-----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, GFzJapq0VNPbgxhW5PpzRcXjck0zdvqICz85vd9c35P9tGOlGdgEJYvCsRVkHuTR TKEMpsu5rLcHM74czE0gqw== 0000950110-99-000370.txt : 19990325 0000950110-99-000370.hdr.sgml : 19990325 ACCESSION NUMBER: 0000950110-99-000370 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIO TECHNOLOGY GENERAL CORP CENTRAL INDEX KEY: 0000722104 STANDARD INDUSTRIAL CLASSIFICATION: MEDICINAL CHEMICALS & BOTANICAL PRODUCTS [2833] IRS NUMBER: 133033811 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15313 FILM NUMBER: 99570177 BUSINESS ADDRESS: STREET 1: 70 WOOD AVE S CITY: ISELIN STATE: NJ ZIP: 08830 BUSINESS PHONE: 9086328800 MAIL ADDRESS: STREET 1: 70 WOOD AVENUE SOUTH CITY: ISELIN STATE: NJ ZIP: 08830 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1998 Commission File Number 0-15313 BIO-TECHNOLOGY GENERAL CORP. (Exact name of Registrant as specified in its charter) Delaware 13-3033811 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 70 Wood Avenue South, Iselin, New Jersey 08830 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (732) 632-8800 Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.01 par value (Title of class) Securities registered pursuant to Section 12(g) of the Act: Warrants to Purchase Shares of Common Stock, par value $.01 per share, at a purchase price of $9.84 per Share (Title of each class) 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. YES |X| NO | | Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. [ ] Aggregate market value of the Registrant's Common Stock held by non-affiliates at March 15, 1999 (based on the closing sale price for such shares as reported by the National Association of Securities Dealers Automated Quotation System): $335,328,000. Common Stock outstanding as of March 15, 1999: 51,971,174 shares. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's definitive proxy statement for its 1999 annual meeting of stockholders are incorporated by reference into Part III of this report. PART I ITEM 1. BUSINESS GENERAL OVERVIEW The Company is engaged in the research, development, manufacture and marketing of biopharmaceutical products. Through a combination of internal research and development, acquisitions, collaborative relationships and licensing arrangements, BTG has developed a portfolio of therapeutic products, including six products that have received regulatory approval for sale, of which five are currently being marketed. Additionally, the Company has five products in registration or clinical trials and several products in pre-clinical development. The Company distributes its products on a worldwide basis through a direct sales force in the United States and primarily through third-party license and distribution relationships elsewhere. The Company seeks both broad markets for its products as well as specialized niche markets where it can seek Orphan Drug status and potential marketing exclusivity. The Company's approved products include Oxandrin(R) (oxandrolone) for the treatment of weight loss due to severe trauma, chronic infection, extensive surgery or unknown pathophysiology, which is primarily marketed in the United States and which, to date, has been primarily used to treat weight loss in AIDS patients; Bio-Tropin(TM) (human growth hormone), which is currently being marketed in Japan and in several countries in Europe, Latin America and the Far East for the treatment of growth hormone deficiency in children; BioLon(TM) (sodium hyaluronate), which is currently marketed in the United States and in several other countries in North and Latin America, Europe, Asia, Africa and the Far East for the protection of the corneal endothelium during ophthalmic implant surgery; Delatestryl(R) (injectable testosterone), which is currently marketed in the United States for hypogonadism and delayed puberty; MircetteTM, an oral contraceptive dosing regimen that is currently being marketed in the United States; and Silkis(R), a vitamin D derivative, which is currently approved in two European countries for the topical treatment of recalcitrant psoriasis. The Company's principal products in registration, advanced stages of clinical testing and development include Bio-Hep-B(TM), a third generation recombinant vaccine against hepatitis B virus; recombinant insulin for diabetes; Androtab-SL(TM) (sublingual testosterone) for the treatment of hypogonadism; Fibrimage(TM), a thrombus imaging agent; and OxSODrol(TM) (human superoxide dismutase) for the reduction of asthma and as a neuro protectant in premature infants. The Company's research and development focus includes Factorex(TM), a cardiovascular thrombolytic adjunct agent; PEGylated uricase for allopurinol-resistant gout patients; Bio-Hy(TM) (sodium hyaluronate) for osteoarthritis; and three potential anti-cancer drugs. The Company was founded in 1980 to develop, manufacture and market novel therapeutic products. The Company's overall administration, business development, human clinical studies, marketing activities, quality assurance and regulatory affairs are primarily coordinated at the Company's headquarters in Iselin, New Jersey. Pre-clinical studies, research and development activities and manufacturing of the Company's biotechnology-derived products are primarily carried out through Bio-Technology General (Israel) Ltd. ("BTG-Israel"), the Company's wholly-owned subsidiary in Rehovot, Israel. PRODUCTS AND APPLICATIONS The Company's products under commercialization are currently being marketed by third parties, with the exception of Oxandrin and Delatestryl, which the Company is marketing on its own in the United States. In addition, the Company is marketing Bio-Tropin and BioLon on its own in Israel. The following table presents information regarding the Company's principal products: 1 PRODUCT Indication/Application Status ------- ---------------------- ------ PRODUCTS UNDER COMMERCIALIZATION - ------------------------------------------------------------------------------------------------------------------------------------ OXANDRIN Involuntary weight loss Commercial sales (oxandrolone) (United States and various other countries) - ------------------------------------------------------------------------------------------------------------------------------------ BIO-TROPIN Growth hormone deficiency in Commercial sales (human growth hormone) children (Japan, Europe and various other countries) - ------------------------------------------------------------------------------------------------------------------------------------ BIOLON Injectable viscous solution for Commercial sales (United States and (sodium hyaluronate) ophthalmic procedures various other countries) - ------------------------------------------------------------------------------------------------------------------------------------ DELATESTRYL Hypogonadism Commercial sales (United States) (injectable testosterone) - ------------------------------------------------------------------------------------------------------------------------------------ MIRCETTE Reduced pregnancy risk Commercial sales (United States) (oral contraceptive dosing regimen) - ------------------------------------------------------------------------------------------------------------------------------------ SILKIS Anti-psoriasis/contact dermatitis Approved for sale (Nine European (vitamin D derivative) agent/other skin disorders countries) ==================================================================================================================================== PRODUCTS IN REGISTRATION AND CLINICAL TRIALS: - ------------------------------------------------------------------------------------------------------------------------------------ BIO-HEP-B Hepatitis-B vaccine NDA filed in Israel 1997 - ------------------------------------------------------------------------------------------------------------------------------------ INSULIN Diabetes Bio-equivalency study - ------------------------------------------------------------------------------------------------------------------------------------ ANDROTAB-SL Hypogonadism Phase III clinical trials (sublingual testosterone supplement) - ------------------------------------------------------------------------------------------------------------------------------------ FIBRIMAGE Diagnostic for locating deep vein Phase II clinical trials (Canada and (thrombus-imaging agent) thrombus United States) - ------------------------------------------------------------------------------------------------------------------------------------ OXSODROL Reduction of asthma and neuro Phase II clinical trials (human superoxide dismutase) protectant in premature infants ==================================================================================================================================== PRODUCTS IN LABORATORY AND PRE-CLINICAL RESEARCH: - ------------------------------------------------------------------------------------------------------------------------------------ FACTOREX Anti-coagulant Pre-clinical development - ------------------------------------------------------------------------------------------------------------------------------------ PEG-URICASE Gout Pre-clinical development - ------------------------------------------------------------------------------------------------------------------------------------ BIO-HY Osteoarthritis Development - ------------------------------------------------------------------------------------------------------------------------------------ CANCER THERAPIES Cancer Development ====================================================================================================================================
Oxandrin (oxandrolone) The Company's oxandrolone product, trademarked Oxandrin, is an oral anabolic agent that is an analogue of testosterone and is used to promote weight gain. There is growing recognition in the medical community that interventional management of disease-related weight loss (cachexia) is an extremely important facet of patient care. Involuntary weight loss is associated with a relatively wide range of clinical conditions which, unless monitored and carefully managed, can lead to a delay in recovery and a rapid escalation in the incidence of infection, morbidity and ultimately death. Published studies indicate that the loss of only 10% (the clinical definition of cachexia) of an individual's lean body mass (i.e., muscle) is associated with a 20% increase in mortality. At 35% weight loss there is a 100% death rate. Additionally, weight loss may lead to increased intensive care and longer recovery and rehabilitation periods, thereby increasing the cost of treating 2 the underlying disease. The Company estimates the incidence of involuntary weight loss in the United States exceeds several million persons each year. The causes of involuntary weight loss suffered by persons with a wide variety of chronic and acute diseases are believed to be the result of a number of factors, with inadequate nutrient intake and an altered metabolic state playing central roles. Malnutrition, the pathophysiology of which is frequently unknown, is the one condition common to all weight loss disorders, regardless of etiology. It is generally accepted that anabolic agents promote protein synthesis, which enhances the building of lean body mass and ultimately weight gain. However, because natural androgens, such as testosterone, also possess androgenic or virilizing properties that have undesirable side-effects when used for treating weight loss, particularly in women, potent anabolic and weak androgenic effects are preferable drug properties for the treatment of this condition. Clinical trials have shown that Oxandrin is an effective adjunctive therapy to promote weight gain in a variety of pathophysiologic conditions and has a low potential for androgenic activity. Unlike many other anabolic steroids, Oxandrin