-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pyv/bOXHEa68/OOYUaMUVBSkk2z6dAHAnhJzs78XaVnuLK63+iKcKbOqx5R0QpK9 eC1tYOBJ4ysLzI+NDUIEww== 0000719598-98-000036.txt : 19980812 0000719598-98-000036.hdr.sgml : 19980812 ACCESSION NUMBER: 0000719598-98-000036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980811 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MOLECULAR BIOSYSTEMS INC CENTRAL INDEX KEY: 0000719598 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 363078632 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10546 FILM NUMBER: 98682155 BUSINESS ADDRESS: STREET 1: 10070 BARNES CANYON RD CITY: SAN DIEGO STATE: CA ZIP: 92121-2789 BUSINESS PHONE: 6198127001 MAIL ADDRESS: STREET 1: 10070 BARNES CANYON ROAD CITY: SAN DIEGO STATE: CA ZIP: 92121 10-Q 1 FIRST QUARTER 10-Q Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from............... to ............... Commission file number 1-10546 MOLECULAR BIOSYSTEMS, INC. (Exact name of registrant as specified in its charter) Delaware 36-3078632 (State of Incorporation) (I.R.S. Identification No.) 10030 Barnes Canyon Road San Diego, California 92121 (619) 812-7001 (Address, including zip code, and telephone number, including area code, of principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 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. X Yes No The number of shares outstanding of the issuer's common stock, $.01 par value, as of July 31, 1998 was 18,580,095 shares. INDEX PAGE PART I - FINANCIAL INFORMATION Item 1 - Financial Statements 1. Consolidated Balance Sheets 3 March 31, 1998 and June 30, 1998 2. Consolidated Statements of Operations 4 Three Months Ended June 30, 1997 and 1998 3. Consolidated Statements of Cash Flows 5 Three Months Ended June 30, 1997 and 1998 4. Notes to Financial Statements 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II -OTHER INFORMATION Item 1 - Legal Proceedings 15 Item 2 - Changes in Securities 15 Item 3 - Defaults Upon Senior Securities 15 Item 4 - Submission of Matters to a Vote of Securities Holders 15 Item 5 - Other Information 15 Item 6 - Exhibits and Reports on Form 8-K 15 (a) Exhibits (b) Reports on Form 8-K Signatures 16 PART I - FINANCIAL INFORMATION Item 1 - FINANCIAL STATEMENTS
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30, March 31, 1998 1998 (Unaudited) ---------- ----------- ASSETS Current assets: Cash and cash equivalents $ 1,064 $ 359 Marketable securities, available-for-sale 20,274 24,352 Accounts and notes receivable 1,498 13,094 License rights 8,500 - Inventories 1,902 2,371 Prepaid expenses and other assets 400 415 ---------- ----------- Total current assets 33,638 40,591 ---------- ----------- Property and equipment, at cost: Building and improvements 14,412 14,412 Equipment, furniture and fixtures 4,364 4,413 Construction in progress 471 911 ---------- ----------- 19,247 19,736 Less: Accumulated depreciation and amortization 7,073 7,297 ---------- ----------- Total property and equipment 12,174 12,439 ---------- ----------- Other assets: Patents and license rights, net of amortization $87 and $107, respectively 320 350 Certificate of deposit, pledged 3,000 3,000 Other assets, net 2,186 2,160 ---------- ----------- Total other assets 5,506 5,510 ---------- ----------- $ 51,318 $ 58,540 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 1,272 $ 1,272 Accounts payable and accrued liabilities 7,498 11,393 Compensation accruals 2,227 731 Deferred contract revenue 1,575 - ---------- ----------- Total current liabilities 12,572 13,396 ---------- ----------- Long-term debt, net of current portion 6,082 5,764 Other noncurrent liabilities 1,500 1,500 Commitments and contingencies (Note 2) Stockholders' equity: Common Stock, $.01 par value, 40,000,000 shares authorized, 17,846,237 and 18,575,245 shares issued and outstanding, respectively 178 186 Additional paid-in capital 128,145 134,308 Accumulated deficit (96,729) (95,988) Unrealized loss on available-for-sale securities (67) (263) Less 40,470 shares of treasury stock, at cost (363) (363) ---------- ----------- Total stockholders' equity 31,164 37,880 ---------- ----------- $ 51,318 $ 58,540 ========== ===========
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) Three Months Ended June 30, 1997 1998 ------------ ------------ (Unaudited) Revenues: Revenues under collaborative agreements $ 1,250 $ 1,250 Product and royalty revenues 224 1,367 License Fees - 16,371 ------------ ------------ 1,474 18,988 ------------ ------------ Operating expenses: Research and development costs 2,185 2,227 Costs of products sold 1,511 1,639 Selling, general and administrative expenses 3,040 3,869 Other Nonrecurring Charges - 9,378 ------------ ------------ 6,736 17,113 ------------ ------------ Income (loss) from operations (5,262) 1,875 Interest expense (191) (160) Interest income 654 425 ------------ ------------ Income (loss) before income taxes (4,799) 2,140 Foreign income tax provision - (1,400) ------------ ------------ Net income/(loss) $ (4,799) $ 740 ============ ============ Net income (loss) per share - basic: $ (0.27) $ 0.04 ============ ============ Weighted average common shares outstanding 17,752 18,512 ============ ============ Net income (loss) per share - diluted: $ (0.27) $ 0.04 ============ ============ Weighted average common and common equivalent shares 17,752 18,843 ============ ============ outstanding
