our
collaborative partners may seek approval to market and sell some of our products
outside of the United States before submitting an application for approval to
the FDA. The clinical testing requirements and the time required to obtain
foreign regulatory approvals may differ from that required for FDA approval.
Although there is now a centralized European Union approval mechanism for new
pharmaceutical products in place, each European Union country may nonetheless
impose its own procedures and requirements, many of which are time consuming and
expensive, and some European Union countries require price approval as part of
the regulatory process. Thus, there can be substantial delays in obtaining
required approval from both the FDA and foreign regulatory authorities after the
relevant applications are filed.
Changes in Requirements. The regulatory requirements applicable to any
product may be modified in the future. We cannot determine what effect changes
in regulations or statutes or legal interpretations may have on our business in
the future. Changes could require changes to manufacturing methods, expanded or
different labeling, the recall, replacement or discontinuation of certain
products, additional record keeping and expanded documentation of the properties
of certain products and scientific substantiation. Any changes or new
legislation
15
could have a material adverse effect on our ability to develop and sell products
and, therefore, generate revenue and cash flow.
The products under development by us may not meet all of the applicable
regulatory requirements needed to receive regulatory marketing approval. Even
after we expend substantial resources on research, clinical development and the
preparation and processing of regulatory applications, we may not be able to
obtain regulatory approval for any of our products. Moreover, regulatory
approval for marketing a proposed pharmaceutical product in any jurisdiction may
not result in similar approval in other jurisdictions. Our failure to obtain and
maintain regulatory approvals for products under development would have a
material adverse effect on our ability to develop and sell products and,
therefore, generate revenue and cash flow.
We may not be successful in receiving orphan drug status for certain of
our products or, if that status is obtained, fully enjoying the benefits of
orphan drug status
Under the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs intended to treat a rare disease or condition. A disease or condition that
affects populations of fewer than 200,000 people in the United States generally
constitutes a rare disease or condition. We may not be successful in receiving
orphan drug status for certain of our products. Orphan drug designation must be
requested before submitting a new drug application. After the FDA grants orphan
drug designation, the generic identity of the therapeutic agent and its
potential orphan use are publicized by the FDA. Under current law, orphan drug
status is conferred upon the first company to receive FDA approval to market the
designated drug for the designated indication. Orphan drug status also grants
marketing exclusivity in the United States for a period of seven years following
approval of the new drug application, subject to limitations. Orphan drug
designation does not provide any advantage in, or shorten the duration of, the
FDA regulatory approval process. Although obtaining FDA approval to market a
product with orphan drug status can be advantageous, the scope of protection or
the level of marketing exclusivity that is currently afforded by orphan drug
status and marketing approval may not remain in effect in the future.
Our business strategy involves obtaining orphan drug designation for
certain of the oncology products we have under development. Although clofarabine
has received orphan drug designation with the FDA and EMEA, we do not know
whether any of our other products will receive an orphan drug designation.
Orphan drug designation does not prevent other manufacturers from attempting to
develop similar drugs for the designated indication or from obtaining the
approval of a new drug application for their drug prior to the approval of our
new drug application. If another sponsor's new drug application for a competing
drug in the same indication is approved first, that sponsor is entitled to
exclusive marketing rights if that sponsor has received orphan drug designation
for its drug. In that case, the FDA would refrain from approving an application
by us to market our competing product for seven years, subject to limitations.
Competing products may receive orphan drug designations and FDA marketing
approval before the products under development by us.
New drug application approval for a drug with an orphan drug
designation does not prevent the FDA from approving the same drug for a
different indication, or a molecular variation of the same drug for the same
indication. Because doctors are not restricted by the FDA from prescribing an
approved drug for uses not approved by the FDA, it is also possible that another
company's drug could be prescribed for indications for which products developed
by us have received orphan drug designation and new drug application approval
and the same is true with the EMEA in Europe. Prescribing of approved drugs for
unapproved uses, commonly referred to as "off label" sales, could adversely
affect the marketing potential of products that have received an orphan drug
designation and new drug application approval. In addition, new drug application
approval of a drug with an orphan drug designation does not provide any
marketing exclusivity in foreign markets.
The possible amendment of the Orphan Drug Act by the United States
Congress has been the subject of frequent discussion. Although no significant
changes to the Orphan Drug Act have been made for a number of years, members of
Congress have from time to time proposed legislation that would limit the
application of the Orphan Drug Act. The precise scope of protection that may be
afforded by orphan drug designation and marketing approval may be subject to
change in the future.
The use of our products may be limited or eliminated by professional guidelines
which would decrease our sales of these products and, therefore, our revenue and
cash flows
In addition to government agencies, private health/science foundations
and organizations involved in various diseases may also publish guidelines or
recommendations to the healthcare and patient communities. These private
organizations may make recommendations that affect the usage of therapies, drugs
or procedures, including
16
products developed by us. These recommendations may relate to matters such as
usage, dosage, route of administration and use of concomitant therapies.
Recommendations or guidelines that are followed by patients and healthcare
providers and that result in, among other things, decreased use or elimination
of products developed by us could have a material adverse effect on our revenue
and cash flows. For example, if clofarabine is definitively determined in
clinical trials to be an active agent to treat solid tumor cancer patients, but
the required dose is high, private healthcare/science foundations could
recommend various other regimens of treatment which may from time to time show
activity at lower doses.
Generic products which third parties may develop may render our products
noncompetitive or obsolete
An increase in competition from generic pharmaceutical products could
have a material adverse effect on our ability to generate revenue and cash flow.
For example, many of the indications in which clofarabine and Modrenal(R), our
co-lead drugs, have demonstrated activity are areas of unmet clinical need, such
as clofarabine's application to pediatric acute leukemias in which, initially,
the drug will be used as a salvage therapy, after other regimens of treatment
have failed. Our lead investigators, who have assisted with the development of
Modrenal(R), envision, initially, that Modrenal(R) would be used as second or
third line therapy, only after patients with advanced post-menopausal breast
cancer receive regimens of tamoxifen and/or aromatase inhibitors (or similar
drug) treatments. If generic drug companies develop a compound which is more
effective than either clofarabine or Modrenal(R) in these areas of unmet
clinical need, or equally as effective but at lower doses, it could adversely
affect our market and/or render our drugs obsolete.
Because many of our competitors have substantially greater capabilities and
resources, they may be able to develop products before us or develop more
effective products or market them more effectively which would limit our ability
to generate revenue and cash flow
Competition in our industry is intense. Potential competitors in the
United States and Europe are numerous and include pharmaceutical, chemical and
biotechnology companies, most of which have substantially greater capital
resources, marketing experience, research and development staffs and facilities
than us. Potential competitors for certain indications of our lead drugs
include, with respect to clofarabine, Schering AG, which markets fludarabine,
and certain generic drug companies in Europe which could market fludarabine upon
expiry of the patent protections held by Schering. Potential competitors with
respect to Modrenal(R) include Astra-zeneca and Novartis, which market tamoxifen
and other aromatase inhibitors, which could be used by clinicians as first and
second line therapies in patients with hormone sensitive, advanced,
post-menopausal breast cancer prior to a Modrenal(R) regimen of treatment. No
assurance can be given that the ongoing business activities of our competitors
will not have a material adverse effect on our business prospects and
projections going forward.
Although we seek to limit potential sources of competition by
developing products that are eligible for orphan drug designation and new drug
application approval or other forms of protection, our competitors may develop
similar technologies and products more rapidly than us or market them more
effectively. Competing technologies and products may be more effective than any
of those that are being or will be developed by us. The generic drug industry is
intensely competitive and includes large brand name and multi-source
pharmaceutical companies. Because generic drugs do not have patent protection or
any other market exclusivity, our competitors may introduce competing generic
products, which may be sold at lower prices or with more aggressive marketing.
Conversely, as we introduce branded drugs into our product portfolio, we will
face competition from manufacturers of generic drugs which may claim to offer
equivalent therapeutic benefits at a lower price. The aggressive pricing
activities of our generic competitors could have a material adverse effect on
our operations, revenue and cash flow.
If we fail to keep up with rapid technological change and evolving therapies,
our technologies and products could become less competitive or obsolete
The pharmaceutical industry is characterized by rapid and significant
technological change. We expect that pharmaceutical technology will continue to
develop rapidly, and our future success will depend on our ability to develop
and maintain a competitive position. Technological development by others may
result in products developed by us, branded or generic, becoming obsolete before
they are marketed or before we recover a significant portion of the development
and commercialization expenses incurred with respect to these products.
Alternative therapies or new medical treatments could alter existing treatment
regimes, and thereby reduce the need for one or more of the products developed
by us, which would adversely affect our revenue and cash flow. See also
"--Generic products which third parties may develop may render our products
noncompetitive or obsolete" Above.
17
We depend on others for clinical testing of our products which could delay our
ability to develop products
We do not currently have any internal product testing capabilities. Our
inability to retain third parties for the clinical testing of products on
acceptable terms would adversely affect our ability to develop products. Any
failures by third parties to adequately perform their responsibilities may delay
the submission of products for regulatory approval, impair our ability to
deliver products on a timely basis or otherwise impair our competitive position.
Our dependence on third parties for the development of products may adversely
affect our potential profit margins and our ability to develop and deliver
products on a timely basis.
We depend on others to manufacture our products and have not manufactured them
in significant quantities
We have never manufactured any products in commercial quantities, and
the products being developed by us may not be suitable for commercial
manufacturing in a cost-effective manner. Manufacturers of products developed by
us will be subject to current good manufacturing practices prescribed by the FDA
or other rules and regulations prescribed by foreign regulatory authorities. We
may not be able to enter into or maintain relationships either domestically or
abroad with manufacturers whose facilities and procedures comply or will
continue to comply with current good manufacturing practices or applicable
foreign requirements. Failure by a manufacturer of our products to comply with
current good manufacturing practices or applicable foreign requirements could
result in significant time delays or our inability to commercialize or continue
to market a product and could have a material adverse effect on our sales of
products and, therefore, our cash flow. In the United States, failure to comply
with current good manufacturing practices or other applicable legal requirements
can lead to federal seizure of violative products, injunctive actions brought by
the federal government, and potential criminal and civil liability on the part
of a company and our officers and employees.
We have limited sales and marketing capability, and may not be successful in
selling or marketing our products
The creation of infrastructure to commercialize oncology products is a
difficult, expensive and time-consuming process. We may not be able to establish
direct or indirect sales and distribution capabilities or be successful in
gaining market acceptance for proprietary products or for other products. We
currently have very limited sales and marketing capabilities. We currently
employ one full-time sales employee and one full-time marketing employee. To
market any products directly, we will need to develop a more fulsome marketing
and sales force with technical expertise and distribution capability or contract
with other pharmaceutical and/or health care companies with distribution systems
and direct sales forces. To the extent that we enter into co-promotion or other
licensing arrangements, any revenues to be received by us will be dependent on
the efforts of third parties. The efforts of third parties may not be
successful. Our failure to establish marketing and distribution capabilities or
to enter into marketing and distribution arrangements with third parties could
have a material adverse effect on our revenue and cash flows.
If we lose key management our business will suffer
We are highly dependent on our Chief Executive Officer to develop our
lead drug. Dr. Wood has an employment agreement with the Company, dated December
31, 2002, for an initial term of one year which automatically extends for an
additional one year periods until either party gives the other written notice of
termination at least 90 days prior to the end of the current term. Dr. Wood is
not near retirement age and he does not, to our knowledge, plan on leaving the
Company in the near future. Dr. Wood is one of the founders of the company and
he is intimately familiar with the science that underlies our lead drugs and
ancillary technologies. He also maintains a position on the clofarabine
management team that is responsible for all drug development activities relating
to that lead drug, and has been instrumental in the development and maintenance
of our key relationships within the scientific research and medical communities,
and those with our vendors, inventors, co-development partners and licensors. If
Dr. Wood was no longer employed by the company, the development of our drugs
would be significantly delayed and otherwise would be adversely impacted, and we
may be unable to maintain and develop these important relationships.
Need for additional personnel
The Company will be required to hire additional qualified scientific
and technical personnel, as well as personnel with expertise in clinical testing
and government regulation to expand our research and development programs and
pursue our product development and marketing plans. There is intense competition
for qualified personnel in the areas of the Company's activities, and there can
be no assurance that the Company will be able to attract and retain the
qualified personnel necessary for the development of its business. The Company
faces
18
competition for qualified individuals from numerous pharmaceutical and
biotechnology companies, universities and research institutions. The failure to
attract and retain key scientific, marketing and technical personnel would have
a material adverse effect on the development of the Company's business and our
ability to develop, market and sell our products. See also "- We have limited
sales and marketing capability, and may not be successful in selling or
marketing our products" above.
Our management and internal systems might be inadequate to handle our potential
growth
Our success will depend in significant part on the expansion of our
operations and the effective management of growth. This growth has and will
continue to place a significant strain on our management and information systems
and resources and operational and financial systems and resources. To manage
future growth, our management must continue to improve our operational and
financial systems and expand, train, retain and manage our employee base. Our
management may not be able to manage our growth effectively. If our systems,
procedures, controls, and resources are inadequate to support our operations,
our expansion would be halted or delayed and we could lose our opportunity to
gain significant market share or the timing with which we would otherwise gain
significant market share. Any inability to manage growth effectively may harm
our ability to institute our business plan. The strain on our systems,
procedures, controls and resources is further heightened by the fact that our
executive office and operational development facilities are located in separate
time zones (New York, New York and Edinburgh, Scotland, respectively).
We depend on patent and proprietary rights to develop and protect our
technologies and products, which rights may not offer us sufficient protection
The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and processes.