appears to undergo less overall metabolic transformation in the liver, which the Company believes offers a safety advantage over other androgenic/anabolic alternatives that are fully metabolized in the liver and have the potential to cause liver toxicity. Unlike appetite enhancers currently used for treating weight loss, studies indicate that Oxandrin promotes weight gain primarily through the building of lean body mass rather than fat and water. The Company also believes that Oxandrin is preferable to human growth hormone for treatment of weight loss because of the ease of administration of Oxandrin (oral versus injectable) and its lower cost. The Company believes that Oxandrin is the only United States Food and Drug Administration ("FDA") approved oral anabolic agent to promote weight gain without deleterious side effects. In 1964, the FDA approved Oxandrin for weight gain following weight loss due to severe trauma, chronic infection or extensive surgery and for patients who, without definite pathophysiologic reasons, fail to gain or to maintain normal weight. This approval permits the use of Oxandrin to treat all disease-related weight loss other than starvation. G.D. Searle & Company Limited ("Searle"), which originally developed and obtained FDA approval of Oxandrin and now licenses Oxandrin to, and contract manufactures Oxandrin for the Company, ceased offering Oxandrin in the 1980s. With the growing awareness of the importance of combating disease-related involuntary weight loss, BTG decided to re-launch the product on its own under the Oxandrin tradename. Sales of Oxandrin commenced in December 1995 in the United States for all indications under the FDA approval. Since the Company's launch of Oxandrin in December 1995, a significant portion of its Oxandrin sales has been for treatment of patients suffering from AIDS-related weight loss. In order to increase market awareness and acceptance of Oxandrin for the treatment of other disease-related weight loss conditions, BTG is conducting Phase III and post-approval Phase IV clinical trials to provide further clinical support for the use of Oxandrin for such conditions. Recently completed clinical trials at leading institutions studied: (i) the effect of Oxandrin as an adjunct to promote weight gain and hasten the rate of skin regrowth and healing in burn patients and as an adjunct to promote weight gain and hasten healing of decubitus ulcers in malnourished patients; and (ii) Oxandrin for the promotion of weight gain in patients suffering from weight loss due to chronic obstructive pulmonary disease. A manuscript for the first study has been submitted for publication and the second study has been published. Clinical trials currently being conducted at leading institutions include studies of: (i) Oxandrin for the promotion of weight gain in malnourished patients with inoperable non-small cell lung cancer; and (ii) Oxandrin for the promotion of weight gain and shortened recovery time in patients who have undergone liver transplants. In January 1994 the Company obtained approval to market oxandrolone for pediatric growth disorders in Australia. This is the first regulatory approval for the marketing of oxandrolone for pediatric growth disorders anywhere in the world. BTG has granted CSL Limited ("CSL") of Australia exclusive marketing rights for oxandrolone in Australia, New Zealand and the nearby South Pacific region. CSL commenced sales of oxandrolone in Australia in February 1994 under the trade name Lonavar(R). The product has been approved in South Korea, Russia and Azerbaijan and BTG is currently evaluating the opportunity to commercialize Oxandrin in those countries. 3 In February 1999, the Company was granted a U.S. patent directed to the use of oxandrolone in the treatment of chronic obstructive pulmonary disease. Patent applications directed to other uses of Oxandrin are pending in the United States and other countries. Bio-Tropin (human growth hormone) Human growth hormone ("hGH") is naturally secreted by the pituitary gland and controls many physiological functions that are essential for normal development and maturation. A deficiency of hGH results in diminished growth and, in extreme cases, dwarfism. The Company estimates that current annual worldwide sales of hGH for the treatment of growth hormone deficiency are approximately $1.5 billion. Geographic distribution of worldwide sales of human growth hormone is estimated by the Company to be approximately 25% in North America and 30% in Europe, with the balance in Japan and other countries. The Company's scientists first produced hGH by recombinant DNA methods in the early 1980s. As a result of a seven-year Orphan Drug status exclusivity period granted to a competitor, followed by extensive and continuing patent litigation with Genentech, Inc. ("Genentech"), the Company has to date been precluded from marketing Bio-Tropin in the United States, despite the fact that the FDA approved Bio-Tropin for marketing in the United States in May 1995. Genentech's patent expires in 2003. The Company's human growth hormone is currently being marketed by third parties in Japan and several European and Latin American countries and by the Company in Israel. See "-Sales and Distribution" and "Item 3. Legal Proceedings." In April 1993, JCR, BTG's marketing partner in Japan, received regulatory approval for hGH for the treatment of short stature, and began marketing hGH in June 1993. JCR has also completed a clinical trial to test the efficacy of the Company's hGH for treating Turner syndrome, a condition in which girls born with non-functioning ovaries do not develop secondary sexual characteristics and are shorter than normal, and filed for regulatory approval in January 1994. In January 1995, the Company granted JCR exclusive distribution rights in The People's Republic of China for all hGH-related pharmaceutical indications. In January 1998, JCR signed an agreement memorandum with Sumitomo Pharmaceuticals Co., Ltd. ("Sumitomo"), to enter into a marketing alliance for the marketing of hGH in Japan. Under the terms of the agreement memorandum, JCR will supply Sumitomo with BTG's hGH and Sumitomo commenced distribution in Japan in January 1999, following termination of its agreement to distribute Pharmacia Upjohn Co., Ltd.'s recombinant human growth hormone, Genotropin(TM), at the end of 1998. Upon termination of Pharmacia Upjohn's agreement with Sumitomo, Pharmacia Upjohn began to market Genotropin in Japan on its own. In 1998 Sumitomo was the leading distributor of hGH in Japan. In November 1992, the Company entered into an exclusive distribution agreement with the Ferring Group ("Ferring") for the marketing of the Company's human growth hormone for enhancing growth and stature in growth hormone deficient children in Europe and the countries comprising the former Soviet Union. Sales began during the fourth quarter of 1994, and the Company's hGH is now approved in 17 countries in Ferring's territory. The Company received approval for hGH from the Israel Ministry of Health in April 1988 and began direct marketing in Israel under the Bio-Tropin trademark in October 1988. In July 1992, Bio-Tropin was approved by the Israel Ministry of Health for the treatment of a second indication, Turner syndrome. In July 1997, Bio-Tropin was approved by the Israel Ministry of Health for the treatment of children suffering from renal insufficiency. The Company's human growth hormone is also being sold by third-party distributors in several countries in South America and the Far East. The product was approved in Canada and Cyprus in 1997, and in Colombia in 1998. In addition, regulatory approval to market BTG's human growth hormone is pending in several Latin American countries, South Africa and several Pacific Rim countries. The Company's human growth hormone product is currently being marketed by Ferring in Europe and JCR in Japan in conjunction with a needleless delivery device. Most of the Company's other third-party 4 distributors are expected to utilize this delivery device as well. BTG has licensed exclusive rights to this delivery device in the United States for use with the Company's hGH. BioLon (sodium hyaluronate) Sodium hyaluronate is a high-viscosity, gel-like fluid. The Company has developed a sodium hyaluronate-based product, trademarked BioLon, for use in ophthalmic surgery procedures such as cataract removal and intraocular lens implantation. BioLon is a syringe filled with a 1% sodium hyaluronate solution that facilitates such surgery by acting as a highly viscous lubricant allowing for surgical manipulation of the ocular tissues. Product sales of BioLon commenced in early 1993, and BioLon is currently approved for sale in the United States and more than 30 other countries. In June 1995, BioLon was approved as a medical device by mdc, a notified body of the European Economic Community. As a result, a CE mark granted to the product and appearing on the product box allows the Company's partners to freely market BioLon throughout Europe. The Company licensed exclusive BioLon distribution rights in the United States to Akorn, Inc. in March 1998. Akorn launched BioLon in the United States in conjunction with Allergan, Inc. in November 1998. See "--Sales and Distribution." The Company has completed the development of a second-generation product, BioLon Prime(TM), that has a higher viscosity than BioLon and gives better support inside the chamber of the eye during the surgical procedure. This product was granted a CE mark in June 1997, and approval was received in Israel in February 1998. Delatestryl (testosterone enanthate) Delatestryl is the Company's injectable testosterone product currently used to treat men with hypogonadism (testosterone deficiency), a condition associated with reduced libido, insufficient muscle development and bone loss. The Company believes that currently only 100,000 of the approximately 200,000 to 400,000 men in the United States suffering from this condition are undergoing treatment. The product is also prescribed for delayed puberty, which BTG believes is a treatable condition in approximately 30,000 boys in the United States. The Company acquired the approved NDA and trademark from Bristol-Myers Squibb Company ("Bristol"), which contract manufactures Delatestryl for BTG on a purchase order basis, and BTG pays Bristol a fee based on its sales of Delatestryl. The Company began the sale and distribution of Delatestryl in mid-1992. See "--Risk Factors--Dependence on Third-Party Suppliers." Mircette (oral contraceptive dosing regimen) The Company has acquired an exclusive license to a patented oral contraceptive dosing regimen. This new approach to oral contraception is expected to reduce both the risk of pregnancy, in the event a woman forgets to take a pill, and the breakthrough bleeding and spotting experienced by many women who use conventional low-dose oral contraceptives. The market for oral contraceptives in the United States is estimated by BTG to exceed $1 billion annually. Organon, Inc. ("Organon"), a subsidiary of AKZO Nobel N.V., has licensed the Company's patented oral contraceptive dosing regimen and has developed a product using this regimen with the progestogen desogestrel. Organon filed an NDA with the FDA in April 1997, which approved the product in April 1998, and Organon began to commercialize the product under the name Mircette in the third quarter of 1998. The license agreement with Organon provided for milestone payments and provides for royalties on sales. Regulatory authorities in Germany and the United Kingdom have declined to approve Organon's desogestrel product using the oral contraceptive regimen as a result of reported higher incidence of thromboembolic disease than competing levonorgestrel oral contraceptive regimens. 