MOLECULAR BIOSYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Three Months Ended June 30, 1997 1998 ------------- ------------- (Unaudited) Cash flows from operating activities: Net loss $ (4,799) $ 740 Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 318 244 Write-off of former Shionogi territory license rights - 8,500 Premium received on Chugai equity investment - (2,371) Changes in operating assets and liabilities: Receivables (25) (11,745) Inventories (117) (469) Prepaid expenses and other assets 236 136 Accounts payable and accrued liabilities 941 3,895 Deferred contract revenue - (1,575) Compensation accruals (666) (1,496) ------------- ------------- Cash used in operating activities (4,112) (4,141) ------------- ------------- Cash flows from investing activities: Purchases of property and equipment (210) (489) Additions to patents and license rights - (50) Decrease in other assets - 26 Change in marketable securities 4,376 (4,275) ------------- ------------- Cash provided by (used in) investing activities 4,166 (4,788) ------------- ------------- Cash flows from financing activities: Proceeds from sale of common stock to Chugai - 8,300 Net proceeds from stock options exercised 83 242 Principal payments on long-term debt (315) (318) ------------- ------------- Cash provided by (used in) financing activities (232) 8,224 ------------- ------------- Decrease in cash and cash equivalents (178) (705) Cash and cash equivalents, beginning of period 587 1,064 ------------- ------------- Cash and cash equivalents, end of period $ 409 $ 359 ============= ============= Supplemental cash flow disclosures: Interest income received $ 798 $ 575 ============= ============= Interest paid $ 190 $ 159 ============= =============
NOTES TO FINANCIAL STATEMENTS (1) Basis of Presentation- These interim Consolidated Financial Statements of Molecular Biosystems, Inc. and Subsidiaries (the "Company") should be read in conjunction with the Consolidated Financial Statements of the Company and related Notes filed with the Company's Annual Report on Form 10-K for the year ended March 31, 1998. These interim Consolidated Financial Statements of the Company have not been audited by independent public accountants. However, in the opinion of the Company, all adjustments required for a fair presentation of the financial position of the Company as of June 30, 1998, and the results of its operations for the three-months ended June 30, 1997 and 1998, and its cash flows for the three-months ended June 30, 1997 and 1998, have been made. The results of operations for these interim periods are not necessarily indicative of the operating results for the full year. (2) Commitments and Contingencies- In July, 1997 the Company and its marketing partner, Mallinckrodt, Inc. ("Mallinckrodt") filed suit (the "MBI Case") in United States District Court for the District of Columbia against four potential competitors - Sonus Pharmaceuticals, Inc. ("Sonus"), Nycomed Imaging AS ("Nycomed"), ImaRx Pharmaceutical Corp. ("ImaRx") and its marketing partner DuPont Merck and Bracco - - seeking declarations that certain of their ultrasound contrast agent patents are invalid. The complaint alleges that each of the defendants' patents is invalid on a variety of independent grounds under U.S. patent law. In addition to requesting that all of the patents in question be declared invalid, the complaint requests a declaration that, contrary to defendants' contentions, the Company and Mallinckrodt do not infringe the defendants' patents, and asks that defendants be enjoined from proceeding against the Company and Mallinckrodt for infringement until the status of defendants' patents has been determined by the court or the U.S. Patent and Trademark Office ("PTO"). The complaint alleges that each defendant has claimed or is likely to claim that its patent or patents cover OPTISON, the Company's second generation ultrasound contrast agent, and will attempt to prevent its commercialization. All of the defendants except Nycomed filed motions to dismiss the complaint on juridictional grounds. In January 1998, the court dismissed each of the defendants except Nycomed, ruling that the court lacked jurisdiction over those defendants with respect to the Company's