Our success will depend on our ability to obtain and enforce protection for
products that we develop under United States and foreign patent laws and other
intellectual property laws, preserve the confidentiality of our trade secrets
and operate without infringing the proprietary rights of third parties. Through
our current license agreements, we have acquired the right to utilize the
technology covered by issued patents and patent applications, as well as
additional intellectual property and know-how that could be the subject of
further patent applications in the future. Several of the original patents to
Modrenal(R) have expired in the United States and foreign countries. Thus, we
and our licensors are pursuing patent applications to specific uses, combination
therapy and dosages or formulations of Modrenal(R). We cannot guarantee that
such applications will result in issued patents or that such patents if issued
will provide adequate protection against competitors. Patents may not be issued
from these applications and issued patents may not give us adequate protection
or a competitive advantage. Issued patents may be challenged, invalidated,
infringed or circumvented, and any rights granted thereunder may not provide us
with competitive advantages. Parties not affiliated with us have obtained or may
obtain United States or foreign patents or possess or may possess proprietary
rights relating to products being developed or to be developed by us. Patents
now in existence or hereafter issued to others may adversely affect the
development or commercialization of products developed or to be developed by us.
Our planned activities may infringe patents owned by others. Our patents to
clofarabine are licensed from Southern Research Institute. The current projected
expiration date of the license is March 2021. These patents cover pharmaceutical
compositions and methods of using clofarabine. We cannot guarantee that these
patents would survive an attack on their validity or that they will provide a
competitive advantage over our competitors. Moreover, we cannot guarantee that
Southern Research Institute was the first to invent the subject matter of these
patents. In addition, we are aware of a third party patent which is directed to
the treatment of chronic myeloid leukemia ("CML") using specific doses of
clofarabine. We do not believe that we will infringe this patent. If this patent
is asserted against us, even though we may be successful in defending against
such an assertion, our defense would require substantial financial and human
resources. And, we may need a license to this patent to use the claimed dose in
the treatment of CML. However, we do not know if such a license is available at
commercially reasonable terms, if at all.
We could incur substantial costs in defending infringement suits
brought against us or any of our licensors or in asserting any infringement
claims that we may have against others. We could also incur substantial costs in
connection with any suits relating to matters for which we have agreed to
indemnify our licensors or distributors. An adverse outcome in any litigation
could have a material adverse effect on our ability to sell products or use
patents in the future. In addition, we could be required to obtain licenses
under patents or other proprietary rights of third parties. These licenses may
not be made available on terms acceptable to us, or at all. If we are required
to, and do not obtain any required licenses, we could be prevented from, or
encounter delays in, developing, manufacturing or marketing one or more
products.
19
We also rely upon trade secret protection for our confidential and
proprietary information. Others may independently develop substantially
equivalent proprietary information and techniques or gain access to our trade
secrets or disclose our technology. We may not be able to meaningfully protect
our trade secrets which could limit our ability to exclusively produce products.
We require our employees, consultants, members of the scientific
advisory board and parties to collaborative agreements to execute
confidentiality agreements upon the commencement of employment or consulting
relationships or a collaboration with us. These agreements may not provide
meaningful protection of our trade secrets or adequate remedies in the event of
unauthorized use or disclosure of confidential and proprietary information.
Because we have international operations, we will be subject to risks of
conducting business in foreign countries
We have the right to manufacture, market and distribute our lead drugs,
clofarabine and Modrenal(R), in territories outside of the United States.
Specifically, we currently market Modrenal(R) in the United Kingdom and upon
receiving European approval for clofarabine, we intend to market the drug
throughout Europe. Further, nearly half of our employees are employed by
Bioenvision Limited, our wholly-owned subsidiary with offices in Edinburgh,
Scotland.
Because we have international operations in the conduct of our
business, we are subject to the risks of conducting business in foreign
countries, including:
o difficulty in establishing or managing distribution relationships;
o different standards for the development, use, packaging, pricing and
marketing of our products and technologies;
o our inability to locate qualified local employees, partners, distributors
and suppliers;
o the potential burden of complying with a variety of foreign laws, trade
standards and regulatory requirements, including the regulation of
pharmaceutical products and treatment; and
o general geopolitical risks, such as political and economic instability,
changes in diplomatic and trade relations, and foreign currency risks.
We do not engage in forward currency transactions which means we are
susceptible to fluctuations in the U.S. dollar against foreign currencies such
as the pound sterling. Accordingly, as the value of the dollar becomes weaker
against the pound sterling, ongoing services provided by our UK employees,
Cancer Research Organizations and other service providers become more expensive
to us. No assurance can be given that the U.S. dollar will not continue to
weaken which could have a material adverse effect on the costs associated with
our drug development activities.
We cannot predict our future capital needs and we may not be able to secure
additional financing which could affect our ability to operate as a going
concern
We consummated a private placement transaction on March 22, 2004,
pursuant to which we raised $12.8 million and issued 2,044,514 shares of our
common stock and warrants to purchase an additional 408,903 shares of our common
stock at a conversion price of $7.50 per share. We consummated a second closing
for this financing on May 13, 2004 in order to comply with certain contractual
obligations of the Company to its holders of Series A Convertible Preferred
Stock which hold preemptive rights for equity offerings of the Company. The
Company raised an additional $3.5 million in the second trance closing and
issued an additional 558,384 shares of our common stock and warrants to purchase
111,677 shares of our common stock at a conversion price of $7.50 per share.
However, we may need additional financing to continue to fund the research and
development and marketing programs for our products and to generally expand and
grow our business. For example, we will need to employ a European sales force
within the next twelve months to capitalize on the commercial potential for
clofarabine and Modrenal(R) if and to the extent our lead drugs are at market in
Europe by mid- 2005. To the extent that we will be required to fund operating
losses, our financial position would deteriorate. There can be no assurance that
we will be able to find significant additional financing at all or on terms
favorable to us. If equity securities are issued in connection with a financing,
dilution to our stockholders would result, and if additional funds are raised
through the incurrence of debt, we may be subject to restrictions on our
operations and finances. Furthermore, if we do incur debt, we may be limiting
our ability to repurchase capital stock, engage in mergers, consolidations,
acquisitions and asset sales, or alter our lines of business or accounting
methods, even though these
20
actions would otherwise benefit our business. As of June 30, 2004, we had
stockholders' equity of approximately $27,383,000 and net working capital of
approximately $18,828,000.
If adequate financing is not available, we may be required to delay,
scale back or eliminate some of our research and development programs, to
relinquish rights to certain technologies or products, or to license third
parties to commercialize technologies or products that we would otherwise seek
to develop. Any inability to obtain additional financing, if required, would
have a material adverse effect on our ability to continue our operations and
implement our business plan.
The prices we charge for our products and the level of third-party reimbursement
may decrease and our revenues could decrease
Our ability to commercialize products successfully depends in part on
the price we may be able to charge for our products and on the extent to which
reimbursement for the cost of our products and related treatment will be
available from government health administration authorities, private health
insurers and other third-party payors. We believe that Government officials and
private health insurers are increasingly challenging the price of medical
products and services. Significant uncertainty exists as to the pricing
flexibility which distributors will have with respect to newly approved health
care products as well as the reimbursement status for such approved healthcare
products.
Third-party payors may attempt to control costs further by selecting
exclusive providers of their pharmaceutical products. If third-party payors were
to make this type of arrangement with one or more of our competitors, they would
not reimburse patients for purchasing our competing products. For example, if a
third-party payor in the U.K. were to pay patients for regimens of aromatase
inhibitor treatment but not treatments of Modrenal(R), this would cause a
decline in sales of Modrenal(R). This lack of reimbursement would diminish the
market for products developed by us and would have a material adverse effect on
us.
Our products may be subject to recall
Product recalls may be issued at our discretion or by the FDA, the FTC
or other government agencies having regulatory authority for product sales.
Product recalls, if any in the future, may harm our reputation and cause us to
lose development opportunities, or customers or pay refunds. Products may need
to be recalled due to disputed labeling claims, manufacturing issues, quality
defects, or other reasons. We do not carry any insurance to cover the risk of
potential product recall. Any product recall could have a material adverse
effect on us, our prospects, our financial condition and results of operations.
We may face exposure from product liability claims and product liability
insurance may not be sufficient to cover the costs of our liability claims
related to technologies or products
We face exposure to product liability claims if the use of our
technologies or products or those we license from third parties is alleged to
have resulted in adverse effects to users of such products. Product liability
claims may be brought by clinical trial participants, although to date, no such
claims have been brought against us. If any such claims were brought against us,
the cost of defending such claims may adversely affect our business. Regulatory
approval for commercial sale of our products does not mitigate product liability
risks. Any precautions we take may not be sufficient to avoid significant
product liability exposure. Although we have obtained product liability and
clinical trial insurance on our technologies and products at levels with which
management deems reasonable, no assurance can be given that this insurance will
cover any particular claim or that we have obtained an appropriate level of
liability insurance coverage for our development activities. We currently
maintain three million dollars per year, claims made product liability insurance
coverage which we believe is adequate. Existing coverage may not be adequate as
we further develop our products. In the future, adequate insurance coverage or
indemnification by collaborative partners may not be available in sufficient
amounts, or at acceptable costs, if at all. To the extent that product liability
insurance, if available, does not cover potential claims, we will be required to
self-insure the risks associated with those claims. The successful assertion of
any uninsured product liability or other claim against us could limit our
ability to sell our products or could cause monetary damages. In addition,
future product labeling may include disclosure of additional adverse effects,
precautions and contra indications, which may adversely impact product sales.
The pharmaceutical industry has experienced increasing difficulty in maintaining
product liability insurance coverage at reasonable levels, and substantial
increases in insurance premium costs, in many cases, have rendered coverage
economically impractical.
21
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. This information is available at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information about Bioenvision and
other issuers that file electronically with the SEC at http://www.sec.gov.
Item 2. Description of Property
Facilities
As of the date of this report we do not own any interest in real
property. We currently lease 3,229 square feet of office space at our principal
executive offices at 509 Madison Avenue, Suite 404, New York, New York 10022 for
approximately $13,000 per month. These facilities are the center for all of our
administrative functions in the United States. Also, we rent on a month-to-month
basis approximately 1,000 square feet of office space in Edinburgh, Scotland for
approximately $5,000 per month. To date, most of our drug development programs
have been conducted at scientific institutions around the world. It is our
policy to continue development at leading scientific institutions in the United
States and Europe. We do not plan to conduct laboratory research in any of our
facilities in the near future, rather, we will conduct research through
collaborative arrangements with Southern Research Institute, M.D. Anderson and
others.
Investment Policies
We do not currently have any investments in real estate or interests in
real estate; investments or interests in real estate mortgages or in the
securities of or interests in persons primarily engaged in real estate. We
generally acquire our assets for the purpose of ultimately producing sales
revenues from the exploitation of such assets in the development of our
biopharmaceutical business. We currently invest our surplus cash in
interest-bearing deposit accounts and short-term certificates of deposit.
Item 3. 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 alleged a breach of contract by the Company and demanded 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. In March 2004, the complaint and two counterclaims asserted by the
Company were dismissed with prejudice.
On December 19, 2003, the Company filed a complaint against Dr.
Deidre Tessman and Tessman Technology Ltd. (the "Tessman Defendants") 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. The
Tessman Defendants removed the case to federal court, then remanded it to state
court and served an answer with several purported counterclaims. The Company
denies the allegations in the counterclaims and intends to pursue its claims
against the Tessman Defendants vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
None.
22
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
The following represents the range of reported high and low bid sales
prices for our common stock on a quarterly basis since July 1, 2002 as reported
on the OTC Bulletin Board and the American Stock Exchange. Throughout this
period and up to September 5, 2003, our trading symbol was "BIOV". Our trading
symbol was changed to "BIV" on September 8, 2003 upon commencement of listing
our shares of common stock on the American Stock Exchange. Our symbol was
changed again to "BIVN" on August 20, 2004 upon commencement of listing our
shares of common stock on the NASDAQ Stock Market. The quotations also reflect
inter-dealer prices, without retail mark-up, mark-down or commission, and may
not represent actual transactions.
High Low
---- ---
Fiscal Year Ended June 30, 2003
First Quarter $2.55 $1.35
Second Quarter $2.25 $1.10
Third Quarter $1.55 $0.39
Fourth Quarter $2.89 $0.77
Fiscal Year Ended June 30, 2004
First Quarter $4.97 $1.70
Second Quarter $5.10 $3.35
Third Quarter $10.01 $4.09
Fourth Quarter $12.00 $8.25
Holders
On June 30, 2004, we had 189 stockholders of record.
Dividends
We have never declared or paid cash dividends on our common stock, and
our board of directors does not intend to declare or pay any dividends on the
common stock in the foreseeable future. Our earnings, if any, are expected to be
retained for use in expanding our business. The declaration and payment in the
future of any cash or stock dividends on the common stock will be at the
discretion of the board of directors and will depend upon a variety of factors,
including our ability to service our outstanding indebtedness and to pay our
dividend obligations on securities ranking senior to the common stock, our
future earnings, if any, capital requirements, financial condition and such
other factors as our board of directors may consider to be relevant from time to
time. However, the Company is required to accrue for and pay a dividend of 5% in
April, July, October and January, subject to certain circumstances and
adjustments, on its cumulative Series A Convertible Preferred Stock. We have
paid these accrued dividends on our cumulative Series A Convertible Preferred
Stock in cash through July 30, 2004.
23
Equity Compensation Plan Information
The following table provides information about the securities
authorized for issuance under the Company's equity compensation plans as of June
30, 2004:
Number of securities to Number of securities remaining
be issued upon Weighted-average available for future issuance
exercise of outstanding exercise price of under equity compensation
options, warrants and outstanding options, plans (excluding securities
rights warrants and rights reflected in column (a))
Plan category (a) (b) (c)
------------------------------------ ------------------------- ------------------------- --------------------------------
Equity compensation plans approved
by security holders 2,105,000 $2.57 895,000
Equity compensation plans not
approved by security holders 5,328,624 $1.55 --
Total 7,433,624 -- 895,000
Equity Compensation Plans Approved by Security Holders.