5 In 1997, the Company licensed the oral contraceptive dosing regimen to Gynetics Inc. for future use with any one or more progestins other than desogestrel. The license agreement with Gynetics provides for an upfront license fee, milestone payments in shares of Gynetics common stock, and royalties on sales. Silkis (vitamin D derivative) The Company has obtained an exclusive license to patents covering the composition and use of certain vitamin D derivatives for topical treatment of psoriasis, dermatitis and other skin disorders. Patents have issued in the United States, Israel and in major countries in Europe, including Great Britain. The British patent has also been extended to Singapore and Hong Kong. In March 1996, the Company sublicensed exclusive rights under the patents in the United States to Galderma S.A. ("Galderma"). Galderma has agreed to pay license fees upon the attainment of certain milestones and a royalty on sales in the United States. The licensee of BTG's rights under the patents for the remainder of the world sublicensed those rights to Galderma in 1996. The Company is to receive a royalty on all commercial sales of products containing these vitamin D derivatives in countries outside the United States in which the vitamin D derivative patents have issued. Although the product was approved in The Netherlands and Switzerland in 1995, Galderma determined to change the formulation prior to commencing marketing. Notification of preliminary approval in several European countries, including France and Germany, has been received, and BTG believes that Galderma will begin marketing in nine European countries by the end of 1999. Bio-Hep-B (hepatitis-B vaccine) The Company has genetically engineered a third generation vaccine against the hepatitis-B virus. The Company's Bio-Hep-B vaccine integrates the S, pre-S1 and pre-S2 surface proteins of the virus. Clinical trials in Israel, the Far East and Europe in adults, children and neonates have been completed and showed the vaccine to be safe and highly immunogenic. The Company believes the high immunogenicity, initial faster rate of response and low manufacturing cost of its Bio-Hep-B vaccine will provide it with a competitive advantage, particularly in the less developed countries where hepatitis-B is prevalent. The first generation plasma-derived Hepatitis-B vaccine is generally used in less developed countries. The Company believes, however, that these countries desire an alternative to the plasma-derived vaccine because of fears of viral transmission, but cannot currently replace the plasma-derived vaccine because the second generation recombinant vaccine is too expensive. The Company believes the cost of its Bio-Hep-B vaccine will be affordable by these less developed countries. In addition, many of these countries are pursuing hepatitis-B immunization programs for all newborns in an effort to substantially decrease the incidence of hepatitis-B. The Company has completed clinical trials in healthy adults, children and neonates, and filed an application for approval of its Bio-Hep-B vaccine with the Israel Health Ministry in November 1996. BTG believes that Bio-Hep-B will be approved in Israel by the end of 1999, although there can be no assurance that approval will be received within this time frame or at all. The Company has licensed marketing rights to SciGen Pte Ltd, a Singapore company ("SciGen"), for the commercialization of the Bio-Hep-B vaccine in certain Pacific Rim territories (excluding Japan) and certain other countries, including The Peoples Republic of China, Australia, New Zealand and India. The Company and SciGen have completed clinical trials in several countries. In December 1997, BTG granted SciGen a license to use the technical information provided by BTG to establish a manufacturing facility to produce Bio-Hep-B in India, China or Australia. In February 1998, the Company entered into development and licensing agreements with Swiss Serum and Vaccine Institute Berne ("Swiss Serum") with respect to its Bio-Hep-B in Western Europe, most of Latin America and various other countries. Swiss Serum will purchase vaccine from the Company for distribution, and the Company will receive milestone payments from Swiss Serum, as well as royalties on sales of the vaccine. 6 The Company hopes to obtain an approval for its Bio-Hep-B vaccine from the Israel Health Ministry during 1999, although there can be no assurance that such approval will be obtained in this time frame or at all. The Company has licensed marketing rights for South Africa and certain other African countries to BioVac S.A. The Company's ability to commercialize Bio-Hep-B in the near term will depend on receiving Israeli regulatory approval and the Company's ability to maintain the compulsory license to manufacture the Company's vaccine under Biogen, Inc.'s Israeli patent, granted to BTG-Israel by the Israeli Registrar of Patents in September 1995. Biogen is currently challenging this license grant. See "--Risk Factors--Risk of Pending Patent Litigation,""--Uncertainty of Protection of Patents and Proprietary Rights" and "Item 3. Legal Proceedings." Insulin Insulin is a polypeptide hormone essential for the control of blood glucose levels that is frequently administered to patients suffering from diabetes mellitus, a metabolic disorder characterized by hyperglycemia resulting from relative or absolute insulin deficiency. Biosynthetic recombinant human insulin is currently manufactured by two processes: in E. coli (Eli Lilly and Company and Hoechst AG) or in yeast (Novo-Nordisk A/S). BTG has developed a proprietary expression system and a purification process to efficiently produce recombinant human insulin in E. coli. Patent applications relating to this process have been filed in many countries. BTG's insulin is identical to naturally-occurring human insulin and does not differ from commercially-available insulins in terms of purity or biological activity. In January 1999, the Company entered into a technology transfer and license agreement with Akzo Nobel's wholly owned subsidiary, Diosynth b.v., for the Company's recombinant human insulin. The license grants Diosynth rights to the product in most countries of the world. Under the terms of the agreement, BTG will transfer its recombinant human insulin technology to Diosynth and Diosynth will manufacture the product in bulk form for the licensed territory. Another Akzo Nobel subsidiary, Organon, may in certain instances finish the bulk and market it in finished form. BTG will receive license fees linked to the achievement of certain milestones and royalties on all commercial sales of the product. In January 1998, BTG entered into a licensing agreement with IBATECH Sp. zo.o., a Polish corporation ("Ibatech"), covering the development, production and commercialization of BTG's recombinant human insulin. Under the agreement, Ibatech and BTG will collaborate in the development of the know-how for large scale manufacturing of BTG's recombinant human insulin for the insulin markets in Poland and several other East European countries. The Company will receive certain milestone payments and royalties on sales of the product in the licensed territories. Androtab-SL (sublingual testosterone) Androtab-SL is the Company's sublingual testosterone product for the treatment of hypogonadism. Hypogonadism is associated with diminished libido and sexual function, loss of muscle mass, bone loss and other conditions. Testosterone for the treatment of hypogonadism is currently administered by deep intramuscular injection, transdermal patch or orally. It is estimated that only 60,000 to 70,000 men, of a potential 200,000 to 400,000 who suffer from hypogonadism, are currently being treated. The Company believes this is primarily a result of patient and doctor dissatisfaction with existing products. Injections are painful and may cause mood swings, and orally-active synthetic androgens have been reported to be toxic to the liver. The currently available transdermal patches, which are designed to be worn either on shaven scrotal skin or alternating sites on the back, hip and abdomen, are reported to cause skin irritation. The Company believes its sublingual 7 formulation offers distinct advantages over the competition, because it is painless, discreet, non-toxic to the liver and easy to use. In 1996, the Company completed a multicenter Phase III clinical trial of the product for the treatment of hypogonadism. Results indicate that the Androtab-SL product can effectively deliver native testosterone without reported adverse effects. The men in the study reported restoration of libido and potency. The Company's NDA was filed with the FDA in October 1996. In January 1998, the FDA completed its review and found the information submitted inadequate for approval. The Company and the FDA are in discussions regarding the development of additional clinical data that will be needed to more fully establish safety and efficacy of a sublingual regimen. In 1986, the Company obtained a license from the National Technical Information Service ("NTIS"), an operating unit of the United States Department of Commerce, under a U.S. patent relating to a method of treating a human by sex hormone addition using a formulation of a hormone, such as testosterone, and another compound (the "NTIS License"). This license was later amended to include such formulation as defined by a claim in a related patent which became involved in a patent interference in the U.S. with a patent application belonging to Janssen N.V. ("Janssen") (the "NTIS Interference"). The Company is currently using such a formulation in its Androtab-SL sublingual testosterone product for the treatment of hypogonadism. See "--Patents and Proprietary Rights." Fibrimage (thrombus-imaging agent) Fibrimage (formerly called Imagex) is a novel agent for detection of thrombi and blood clots in patients suffering from deep vein thrombosis or pulmonary embolism. Deep vein thrombosis, which results from the development of thrombi, causes a reduction in the venous blood flow. Pulmonary embolism is the dislodgement of a piece of thrombus and its relocation via the circulatory system to the lungs. Fibrimage consists of a genetically-engineered portion of the fibrin binding domain of fibronectin attached to a radiopharmaceutical tag. Once injected in the patient, it targets and binds to fibrin, a substance that is essentially present only in blood clots. The Company, in collaboration with the Frosst Radiopharmaceuticals Division (the "Division") of Merck Frosst Canada Inc. ("Merck Frosst"), a subsidiary of Merck & Co., Inc., completed a pilot study outside the United States to test the safety and efficacy of Fibrimage in humans. In this trial, consisting of 62 patients suspected to be suffering from deep vein thrombosis, the specificity and sensitivity of clot detection by the product was confirmed. The Company has issued patents covering Fibrimage in the United States, Australia, New Zealand and Russia. Additionally, the European Patent Office (EPO) patent has been allowed and is due to enter the national phase in 13 European countries during 1999. In August 1994, worldwide rights to the polypeptide were licensed to Merck Frosst for the development and commercialization of a diagnostic imaging agent for the detection of thromboembolism. Merck Frosst filed an IND with the Canadian Bureau of Biologics in April 1996. The Division and all rights to Fibrimage were acquired by DRAXIS Health Inc. in September 1997. DRAXIS successfully completed a Phase I study of Fibrimage in Canada in December 1997, and is currently concluding a Phase II study. OxSODrol (human superoxide dismutase) The Company has developed a process for manufacturing a fully active analog of human copper/zinc superoxide dismutase ("SOD"), which neutralizes oxygen free-radicals. Many premature babies are deficient in naturally occurring SOD, and the high concentrations of oxygen that premature babies require are believed to be involved in