claims of patent invalidity and non infringement. The court's ruling does not purport to rule on the merits of the Company's claims; the dismissal was based solely on jurisdictional grounds. Following Sonus's dismissal as a defendant in the MBI Case, Sonus activated a patent infringement lawsuit (the "Sonus Case") which it had filed in August 1997 against the Company and Mallinckrodt in the United States District Court for the Western District of Washington. Although the complaint was filed in August 1997, Sonus had agreed not to proceed with the Sonus Case until the jurisdictional motions were decided in the MBI Case. Sonus's complaint alleges that the manufacture and sale of OPTISON by the Company and Mallinckrodt infringe two patents owned by Sonus. As in the MBI Case, MBI counterclaimed for a declaration of invalidity and non-infringement with respect to the Sonus patents. These two patents are the same patents for which the Company was seeking a declaration of invalidity in the MBI Case. As discussed below, in conjunction with the reexamination proceedings, the PTO has issued a final rejection of all claims of the patents involved in the Sonus Case. Beginning in July 1997, the Company received the first of five notices from the PTO granting the Company's petitions for reexamination which it had filed with respect to five patents held by three potential competitors, Sonus, Nycomed and ImaRx. Each of the five notices stated there was a substantial new question of patentability raised by the Company's petitions with respect to all claims of the patents. Each of the patents in the reexamination process is related to the use of perfluorocarbon gases in ultrasound contrast agents and is included among the patents for which the Company was seeking a declaration of invalidity in the MBI Case (and for which the Company is continuing to seek a declaration of invalidity in the case of Nycomed's patents). In late 1997 and early 1998, the PTO issued office actions in connection with the Company's patent reexamination petitions filed against Sonus, Nycomed and ImaRx. The PTO office actions rejected all relevant claims of these patents based on prior art not previously disclosed to the PTO by Sonus, Nycomed or ImaRx during prosecution of their patent applications. In June 1998, the PTO issued a final rejection of all claims of the two Sonus patents involved in the Sonus Case. If the PTO's rejection is maintained on any appeal subsequently filed by Sonus, the two Sonus patents will be invalid. If the PTO rejection of the Nycomed patent is maintained through further proceedings before the patent examiner and on any appeal, the PTO rejection will invalidate the patent which, by a counterclaim in the MBI Case, Nycomed is attempting to assert against the Company and Mallinckrodt to block the manufacture and sale of OPTISON. Litigation or administrative proceedings relating to these matters could result in a substantial cost to the Company; and given the complexity of the legal and factual issues, the inherent vicissitudes and uncertainty of litigation, and other factors, there can be no assurance of a favorable outcome. An unfavorable outcome could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, there can be no assurance that, in the event of an unfavorable outcome, the Company would be able to obtain a license to any proprietary rights that may be necessary to commercialize OPTISON, either on acceptable terms or at all. If the Company were required to obtain a license necessary to commercialize OPTISON, the Company's failure or inability to do so would have a material adverse effect on the Company's business, financial condition and results of operations. (3) Earnings per Share - In December 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). The statement specifies the computation, presentation, and disclosure requirements for earnings per share (EPS). SFAS 128 requires companies to compute net income (loss) per share under two different methods, basic and diluted per share data for all periods for which an income statement is presented. Basic earnings per share was computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if net income were divided by the weighted-average number of common shares and potential common shares from outstanding stock options for the quarter ended June 30, 1998. Potential common shares were calculated using the treasury stock method and represent incremental shares issuable upon exercise of the Company's outstanding options. For the quarter ended June 30, 1997, the diluted loss per share calculation excludes effects of outstanding stock options as such inclusion would be anti-dilutive. The following table provides a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share for the quarters ended June 30, 1997 and June 30, 1998.