The Board of Directors adopted, and our stockholders approved our 2003
Stock Incentive Plan at the Annual Meeting held in January of 2004. The plan was
adopted to recognize the contributions made by our employees, officers,
consultants, and directors, to provide those individuals with additional
incentive to devote themselves to our future success and to improve our ability
to attract, retain and motivate individuals upon whom our growth and financial
success depends. There are 3,000,000 shares reserved for grants of options under
the plan and at June 30, 2004, 2,105,000 of these options had been issued.
Equity Compensation Plans Not Approved by Security Holders.
The 5,328,624 securities to be issued upon exercise of options and
warrants consist of warrants and options issued to the co-founders, early round
investors and certain former consultants and advisors for services rendered to
or on behalf of us.
24
Item 6. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of our
results of operations and financial condition. The discussion should be read
together with our audited consolidated financial statements and notes included
under Item 7 of this annual report on Form 10-KSB, which consolidated financial
statements are presented beginning at page F-1.
Summary of Significant Accounting Policies
Financial Reporting Release No. 60, which was released by the SEC,
requires all companies to include a discussion of critical accounting policies
or methods used in the preparation of the consolidated financial statements. In
addition, Financial Reporting Release No. 61 was released by the SEC, which
requires all companies to include a discussion to address, among other things,
liquidity, off-balance sheet arrangements, contractual obligations and
commercial commitments. The following discussion is intended to supplement the
summary of significant accounting policies as described in Note 1 of the Notes
To Consolidated Financial Statements for the year ended June 30, 2004 included
under Item 7 in this annual report on Form 10-KSB, which are presented beginning
at page F-1.
These policies were selected because they represent the more
significant accounting policies and methods that are broadly applied in the
preparation of the consolidated financial statements.
Revenue Recognition - Revenue under research contracts is recorded as
earned under the contracts, as services are provided. In accordance with SEC
Staff Accounting Bulletin No. 104, upfront nonrefundable fees associated with
license and development agreements where the Company has continuing involvement
in the agreement, are recorded as deferred revenue and recognized over the
period of involvement. If the estimated service period is subsequently modified,
the period over which the up-front fee is recognized would be modified
accordingly on a prospective basis. Revenues from the achievement of research
and development milestones, which represent the achievement of a significant
step in the research and development process, are recognized when and if the
milestones are achieved.
Stock Based Compensation - In accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, we apply Accounting Principles Board Opinion 25 and
related interpretations in accounting for our stock option plan and,
accordingly, we do not recognize compensation expense for employee stock options
granted with exercise prices equal to or greater than fair market value.
Non-employee stock-based compensation arrangements are accounted for in
accordance with the provisions of SFAS No. 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.
Under EITF No. 96-18, as amended, 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.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles of the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates, and such differences may be material to the
financial statements.
Overview
We are an emerging biopharmaceutical company that develops and markets
drugs to treat cancer. Our two lead drugs are clofarabine and Modrenal(R),
although we have several other products and technologies under development. As
of June 30, 2004, our internal staff consisted of nine full-time and four
part-time employees based in New York, New York and Edinburgh, Scotland.
Our primary business strategy relates to our two lead drugs,
clofarabine and Modrenal(R). With clofarabine, our strategy is to complete drug
development in Europe and obtain marketing authorization from the European
regulatory authorities to market and distribute clofarabine for the treatment of
pediatric and adult acute leukemias (ALL and AML). We anticipate launching
clofarabine in Europe in mid-2005, subject to our obtaining the approval of the
regulatory authorities. We will continue clinical trials in other indications
with the intention of
25
aggressively seeking label extensions after clofarabine's first approval,
including our Pivotal Phase II trial of clofarabine in adults with Acute Myeloid
Leukemia (AML) which commenced in August 2004 and is ongoing. Following this
strategy, throughout the world, approximately two-thirds of the cancer patients
dosed with clofarabine to date fall outside of the pediatric acute leukemias,
which we expect to be the indication first approved by the U.S. and European
regulatory authorities.
With Modrenal(R), our strategy is to expand sales in the United Kingdom
and apply for mutual recognition to obtain the right to market and distribute
Modrenal(R) in the major European markets. We anticipate receiving mutual
recognition from major European Community member states by Q3 of calendar 2005.
We intend to further U.S. development of Modrenal(R) in prostate and breast
cancer indications, subject to the ongoing results of our clinical trials we are
currently conducting in the U.S. and Europe.
Our secondary business strategy is to continue to develop our portfolio
of ancillary products and technologies. We anticipate that revenues derived from
clofarabine and Modrenal(R) and milestone payments and royalties from the
ancillary products will permit us to further develop our portfolio of ancillary
products and technologies.
Over the next 12 months, we intend to continue our internal growth
strategy to provide the necessary regulatory, sales and marketing capabilities
which will be required to pursue the expanded development programs for
clofarabine and Modrenal(R) described above.
Clofarabine is a small molecule, purine nucleoside analogue, which we
believe is effective in the treatment of leukemia, based upon our own clinical
studies and studies conducted by others on our behalf. Clofarabine may also be
an effective agent to treat patients with solid tumors, based on preclinical
studies and Phase I clinical trials performed to date.
In July 2004, we filed for approval of clofarabine in Europe to treat
children with pediatric acute leukemia (ALL and AML). Further, we are conducting
a Pivotal Phase II clinical trial of clofarabine, as first line therapy for the
treatment of adults with Acute Myeloid Leukemia (AML). Also in Europe, at our
direction, an Investigator Sponsored Trial of clofarabine as first-line therapy
for adults with AML was completed ahead of schedule and an interim analysis
indicates a 64% complete response rate observed in this patient population.
In the U.S., ILEX Oncology, Inc., our sub-licensor of U.S. and Canadian
cancer marketing rights, filed a New Drug Application (NDA) in March 2004 for
approval of clofarabine to treat children with acute leukemias (ALL or AML). The
NDA was based upon results of two Pivotal Phase II clinical trials completed by
ILEX prior to the NDA filing. In connection with the NDA, the United States Food
and Drug Administration (the " FDA" has set a Prescription Drug User Fee Act
(PDUFA) response date at December 30, 2004.
In January, 2002, the European orphan drug application for use of
clofarabine to treat acute leukemia in adults was approved. Orphan Drug
Designation provides the Company with ten years of market exclusivity in Europe
for clofarabine, upon grant of marketing authorization. The drug has also been
granted orphan drug status and "fast track" treatment by the FDA. Further, in
July 2004, the FDA granted six months of extended market exclusivity to
clofarabine under the Best Pharmaceuticals for Children Act.
In August 2003, we obtained the exclusive, irrevocable option to sell,
market and distribute clofarabine in Japan and Southeast Asia from the inventor
of clofarabine. These rights were not previously granted by Southern Research
Institute and fall outside the scope of the Company's then current licensing and
development contracts with respect to clofarabine. We originally obtained an
exclusive license from Southern Research Institute to sell, market and
distribute clofarabine throughout the world, except for Japan and Southeast
Asia, for all human applications, pursuant to a co-development agreement, dated
August 31, 1998, between the Company and Southern Research Institute. On March
12, 2001, we granted an exclusive option to sell, market and distribute
clofarabine in the U.S. and Canada to ILEX Oncology, Inc. We converted ILEX's
option to an exclusive sublicense on December 30, 2003. Accordingly, we do not
possess the rights to sell, market and distribute clofarabine for cancer
indications in the U.S.
Modrenal(R) is a hormonal agent with a novel mode of action that makes
it an effective agent in patients with advanced breast cancer who have acquired
resistance to other hormonal agents. We launched Modrenal(R) in May 2003 in the
United Kingdom, where we have received regulatory approval for its use in the
treatment of post-menopausal breast cancer. In Q2 2005, we intend to apply for
mutual recognition in another four large European
26
territories in an effort to gain approval for Modrenal(R) in each such
territory. We anticipate receiving approval in each such territory during
calendar 2005, but such approval is subject to the appropriate regulatory
decisions.
In the U.S., we filed an IND to conduct Modrenal(R) clinical trials for
prostate cancer in February 2004 and commenced enrolling patients in this
clinical trial in July 2004. Further, we intend to seek regulatory approval for
Modrenal(R) in the United States as salvage therapy for hormone-sensitive breast
cancer upon completion of additional clinical studies.
We originally obtained an exclusive license from Stegram
Pharmaceuticals Ltd. to sell, market and distribute Modrenal(R) throughout the
world, except for South Africa, for all human and animal health applications,
pursuant to a co-development agreement dated July 15, 1998.
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 four years if we successfully bring clofarabine to market and if
mutual recognition is granted for Modrenal(R) in the largest European countries.
We anticipate that revenues derived from the two lead drugs will permit
us to further develop the other products currently in our product pipeline. We
anticipate the launch of clofarabine in Europe by mid-2005 and further
anticipate reaching profitability within 12 months following the marketing
launch for clofarabine in Europe.
We commenced marketing one of our lead products, Modrenal(R), in June
2003 and anticipate building out our internal infrastructure of sales and
marketing professionals to sell Modrenal(R) and to conduct pre-marketing
activities for clofarabine in Europe. Management believes it can create
synergies through internal growth by developing a sales and marketing presence
which will be in position to sell both lead drugs at lead European cancer
centers across a broad range of cancer indications.
Further, 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. 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 vivo 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 anti-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
License and Sub-License Agreement with Dechra Pharmaceuticals, plc ("Dechra"),
pursuant to which Bioenvision sub-licensed the marketing and development rights
to vetoryl(R) trilostane, 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;
27
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 the development cycles of new pharmaceutical products and
technologies and the competitive and regulatory environment in which we operate.
Results of Operations
Year Ended June 30, 2004 Compared to Year Ended June 30, 2003
We reported revenues of approximately $3,102,000 and $505,000 for the
years ended June 30, 2004 and 2003, respectively. Revenues reflect recognition
of consideration received pursuant to our agreements with co-development and
sub-licensing partners in connection with our platform of drugs and
technologies. Of the revenues recorded for the year ended June 30, 2004,
approximately $2,100,000 was recognized from ILEX, pursuant to the
Co-Development Agreement, and approximately $600,000 was recognized from Stegram
Pharmaceuticals under the Stegram Co-Development Agreement.
Research and development costs for the years ended June 30, 2004 and
2003 were approximately $4,883,000 and $1,689,000 and respectively, representing
an increase of $3,194,000.
Our research and development costs include costs associated with six
projects of which the Company devotes significant time and resource. Clofarabine
research and development costs for the year ended June 30, 2004 and 2003 were
approximately $2,651,000 and $871,000, respectively, representing an increase of
approximately $1,780,000. The increase primarily reflects costs which are
associated with our increased development activities and clinical trials being
conducted in Europe.
Modrenal(R) research and development costs for the year ended June 30,
2004 and 2003 were approximately $2,026,000 and $913,000, respectively,
representing an increase of $1,113,000. The increase primarily reflects
increased development activities associated with the Modrenal(R) development
plan, including costs associated with the U.S. prostate cancer trial which is
ongoing.
Gossypol research and development costs were approximately $152,000 and
$30,000, respectively, representing an increase of $122,000. The increase
primarily reflects preparation of a protocol and other preparatory activities in
advance of the Phase I Clinical Trial intended to be commenced in Q3 of calendar
2004.
Gene Therapy research and development costs for the year ended June 30,
2004 and 2003 were approximately $0 and ($130,000), respectively. The 2003
amount primarily reflects a reversal of an accrued expense in the year ended
2002 of $200,000 which was determined to be less than originally estimated by
the Company in the year ended June 30, 2003.
The clinical trials and development strategy for the clofarabine and
Modrenal(R) projects, in each case, is anticipated to cost several million
dollars and will continue for several years based on the number of clinical
indications within which we plan to develop these drugs. Currently, management
cannot estimate the timing or costs associated with these projects because many
of the variables, such as interaction with regulatory authorities and response
rates in various clinical trials, are not predictable. Total costs to date for
each of these four projects is as follows: (i) clofarabine research and
development costs have been approximately $5.6 million; (ii) Modrenal(R)
research and development costs have been approximately $4.4 million; (iii)
Gossypol research and development costs have been approximately $302,000; and
(iv) Gene Therapy research and development costs have been approximately
$450,000. Our other two research and development projects involve our two
ancillary technologies; OLIGON and Methylene Blue. We do not currently devote
any significant time or resources to these research and
28
development projects, but we intend to do so if and to the extent we
successfully commercialize our lead drugs, clofarabine and Modrenal(R), over the
next two years.
Selling, general and administrative expenses for the year ended June
30, 2004 and 2003 were approximately $9,082,000 and $4,567,000, respectively,
representing an increase of $4,515,000. Of this amount, approximately $2,400,000
of this increase was due to the re-pricing of 380,000 options granted to an
employee pursuant to the terms of his Employment Agreement (see Note 7 to the
Financial Statements); approximately $1,000,000 of the increase was due to an
increase in sales and marketing expenses related to pre-marketing activities
with clofarabine and marketing costs associated with Modrenal(R); and
approximately $1,100,000 of the increase was due to increases in our consulting
and legal expenses as the result of our recent growth.
We reported interest and finance charges of $0 for the year ended June
30, 2004, representing a decrease of $325,000 from the year ended June 30, 2003.
This decrease reflects the retirement of our credit facility in May 2002 and the
fact that we carried no long term debt during the year ended June 30, 2004.
Depreciation and amortization expense totaled approximately $1,348,000
for the year ended June 30, 2004, representing an increase of $3,100 from the
year ended June 30, 2003. The increase is primarily due to the amortization of
certain intangible assets we acquired in the Pathagon transaction which we
acquired during the year ended June 30, 2002.