generating excess oxygen free-radicals in the lungs, causing permanent lung injury at the cellular level. In February 1993 BTG initiated a Phase I human clinical study, which was completed in December 1993, related to the use of SOD to prevent bronchopulmonary dysplasia ("BPD"), a chronic lung disease that develops following treatment with oxygen and mechanical ventilation of premature infants who experience respiratory distress. The Company completed a Phase I(b) study of the safety of repeated doses, and on the basis of this study, a multicenter double blind Phase III clinical efficacy and safety trial involving 360 patients commenced in January 1997. In November 1997, an independent Data Safety and Monitoring Committee (the "Committee"), comprised of three renowned professors of pediatrics and a statistician, 8 announced that, based on its review of safety data on the first 100 patients in the trial, it had found no evidence to suggest any significant safety concerns and recommended continuation of the trial. In early 1998, the Committee, which did not review efficacy data on the first 100 patients, conducted a second interim analysis on the first 180 patients who completed treatment to review both safety and efficacy data. In February 1998, the Committee informed BTG that it wished to expand its analysis and include the data collected on all 298 neonates enrolled in the study through February 1, 1998, in order to determine if the additional data impact the demonstration of safety and efficacy. In addition, the Committee determined that neonates currently receiving treatment should complete the study as specified in the trial protocol, but that further enrollment of neonates into the trial be temporarily suspended. The expanded evaluation was completed in the second quarter of 1998 and revealed no reduction in the combined incidence of BPD and death at 28 days in neonates treated with OxSODrol. However, based on preliminary data from the earlier Phase I investigations, which suggested a delayed neuroprotective effect in neonates treated with OxSODrol, and in consultation with the FDA, the current trial is continuing as a Phase II study with preservation of blinded treatment assignments. The incidence of pulmonary and neurologic complications in the placebo and OxSODrol treated groups will be assessed at one year corrected postnatal age. This data is expected to be available for analysis in June 1999. In January 1995, OxSODrol was licensed to JCR for the treatment of BPD in Japan and, in August 1997, BTG licensed to Ares Trading S.A., a member of The Ares-Serono Group ("Serono"), worldwide distribution rights (excluding the United States, Canada, Israel and Japan) for OxSODrol for the treatment of bronchopulmonary dysplasia and other respiratory indications. The Company holds a U.S. patent relating to intratracheal delivery of copper/zinc SOD to protect human lungs from injury due to hyperoxia and hyperventilation and is the exclusive licensee of a U.S. patent directed to the DNA encoding copper/zinc SOD. A U.S. patent assigned to the Company, which is directed to a method for producing enzymatically active human copper/zinc SOD in bacteria, is the subject of an interference action with Chiron, which also holds a U.S. patent for bacterially-produced human copper/zinc SOD. A U.S. patent application directed to SOD and assigned to BTG has recently become involved in a second interference with a Chiron patent. An Israeli patent application assigned to Chiron, which relates to copper/zinc SOD, is being opposed by the Company. See "--Risk Factors--Risk of Pending Patent Litigation" and "--Uncertainty of Protection of Patents and Proprietary Rights" and "Item 3. Legal Proceedings." Factorex (anti-coagulant) A highly selective anti-coagulant, a recombinant protein Factor Xa inhibitor, trademarked Factorex, is being developed by BTG for cardiovascular applications. The blood coagulation process is a multi-step, complex cascade of reactions which ultimately lead to the formation of fibrin as an integral component of the clot. Factor Xa catalyzes the conversion of prothrombin to thrombin, which, in turn, converts fibrinogen into fibrin. By inhibiting Factor Xa, thus blocking the catalytic conversion of prothrombin, Factorex inhibits formation and deposition of fibrin in clots and permits tighter control of pathogenic thrombus generation than currently available products. The Company believes that, like other leech-derived peptides, Factorex should have very low immunogenicity in man, facilitating multiple administration. The product is manufactured via recombinant DNA technology in E. coli and is biochemically configured in a proprietary process to its active configuration. It has been shown to possess Factor Xa inhibitory activity in vitro and in pre-clinical analysis in animal models. Potential indications include prevention of deep vein thrombosis and arterial reocclusion and restenosis, as well as an adjunct to thrombolytic agents. Pre-clinical studies have been completed, and the Company has initiated process development of clinical grade material for toxicology studies. In 1998, the Company was awarded two U.S. patents relating to the DNA encoding its Factorex, expression of the Factorex polypeptide and its use. In January 1999 two more U.S. patents issued directed to the Factorex polypeptide. Additionally, the Company holds an exclusive license to other issued U.S. and European Patent Office patents relating to a Factor Xa inhibitor. Parallel patent applications owned or licensed by the Company have been granted in Australia, New Zealand and Israel and are pending in many other countries. 9 Uricase Gout occurs when uric acid accumulates in the joints. The disease causes severe pain and creates risk of kidney failure, which may lead to life-threatening complications. Current treatments for gout and related conditions are sometimes ineffective because of side effects or lack of efficacy of approved medication. PEG-uricase is a chemically modified enzyme of mammalian origin that converts uric acid to a more soluble and readily excreted product. The PEG-modified enzyme has a much longer circulating lifetime and is less likely to induce immune reactions than the unmodified enzyme. Therefore, in individuals who cannot excrete excess uric acid, the PEG uricase enzyme should effectively and efficiently eliminate excess uric acid from the body. In August 1998 the Company licensed exclusive worldwide rights from Duke University ("Duke") of North Carolina and Mountain View Pharmaceuticals, Inc. ("MVP"), a California company, to technology relating to polyethylene glycol ("PEG") conjugates of uricase (urate oxidase). The Company and MVP have since received a grant to develop the product from the U.S.-Israeli Binational Research and Development ("BIRD") Foundation. Duke has developed recombinant uricases and, together with MVP, has developed PEG conjugates of uricases to make them safer and longer acting. MVP has transferred its PEG technology to the Company, and the Company will produce PEG conjugates of uricase, undertake clinical trials and commercialize the product. The Company believes that it could receive Orphan Drug designation for the use of this product in allopurinol-resistant gout patients and others for whom current treatment is ineffective or contraindicated. BioHy BioHy is a sodium hyaluronate composition developed by the Company for intra-articular injection. Such treatments are likely to reduce arthritic pain. The Company expects to conduct clinical evaluations in 1999 to examine the product's efficacy in treating osteoarthritis. Cancer Therapies The Company is evaluating early stage research options for specifically attacking malignant growth. These options include (i) approaches to destroying blood vessels that are needed for growth of solid tumors and (ii) development of a cancer vaccine. SALES AND DISTRIBUTION The Company markets its products on a direct basis in the United States and Israel and grants exclusive marketing or distribution rights to third parties for sales in most other countries. The Company's sales and marketing team in the United States, which was established in the second half of 1995, currently consists of 44 people. With respect to sales outside the United States, BTG's current distribution arrangements include exclusive relationships with JCR Pharmaceuticals Co., Ltd. for the sale of BTG's hGH in Japan and The People's Republic of China, the Ferring Group for the sale of BTG's hGH in Europe and the former Soviet Union, as well as with 9 other companies, covering more than 30 countries, for the sale of BTG's hGH and 19 companies, covering more than 70 countries, for the sale of BioLon. In substantially all of the Company's product distribution agreements, the Company grants exclusive marketing and distribution rights in one or more countries in exchange for upfront license payments and exclusive supply arrangements. Pursuant to these agreements, the Company supplies product at a price equal to a percentage of the distributor's net sales price, subject to a minimum price. Regulatory approvals are obtained either by the Company or by its distributors, depending on the product, the territory and the terms of the commercial agreement. The Company is generally obligated to indemnify the distributor for product liability claims resulting from the failure of supplied product to meet agreed upon specifications and infringement of third-party patents. See "--Risk Factors--Dependence on Third-Party Licensees." 10 BTG has an agreement with Olsten Corporation, a provider of personnel to business, industry and government, home health care services and products for chronic and acute care, as BTG's exclusive wholesale and retail distributor of BTG's Oxandrin and Delatestryl products, in the United States. Olsten also offers patient reimbursement assistance for Oxandrin. Sales of Oxandrin in 1996, 1997 and 1998 were primarily to Olsten. See "--Risk Factors--Dependence on Oxandrin." In 1988 and 1995, respectively, the Company granted exclusive distribution rights in Japan and The Peoples Republic of China to JCR for all hGH-related pharmaceutical indications. BTG sells bulk product to JCR at a fixed price. BTG is obligated to indemnify JCR for all expenses incurred and damages suffered by JCR as a result of any adjudgement of infringement of third-party patents. A substantial portion of the Company's hGH sales have been to JCR. See "Item 3. Legal Proceedings." In November 1992, the Company entered into an exclusive distribution agreement with the Ferring Group for marketing of the Company's human growth hormone for the enhancement of growth and stature in growth hormone deficient children in Europe and the countries comprising the former Soviet Union. Bio- Tropin is now available in 17 countries in Ferring's territory. BTG sells finished product to Ferring and receives a percentage of Ferring's net sales. Ferring has the right to purchase bulk product from BTG and formulate, vial and package the product if Ferring can obtain all required regulatory approvals. BTG is obligated to indemnify Ferring for all expenses incurred and damages suffered by Ferring as a result of any adjudgement of infringement of third-party patents. The Company has concluded agreements for the commercialization and distribution of BioLon with several companies covering most countries in Europe and Latin America and several countries in Africa, Asia and the Far East. These agreements provide for license fees and/or royalties and most require minimum guaranteed purchases in the first years after registration and commencement of commercialization. In order to take advantage of the Company's distribution organization in the United States, BTG and Serono Laboratories, Inc., a member of Serono, in May 1998 entered into an agreement under which BTG will co-promote Serono's line of pediatric growth