Quarter Ended June 30, 1997 1998 ----------- ----------- NET INCOME (LOSS) $ (4,799) $ 740 BASIC EARNINGS (LOSS) PER SHARE: Income (loss) available to common stockholders (4,799) 740 Weighted average common shares outstanding 17,752 18,512 =========== =========== BASIC EARNINGS (LOSS) PER SHARE: $ (0.27) $ 0.04 =========== =========== DILUTED EARNINGS (LOSS) PER SHARE: Income (loss) available to common stockholders $ (4,799) $ 740 Weighted average common shares outstanding 17,752 18,512 Common stock options outstanding (unless anti-dilutive) - 331 Total weighted avg common shares and equivalents 17,752 18,843 =========== =========== DILUTED EARNINGS (LOSS) PER SHARE: $ (0.27) $ 0.04 =========== ===========
(4) The Chugai Agreement - In April, 1998, the Company entered into a cooperative development and marketing agreement with Chugai Pharmaceutical Co., Ltd. ("Chugai") of Japan. The parties entered into this strategic alliance which covers Japan, Taiwan and South Korea, to develop OPTISON (which may be marketed under a different name) and ORALEX, as well as related products. The Company granted Chugai an exclusive license to develop, manufacture, and market these products in the subject territory, for which the Company received an up-front license fee of $14 million. With respect to licensed products manufactured by Chugai, Chugai will pay the Company a royalty on net sales. For licensed products manufactured by the Company, the Company will receive royalties on net sales, the amount of which will depend upon the sales volume, in addition to a transfer price based on average net sales per unit from the previous quarter. Additionally, Chugai purchased 691,883 shares of the Company's common stock at a premium of 40% over the then-prevailing market price. This premium was equal to $2.4 million and was recognized as revenue in the current quarter. The equity investment was valued at $8.3 million. The Company is also eligible to receive milestone payments of up to $20 million based on Chugai's achievement of certain Japanese product development and regulatory goals. The accompanying consolidated statements of operations incorporate the impact of the Chugai transaction. Pro forma unaudited consolidated operating results of the Company for the quarter ended June 30, 1998, excluding the impact of the Chugai transaction, are summarized below (in thousands, except per share amounts):
Three Months Ended June 30, 1998 Results Pro forma Including Impact of Results Chugai Chugai Excluding Transaction Transaction Chugai ----------------------------------------- Revenues $ 18,988 $ 16,371 $ 2,617 Operating Expenses (17,113) (9,378) (7,735) Interest Income, Net 265 - 265 ----------------------------------------- Income (Loss) before income taxes $ 2,140 $ 6,993 $ (4,853) Foreign income taxes (1,400) (1,400) - ========================================= Net Income (Loss) $ 740 $ 5,593 $ (4,853) ========================================= Net Income (Loss) per share - Basic $ 0.04 $ 0.31 $ (0.27) Weighted Avg Common Shares Outstanding 18,512 659 17,853 Net Income (Loss) per share - Diluted $ 0.04 $ 0.31 $ (0.27) Weighted Avg Common and Common 18,843 659 18,184 Equivalent Shares Outstanding
These unaudited pro forma results have been prepared for comparative purposes only. Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management discussion and analysis should be read in conjunction with (1) the current Consolidated Financial Statements and (2) the Company's Consolidated Financial Statements and related Notes and Management's Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the year ended March 31, 1998. From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, regulatory approval, research and development activities and similar matters. A variety of factors could cause the Company's actual results and experience to differ materially from the Company's anticipated results or other expectations. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include the expense and uncertain outcome of the litigation described under the caption "Recent Events," including the possibility of injunctive relief to competitors prohibiting the sale of OPTISON(TM); a ruling by the Patent and Trademark Office ("PTO") in the pending patent reexamination proceedings favoring competitors' patents; delays or an inability to bring OPTISON(TM) to market in Europe as a result of regulatory delays or patent litigation; difficulties and delays with respect to the performance of clinical trials; delays by regulatory authorities in approving additional indications for OPTISON(TM), including the evaluation of myocardial perfusion; manufacturing problems; difficulties and delays with respect to marketing and sales activities; general uncertainties accompanying the development and introduction of new products; and other risk factors reported from time to time in the Company's reports filed with the Securities and Exchange Commission. Recent Events In April, 1998, the Company entered into a cooperative development and marketing agreement with Chugai Pharmaceutical Co., Ltd. ("Chugai") of Japan. The parties entered into this strategic alliance which covers Japan, Taiwan and South Korea, to develop OPTISON (which may be marketed under a different name) and ORALEX, as well as related products. The Company granted Chugai an exclusive license to develop, manufacture, and market these products in the subject territory, for which the Company received an up-front license fee of $14 million. With respect to licensed products manufactured by Chugai, Chugai will pay the Company a royalty on net sales. For licensed products manufactured by the Company, the Company will receive royalties on net sales, the amount of which will depend upon the sales volume, in addition to a transfer price based on average net sales per unit from the previous quarter. Additionally, Chugai purchased 691,883 shares of the Company's common stock at a premium of 40% over the then-prevailing market price. The equity investment was valued at $8.3 million. The Company is also eligible to receive milestone payments of up to $20 million based on Chugai's achievement of certain Japanese product development and regulatory goals. In May, 1998, OPTISON, the Company's second-generation contrast agent for cardiac ultrasound imaging, received final marketing authorization by the European Agency for the Evaluation of Medicinal Products for use in patients with suspected or known cardiovascular disease. The authorization covers all 15 member states of the European Union. Also in May, 1998, the Company and Mallinckrodt announced that they had launched OPTISON in Germany, Austria, and the United Kingdom. Initial shipments of OPTISON to European customers were sent within 24 hours of product approval. In July, 1997 the Company and its marketing partner, Mallinckrodt, Inc. ("Mallinckrodt") filed suit (the "MBI Case") in United States District Court for the District of Columbia against four potential competitors - Sonus Pharmaceuticals, Inc. ("Sonus"), Nycomed Imaging AS ("Nycomed"), ImaRx Pharmaceutical Corp. ("ImaRx") and its marketing partner DuPont Merck and Bracco - - seeking declarations that certain of their ultrasound contrast agent patents are invalid. The complaint alleges that each of the defendants' patents is invalid on a variety of independent grounds under U.S. patent law. In addition to requesting that all of the patents in question be declared invalid, the complaint requests a declaration that, contrary to defendants' contentions, the Company and Mallinckrodt do not infringe the defendants' patents, and asks that defendants be enjoined from proceeding against the Company and Mallinckrodt for infringement until the status of defendants' patents has been determined by the court or the U.S. Patent and Trademark Office ("PTO"). The complaint alleges that each defendant has claimed or is likely to claim that its patent or patents cover OPTISON, the Company's second generation ultrasound contrast agent, and will attempt to prevent its commercialization. All of the defendants except Nycomed filed motions to dismiss the complaint on juridictional grounds. In January 1998, the court dismissed each of the defendants except Nycomed, ruling that the court lacked jurisdiction over those defendants with respect to the Company's claims of patent invalidity and non infringement. The court's ruling does not purport to rule on the merits of the Company's claims; the dismissal was based solely on jurisdictional grounds. Following Sonus's dismissal as a defendant in the MBI Case, Sonus activated a patent infringement lawsuit (the "Sonus Case") which it had filed in August 1997 against the Company and Mallinckrodt in the United States District Court for the Western District of Washington. Although the complaint was filed in August 1997, Sonus had