Year Ended June 30, 2003 Compared to Year Ended June 30, 2002
We reported revenues of approximately $505,000 and $803,000 for the
years ended June 30, 2003 and 2002, respectively. Revenues reflect recognition
of consideration received pursuant to our agreements with co-development and
sub-licensing partners in connection with our platform of drugs and
technologies. Of the revenues recorded for the year ended June 30, 2003,
approximately $370,000 was recognized from ILEX pursuant to the Co-Development
Agreement and $100,000 was recognized as royalty revenue from Edwards
Lifesciences.
Research and development costs for the years ended June 30, 2003 and
2002 were approximately $1,689,000 and $1,912,000, respectively, representing a
decrease of $223,000.
Our research and development costs include costs associated with six
projects of which the Company devotes significant time and resource. Clofarabine
research and development costs for the year ended June 30, 2003 and 2002 were
approximately $871,000 and $596,000, respectively, representing an increase of
$275,000. The increase primarily reflects the costs associated with our having
commenced clinical trials in Europe to develop clofarabine.
Modrenal(R) research and development costs for the year ended June 30,
2003 and 2002 were approximately $913,000 and $923,000, respectively,
representing a decrease of $10,000.
Gossypol research and development costs were approximately $30,000 and
$90,000, respectively, representing a decrease of $60,000. The decrease
primarily reflects a decrease in the amount of resource devoted by the Company
to this compound while the Company focused on developing its lead drugs.
Gene Therapy research and development costs for the year ended June 30,
2003 were approximately $(130,000) and $303,000, respectively, representing a
decrease of $433,000. The decrease primarily reflects an accrued expense in the
year ended 2002 of $200,000 which was determined to be less than originally
estimated by the Company in the year ended June 30, 2003.
The clinical trials and development strategy for the clofarabine and
Modrenal(R) projects, in each case, is anticipated to cost several million
dollars and will continue for several years based on the number of clinical
indications within which we plan to develop these drugs. Currently, management
cannot estimate the timing or costs associated with these projects because many
of the variables, such as interaction with regulatory authorities and response
rates in various clinical trials, are not predictable. Estimated total costs to
date for each of these four projects is as follows: (i) clofarabine research and
development costs have been approximately $3.0 million; (ii) Modrenal(R)
research and development costs have been approximately $2.35 million; (iii)
Gossypol research and development costs have been approximately $150,000; and
(iv) Gene Therapy research and development costs have been approximately
$450,000. Our other two research and development projects involve our two
ancillary technologies; OLIGON and Methylene Blue. We do not currently devote
any significant time or resources to these
29
research and development projects, but we intend to do so if and to the extent
we successfully commercialize our lead drugs, clofarabine and Modrenal(R), over
the next two years.
Administrative expenses for the year ended June 30, 2003 and 2002 were
approximately $4,567,000 and $2,128,000, respectively, representing an increase
of $2,439,000. Of this amount, approximately $1,600,000 of this increase was due
to the expansion of the internal management team from one full time employee to
eight full time employees; approximately $150,000 of this increase was due to
lease expenses and office supplies /equipment for the newly opened New York and
Edinburgh, Scotland offices, both of which we opened during the year;
approximately $300,000 of the increase was due to an increase in investor and
public relations expenses related to pre-marketing activities with clofarabine
and marketing costs associated with Modrenal(R); approximately $200,000 of the
increase was related to increases in related travel expense to successfully
manage our drug development activities; and approximately $150,000 of the
increase was due to increases in our consulting and legal expenses as the result
of our recent growth.
We reported interest and finance charges of $325,000 for the year ended
June 30, 2003, representing a decrease of $1,848,000 from the year ended June
30, 2002. This decrease reflects the retirement of our credit facility in May
2002 and the fact that we carried no long term debt during the year ended June
30, 2003.
Depreciation and amortization expense totaled approximately $1,345,000
for the year ended June 30, 2003, representing an increase of $766,000 from the
year ended June 30, 2002. The increase is primarily due to the amortization of
certain intangible assets we acquired in the Pathagon transaction which we
consummated in February 2002.
Liquidity and Capital Resources
We anticipate that we may continue to incur significant operating
losses for the fiscal year ended June 30, 2005. There can be no assurance as to
whether or when we will generate material revenues or achieve profitable
operations.
The Company received a nonrefundable upfront payment of $1.35 million
when it entered into the co-development agreement with ILEX and received an
additional $3.5 million in December 2003 when it converted ILEX's option to
market clofarabine in the U.S. into a sublicense. The Company received an
additional $2 million in April 2004 upon ILEX's filing the New Drug Application
for clofarabine with FDA and the Company expects to receive an additional $2
million from ILEX in October 2004 in connection with ILEX having completed such
NDA filing. The Company deferred the upfront payment and recognized revenues
ratably, on a straight-line basis over the related service period, through
December 2002. The Company has deferred the milestone payments received to date
and recognizes revenues ratably, on a straight line basis over the related
service period, through March 2021. For the years ended June 30, 2004 and 2003,
respectively, the Company recognized revenues of approximately $161,000 and
$370,000 in connection with the upfront and milestone payments received to date.
Deferred costs included royalty payments that became due and payable to
SRI upon the Company's execution of the co-development agreement with ILEX. The
Company defers all royalty payments made to SRI and recognizes these costs
ratably, on a straight-line basis, concurrent with revenue that is recognized in
connection with the ILEX agreement. Research and Development costs include
approximately $81,000 and $207,000 for the years ended June 30, 2004 and 2003,
respectively, related to such charges.
The Company received a nonrefundable upfront payment of $1.25 million
when it entered into the License and Sublicense Agreement with Dechra
Pharmaceuticals in May 2003. The Company deferred the upfront payment and
recognizes revenues ratably, on a straight-line basis over the related service
period, through May 2014. The Company recognized revenues of approximately
$114,000 and $12,000 in connection with the upfront payment from Dechra for the
years ended June 30, 2004 and 2003, respectively.
Deferred costs include royalty payments that became due and payable to
Stegram Pharmaceuticals Ltd. upon the Company's execution of the License and
Sub-License Agreement with Stegram in May 2003. The Company defers all royalty
payments made to Stegram and recognizes these costs ratably, on a straight-line
basis concurrent with revenue that is recognized in connection with the Dechra
agreement. Research and Development costs include approximately $23,000 and
$2,000 for the years ended June 30, 2004 and 2003, respectively.
On May 7, 2002 we authorized the issuance and sale of up to 5,920,000
shares of Series A Convertible Preferred Stock. The Series A Convertible
Preferred Stock may be converted into shares of common stock at an
30
initial conversion price of $1.50 per share of common stock, subject to
adjustment for stock splits, stock dividends, mergers, issuances of cheap stock
and other similar transactions. Holders of Series A Convertible Preferred Stock
also received, in respect of each share of Series A Convertible Preferred Stock
purchased in a private placement which took place in May 2002, one warrant to
purchase one share of our common stock at an initial exercise price of $2.00
subject to adjustment.
Through May 16, 2002 we have sold an aggregate of 5,916,666 shares of
Series A Convertible Preferred Stock in the May 2002 private placement for $3.00
per share and warrants to purchase an aggregate of 5,916,666 shares of common
stock, resulting in aggregate gross proceeds of approximately $17,750,000. A
portion of the proceeds were used to repay in full the Jano Holdings and SCO
Capital obligations upon which such facilities were terminated as well as to
repay fees amounting to $1,610,000 related to the transaction.
On March 22, 2004, we consummated a private placement transaction,
pursuant to which we raised $12.8 million and issued 2,044,514 shares of our
common stock and warrants to purchase an additional 408,903 shares of our common
stock at a conversion price of $7.50 per share. We recorded proceeds of
$11,792,801 net of all legal, professional and financing fees incurred in
connection with the offering. We consummated a second closing for this financing
on May 13, 2004 in order to comply with certain contractual obligations to our
holders of Series A Convertible Preferred Stock which hold preemptive rights for
equity offerings. We raised an additional $3.2 (net of all legal, professional
and financial services incurred) million from the second closing and issued an
additional 558,384 shares of our common stock and warrants to purchase 111,677
shares of our common stock at a conversion price of $7.50 per share.
On June 30, 2004, we have cash and cash equivalents of approximately
$19,166,000 and working capital of $18,828,000 which management believes will be
sufficient to continue currently planned operations over the next 12 months. We
can not ensure additional funds will not be raised during the next twelve months
because of the significant scale up of our operating activities, including
clofarabine development and the launch of Modrenal(R). However, if required or
desirable, there can be no assurance that suitable debt or equity financing will
be available for the Company. Further, although we do not currently plan to
acquire or obtain licenses for new technologies, 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.
We anticipate that we may continue to incur significant operating
losses for the fiscal year ended June 30, 2005. There can be no assurance as to
whether or where we will generate material revenues or achieve profitable
operations.
The Company has the following commitments as of June 30, 2004:
Payments Due in
Total 2005 2006 2007
Employee Contracts 474,539 474,539 - -
Occupancy Lease and Automobiles 278,673 205,569 62,919 10,185
Total 753,212 680,108 62,919 10,185
The Company has a commitment under its operating lease with the New
York office. The Company leases 3,229 square feet under a lease that expires on
September 30, 2005. The Company leases approximately 1,000 square feet in
Edinburgh, Scotland under lease agreement for its subsidiary, Bioenvision, Ltd.
which expire on August 31, 2004.
Plan of Operation
We are an emerging biopharmaceutical company with a primary business
focus on the development and distribution of drugs to treat cancer. We intend to
seek approval for clofarabine as a treatment for relapsed or refractory acute
leukemia in children and, subsequently, as first-line therapy for adults with
Acute Myeloid Leukemia (AML). Further Phase I Clinical Trials are ongoing
testing clofarabine in solid tumors and chronic leukemia and we intend to
aggressively pursue label extensions in these and other areas from and after the
date we receive the first license to market clofarabine.
Further, we intend to seek approval of Modrenal(R) in the largest
European countries and commence marketing this drug outside of the U.K. where it
is approved for treatment of advanced post-menopausal breast
31
cancer and to complete Phase II trials in the U.S. for prostate cancer and Phase
II and IV pre-menopausal and post-menopausal breast cancer trials in the U.K. We
expect our third product, gossypol, to enter Phase I Clinical Trials in the U.K.
in Q4 of calendar 2004.
Our secondary business strategy is to continue to develop our portfolio
of ancillary products and technologies. We anticipate that revenues derived from
clofarabine and Modrenal(R) will permit us to further develop our portfolio of
ancillary products and technologies.
Once a product is 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 March
and May 2004 private placement to complete our currently conducted clinical
trials for clofarabine and Modrenal(R) described above and to initiate new
clinical trials for our lead drugs in Europe. Further, over the next 12 months,
we intend to use such proceeds, in part, to continue our internal growth
strategy to provide the necessary regulatory, sales and marketing capabilities
which will be required to pursue the expanded development programs for
clofarabine and Modrenal(R) described above.
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 methylene 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.
Recent Accounting Pronouncements
On December 31, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock Based Compensation Transition and Disclosure" ("SFAS 148"). SFAS 148
amends FASB Statement No. 123, "Accounting for Stock Based Compensation," to
provide alternative methods of transition to SFAS 123's fair value method of
accounting for stock-based employee compensation. SFAS 148 also amends the
disclosure provisions of SFAS 123 and APB Opinion No. 28, "Interim Financial
Reporting," to require disclosure on the summary of significant accounting
policies of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income and earnings per share
in annual and interim financial statements. While SFAS 148 does not amend SFAS
123 to require companies to account for employee stock options using the fair
value method, the disclosure provisions of SFAS 148 are applicable to all
companies with stock-based employee compensation, regardless of whether they
account for the compensation using the fair value method of SFAS 123 or the
intrinsic value method of APB Opinion 25. The Company adopted the required
disclosure provisions of SFAS 148 as described under accounting policy footnote,
"Stock Based Compensation."
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.
Subsequent Events
In July 2004, the Company filed for approval of clofarabine in Europe
for the treatment of relapsed or refractory acute leukemia in children. The EMEA
accepted and validated the application and has commenced a marketing
authorization review for clofarabine.
32
In July 2004, the Company hired a new employee to serve in the capacity
as Vice President, Corporate Compliance and Associate General Counsel of the
Company.
In July 2004, the Company commenced enrollment of patients in a Phase
II clinical study of Modrenal(R) in androgen independent prostate cancer.
In August 2004, shares of the Company's common stock commenced trading
on the NASDAQ National Market.
In August 2004, the Company commenced enrollment of patients in its
Pivotal Phase II study to evaluate the use of clofarabine as first-line therapy
for the treatment of adults with Acute Myeloid Leukemia.
Item 7. Financial Statements
The consolidated financial statements of Bioenvision, Inc. and its
subsidiaries including the notes thereto and the report thereon, is presented
beginning at page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 8a. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) as of the end of the period covered
by this annual report on Form 10-KSB. Based on this evaluation, our principal
executive officer and principal financial officer concluded that these
disclosure controls and procedures are effective and designed to ensure that the
information required to be disclosed in our reports filed or submitted under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the requisite time periods.
In connection with its review of the Company's consolidated financial
statements for and as of the three month period ended March 31, 2004, Grant
Thornton LLP ("Grant Thornton"), the Company's independent accountants, advised
the Audit Committee and management of certain significant internal control
deficiencies that they considered to be, in the aggregate, a material weakness,
including, inadequate staffing and supervision leading to the untimely
identification and resolution of certain accounting matters; failure to perform
timely reviews, substantiation and evaluation of certain general ledger account
balances; lack of procedures or expertise needed to prepare all required
disclosures; and evidence that employees lack the qualifications and training to
fulfill their assigned functions. Grant Thornton indicated that they considered
these deficiencies to be a material weakness as that term is defined under
standards established by the American Institute of Certified Public Accountants.
A material weakness is a significant deficiency in one or more of the internal
control components that alone or in the aggregate precludes our internal control
from reducing to an appropriately low level the risk that material misstatements
in our financial statements will not be prevented or detected on a timely basis.