products in the United States. Under this agreement, BTG is promoting, through the Company's distribution channel, Serono's recombinant human growth hormone, Saizen(R) (somatropin [r-DNA origin] for injection) for the treatment of children with growth failure due to inadequate levels of growth hormone; Geref(R) (sermorelin acetate for injection), the first approved growth hormone releasing hormone for the treatment of idiopathic growth hormone deficiency in children; and Geref(R). The Company earns royalties on its sales of these Serono products. RESEARCH AND DEVELOPMENT The Company conducts research on potential products for which it has retained future rights for its own account and on behalf of its partners for which it receives certain current revenues and, if successful, future revenues in the form of royalties or manufacturing rights. At February 1, 1999, the Company's research and development organization comprised 79 scientists, associates and related personnel with expertise in molecular biology, cell biology and protein chemistry. These individuals have received various undergraduate and advanced degrees at prestigious universities throughout the world. Twenty four hold Ph.D. or M.D. degrees, and several have completed post-doctoral studies under the direction of internationally renowned scientists in the area of biotechnology. The Company applies to the Chief Scientist of the State of Israel (the "Chief Scientist") annually for research and development funding for its various projects for the coming year. The projects and amount funded each year are within the sole discretion of the Chief Scientist. There can be no assurance that the Company will be able to continue to secure additional funds from the Chief Scientist at the same levels or at all. The Company is obligated to pay royalties to the Chief Scientist for products resulting from research and development partially funded by the Chief Scientist. These royalties range from 3% to 5% on commercial sales, if any, of these products if produced in Israel, up to the amount so funded, and 4% to 6% of commercial sales, if any, if these products are produced outside Israel, up to 120% to 300% of the amount so funded. During 1996, the Company completed payment of its entire obligation for royalties to the Chief Scientist for 11 funding of its human growth hormone development. The State of Israel has indicated its intention to reexamine certain of its policies relating to research and development grants and that funding for research and development grants may be reduced in the future. MANUFACTURING AND SUPPLY AGREEMENTS The Company currently operates a GMP certified facility in Israel for production of its bulk human growth hormone, BioLon, Bio-Hep-B, OxSODrol, Factorex and insulin products, as well as the genetically-engineered portion of the Fibrimage product. The Company also operates a modern filling suite for its BioLon syringes which has undergone inspection by European and American regulatory authorities. Based on these inspections, European Device Approval (CE Mark) was granted. Although a substantial portion of the hGH supplied by BTG to its distributors is in bulk form, BTG also provides distributors with fully packaged product. For these distributors, the bulk human growth hormone is formulated, filled and packed in vials by Dr. Madaus GmbH in Germany, which functions as the Company's subcontractor for manufacturing the packaged product. In addition, sterilization of the BioLon syringe is performed by Mediplast Israel Ltd., which functions as the Company's subcontractor for these purposes. The Company believes that it operates its facilities under, and is in compliance with, the FDA's good laboratory and manufacturing practices. The Company's Oxandrin product is currently being manufactured for BTG on an exclusive basis by Searle, which originally developed the product. The agreement with Searle provides that Searle will produce and exclusively sell to BTG all of BTG's Oxandrin requirements. The agreement requires that BTG purchase all of its Oxandrin requirements exclusively from Searle through April 1999 and 80% of its requirements for the subsequent two-year period. The agreement expires in April 2001, subject to earlier termination under certain circumstances, and may be extended by mutual agreement of the parties. The agreement provides that Searle will not produce Oxandrin for any other person prior to April 2006. The Company and Searle are currently negotiating an amendment to the supply agreement which would extend the agreement and maintain the exclusivity subject to BTG purchasing a certain minimum annual amount. In addition to a long term exclusive supply agreement with Searle, BTG has had an alternative exclusive agreement with Societa Prodotti Antibiotici S.p.A. ("SPA") covering, if necessary, the supply of oxandrolone to BTG through at least the year 2003, contingent on certain regulatory approvals. The Company and SPA are negotiating the termination of this agreement. In February 1999, the Company entered into a supply agreement with Gedeon-Richter Ltd. ("GRL") pursuant to which GRL will supply oxandrolone to BTG on an exclusive basis provided certain annual minimum purchase requirements are met. It is anticipated that supply by GRL will begin prior to termination of the current Searle agreement. Should Searle for any reason be unable to supply Oxandrin to BTG prior to GRL obtaining the necessary approvals, BTG's business, results of operations and financial condition could be materially adversely affected. See "--Risk Factors--Dependence on Third-Party Suppliers." BTG has entered into a manufacturing agreement with ProCyte Corp., Kirkland, Washington and Applied Analytical Industries Inc., Wilmington, North Carolina for the manufacture of Androtab-SL. Bristol has manufactured Delatestryl for the Company on a purchase order basis following expiration of a supply agreement in December 1997. There can be no assurance that Bristol will continue to honor the Company's purchase orders or that the Company's supply requirements will be satisfied. Additionally, Bristol has from time to time indicated to BTG that it intends to close the facility at which it manufactures Delatestryl. The need to find a new manufacturer could affect the availability of Delatestryl. In February 1995, BTG-Israel was awarded ISO 9002 certification by the Standards Institution of Israel ("SII"). The certification was issued with respect to the manufacture, packaging and dispatch of BTG's pharmaceutical products for human use. ISO 9002 is one of a series of Quality Management System Standards established by the International Organization for Standardization ("ISO") based in Geneva, Switzerland. It is equivalent to the European Community Standard EN 29002. SII is a member of an international organization, 12 the International Quality Certification Network ("IQNet"), that encompasses quality certification institutes worldwide in a mutual recognition agreement. Receipt of the ISO 9002 certification was a significant milestone in the process of obtaining the BioLon CE mark. In August 1997, SII awarded BTG-Israel ISO 14001 certification for its Environmental Management System. The ISO 14000 series of standards, dealing with the environment and its protection, are becoming important from both a regulatory and commercial point of view. GOVERNMENTAL REGULATION Regulation by governmental authorities in the United States and other countries is a significant factor affecting the timing of the commercialization of the Company's products and its ongoing research and development activities. The Company's policy is to conduct its research and development activities in compliance with current United States National Institutes of Health Guidelines for Research Involving Recombinant DNA Molecules, and with comparable guidelines in Israel and other countries where the Company may be conducting clinical trials or other developmental activities. See "--Risk Factors--Effect of Government Regulation." Clinical testing, manufacturing and marketing human pharmaceutical products require prior approval from the FDA and comparable agencies in foreign countries. The FDA has established mandatory procedures and safety and efficacy standards that apply to the testing, manufacture and marketing of such products in the United States. In the United States, these procedures include pre-clinical studies, the filing of an IND, human clinical trials and approval of an NDA. European countries generally follow the same procedures. The EEC has established a unified filing system administered by the Committee for Proprietary Medicinal Products ("CPMP") designed to reduce the administrative burden of prosecuting applications for new pharmaceutical products. Following CPMP review and approval, marketing applications are submitted to member countries for final approval and pricing approval, as appropriate. These processes are likely to take a number of years and often involve substantial expenditures. There can be no assurance that any approval will be granted and, even if granted, such approval may be withdrawn if compliance with regulatory standards is not maintained. In addition, certain environmental and consumer groups are generally opposed to genetically engineered products, primarily in the agricultural field. There can be no assurance that opposition from such groups will not adversely affect the FDA approval process with respect to the Company's biotechnology products. In addition to the foregoing, the Company's present and future business may be subject to regulation under the United States Atomic Energy Act, Drug Enforcement Agency, Clean Air Act, Clean Water Act, Occupational Safety and Health Act, National Environmental Policy Act, Toxic Substances Control Act, Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation and Liability Act and similar state and foreign statutes, as well as national restrictions on technology transfer, and import, export and customs regulations and similar laws and regulations in foreign countries. PATENTS AND PROPRIETARY RIGHTS The Company's scientific staff and consultants are actively working in various areas of biotechnology to develop techniques, microorganisms, processes and products to achieve the Company's commercial aims. It is the Company's policy to protect its intellectual property rights in this work by a variety of means, including filing patent applications in the United States and major industrialized countries. The Company also relies upon trade secrets and improvements, unpatented proprietary know-how and continuing technological innovation to develop and maintain its competitive position. See "--Risks Factors--Uncertainty of Protection of Patents and Proprietary Rights." As of February 10, 1999, approximately 400 granted patents, owned or exclusively licensed by the Company, are being maintained worldwide, including 56 patents granted in the United States, 14 patents granted by the European Patent Office ("EPO") and 18 patents granted in Israel. Additionally, approximately 170 patent applications owned or exclusively licensed by the Company are pending in various countries. There can be no assurance that any of the patent applications assigned or licensed to BTG will result in granted patents, or that granted patents will not be circumvented or invalidated. The Company believes that important 13 legal issues remain to be resolved as to the extent and scope of patent protection, and the Company expects that in certain cases litigation may be necessary to determine the validity and scope of its and others' proprietary rights. Such litigation may consume substantial resources. See "--Risk Factors--Uncertainty of Protection of Patents and Proprietary Rights" and "Item 3. Legal Proceedings." The Company is aware of patent applications filed by, or patents issued to, other entities with respect to technology potentially