agreed not to proceed with the Sonus Case until the jurisdictional motions were decided in the MBI Case. Sonus's complaint alleges that the manufacture and sale of OPTISON by the Company and Mallinckrodt infringe two patents owned by Sonus. As in the MBI Case, MBI counterclaimed for a declaration of invalidity and non-infringement with respect to the Sonus patents. These two patents are the same patents for which the Company was seeking a declaration of invalidity in the MBI Case. As discussed below, in conjunction with the reexamination proceedings, the PTO has issued a final rejection of all claims of the patents involved in the Sonus Case. Beginning in July 1997, the Company received the first of five notices from the PTO granting the Company's petitions for reexamination which it had filed with respect to five patents held by three potential competitors, Sonus, Nycomed and ImaRx. Each of the five notices stated there was a substantial new question of patentability raised by the Company's petitions with respect to all claims of the patents. Each of the patents in the reexamination process is related to the use of perfluorocarbon gases in ultrasound contrast agents and is included among the patents for which the Company was seeking a declaration of invalidity in the MBI Case (and for which the Company is continuing to seek a declaration of invalidity in the case of Nycomed's patents). In late 1997 and early 1998, the PTO issued office actions in connection with the Company's patent reexamination petitions filed against Sonus, Nycomed and ImaRx. The PTO office actions rejected all relevant claims of these patents based on prior art not previously disclosed to the PTO by Sonus, Nycomed or ImaRx during prosecution of their patent applications. In June 1998, the PTO issued a final rejection of all claims of the two Sonus patents involved in the Sonus Case. If the PTO's rejection is maintained on any appeal subsequently filed by Sonus, the two Sonus patents will be invalid. If the PTO rejection of the Nycomed patent is maintained through further proceedings before the patent examiner and on any appeal, the PTO rejection will invalidate the patent which, by a counterclaim in the MBI Case, Nycomed is attempting to assert against the Company and Mallinckrodt to block the manufacture and sale of OPTISON. Litigation or administrative proceedings relating to these matters could result in a substantial cost to the Company; and given the complexity of the legal and factual issues, the inherent vicissitudes and uncertainty of litigation, and other factors, there can be no assurance of a favorable outcome. An unfavorable outcome could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, there can be no assurance that, in the event of an unfavorable outcome, the Company would be able to obtain a license to any proprietary rights that may be necessary to commercialize OPTISON, either on acceptable terms or at all. If the Company were required to obtain a license necessary to commercialize OPTISON, the Company's failure or inability to do so would have a material adverse effect on the Company's business, financial condition and results of operations. Liquidity and Capital Resources At June 30, 1998, the Company had net working capital of $27.2 million compared to $21.1 million at March 31, 1998. Cash, cash equivalents, marketable securities and certificates of deposit pledged were $27.7 million at June 30, 1998 compared to $24.3 million at March 31, 1998. The cash balance at June 30, 1998 does not include $9.5 million of the $22.3 million in up-front payments due from Chugai, which will be received in quarterly installments during fiscal 1999. For the next several years, the Company expects to incur substantial additional expenditures associated with product development. The Company anticipates that its existing resources, including the proceeds of the public offering in May 1996, up-front license fees received from Chugai, and interest thereon, plus payments under its collaborative agreement with Mallinckrodt and Chugai, will enable the Company to fund its operations for at least the next eighteen months. The Company continually reviews its product development activities in an effort to allocate its resources to those products that the Company believes have the greatest commercial potential. Factors considered by the Company in determining the products to pursue may include, but are not