The Company considered these matters in connection with the quarter end closing
of accounts and preparation of related quarterly financial statements at and as
of March 31, 2004 and determined that no prior period financial statements were
materially affected by such matters.
In response to the observations made by Grant Thornton, the Company
will proceed more expeditiously with its existing plan to enhance the Company's
internal controls and procedures, which it believes addresses each of the
matters raised by Grant Thornton.
Changes in Internal Controls
We enhanced our internal control procedures in March 2004 by adding a
full-time dedicated accountant with more than seven years work experience to the
staff in our principal executive offices in New York, New York. Our accountant
works directly for our outsourced accounting firm which assists us in the
preparation and finalization of our accounts on an ongoing basis. Her
responsibilities include preparation of the Company's
33
financial statements on a quarterly and annual basis and preparation of
budget-to-actual analyses on a quarterly basis. Our management intends to expand
her responsibilities on our behalf to include preparation of monthly financial
statements and monthly and annual budget-to-actual analyses. We believe the
addition of this dedicated resource will further enhance the Company's internal
control over financial reporting in the near term, which management will
continue to monitor on a regular basis.
In June 2004, we hired a new employee to serve as our Vice President,
Corporate Compliance and Associate General Counsel. This new employee has five
years of corporate law experience with a full-service internationally based law
firm in the office located in New York, New York. She has represented several
public companies and is knowledgeable with respect to contract law, the
requirements under the Sarbanes-Oxley Act and other areas of public disclosure.
We intend to continue to streamline the responsibilities of our Chief Financial
Officer and General Counsel to permit him to focus more of his time and effort,
as needed, on the accounting and financial reporting needs of the Company.
Further, in July 2004, the Company adopted, and management implemented,
a comprehensive set if internal accounting controls, which were approved by the
audit committee.
34
PART III
The information required for Part III in this Annual Report on Form
10-KSB is incorporated by reference from the Company's definitive proxy
statement for the Company's 2004 Annual Meeting of Stockholders.
Item 13. Exhibits and Reports on Form 10-KSB
Exhibit
Number Description
------- -----------
2.1 Acquisition Agreement between Registrant and Bioenvision, Inc.
dated December 21, 1998 for the acquisition of 7,013,897
shares of Registrant's Common Stock by the stockholders of
Bioenvision, Inc. (1)
2.2 Amended and Restated Agreement and Plan of Merger, dated as of
February 1, 2002, by and among Bioenvision, Inc., Bioenvision
Acquisition Corp. and Pathagon, Inc. (5)
3.1 Certificate of Incorporation of Registrant. (2)
3.1(a) Amendment to Certificate of Incorporation filed January 29,
1999. (3)
3.1(b) Certificate of Correction to the Certificate of Incorporation,
filed March 15, 2002 (6)
3.1(c) Certificate of Amendment to the Certificate of Incorporation,
filed April 30, 2002 (6)
3.1(d) Certificate of Designations, Preferences and Rights of series
A Preferred Stock (6)
3.1(e) Certificate of Amendment to the Certificate of Incorporation,
filed January 14, 2004 (15)
3.2 Amended and Restated By-Laws of the Registrant. (13)
4.1 Registration Rights Agreement, dated as of February 1, 2002,
by and among Bioenvision, Inc., the former shareholders of
Pathagon, Inc. party thereto, Christopher Wood, Bioaccelerate
Limited, Jano Holdings Limited and Lifescience Ventures
Limited. (8)
4.2 Stockholders Lock-Up Agreement, dated as of February 1, 2002,
by and among Bioenvision, Inc., the former shareholders of
Pathagon, Inc. party thereto, Christopher Wood, Bioaccelerate
Limited, Jano Holdings Limited and Lifescience Ventures
Limited. (8)
4.3 Form of Securities Purchase Agreement by and among
Bioenvision, Inc. and certain purchasers, dated as of May 7,
2002. (6)
4.4 Form of Registration Rights Agreement by and among
Bioenvision, Inc. and certain purchasers, dated as of May 7,
2002. (6)
4.5 Form of Warrant (6)
4.6 Registration Rights Agreement, dated April 2, 2003, by and
between Bioenvision, Inc. and RRD International, LLC (14)
35
4.7 Warrant, dated April 2, 2003, made by Bioenvision, Inc. in
favor of RRD International, LLC (14)
4.8 Common Stock and Warrant Purchase Agreement, dated as of March
22, 2004, by and among Bioenvision, Inc. and the Investors set
forth on Schedule I thereto (16)
4.9 Registration Rights Agreement, dated March 22, 2004, by and
between Bioenvision, Inc. and the Investors set forth on
Schedule I thereto (16)
4.10 Form of Warrant (16)
4.11 Bioenvision, Inc. 2003 Stock Incentive Plan (17)
10.1 Pharmaceutical Development Agreement, dated as of June 10,
2003, by and between Bioenvision, Inc. and Ferro Pfanstiehl
Laboratories, Inc.
10.2 Co-Development Agreement between Bioheal, Ltd. and Christopher
Wood dated May 19, 1998. (3)
10.3 Master Services Agreement, dated May 14, 2003, by and between
PennDevelopment Pharmaceutical Services Limited and
Bioenvision, Inc.
10.4 Co-Development Agreement between Stegram Pharmaceuticals, Ltd.
and Bioenvision, Inc. dated July 15, 1998. (3)
10.5 Co-Development Agreement between Southern Research Institute
and Eurobiotech Group, Inc. dated August 31, 1998. (3)
10.5(a) Agreement to Grant License from Southern Research Institute to
Eurobiotech Group, Inc. dated September 1, 1998. (3)
10.6 License and Sub-License Agreement, dated as of May 13, 2003,
by and between Bioenvision, Inc. and Dechra Pharmaceuticals,
plc
10.7 Employment Agreement between Bioenvision, Inc. and Christopher
B. Wood, M.D., dated December 31, 2002 (3)
10.8 Employment Agreement between Bioenvision, Inc. and David P.
Luci, dated March 31, 2003 (14)
10.9 Securities Purchase Agreement with Bioaccelerate Inc dated
March 24, 2000. (4)
10.10 Engagement Letter Agreement, dated as of November 16, 2001, by
and between Bioenvision, Inc. and SCO Securities LLC. (7)
10.11 Security Agreement, dated as of November 16, 2001, by
Bioenvision, Inc. in favor of SCO Capital Partners LLC. (7)
10.12 Commitment Letter, dated November 16, 2001, by and between SCO
Capital Partners LLC and Bioenvision, Inc. (7)
10.13 Senior Secured Grid Note, dated November 16, 2001, by
Bioenvision, Inc. in favor of SCO Capital Partners LLC. (7)
10.14 Exclusive License Agreement by and between Baxter Healthcare
Corporation, acting through its Edwards Critical-Care
division, and Implemed, dated as of May 6, 1997. (12)
10.15 License Agreement by and between Oklahoma Medical Research
36
Foundation and bridge Therapeutic Products, Inc., dated as of
January 1, 1998. (12)
10.16 Amendment No. 1 to License Agreement by and among Oklahoma
Medical Research Foundation, Bioenvision, Inc. and Pathagon,
Inc., dated May 7, 2002. (12)
10.17 Inter-Institutional Agreement between Sloan-Kettering
Institute for Cancer Research and Southern Research Institute,
dated as of August 31, 1998. (12)
10.18 License Agreement between University College London and
Bioenvision, Inc., dated March 1, 1999. (12)
10.19 Research Agreement between Stegram Pharmaceuticals Ltd., Queen
Mary and Westfield College and Bioenvision, Inc., dated June
8, 1999 (12)
10.20 Research and License Agreement between Bioenvision, Inc.,
Velindre NHS Trust and University College Cardiff Consultants,
dated as of January 9, 2001. (12)
10.21 Co-Development Agreement, between Bioenvision, Inc. and ILEX
Oncology, Inc., dated March 9, 2001. (12)
10.22 Amended and Restated Agreement and Plan of Merger, dated as of
February 1, 2002, among Bioenvision, Inc., Bioenvision
Acquisition Corp. and Pathagon Inc. (5)
10.23 Master Services Agreement, dated as of April 2, 2003, by and
between Bioenvision, Inc. and RRD International, LLC. (14)
10.24 Employment Agreement between Bioenvision Limited and Hugh
Griffith, made effective as of October 23, 2002 (18)
10.25 Employment Agreement between Bioenvision Limited and Ian
Abercrombie, made effective as of January 6, 2003 (18)
14.1 Bioenvision Inc.'s Code of Business Conduct and Ethics
16.1 Letter from Graf Repetti & Co., LLP to the Securities and
Exchange Commission, dated September 30, 1999. (9)
16.2 Letter from Ernst & Young LLP to the Securities and Exchange
Commission, dated July 6, 2001. (10)
16.3 Letter from Ernst & Young LLP to the Securities and Exchange
Commission, dated August 16, 2001. (11)
21.1 Subsidiaries of the registrant (4)
23.1 Consent Of Independent Registered Public Accounting Firm
24.1 Power of Attorney (appears on signature page)
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, Chief Accounting Officer, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted
37
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Accounting Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
-----------------------
(1) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the SEC on January 12, 1999.
(2) Incorporated by reference and filed as an Exhibit to Registrant's
Registration Statement on Form 10-12g filed with the SEC on September 3,
1998.
(3) Incorporated by reference and filed as an Exhibit to Registrant's Form
10-KSB/A filed with the SEC on October 18, 1999.
(4) Incorporated by reference and filed as an Exhibit to Registrant's Form
10-KSB filed with the SEC on November 13, 2000.
(5) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K filed with the SEC on April 16, 2002.
(6) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K, filed with the SEC on May 28, 2002.
(7) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K, filed with the SEC on January 8, 2002.
(8) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K, filed with the SEC on February 21, 2002.
(9) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K, filed with the SEC on October 1, 1999.
(10) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K/A, filed with the SEC on July 26, 2001.
(11) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K, filed with the SEC on December 6, 2001.
(12) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K, filed with the SEC on June 24, 2002.
(13) Incorporated by reference and filed as an Exhibit to Registrant's
Quarterly Report on Form 10-QSB for the three-month period ended
December 31, 2002.
(14) Incorporated by reference and filed as an Exhibit to Registrant's
Quarterly Report on Form 10-QSB for the three-month period ended March
31, 2003.
(15) Incorporated by reference and filed as an Exhibit to Registrant's
Quarterly Report on Form 10-QSB for the three- month period ended
December 31, 2004.
(16) Incorporated by reference and filed as an Exhibit to Registrant's
Current Report on Form 8-K, filed with the SEC on March 24, 2004.
(17) Registrant's definitive proxy statement on Schedule 14-A, filed in
connection with the annual meeting held on January 14, 2004.
(18) Incorporated by reference and filed as an Exhibit to Registrant's
Quarterly Report on Form 10-QSB for the three-month period ended
September 30, 2003.
38
(b) Reports on Form 8-K. No Current Reports on Form 8-K were filed by the
registrant during the last quarter of the period covered by this report.
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of June 30, 2004 and 2003 F-2
Consolidated Statements of Operations for years ended June 30, 2004 and 2003 F-3
Consolidated Statements of Stockholders' Equity (Deficit) for years ended June 30, 2004 F-4
and 2003
Consolidated Statements of Cash Flows for years ended June 30, 2003 and 2002 F-5
Notes to Consolidated Financial Statements F-6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of Bioenvision, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Bioenvision,
Inc. and Subsidiaries as of June 30, 2004 and 2003 and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bioenvision, Inc.
and Subsidiaries as of June 30, 2004 and 2003, and the consolidated results of
their operations and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
GRANT THORNTON LLP
New York, New York
September 16, 2004
F-1
Bioenvision, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2004 2003
------------ -----------
ASSETS
Current assets
Cash and cash equivalents $ 18,875,675 $ 7,929,686
Restricted cash 290,000 290,000
Deferred costs - current 241,824 22,727
Accounts receivable 2,627,773 25,000
Other assets 253,311 105,976
------------ -----------
Total current assets 22,288,583 8,373,389
Property and equipment, net 47,857 49,265
Deferred costs - long term 3,651,471 224,937
Intangible assets, net 14,563,660 15,779,399
Goodwill 3,902,705 3,902,705
Security deposits 79,111 79,111
Other long term assets - 126,869
------------- -----------
Total assets $ 44,533,387 $28,535,675
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,495,866 $ 411,392
Accrued expenses 1,322,584 730,722
Accrued dividends payable 90,141 1,009,146
Deferred revenue - current 551,828 113,636
------------ -----------
Total current liabilities 3,460,419 2,264,896
Deferred revenue - long term 7,909,598 1,124,685
Deferred tax liability - non-current 5,780,799 6,317,702
------------ -----------
Total liabilities 17,150,816 9,707,283
------------ ----------
Stockholders' equity
Preferred stock - $0.001 par value; 20,000,000 and 5,920,000 shares
authorized and 3,341,666 and 5,916,666 shares issued and
outstanding at June 30, 2004 and June 30, 2003, respectively
(liquidation preference $10,024,998 and $17,749,998 at
June 30, 2004 and June 30, 2003, respectively) 3,342 5,917
Common stock - $0.001 par value; 70,000,000 and 50,000,000 shares
authorized and 28,316,163 and 17,122,739 shares issued
and outstanding at June 30, 2004 and June 30, 2003, respectively 28,316 17,123
Additional paid-in capital 68,517,702 47,304,449
Deferred compensation (223,990) -
Accumulated deficit (41,082,397) (28,651,443)
Accumulated other comprehensive income 139,598 152,346
------------ -----------
Stockholders' equity 27,382,571 18,828,392
------------ -----------
Total liabilities and stockholders' equity $ 44,533,387 $28,535,675
============ ===========
The accompanying notes are an integral part of these financial statements.