useful to the Company and, in some cases, related to products and processes being developed by the Company. The Company cannot presently assess the effect, if any, that these patents may have on its operations. The extent to which efforts by other researchers have or will result in patents and the extent to which the issuance of patents to others would have a materially adverse effect on the Company or would force the Company to obtain licenses from others is currently unknown. See "--Risk Factors--Uncertainty of Protection of Patents and Proprietary Rights." The NTIS Agreement requires the Company to expend reasonable efforts and resources to develop and bring licensed products to the point of practical application by January 1, 1997, unless this period is extended by mutual agreement of the parties. The Company believes that its October 1996 filing of an NDA and its ongoing activities for Androtab-SL satisfy this requirement. The Company pays an annual maintenance fee to NTIS and will pay NTIS an administration and royalty fee of five percent of the net sales of licensed products during the exclusive period of the NTIS Agreement, except that no administration and royalty fee will be payable for direct sales of licensed products by the Company to the United States Government. NTIS has notified the Company that BTG must pay a portion of the legal fees relating to the NTIS Interference pursuant to the NTIS Agreement relating to the Company's sublingual testosterone product, Androtab-SL. The Company, which believes it is not obligated to pay these fees, is currently in discussions with the NTIS. There can be no assurance as to the outcome of these discussions. The Company has a know-how license in the U.S. and a patent license outside the U.S. from Janssen relating to sublingual formulations of the compound and testosterone. The Company believes Janssen and NTIS have reached an agreement concerning the settlement of the NTIS Interference whereby each will respect the existing U.S. licenses of the other. The NTIS Interference is continuing and the exact scope of protection, if any, will be assessed based on the scope of any claims that may be granted at the conclusion of the NTIS Interference. The Company does not expect the patents licensed under the NTIS Agreement will prevent other companies from introducing sublingual steroid replacement products using other delivery systems in the United States or similar delivery systems outside the United States. See "--Products and Applications--Androtab-SL." To date, the Company has been, or currently is, party to several administrative and legal proceedings relating to its technologies, products and patents and the patents of others. See "--Risk Factors--Risk of Pending Patent Litigation" and "Item 3. Legal Proceedings." INSTITUTIONAL AND GOVERNMENTAL RELATIONSHIPS The Company believes its relationships with research institutions in the United States, Europe and Israel and with the Government of Israel to be important in its research and product development efforts. The Company believes that these relationships greatly enhance its research and product development efforts, and the Company intends to develop and maintain relationships with leading universities and research institutions even as it continues to expand its capability to conduct research and product development at its own facilities. See "--Risk Factors--Risk of Operations in Israel." The State of Israel supports and encourages research and development in the field of high technology, as well as manufacturing for export through programs that provide for research and development funding, export financing, tax benefits and capital investment incentives. The Company's research and development activities in Israel through BTG-Israel enable it to take advantage of these programs. There can be no assurance, however, that such programs will continue. 14 OPERATIONS IN ISRAEL The Company's primary research and development and production activities are conducted in Israel and are affected by economic, military and political conditions there. Israel has been involved in a number of armed conflicts with its bordering countries. During the course of military operations, Israel's military reserves, which include a number of the Company's employees and executives, may be called up. To date, the Company has been able to continue its research and development and production activities during periods of military mobilization, although there can be no assurance that such activities could be continued in the event of future hostilities. Because BTG-Israel is involved in a technological industry and is an exporter of Israeli goods, the Company has enjoyed the benefits of certain programs promulgated by the Government of Israel in order to encourage the development of technology and export of Israeli products. However, there can be no guarantee that these programs will continue. COMPETITION Therapeutic drug development is conducted by numerous companies throughout the world. Competition is intense in the product areas in which the Company has focused its efforts. Significant competition comes from independent, dedicated biotechnology companies as well as from large, established pharmaceutical companies. In addition, the Company's products may compete against products developed by non-recombinant techniques. The primary competitive factors in this field are the ability to attract and retain highly qualified scientists and technicians, to create and maintain scientifically advanced technology during a period of rapid technological development and to develop proprietary products or processes. The principal parameters influencing competition are the efficacy of products and their production processes, the patent protection available for such products, the timing of commercialization vis-a-vis competitors' products and, to a limited extent, price. The Company's competitive position in the industry varies on a product-by-product and country-by-country basis depending upon the efficacy of the Company's products as compared to competing products, the scope of patent protection in each country for the Company's products as compared to competing products, whether the Company's product is the first such product to be commercialized and, where there are a number of similar products, the price of the Company's product as compared to its competitors' products, and the relative strength of the Company's partner in said territory. Many of the Company's current competitors have significantly greater financial and organizational resources than the Company. Since technological developments are expected to continue at a rapid pace in the biotechnology industry, the successful development of the Company's products will be dependent upon its ability to maintain a competitive position with respect to its technology. See "--Risk Factors--Competition." EMPLOYEES As of February 1, 1999 the Company had 271 employees, most of whom are engaged in research, development, manufacturing, quality assurance and marketing activities, including 36 who hold Ph.D. or M.D. degrees. In addition, the Company has consulting arrangements with scientists at various institutions and universities in the United States and Israel. The Company's ability to develop marketable products and to establish and maintain its competitive position in light of technological developments will depend, in part, on its ability to attract and retain qualified scientific, marketing and management personnel. Competition for such personnel is intense. None of the Company's employees is represented by a labor union and the Company has experienced no work stoppages. The Company believes its relations with its employees are good and has experienced a low turnover rate among its employees. 15 RISK FACTORS This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements regarding the Company's expected future financial position, results of operations, cash flows, financing plans, business strategy, competitive position, plans and objectives and words such as "anticipate," "believe," "estimate," "expect," "intend," "plan" and other similar expressions are forward-looking statements. Such forward looking statements are inherently uncertain, and stockholders must recognize that actual results could differ materially from those projected or contemplated in the forward-looking statements as a result of a variety of factors, including the factors set forth below. Dependence on Oxandrin. Approximately 64%, 96% and 87% of the increase in the Company's product sales in 1996, 1997 and 1998 resulted from increasing sales of Oxandrin, which the Company relaunched in the United States in December 1995. Sales of Oxandrin in 1996, 1997 and 1998 amounted to approximately $15.1 million, $27.9 million and $40.5 million, respectively, representing 37%, 52% and 59%, respectively, of the Company's total product sales in those periods. Oxandrin is facing increasing competition from other products, including human growth hormone, and there can be no assurance that such sales increases will continue. A substantial number of users of Oxandrin are patients with AIDS and as more successful treatments for this disease, such as protease inhibitors, are developed, the need to use Oxandrin by these patients may be reduced. Although the Company is working to expand the use of Oxandrin to treat other conditions covered by the product's current FDA approval, such as the treatment of weight loss suffered by burn victims and persons suffering from weight loss associated with non-healing wounds, chronic obstructive pulmonary disease and cancer, there can be no assurance that the Company will be successful in its efforts. Additionally, there are no patents covering Oxandrin and there can be no assurance that others will not introduce an oxandrolone product. Dependence on Third-Party Suppliers. The Company is dependent on third parties for the manufacture of Oxandrin and Delatestryl and the filling and vialing of its Bio-Tropin product. Although the Company is a party to an exclusive supply arrangement with Searle, and an alternative exclusive supply agreement with GRL, covering the supply of Oxandrin to BTG through at least the year 2003, there can be no assurance that Searle will continue, or that GRL will be able, to provide the Company with sufficient supplies of Oxandrin to satisfy its future needs. Bristol has manufactured Delatestryl for the Company pursuant to an agreement which expired in December 1997. There can be no assurance that Bristol will continue to honor the Company's purchase orders or that the Company's supply requirements will be satisfied. Additionally, Bristol has from time to time indicated to BTG that it intends to close the facility at which it manufactures Delatestryl. The need to find a new manufacturer could affect the availability of Delatestryl. In addition, the Company is dependent on Dr. Madaus GmbH ("Dr. Madaus") to fill and vial the Company's Bio-Tropin product. Any failure of Searle and GRL, Bristol or Dr. Madaus to fulfill its obligations to the Company could have a material adverse effect on the business, results of operations and financial condition of the Company. There can be no assurance that the Company would be able to find an alternative supplier for any of Searle and GRL, Bristol or Dr. Madaus if they were unable or unwilling to fulfill their obligations to the Company. See "--Manufacturing and Supply Agreements." Dependence on Third Party Licensees. The Company has derived, and expects to continue to derive over the next several years, revenues from existing and new licensing, research and development and marketing agreements. These agreements typically provide the Company's licensees with certain rights, subject to an obligation to pay royalties to the Company based on any future product sales or to purchase product from the Company, to manufacture and market