limited to, the projected markets, potential for regulatory approval, technical feasibility and estimated costs to bring the product to the market. Based upon these factors, the Company may from time to time reallocate its resources among its product development activities. The Company may pursue a number of options to raise additional funds, including borrowings; lease arrangements; collaborative research and development arrangements with pharmaceutical companies; the licensing of product rights to third parties; or additional public and private financing, as capital requirements change as a result of strategic, competitive, technological and regulatory factors. There can be no assurance that funds from these sources will be available on favorable terms, or at all. Results of Operations Revenues Under Collaborative Agreements. Revenues under collaborative agreements were $1.3 million for the quarter ended June 30, 1998 compared to $1.3 million for the same quarter in the prior year. These revenues in both years consist solely of quarterly payments to support clinical trials, regulatory submissions and product development received from Mallinckrodt under the Company's amended agreement with Mallinckrodt which the Company entered into in September 1995. Product and Royalty Revenues. Revenues from product sales and royalties were $1.4 million for the quarter ended June 30, 1998, compared to $224,000 for the same quarter in the prior year. Product revenues come from the Company's sales of OPTISON to Mallinckrodt, in the case of the quarter ended June 30, 1998, and from the Company's sales of ALBUNEX(R) to Mallinckrodt in the case of the quarter period ended June 30, 1997, and were recognized upon shipment of the product. The transfer price for the Company's sales of OPTISON to Mallinckrodt is approximately equal to 40% of Mallinckrodt's average net sales price to its end users of the product for the immediately preceding quarter. Pursuant to ARDA, the average net sales price to end users is calculated by dividing the net sales for the preceding quarter by the total number of units shipped to end users whether paid for or shipped as samples. Consistent with industry practice, the Company considers samples a marketing expense and as such the cost of samples is recorded as selling, general and administrative expense. The transfer price for the Company's sales of ALBUNEX to Mallinckrodt was determined pursuant to ARDA and was approximately equal to 40% of Mallinckrodt's average net sales price to its end users of the product. Royalty revenues are pursuant to a licensing agreement between the Company and Abbott Laboratories. License Fees. Revenues for the most recent quarter also include $16.4 million recognized in connection with MBI's partnership with Chugai Pharmaceutical Co., Ltd., announced on April 8, 1998. Costs of Products Sold. Cost of products sold totaled $1.6 million for the quarter ended June 30, 1998, resulting in a negative gross profit margin. This negative gross profit margin was due to the fact that the current low levels of production are insufficient to cover the Company's fixed manufacturing overhead expenses. For the same quarter in the prior year, cost of products sold totaled $1.5 million. The Company anticipates an increase in its gross profit margins if and when OPTISON sales volume increases. The increase in sales volume would permit the fixed costs included in manufacturing overhead to be allocated over a larger number of vials produced. Manufacturing fixed costs are currently running at an annual rate of approximately $5.5 million. The amount of any increase in the Company's margins and the time required by the Company to achieve higher margins are highly dependent on the market acceptance of OPTISON and are therefore uncertain. Research and Development Costs. For the quarter ended June 30, 1998, the Company's research and development costs totaled $2.2 million, as compared to $2.2 million for the same period in 1997. Selling, General and Administrative Expenses. For the quarter ended June 30, 1998, the Company's selling, general and administrative expenses totaled $3.9 million, as compared to $3.0 million for the same quarter in 1997. This increase in the current year is primarily due to continuing legal expenses, and marketing costs associated with the launch of OPTISON. Other Nonrecurring Charges and Foreign Income Taxes. Total operating expenses for