F-2
Bioenvision, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended
June 30,
-----------------------------------------
2004 2003
------------ -----------
License and royalty revenue $ 1,187,212 $ 504,857
Research and development contract revenue 1,915,002 -
------------ -----------
Total revenue 3,102,214 504,857
Costs and expenses
Research and development 4,882,574 1,689,278
Selling, general and administrative 9,082,420 4,567,413
(includes stock based compensation expense of $3,491,252
and $1,812,894 for the twelve months ended June 30, 2004 and 2003,
respectively. )
Depreciation and amortization 1,348,064 1,344,969
---------- -----------
Total costs and expenses 15,313,058 7,601,660
----------- -----------
Loss from operations (12,210,844) (7,096,803)
Interest income (expense)
Interest and finance charges - (325,000)
Interest income 99,763 138,574
---------- -----------
Net loss before income tax benefit (12,111,081) (7,283,229)
Income tax benefit 536,903 536,903
----------- -----------
Net loss (11,574,178) (6,746,326)
Cumulative preferred stock dividend (856,776) (877,818)
-------- -----------
Net loss available to common stockholders $(12,430,954) $(7,624,144)
============ ===========
Basic and diluted net loss per share of common stock $ (0.61) $ (.45)
============ ===========
Weighted-average shares used in
computing basic and diluted
net loss per share 20,257,482 16,920,939
============ ===========
The accompanying notes are an integral part of these financial statements.
F-3
Bioenvision, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Additional
Preferred Stock Common Stock Paid In Deferred
-----------------------------------------
Shares $ Shares $ Capital Compensation
---------------------------------------------------------------------------
Balance at June 30, 2002 5,916,666 $5,917 16,887,786 $16,888 $45,491,554
Net loss for the year
Cumulative preferred stock
dividend
Shares issued to consultants for
services 234,953 235 1,258,080
Warrants issued in connection
with services 182,350
Repricing of options 372,465
--------- ------ ---------- ------ ---------- -----------
Balance at June 30, 2003 5,916,666 5,917 17,122,739 17,123 47,304,449
Net loss for the year
Cumulative preferred stock
dividend
Currency translation adjustment
Deferred compensation $(223,990)
Shares issued in connection with
private placement 2,602,898 2,603 16,265,495
Costs related to private
placement (1,301,035)
Preferred stock converted to
common stock (2,575,000) (2,575) 5,150,000 5,150 (2,575)
Expense related to repricing of
options 2,381,066
Cashless exercises of options to
shares 2,122,682 2,122 (2,122)
Warrants issued in connection
with services 671,601
Shares issued to consultants for
services 14,510 15 305,972
Shares issued to employee 20,000 20 28,380
Options issued in connection
with services 93,987
Options issued to employees 262,601
Shares issued from warrant
conversions 1,283,334 1,283 2,509,883
---------- ------ ---------- ------ ---------- ------------
Balance at June 30, 2004 $3,341,666 $3,342 28,316,163 $28,316 $68,517,702 $(223,990)
========== ====== ========== ======= =========== ============
The accompanying notes are an integral part of this financial statement.
Accumulated Total
Other Stockholders'
Accumulated Comprehensive Equity
Deficit Income (Deficit)
----------------------------- ------------
Balance at June 30, 2002 $(21,027,299) $152,346 $24,639,405
Net loss for the year (6,746,326) (6,746,326)
Cumulative preferred stock
dividend (877,818) (877,818)
Shares issued to consultants for
services 1,258,080
Warrants issued in connection
with services 182,350
Repricing of options 372,465
------------ --------- ----------
Balance at June 30, 2003 (28,651,443) 152,346 18,828,392
Net loss for the year (11,574,178) (11,574,178)
Cumulative preferred stock
dividend (856,776) (856,776)
Currency translation adjustment (12,748) (12,748)
Deferred compensation (223,990)
Shares issued in connection with
private placement 16,268,098
Costs related to private
placement (1,301,035)
Preferred stock converted to
common stock
Expense related to repricing of
options 2,381,066
Cashless exercises of options to
shares
Warrants issued in connection
with services 671,601
Shares issued to consultants for
services 305,987
Shares issued to employee 28,400
Options issued in connection
with services 93,987
Options issued to employees 262,601
Shares issued from warrant
conversions 2,511,166
------------- --------- ----------
Balance at June 30, 2004 $(41,082,397) $139,598 $27,382,571
============= ========= ===========
The accompanying notes are an integral part of this financial statement.
F-4
Bioenvision, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
June 30,
-----------------------------------------
2004 2003
------------ -----------
Cash flows from operating activities
Net loss $(11,574,178) $(6,746,326)
------------ ----------
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 1,348,064 1,344,969
Deferred tax benefit (536,903) (536,903)
Compensation costs-shares and warrants issued to non-employees 1,071,575 1,440,429
Compensation costs-re-pricing of options 2,381,066 372,465
Compensation costs-options issued to employees 38,611
Changes in assets and liabilities
Deferred costs (3,645,631) (63,573)
Deferred revenue 7,223,105 870,139
Accounts payable 1,084,474 (22,924)
Other current assets (147,335) (105,976)
Other long term assets 126,870 (126,869)
Accounts receivable (2,602,773) 25,000
Security deposits (79,111)
Other accrued expenses and liabilities 591,862 (782,901)
------------ -----------
Net cash used in operating activities (4,641,193) (4,411,581)
------------ -----------
Cash flows from investing activities
Purchase of intangible assets (112,580) (191,848)
Capital expenditures (18,337) (59,406)
Restricted cash - (290,000)
------------ -----------
Net cash used in investing activities (130,917) (541,254)
------------ -----------
Cash flows from financing activities
Proceeds from issuance of common stock 14,967,064
Proceeds from exercise of options, warrants and other convertible
securities 2,539,565
Cash dividend paid (1,775,782)
------------ -----------
Net cash provided by financing activities 15,730,847
------------ -----------
Effect of exchange rate on cash (12,748)
Net increase (decrease) in cash and cash
equivalents 10,945,989 (4,952,835)
Cash and cash equivalents, beginning of year 7,929,686 12,882,521
------------ -----------
Cash and cash equivalents, end of year $ 18,875,675 $7,929,686
============ ===========
The accompanying notes are an integral part of these financial statements.
F-5
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
Note 1 - Organization and significant accounting policies
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.
The Company was incorporated as Express Finance, Inc. under the laws of the
State of Delaware on August 16, 1996, and changed its name to Ascot Group, Inc.
in August 1998 and further to Bioenvision, Inc. in December 1998.
On February 1, 2002, the Company completed the acquisition of Pathagon Inc.
("Pathagon"), a privately held company focused on the development of novel
anti-infective products and technologies. Pathagon's principal products are
OLIGON(R) and methylene blue. Affiliates of SCO Capital Partners LLC, the
Company's financial advisor and consultant, owned 82% of Pathagon prior to the
acquisition. The Company acquired 100% of the outstanding shares of Pathagon in
exchange for 7,000,000 shares of the Company's common stock. The acquisition has
been accounted for as a purchase business combination in accordance with SFAS
141.
Basis of presentation
Prior to the acquisition of Pathagon and the May 2002 private placement in which
the Company raised gross proceeds of $17.7 million (see Note 6), the Company
devoted most of its efforts to establishing a new business (raising capital,
research and development, etc.) and had been a development stage enterprise.
Management believes they now have the financial resources to market some of the
Company's late-stage products which can lead to significant revenues from
royalty payments and drug sales. Accordingly, effective June 30, 2002, the
financial statements do not reflect the required disclosure for a Development
Stage Enterprise.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Inter-company accounts and
transactions have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates, and such differences may be material to the financial statements.
F-6
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
Note 1 - Organization and significant accounting policies - continued
Revenue Recognition
In accordance with SEC Staff Accounting Bulletin No. 104, upfront nonrefundable
fees associated with research and development collaboration agreements where the
Company has continuing involvement in the agreement, are recorded as deferred
revenue and recognized over the estimated research and development period using
the straight-line method. If the estimated period is subsequently modified, the
period over which the up-front fee is recognized is modified accordingly on a
prospective basis using the straight-line method. Revenues from the achievement
of research and development milestones, which represent the achievement of a
significant step in the research and development process, are recognized when
and if the milestones are achieved. Continuation of certain contracts and grants
are dependent upon the Company and/or its co-development partners' achieving
specific contractual milestones; however, none of the payments received to date
are refundable regardless of the outcome of the project.
Upfront nonrefundable fees associated with licensing arrangements are recorded
as deferred revenue and recognized over the licensing arrangement using the
straight line method, which approximates the life of the patent.
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.
Research and development
Research and development costs are charged to expense as incurred.
Stock based compensation
At June 30, 2004, the Company has stock based compensation plans which are
described more fully in Note 6. As permitted by SFAS No. 123, "Accounting for
Stock Based Compensation", the Company accounts for stock based compensation
arrangements with employees 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. For year ended June 30, 2004, the
Company recognized stock based employee compensation cost of $2,381,066 as a
result of the re-pricing of 380,000 options granted to an employee pursuant to
the terms of his Employment Agreement (see Note 9). The Company also recognized
a compensation expense of $38,611 for the year ended June 30, 2004 as a result
of 505,000 options granted to certain employees on January 20, 2004.
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.
F-7
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
Note 1 - Organization and significant accounting policies - continued
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.
Year Ended June 30,
-------------------------
2004 2003
------- -------
Net loss available to common stockholders, as reported $(12,430,954) $(7,624,144)
Add: Stock based employee compensation expense
included in reported net loss, net of tax effects 2,419,677 372,465
Deduct: Total stock based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (449,936) (1,214,723)
-------------- -------------
Pro forma net loss available to common stockholders $(10,461,213) $(8,466,402)
============== =============
Loss per share
Basic and diluted - as reported $(0.61) $(0.45)
Basic and diluted - pro forma $(0.52) $(0.50)
The fair value of options at the date of grant was established using the
Black-Scholes model with the following assumptions:
2004 2003
---- ----
Expected average life (years) 4.00 4.00
Risk free interest rate 3.00% 3.00%
Expected volatility 80% 80%
Expected dividend yield 0.00 0.00
Income taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under FAS 109,
deferred tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates that will be in effect when the differences
are expected to reverse. The Company records a valuation allowance for certain
temporary differences for which it is more likely than not that it will not
receive future tax benefits.
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
13,674,242 and 15,749,543 shares of common stock have not been included in the
calculation of net loss per share for the years ended June 30, 2004 and 2003,
respectively, as their effect would have been anti-dilutive.
F-8
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
Note 1 - Organization and significant accounting policies - continued
Foreign currency translation
Through June 30, 2001, the functional currency of the Company was the
Pound Sterling and its reporting currency was the United States dollar.
Translation adjustments arising from differences in exchange rates from these
transactions were reported as accumulated other comprehensive income in
stockholders' equity (deficit). Effective July 1, 2001, the functional and
reporting currency is the United States dollar. The functional currency of
Bioenvision Limited, the Company's wholly-owned subsidiary with offices in
Edinburgh, Scotland, is the Pound Sterling.
Cash and cash equivalents
The Company considers all highly liquid financial instruments with a maturity of
three months or less when purchased to be cash equivalents. The Company invests
all its funds with a single financial institution which provides for FDIC
insurance of $100,000. The Company has invested $13 million in certificates of
deposit which bear interest at a rate of 1.34% per annum, all of which will come
due in December 2004. All funds invested in the Certificate of Deposit may be
withdrawn at any time without penalty and therefore are classified as cash
equivalents.
Accounts Receivable
Accounts receivable are concentrated in that of the approximately $2,628,000 of
accounts receivable, $2,244,000 (85%) are due from ILEX and an additional
$334,000 (13%) are due from Stegram Pharmaceuticals. To limit credit risk, the
Company periodically evaluates the financial condition and payment history of
each of these parties.
Advertising costs
Costs related to advertising and other promotional expenditures are expensed as
incurred.
Deferred costs
Deferred costs represent royalty payments that became due and payable to SRI and
to Stegram Pharmaceutical Ltd, which relate to milestone payments received in
connection with the Ilex Co-Development Agreement and the Dechra Sub-License
Agreement, respectively. These costs have been presented together with research
and development costs on the statement of operations for the years ended June
30, 2004 and 2003.
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment are depreciated on a straight-line basis
over their estimated useful lives, which range from 3 to 7 years.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in accordance
with Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments." Management of the Company believes that
the fair value of financial instruments, consisting of cash, accounts
receivable, accounts payable and accrued liabilities, approximates carrying
value due to the immediate or short-term maturity associated with these
instruments.
F-9
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
Note 1 - Organization and significant accounting policies - continued
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over the fair value of identifiable net
assets of Pathagon. Intangible assets include patents and licensing rights
acquired in connection with the acquisition of Pathagon. The Company accounts
for these assets in accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets. Goodwill and intangible
assets acquired in a purchase business combination and determined to have an
indefinite useful life are not amortized, but instead tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). The Company does
not have any intangible assets with an indefinite useful life.
Long-Lived Assets
The Company adopted the provisions of SFAS No. 144 on July 1, 2003. In
accordance with SFAS No. 144, long-lived assets, such as property and equipment
and intangible assets subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of.
F-10
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
NOTE 2 - Acquisition of Pathagon
On February 1, 2002, the Company completed the acquisition of Pathagon. The
acquisition was accounted for as a purchase business combination in accordance
with SFAS 141. The Company issued 7,000,000 shares of common stock to complete
the acquisition, which was valued at $12,600,000 based on the 5-day average
trading price of the stock ($1.80) surrounding November 22, 2001, the day of the
Company's announcement of the agreed upon acquisition. The acquired patents and
licensing rights of OLIGON(R) and methylene blue (collectively referred to as
"Purchased Technologies"), were recorded at their fair market value which was
approximately $17,576,000. The patent and licensing rights acquired are being
amortized over 13 years, which is the estimated remaining contractual life of
these assets. Since the estimated fair value of the Purchased Technologies was
at least equal to the amount paid, the purchase price, net of assumed
liabilities, was allocated to Purchased Technologies. The transaction qualified
as a tax-free merger which resulted in a difference between the tax basis value
of the assets acquired and the fair market value of the patents and licensing
rights. As a result, a deferred tax liability was recorded for approximately
$7,909,000. The purchase price exceeded the fair market value of the net assets
acquired resulting in the recording of Goodwill of $4,704,100. The Company
recorded a charge to goodwill of $801,395 for fiscal year ended June 30, 2003 as
a result of a change in tax rates used to compute the deferred tax liability
arising as a result of this acquisition. Pathagon had no operations other than
holding the patents and licenses acquired. As Pathagon had no operations, its
pro-forma financials would not be meaningful and thus are not presented.