specified products developed using the Company's proprietary technology. Certain of these agreements provide for funding by licensees of research activities performed on their behalf by the Company. Continued funding and participation by these licensees will depend not only on the timely achievement of milestones, which cannot be assured, but also on each licensee's own financial, competitive, marketing and strategic considerations. Such considerations include the relative advantages, including patent and proprietary positions, of alternate products being marketed or developed by others. Furthermore, the amounts of any payments to be received by the Company under its license agreements from sales of product by licensees will be dependent on the extent to which its licensees devote resources to the development and commercialization of the products. Although the Company believes its licensees have an 16 economic motivation to commercialize their products, the Company will have no effective control over the licensees' commercialization efforts. Risk of Pending Patent Litigation. To date, the Company has been, or currently is, party to several administrative and legal proceedings relating to its technologies, products and patents and the patents of others. Genentech, Inc. ("Genentech") has alleged that the Company's human growth hormone ("hGH") product infringes various Genentech patents and has obtained a preliminary injunction prohibiting the commercial introduction of the Company's human growth hormone in the United States. It is currently anticipated that this lawsuit will be tried beginning in October 1999. There can be no assurance that Genentech will not be successful in prosecuting similar infringement claims in one or more other countries in which BTG's human growth hormone product is being sold. If the Company's hGH is found to infringe certain Genentech patents in one or more other countries, the Company and/or its distributor(s) may be obligated to pay damages, and would need to obtain a license from Genentech in order to continue sales of hGH. There can be no assurance that such a license will be granted by Genentech, or that the Company's distributor(s) will not be required to stop selling the Company's hGH. Additionally, BTG's patent covering a method for producing enzymatically active human copper/zinc superoxide dismutase ("SOD") in bacteria is currently the subject of an interference action with Chiron Corp. ("Chiron") in the United States Patent Office Board of Patent Appeals and Interferences. An additional interference action has been declared between an application owned by BTG and a U.S. patent issued to Chiron for a bacterially produced form of recombinant human copper/zinc SOD. Unless BTG is able to prevail in these actions or obtain a license from Chiron, BTG may be unable to commercialize its OxSODrol product in the United States. BTG is also engaged in litigation with Biogen, Inc. ("Biogen") relating to the compulsory license granted to BTG which allows BTG to produce its Bio-Hep-B vaccine in Israel and to export the vaccine to countries in which neither Biogen nor others have been granted a blocking patent. If Biogen is successful in overturning the compulsory license, BTG will not be able to manufacture its Bio-Hep-B vaccine in Israel. See "Item 3. Legal Proceedings." Uncertainty of Protection of Patents and Proprietary Technology. The Company has developed patentable technology and proprietary know-how and has acquired from various universities and institutions certain basic technologies, as to which either patents have been issued or patent applications are pending. There can be no assurance that patent applications will result in issued patents, that the claims allowed in such issued patents will be sufficiently broad to protect the Company's proprietary rights or that patents will not be challenged, circumvented or invalidated or that rights granted pursuant to such patents will provide competitive advantages to the Company. The Company's success depends in part on its ability to continue to obtain patent protection in the United States and other countries for its technologies and the products, if any, resulting from such technologies. Patent applications in the United States are maintained in secrecy until a patent issues, and the Company cannot be certain that others have not filed patent applications for technology covered by the Company's pending applications or that the Company was the first to file patent applications for such technology. The Company also relies on trade secrets, proprietary know-how and technological innovation which it seeks to protect with confidentiality agreements with its employees, consultants and licensees. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach or that BTG's trade secrets and proprietary know-how will not otherwise become known or be independently discovered by competitors. BTG's commercial success will also depend in part on the Company not infringing patents or proprietary rights of third parties. A number of companies and research and academic institutions have developed technologies, filed patent applications or received patents on various technologies that relate to the Company's business, and such entities may file applications for or be issued patents in the future with respect to technology potentially necessary or useful to BTG. Some of these technologies, applications or patents may conflict with the Company's technologies and existing or future patents, if any, or patent applications. Such conflict could limit the scope of patents that BTG has obtained or may obtain in the future or result in patent applications failing to issue as patents. In addition, if third parties obtain patents which cover the Company's activities, there can be no assurance that BTG would be able to license such patents on reasonable terms, or at all, or be able to license or develop alternative technology. As more patents are issued to third parties, the 17 risk that the Company's products and activities may give rise to claims that they infringe the patents of others increases. The Company expects that administrative hearings, litigation or both will be necessary to determine the validity and scope of its and others' proprietary or biotechnology patents. Such administrative proceedings or litigation have to date required, and may in the future require, a significant commitment of the Company's resources. Any such commitment may divert resources from other areas of the Company. Limited Manufacturing Capacity and Experience. The Company has limited commercial scale manufacturing capacity and experience. While it is expected that the Company's manufacturing facilities will allow the Company to satisfy its current and anticipated near-term requirements, the Company will need a larger facility to meet anticipated increases in demand for its products. The Company is required to obtain regulatory approval for all of its commercial manufacturing processes and facilities, and to date the Company has been able to obtain such approvals. Any failure to receive, or substantial delay in obtaining, regulatory approval for its manufacturing processes and facilities could have a material adverse effect on the Company. The manufacture of the Company's products involves a number of technical steps and requires meeting stringent quality control specifications imposed by governmental regulatory bodies and by the Company itself. Further, such products can only be manufactured in facilities approved by the applicable regulatory authorities. As a result, the Company may not be able to quickly and efficiently replace its manufacturing capacity in the event that it is unable to manufacture its products at its facilities. In the event of a natural disaster, equipment failure, strike, war or other difficulty, BTG may be unable to manufacture its products in a manner necessary to fulfill demand. BTG's inability to fulfill demand may permit its licensees and distributors to terminate their agreements, seek alternate suppliers or manufacture the products themselves. Additionally, if the Company does not receive regulatory approval for any new facility, it would likely be unable to meet the anticipated increased demand for its products, which would have a material adverse effect on BTG's business, results of operations and financial condition. The Company is dependent on third parties to manufacture all or a portion of certain of its products. See "-- Dependence on Third-Party Suppliers." Limited Marketing Capability and Experience. The Company established a sales and marketing force in the United States during the second half of 1995 to promote distribution of Oxandrin and other BTG products in the United States. With respect to territories outside the United States, the Company does not yet have an established sales force and relies on third parties to market its products. There can be no assurance that the Company's marketing strategy will be successful. The Company's ability to market its products successfully in the future will be dependent on a number of factors, many of which are not within its control. Limited Commercial Products. The Company's principal activities since its formation in 1980 have been the research and development of products with commercial potential. Commercialization of the Company's products is subject to successful clinical testing and governmental approvals, the timing of which is not within the control of the Company and has taken and may continue to take longer than anticipated. Acceptance by the medical community of the Company's products is also necessary for their successful commercialization. Variability of Operating Results. Revenue has in the past and may in the immediate future continue to display significant variations due to the level of sales of existing products, the introduction of new products and new research and development contracts and licensing arrangements, the completion or termination of those contracts and arrangements, the timing and amounts of milestone payments and the timing of regulatory approvals of products. The Company's continued profitability will be dependent on its success in developing, obtaining regulatory approvals for and effectively marketing its products. The annual cash flows of the Company have fluctuated significantly due to the impact of net income and losses, capital spending, working capital requirements and issuances of Common Stock and other financings. The Company expects that cash flow in the near future will be primarily determined by the levels of net income, working capital requirements and financings, if any, undertaken by the Company. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." 