the quarter were $17.1 million compared to $6.7 million for the same quarter in 1998. The increase is primarily due to a non-cash, non-recurring expense of $8.5 million related to the sale to Chugai of territory rights previously reacquired from Shionogi. Additionally, the company paid $1.4 million in foreign taxes related to the Chugai alliance. Interest Expense and Interest Income. Interest expense for the quarter ended June 30, 1998 amounted to $160,000, compared to $191,000 for the same period in the prior year, and consisted of mortgage interest on the Company's manufacturing building and interest on a note payable which is secured by the tangible assets of the Company. The interest rate on the mortgage was 8% in June 1998. The note payable bears interest at prime plus 1% and is payable in monthly installments of principal plus interest over five years. The interest rate on the note was 9.5% in June 1998. Interest income for the quarter ended June 30, 1998 was $425,000 compared to $654,000 for the same quarter in the prior year. The decrease in interest income in the current year is due to lower average cash and marketable securities balances. The Company's cash is invested primarily in short-term, fixed principal investments, such as U.S. Government agency issues, corporate bonds, certificates of deposit and commercial paper. Pro forma Results. See Note 4 in Notes to the Financial Statements for a discussion of quarterly results excluding the impact of the Chugai transaction. Prospective Information The Company is involved in several legal and administrative proceedings which could result in a substantial cost to the Company. Given the complexity of the legal and factual issues and the uncertainty of litigation, there can be no assurance of a favorable outcome. An unfavorable outcome could have a material adverse effect on the Company's business, financial condition and results of operations. For a detailed discussion of these matters, see "Recent Events." PART II - OTHER INFORMATION Item 1 - LEGAL PROCEEDINGS See "Recent Events" in Part I, Item 2, which is incorporated by reference in this response. Item 2-4 - The Company has nothing to report with respect to these items during the quarter ended June 30, 1998. Item 5 - OTHER INFORMATION Dates for Submission of Stockholder Proposals: Any stockholder of the Company who wishes to present a proposal to be considered at the 1999 Annual Meeting of Stockholders and who, pursuant to Rule 14a-8 of the Securities and Exchange Commission, wishes to have the proposal included in the Company's proxy statement and form of proxy for that meeting, must submit the proposal in writing to the Company at 10070 Barnes Canyon Road, San Diego, California 92121, so that it is received by February 16, 1999. Any stockholder of the Company who wishes to present a proposal to be considered at the 1999 Annual Meeting of Stockholders, but to do so outside of the processes of Rule 14a-8, must submit the proposal in writing to the Company at 10070 Barnes Canyon Road, San Diego, California 92121, so that it is received by April 30, 1999. Item 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - None (b) Reports on Form 8-K A Current Report on Form 8-K dated April 7, 1998, was filed on April 22, 1998, reporting (1) a Cooperative Development and Marketing Agreement effective March 31, 1998 between the Company and Chugai Pharmaceutical Co., Ltd., and (2) a Common Stock Purchase Agreement effective March 31, 1998 between the Company and Chugai Pharmaceutical Co., Ltd. A Current Report on Form 8-K dated May 18,1998, was filed on May 22, 1998, reporting that OPTISON received final marketing authorization by the European Agency for the Evaluation of Medicinal Products for use in patients with suspected or known cardiovascular disease. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MOLECULAR BIOSYSTEMS, INC. /s/ Gerard Wills Gerard A. Wills Vice President Finance and Chief Financial Officer 8/11/98 Date EX-27 2 FDS --
5 This schedule contains summary financial information extracted from the consolidated financial statements of Molecular Biosystems, Inc. dated June 30, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 3-mos MAR-31-1998 JUN-30-1997 359 24,352 13094 0 2371 40,591 12,439 6,714 58,540 13,396 0 0 0 186 133,419 37,880 1367 18,988 1,639 17,113 0 0 265 2,140 1400 740 0 0 0 740 0.04 0
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