The Company now has the worldwide rights to the use of thiazine dyes,
including methylene blue, for in vitro and in vivo inactivation of pathogens in
biological fluids. Methylene blue is one of only two compounds used commercially
to inactivate pathogens in blood products, and is currently used in many
European countries to inactivate pathogens in fresh frozen plasma. The Company
believes that, as a result of the mechanism of action of its proprietary
technology, its systems also have the potential to inactivate many new pathogens
before they are identified and before tests have been developed to detect their
presence in the blood supply. Because the Company's systems are being designed
to inactivate rather than merely test for pathogens, the Company's systems also
have the potential to reduce the risk of transmission of pathogens that would
remain undetected by testing.
The OLIGON(R) technology is a patented anti-microbial technology that can be
incorporated into the manufacturing process of many implantable devices. The
patented process, involving two dissimilar metals (silver and platinum) creates
an electrochemical reaction that releases silver ions that destroy bacteria,
fungi and other pathogens. The Company intends to commercialize the technology
in partnership with leading medical devices manufacturers.
On May 6, 1997, Baxter Healthcare Corporation acting through its Edwards
Clinical-Care Division ("Edwards") entered into an Exclusive License Agreement
with Implemed, Inc. ("Implemed"), a predecessor in interest to the Pathagon and,
by virtue of the acquisition of Pathagon, a predecessor in interest to the
Company. Pursuant to the terms of the License Agreement, among other things,
Edwards licensed certain intellectual property technology relating to the
manufacture of anti-microbial polymers from Implemed.
On May 7, 2002, the Company executed an amendment to the original license
agreement between Oklahoma Medical Research Foundation ("OMRF") and Bridge
Therapeutic Products, Inc. ("BTP"), a predecessor of Pathagon, relating to the
licensing of methylene blue. Under the terms of the amendment, OMRF agreed to
the assignment of the original license agreement by BTP to Pathagon. Pursuant to
the amendment, the Company paid OMRF $100,000 and issued 200,000 shares of the
Company's common stock and a five-year warrant to purchase an additional 200,000
shares of common stock. The exercise price of the warrant is $2.33 per share,
subject to adjustment. The Company capitalized the costs of approximately
$1,145,600 related to this amendment as an intangible asset and will amortize
this asset over the remaining life of the methylene blue license agreement.
F-11
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
NOTE 3 - Intangible Assets
Intangible assets consist of the following: June 30, 2004 June 30, 2003
Patents and licensing rights $17,757,101 $17,644,521
Less: accumulated amortization (3,193,441) (1,865,122)
----------- -----------
$14,563,660 $15,779,399
=========== ===========
Amortization of patents and licensing rights amounted to $1,328,318 and
$1,334,241 for the years ended June 30, 2004 and June 30, 2003, respectively.
Other intangible assets are recorded at cost and amortized over periods
generally ranging from 10-20 years. Amortization for each of the next five
fiscal years will amount to approximately $1,355,000 annually.
NOTE 4 - License and Co-Development Agreements
Clofarabine
We have 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. Under the terms of the agreement with SRI, we were granted the
exclusive worldwide license, excluding Japan and Southeast Asia, to make, use
and sell products derived from the 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 SRI from the technology. We plan 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 us an irrevocable, exclusive option to make, use and
sell products derived from the 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 such territory.
To facilitate the development of clofarabine, we 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). ILEX is
responsible for conducting all clinical trials and the filing and prosecution of
applications with applicable regulatory authorities in the United States and
Canada. The Company retains the right to handle those matters in all territories
outside the United States and Canada (excluding Japan and Southeast Asia). The
Company retained the exclusive manufacturing and distribution rights in Europe
and elsewhere worldwide, except for the United States, Canada, Japan and
Southeast Asia. Under the co-development agreement, ILEX will have certain
rights if it performs its development obligations in accordance with that
agreement. The Company would be required to pay ILEX a royalty on sales outside
the U.S., Canada, Japan and Southeast Asia. In turn, ILEX, which would have U.S.
and Canadian distribution rights, would pay the Company a royalty on sales in
the U.S. and Canada. In addition, the Company is entitled to certain milestone
payments. Under the terms of the co-development agreement, ILEX also pays
royalties to Southern Research Institute based on certain milestones. The
Company also is obligated to milestones and royalties to Southern Research
Institute in respect to clofarabine.
F-12
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
Note 4 - License and Co-Development Agreements - continued
The Company received a nonrefundable upfront payment of $1.35 million when it
entered into the co-development agreement with ILEX and received an additional
$3.5 million in December 2003 when it converted ILEX's option to market
clofarabine in the U.S. into a sublicense. The Company received an additional $2
million in April 2004 upon ILEX's filing the New Drug Application for
clofarabine with FDA and the Company expects to receive an additional $2 million
from ILEX in October 2004 in connection with the achievement of the NDA filing.
The Company deferred the upfront payment and recognized revenues ratably, on a
straight-line basis over the related service period, through December 2002. The
Company has deferred the milestone payments received to date and recognizes
revenues ratably, on a straight line basis over the related service period,
through March 2021. For the years ended June 30, 2004 and 2003, respectively,
the Company recognized revenues of approximately $161,000 and $370,000 in
connection with the upfront and milestone payments received to date.
Deferred costs include royalty payments that became due and payable to SRI upon
the Company's execution of the co-development agreement with Ilex Oncology. The
Company defers all royalty payments made to SRI and recognizes these costs
ratably, on a straight-line basis concurrent with revenue that is recognized in
connection with research and development costs including approximately $81,000
and $207,000 for the years ended June 30, 2004 and 2003, respectively, related
to such charges.
Modrenal(R)
The Company holds an exclusive license, until the expiration of existing and new
patents related to Modrenal(R), to market Modrenal(R) in major international
territories, and an agreement with a United Kingdom company to co-develop
Modrenal(R) for other therapeutic indications. Management believes that
Modrenal(R) 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(R), but will continue to use third-party
contractors.
The Company received a nonrefundable upfront payment of $1.25 million when it
entered into the License and Sublicense Agreement with Dechra Pharmaceuticals in
May 2003. The Company deferred the upfront payment and recognizes revenues
ratably, on a straight-line basis over the related service period, through May
2014. The Company recognized revenues of approximately $114,000 and $12,000 in
connection with the upfront payment from Dechra for the years ended June 30,
2004 and 2003, respectively.
Deferred costs include royalty payments that became due and payable to Stegram
Pharmaceuticals Ltd. upon the Company's execution of the License and Sub-License
Agreement with Stegram in May 2003. The Company defers all royalty payments made
to Stegram and recognizes these costs ratably, on a straight-line basis
concurrent with revenue that is recognized in connection with the Dechra
agreement. Research and Development costs include approximately $23,000 and
$2,000 for the years ended June 30, 2004 and 2003, respectively.
Anti-Estrogen Prostate. We received Institutional Review Board approval from the
Dana Faber Cancer Institute for a Phase II study of trilostane for the treatment
of androgen independent prostate cancer. The study is being conducted by The
Dana Faber Cancer Institute and commenced in July 2004.
Operational Developments
In June 2003, we 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.
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.
F-13
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
Note 4 - License and Co-Development Agreements - continued
In May 2003, we entered into a sub-license agreement with Dechra, pursuant to
which Dechra has been granted a sub-license for all of Bioenvision's rights and
entitlements to market and distribute Modrenal(R) 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(R) or the completion of the last royalty set forth in the agreement.
Through June 30, 2003, we have recognized deferred revenue and deferred costs
related to this agreement as described below in this Note 4. The Company
received an upfront non-refundable 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, we 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 our 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 April 2003, we 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(R). 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(R) throughout Europe. Through June 30, 2003, the Company paid
an advance of $175,000 related to development services to be provided by CLL
over an eighteen month period, which advance was initially recorded as a prepaid
development cost by the Company.
F-14
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
Note 5 - Income taxes
The components of the income tax benefit are as follows:
June 30,
---------------------
2004 2003
------- -------
Current:
Federal $ -- $ --
------- -------
State -- --
------- -------
Deferred:
Federal (404,000) (404,000)
State (133,000) (133,000)
-------- --------
(537,000) (537,000)
-------- --------
Total benefit $(537,000) $(537,000)
========== ==========
Significant components of the company's deferred tax assets and liability at
June 30 are as follows:
June 30,
---------------------------
2004 2003
------- -------
Deferred tax liability
Acquired intangibles $(5,781,000) $(6,318,000)
Deferred costs (1,577,000) (100,000)
Amortization (20,000) -
--------- -----------
Total deferred tax liability (7,378,000) (6,418,000)
Deferred tax assets
Net operating loss 9,431,000 5,512,000
Options, warrants and shares
issued to non-employees 352,000 -
Options issued to employees 16,000 -
Deferred revenue 455,000 501,000
Amortization - 1,000
Depreciation 10,000 11,000
Other 40,000 65,000
---------- -----------
Total deferred tax assets 10,304,000 6,090,000
Valuation allowance for deferred
tax assets (8,707,000) (5,990,000)
---------- -----------
Net deferred tax asset 1,587,000 100,000
---------- -----------
Net deferred tax liability (5,781,000) (6,318,000)
========== ===========
F-15
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
Note 5 - Income taxes - continued
At June 30, 2004, the Company had approximately $23,287,000 of net operating
loss carryforwards for U.S. Federal and state income tax purposes that expire
fiscal year ending 2019, with a tax value of $9,431,000. A full valuation
allowance has been established for the deferred tax assets due to the
uncertainty of the utilization of such deferred tax asset.
The Tax Reform Act of 1986 enacted a complex set of rules (Internal Revenue Code
Section 382) limiting the utilization of NOLs to offset future taxable income
following a corporate "ownership change." Generally, this occurs when there is a
greater than 50 percentage point change in ownership. Accordingly, such change
could limit the amount of NOLs available in a given year, which could ultimately
cause NOLs to expire prior to utilization.
The income tax benefit as recognized differs from the benefit that would be
recognized at the Federal statutory rate on the pre-dividend net loss primarily
due to certain permanent items and the valuation allowance established against
the net operating loss deferred tax assets.
NOTE 6 - Stockholders' transactions
Common Stock and Securities Convertible into Common Stock
The Board of Directors adopted, and the stockholders approved the 2003 Stock
Incentive Plan at the Annual Meeting held in January of 2004. The plan was
adopted to recognize the contributions made by the Company's employees,
officers, consultants, and directors, to provide those individuals with
additional incentive to devote themselves to our future success and to improve
the Company's ability to attract, retain and motivate individuals upon whom the
Company's growth and financial success depends. Under the plan, stock options
may be granted as approved by the Board of Directors or the Compensation
Committee. There are 3,000,000 shares reserved for grants of options under the
plan and at June 30, 2004, options to purchase 2,105,000 shares of common stock
had been issued. Stock options vest pursuant to individual stock option
agreements. No options granted under the plan are exercisable after the
expiration of ten years (or less in the discretion of the Board of Directors or
the Compensation Committee) from the date of the grant. The plan will continue
in effect until terminated or amended by the Board of Directors or until
expiration of the plan on November 17, 2013.
In June 2002, the Company granted options to an officer of the Company 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 the 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 such officer of the Company, pursuant
to which, among other things, the exercise price for all 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 $0.735 per share which vested immediately. As a result of the re-pricing of
380,000 options, the Company will re-measure the intrinsic value of these
options at the end of each reporting period and will adjust compensation expense
based on changes in the stock price. Compensation expense recognized as a result
of this re-pricing amounted to $2,381,066 and $372,465 for the year ended June
30, 2004 and 2003, respectively.
On October 23, 2002, the Company granted options to purchase 300,000 shares of
common stock at an exercise price of $1.45 per share to the Commercial Director
(Europe) of the Company. Of these options, options to purchase 100,000 shares of
common stock vest and become exercisable on each of the first, second and third
anniversary of October 23, 2002, the grant date.
On October 23, 2002, the Company granted options to purchase 50,000 shares of
common stock at an exercise price of $1.45 per share to another employee of the
Company. Of these options, options to purchase 50,000 shares of common stock
vest and become exercisable on each of the first and second anniversary of
October 23, 2002, the grant date.
On December 31, 2002 the Company issued options to purchase 500,000 shares of
common stock at an exercise price equal to $1.45 per share (average of the high
and low bid price on the grant date), to its Chairman and Chief Executive
Officer, Dr. Christopher B. Wood. Of these options, subject to certain
circumstances, options to purchase 166,666 shares of common stock vest on each
of the first, second and third anniversary of the grant date.
F-16
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
Note 6 - Stockholders' transactions - continued
On January 9, 2003 the Company issued to an employee of the Company, options to
purchase 20,000 shares of common stock at an exercise price of $1.42 per share,
which equaled the stock price on the date of grant. Of these options, subject to
certain circumstances, options to purchase 10,000 shares of common stock vest
and become exercisable on the first anniversary of the grant date and the
remaining options to purchase 10,000 shares of common stock vest and become
exercisable on the second anniversary of the grant date.
In January 2003, we entered into an agreement with RRD International LLC
("RRD"), pursuant to which RRD serves as the global product development
consultant to the Company in connection with the development of clofarabine,
Modrenal(R) and OLIGON and assists with designing and managing our clinical
development program for our products. On April 2, 2003, the Company and RRD
further memorialized their agreement pursuant to a formal Master Services
Agreement and Registration Rights Agreement and, in connection therewith, the
Company issued a Warrant to RRD pursuant to which RRD has the right to acquire
175,000 shares of our common stock at an exercise price of $2.00 per share,
which warrant includes registration rights under certain circumstances.
Compensation expense of $672,000 and $182,000 was recorded as consulting fees
for the years ended June 30, 2004 and June 2003, respectively.
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 year ended June 30, 2004, certain holders of 2,575,900 shares of the
Company's preferred stock converted such shares into 5,150,000 shares of the
Company's common stock. In addition, during the year ended June 30, 2004,
certain warrant holders of the Company exercised their warrants to acquire
1,283,334 shares of the Company's common stock. The Company received proceeds of
approximately $2,509,882 during the year ended June 30, 2004, respectively from
the exercise of these warrants.
During the year ended June 30, 2004, certain non-employee holders of options
exercised pursuant to the cashless exercise feature available to such option
holders and the Company issued approximately 2,122,682 shares of its common
stock in connection therewith.
On January 3, 2004, the Company issued 14,510 restricted shares of its common
stock to a consultant to the Company for certain executive placement services
rendered to the Company. The Company recorded compensation expense of
approximately $60,637 for the year ended June 30, 2004 in connection with such
issuance.
On January 14, 2004, a majority of the Company's stockholders authorized an
amendment to the Company's certificate of incorporation, approved by the
Company's Board of Directors, to increase the number of authorized shares of
common stock from 50,000,000 to 70,000,000 and to increase the number of
authorized shares of the Company's preferred stock from 10,000,000 to
20,000,000. The shareholder action became effective, and the amendment was filed
and became effective, on January 14, 2004.
On January 20, 2004, the Company granted 25,000 options to Dr. Michael Kauffman,
for serving as a member of the Board of Directors, at an exercise price of $4.55
per share which vest ratably on the first and second anniversaries of the grant
date. The Company recognized $20,988 as consulting expenses for the year ended
June 30, 2004.
The Company recorded a compensation expense of $38,611 for the year ended June
30, 2004 as a result of 505,000 options granted to certain employees on January
20, 2004.
On February 4, 2004, the Company issued 20,000 shares of its common stock to an
employee of the Company in connection with the exercise of options issued prior
to that date which had an exercise price of $1.42.
On March 11, 2004, the Company issued options to another employee to purchase
50,000 shares of common stock at an exercise price of $6.50 per share. Of this
amount, 16,666.66 options vest on March 11, 2005 and the remaining 33,332.33
will vest on March 11, 2006.
On March 22, 2004, the Company consummated a private placement transaction,
pursuant to which it raised $12.8 million and issued 2,044,514 shares of its
common stock and warrants to purchase an additional 408,903 shares of its common
stock at an exercise price of $7.50 per share. The Company recorded proceeds of
$12,151,240 net of all legal, professional and financing fees incurred in
connection.
F-17
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
Note 6 - Stockholders' transactions - continued
with the offering. The Company consummated a second closing for this financing
on May 13, 2004 in order to comply with certain contractual obligations of the
Company to its holders of Series A Convertible Preferred Stock which hold
preemptive rights for equity offerings of the Company. The Company raised an
additional $3.2 million (net of all legal, professional and financial services
incurred) from the second closing and issued an additional 558,384 shares of its
common stock and warrants to purchase 111,677 shares of its common stock at an
exercise price of $7.50 per share.
On June 22, 2004, the Company issued options to a new employee to purchase
140,000 shares of common stock at an exercise price of $8.25 per share. Of this
amount, 30,000 options vested on June 22, 2004 and the remaining 110,000 will
vest ratably on June 22, 2005 and 2006 respectively.
On June 22, 2004 the Company entered into a consulting agreement pursuant to
which consultant will provide certain investor relation services on behalf of
the Company. In connection therewith, the Company issued a warrant to said
consultant pursuant to which said consultant has the right to purchase 50,000
shares of Company's common stock at a price of $8.25 per share upon the
completion of certain milestones, as set forth in such agreement. No
compensation expense of was recorded for the fiscal year ended June 30, 2004 as
no such milestones had been met yet at that time.
A summary of the Company's stock option activity for options issued to
employees and related information follows:
Weighted Avg.
No. of Shares Exercise Price
----------------------------------
Balance - June 30, 2002 2,200,000 1.25
Granted during 2003 1,370,000 1.19
Exercised during 2003 - -
Forfeiture during 2003 - -
----------------------------------
Balance - June 30, 2003 3,570,000 $ 1.23
Granted during 2004 720,000 $ 5.02
Exercised during 2004 20,000 $ 1.42
Forfeiture during 2004 - -
---------------------------------=
Balance - June 30, 2004 4,270,000 $ 1.87
==================================
Stock Options Outstanding
------------------------------------------------------------------------------------
Weighted
Average
Weighted Remaining Number of
Average Number of Contractual Stock Options
Exercise Price Range Exercise price Options Life Exercisable
------------------------------------------------------------------------------------
$0.74 $ 0.74 500,000 8.12 390,000
$1.25 - $2.75 $ 1.29 3,050,000 6.58 2,491,000
$2.76 - $6.00 $ 4.03 530,000 9.55 0
$6.01 - $8.25 $ 8.12 190,000 9.90 30,000
-------------- ------------
4,270,000 2,911,000
============== ==============
F-18
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
NOTE 6 - Stockholders' transactions - continued
Preferred Stock
On May 7, 2002 the Company authorized the issuance and sale of up to 5,920,000
shares of Series A Convertible Preferred Stock, par value $0.001 per share
("Series A Preferred Stock"). Series A Preferred Stock may be converted into two
shares of common stock at an initial conversion price of $1.50 per share of
common stock, subject to adjustment for stock splits, stock dividends, mergers,
issuances of cheap stock and other similar transactions. In May 2002, the
Company consummated a Private Placement of Series A Preferred Stock and received
gross proceeds of $17.7 million. Holders of Series A Preferred Stock also
received, in respect of each share of Series A Preferred Stock purchased in the
May 2002 Private Placement by the Company, one warrant to purchase one share of
the Company's common stock at an initial exercise price of $2.00, subject to
adjustment. The purchasers of Series A Preferred Stock also received certain
registration rights. The preferred stock generally carries rights to vote with
the holders of common stock as one class on a two-for-one basis. The preferred
stock is convertible into the Company's common stock on a two-for-one basis
subject to certain adjustments at the earlier to occur of (i) at the election of
each holder from and after the issuance date, or (ii) the date at any time after
the one year anniversary of the issuance date upon which both (x) the average of
the market price for a share of common stock for thirty consecutive trading days
exceeds $10.00 per share, subject to certain adjustments, and (y) the average of
the trading volume for the Company's common stock during such period exceeds
150,000, subject to certain adjustments.
The Company is required to accrue for and pay a dividend of 5%, subject to
certain adjustments, on its cumulative Series A Convertible Preferred Stock. The
Company has paid the dividend in cash to holders of Series A Convertible
Preferred Stock through July 30, 2004.
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.
NOTE 7 - Related party transactions
On November 16, 2001, we entered into an engagement letter with SCO Financial
Group, 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 a strike 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.
In May 2002, the Company completed a private placement pursuant to which we
issued an aggregate of 5,916,666 shares of Series A Convertible Preferred Stock
for $3.00 per share and warrants to purchase an aggregate of 5,916,666 shares of
common stock and in March of 2004 the Company consummated a private placement
pursuant to which we raised $12.8 million with a second closing in May 2004 in
which it raised an additional $3.5 million (See "Note 6-Stockholder
Transactions" above). SCO Financial Group served as financial advisor to the
Company in connection with these financings and earned a placement fee of
approximately $1.2 million in connection with May 2002 private placement and a
placement fee of $1.1 million and warrants to purchase 260,291 shares of common
stock for $6.25 per share for the March and May 2004 financings.
Mr. Jeffrey B. Davis, President of SCO Financial Group LLC, has served on the
Company's board of directors since February of 2002. Mr. Davis resigned from the
Board of Directors of the Company effective June 14, 2004.
F-19
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
NOTE 8 - Commitments and Contingencies
Leases
The Company leases 3,229 square feet of office space for its New York
headquarters under a non-cancelable operating lease expiring on September 30,
2005 and approximately 1,000 square feet in Edinburgh, Scotland under a lease
agreement for its subsidiary Bioenvision Ltd. which expires August 31, 2004.
Rent expense for both facilities in the aggregate in 2004, was approximately
$241,000. Further , the Company leases two vehicles under leases which expire
November 29, 2005 and February 28, 2007. Lease expense in 2004 and 2003, in the
aggregate, was approximately $37,000 and $30,000, respectively. At June 30,
2004, total minimum rentals under operating leases with initial or remaining
non-cancelable lease terms of more than one year were approximately:
Year ended June 30,
2005 $206,000
2006 63,000
2007 10,000
2008 ______
$ 279,000
Employment Agreements
On September 1, 1999, we entered into an employment agreement with Christopher
B. Wood, M.D. under which he serves as our Chairman and Chief Executive Officer.
The initial term of Dr. Wood's employment agreement is two years with automatic
one-year extensions thereafter unless either party gives written notice to the
contrary. On December 31, 2002, we entered into a new employment agreement with
Dr. Wood, under which he continues to serve as our Chairman and Chief Executive
Officer. Under this contract, the term is one year, with automatic one-year
extensions thereafter unless either party provides written notice to the
contrary. Dr. Wood's new employment agreement provides for an initial base
salary of $225,000, a bonus as determined by the Board of Directors, health
insurance and other benefits currently or in the future provided to key
employees of the Company. If Dr. Wood's employment is terminated other than for
cause or if he resigns for good reason or if a change of control occurs, he will
receive a lump sum payment in an amount equal to his then current annual base
salary and any and all unvested options will vest and immediately become
exercisable.
On October 23, 2002, we entered into an employment agreement with Hugh S.
Griffith, pursuant to which he agrees to serve as our Commercial Director
(Europe). The initial term of Mr. Griffith's employment agreement is one-year,
with automatic six month extensions thereafter unless either party provides
written notice to the contrary. If Mr. Griffith's employment is terminated other
than for cause or if he resigns for good reason or if a change of control
occurs, he will receive a lump sum payment in an amount equal to 0.5 multiplied
by the sum of his then current annual base salary plus a payment equal to six
(6) months of his then current base salary in complete satisfaction of the
Company's obligation to provide no less than six (6) months prior written notice
as set forth in the employment agreement.
On January 6, 2003, we entered into an employment agreement with Ian
Abercrombie, pursuant to which he agrees to serve as our Sales Manager (Europe).
The initial term of Mr. Abercrombie's employment agreement is one-year, with
automatic six month extensions thereafter unless either party provides written
notice to the contrary. If Mr. Abercrombie's employment is terminated other than
for cause or if he resigns for good reason or if a change of control occurs, he
will receive a payment equal to six (6) months of his then current base salary
in complete satisfaction of the Company's obligation to provide no less than six
(6) months prior written notice as set forth in the employment agreement.
F-20
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
Note 8 - Commitments and Contingencies - continued
On March 31, 2003, we entered into an employment agreement with David P. Luci,
pursuant to which he serves as our Director of Finance, General Counsel and
Corporate Secretary. The initial term of Mr. Luci's employment agreement is
one-year, with automatic one-year extensions thereafter unless either party
provides written notice to the contrary. If Mr. Luci's employment is terminated
other than for cause or if he resigns for good reason or if a change of control
occurs, he will receive a lump sum payment in an amount equal to 1.5 multiplied
by the sum of (i) his then current annual base salary plus (ii) his then average
annual bonus for the preceding two years and any and all unvested options will
vest and immediately become exercisable.
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
alleged a breach of contract by the Company and demanded 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. In March 2004, the complaint and two counterclaims asserted by the
Company were dismissed with prejudice.
On December 19, 2003, the Company filed a complaint against Dr. Deidre Tessman
and Tessman Technology Ltd. (the "Tessman Defendants") 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. The Tessman Defendants
removed the case to federal court, then remanded it to state court and served an
answer with several purported counterclaims. The Company denies the allegations
in the counterclaims and intends to pursue its claims against the Tessman
Defendants vigorously.
F-21
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned on
September 24, 2004, thereunto duly authorized.
BIOENVISION, INC.
By /s/ Christopher B. Wood, M.D.
-------------------------------------------------
Christopher B. Wood, M.D.
Chairman and Chief Executive Officer
(Principal Executive Officer)
By /s/ David P. Luci
-------------------------------------------------
David P. Luci
Chief Financial Officer, General Counsel and Corporate
Secretary
(Principal Financial and Accounting Officer)
Each person whose signature appears below hereby constitutes and
appoints either Christopher B. Wood, M.D. or David P. Luci his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this report, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying all that said attorney-in-fact and agent or his
substitute or substitutes, or any of them, may lawfully do or cause to be done
by virtue hereof. In accordance with the requirements of the Exchange Act, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Christopher B. Wood, M.D. Chairman and Chief Executive Officer and September 24, 2004
-----------------------------
Christopher B. Wood, M.D. Director
(Principal Executive Officer)
/s/ David P. Luci Chief Financial Officer, General Counsel September 24, 2004
-----------------
David P. Luci and Corporate Secretary
(Principal Financial and Accounting
Officer)
/s/ Thomas S. Nelson Director September 24, 2004
--------------------
Thomas S. Nelson, C.A.
/s/ Michael Kaufmann
Michael Kauffman Director September 24, 2004
/s/ Andrew N. Schiff Director September 24, 2004
--------------------
Andrew N. Schiff
Director September 24, 2004
/s/ Steven A. Elms
Steven A. Elms