18 Capital Needs. The development and commercialization of products requires a substantial amount of funds. The Company's cash requirements are currently satisfied primarily through product sales. Historically, cash requirements were satisfied primarily through (i) product sales, (ii) funding of projects through collaborative research and development arrangements, (iii) contract fees, (iv) government of Israel funding of a portion of certain research and development projects and (v) equity and debt financings. There can be no assurance that these financing alternatives will be available in the future to satisfy the Company's cash requirements. The Company believes that its current cash resources, together with anticipated product sales, scheduled payments to be made to BTG under its current agreements with pharmaceutical partners and third parties and continued funding from the Chief Scientist at current levels, will be sufficient to fund the Company's ongoing operations for the foreseeable future. There can, however, be no assurance that product sales will occur as anticipated, that scheduled payments will be made by third parties, that current agreements will not be canceled, that the Chief Scientist will continue to provide funding at current levels, or that unanticipated events requiring the expenditure of funds will not occur. The satisfaction of the Company's future cash requirements will depend in large part on the status of commercialization of the Company's products, the Company's ability to enter into additional research and development and licensing arrangements, and the Company's ability to obtain additional equity investments, if necessary. There can be no assurance that the Company will be able to obtain additional funds or, if such funds are available, that such funding will be on favorable terms. If additional funds are raised by issuing equity securities of the Company, dilution to existing stockholders may result. If adequate funds are not available, BTG may be required to significantly curtail one or more of its commercialization efforts or research and development programs or obtain funds through arrangements with collaborative partners or others on less favorable terms than might otherwise be available. Effect of Governmental Regulation. The Company is subject to regulation by numerous governmental authorities in the United States and other countries. All of the Company's products, manufacturing processes and facilities require governmental licensing or approval prior to commercial use. The approval process applicable to products of the type being developed by the Company usually takes five to seven years from the commencement of human clinical trials and typically requires substantial expenditures. The Company and its licensees may encounter significant delays or excessive costs in their respective efforts to secure necessary approvals or licenses. Before obtaining regulatory approval for the commercial sale of its products, the Company is required to conduct preclinical and clinical trials to demonstrate that the product is safe and efficacious for the treatment of the target disease. The results from preclinical animal studies and early clinical trials may not be predictive of results that will be obtained in large scale testing. A number of biotechnology companies have recently suffered significant setbacks in advanced clinical trials, even after experiencing promising results in preclinical and early human testing. Additionally, the timing of completion of clinical trials is dependent upon a number of factors, many of which are outside the Company's control, including the rate of patient enrollment. Patient enrollment is a function of several factors, including the size of the patient population and the proximity of patients to clinical sites. Delays in patient enrollment could result in increased costs and delays in completion of the clinical trials. In addition, preclinical and clinical trials must meet regulatory and institutional requirements. Data obtained from preclinical and clinical activities are susceptible to varying interpretations which could delay, limit or prevent regulatory approval. In addition, the Company and its partners may encounter delays or rejections based upon changes in the policies of regulatory authorities. Future United States or foreign legislative or administrative acts could also prevent or delay regulatory approval of the Company's or its licensees' products. Failure to obtain requisite governmental approvals, or failure to obtain approvals of the scope requested, could delay or preclude the Company or its licensees from marketing their products, could limit the commercial use of the products and could also allow competitors time to introduce competing products ahead of product introduction by the Company and thereby have a material adverse effect on the Company's results of operations, liquidity and financial condition. Even after regulatory approval is obtained, use of the products could reveal side effects that, if serious, could result in suspension of existing approvals and delays in obtaining approvals in other jurisdictions. Regulation by governmental authorities in the United States and other countries is a significant factor affecting the timing of the commercialization of the Company's products and its ongoing research and development activities. The timing of regulatory approvals is not within the Company's control. To date, the 19 length of time required to obtain regulatory approval of genetically-engineered products has been significantly longer than expected, both for the Company and the biotechnology industry in general. These delays have had, and if they continue could have, a material adverse effect on the results of operations and financial condition of the Company. The Company believes that these delays have in the past negatively impacted its ability to attract funding and that, as a result, the terms of such financings have been less favorable to the Company than they might otherwise have been had the Company's product revenues provided sufficient funds to finance the large costs of taking a product from discovery through commercialization. As a result, the Company has had to license the commercialization of many of its products to third parties in exchange for research funding and royalties on product sales; this will result in lower revenues than if BTG had commercialized the products on its own. Failure to comply with applicable regulatory requirements can, among other things, result in fines, suspension of regulatory approvals, product recalls, seizure of products, imposition of operating restrictions and criminal prosecutions. Further, FDA policy or similar policies of regulatory agencies in other countries may change and additional governmental requirements may be established that could prevent or delay regulatory approval of the Company's products. Uncertainty of Healthcare Reimbursement. The Company's ability to successfully commercialize human therapeutic products may depend in part on the extent to which reimbursement for the cost of such products and related treatment will be available from government health administration authorities, private health coverage insurers and other organizations. Significant uncertainty exists as to the reimbursement status of newly approved healthcare products, and there can be no assurance that adequate third-party coverage will be available for the Company to maintain price levels sufficient for the realization of an appropriate return on its investment in product development. Government and other third party payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement for new therapeutic products approved for marketing by the FDA and by refusing, in some cases, to provide any coverage for use of approved products for disease indications for which the FDA has not granted marketing approval. If adequate coverage and reimbursement levels are not provided by government and third-party payors for use of the Company's healthcare products, the market acceptance of these products would be adversely affected. In addition, in recent years a number of federal and state healthcare reform proposals have been introduced to contain healthcare costs. There can be no assurance as to the ultimate content, timing or effect of any healthcare reform legislation, nor is it possible at this time to estimate the impact of potential legislation on the Company. Regulatory approval of prices is also required in most countries outside the United States. In particular, certain European countries will condition their approval of a product on the agreement of the seller not to sell the product for more than a certain price in that country. There can be no assurance that the establishment of a price in one European country will not have the practical effect of requiring the Company's marketing partners to sell the product in other European countries at no higher than such price. Because BTG generally supplies product to its marketing partners for a specified percentage of net sales, there can be no assurance that the resulting prices would be sufficient to generate an acceptable return on the Company's investment in its products or even cover the Company's manufacturing costs for such product. Risk of Technical Obsolescence; Highly Competitive Industry. Biotechnology has undergone rapid and significant technological change. The Company expects that this technology will continue to develop rapidly, and the Company's future success will depend, in large part, on its ability to maintain a competitive position. Rapid technological development may result in products or processes becoming obsolete before marketing of these products or before the Company recovers a significant portion of the research, development and commercialization expenses incurred with respect to those products. Numerous companies, including well-known pharmaceutical and biotechnology companies, are engaged in the business of researching and developing products similar to those of the Company. Many of these companies have substantially greater capital resources and larger research and development staffs and facilities than the Company. Such companies may succeed in their research, developing on a more timely basis products that may be more effective than any which may be developed by the Company. These companies may also be more successful than the Company in the production and marketing of such products. Retention of Key Personnel. The Company is dependent upon the efforts of its officers and scientists and other employees. The loss of certain of these key employees could materially and adversely affect the 20 Company's business. There is a great deal of competition for the limited number of scientists with expertise in the area of the Company's operations. The business of the Company is dependent upon its ability to attract and retain qualified research and managerial personnel. The Company does not maintain, and has no current intention of obtaining, "key man" life insurance on any of its employees. Risk of Operations in Israel. The Company's primary research, development and production operations are at this time conducted in Israel by its wholly-owned subsidiary BTG-Israel and can be affected by economic, military and political conditions in that country and in the Middle East in general. The Company manages its Israeli operations with the object of protecting against any material net financial loss in U.S. dollars from the impact of Israeli inflation and currency devaluations on its non-U.S. dollar assets and liabilities. The cost of the Company's operations in Israel, as expressed in dollars, is influenced by the extent to which any increase in the rate of inflation in Israel is not offset (or is offset on a lagging basis) by a devaluation of the Israeli Shekel in relation to the dollar. The rate of inflation (as measured by the consumer price index) was approximately 11% in 1996, 7% in 1997 and 9% in 1998, while the Shekel was devalued by approximately 4%, 9% and 18%, respectively. As a result, for those expenses linked to the Israeli Shekel, such as salaries and rent, this resulted in corresponding increases in these costs in U.S. dollars in 1996, but a decrease in 1997 and 1998. To the extent that expenses in Shekels exceed BTG's revenues in Shekels (which to date have consisted primarily of research funding from the Chief Scientist and product sales in Israel), the devaluations of Israeli currency have been and will continue to be a benefit to BTG's financial condition. However, should BTG's revenues in Shekels exceed its expenses in Shekels in any material respect, the devaluation of the Shekel will adversely affect BTG's financial condition. Further, to the extent the devaluation of the Shekel with respect to the U.S. dollar does not substantially offset the increase in the costs of local goods and services in Israel, BTG's financial results will be adversely affected as local expenses measured in U.S. dollars will increase. Risk of Product Liability. The testing and marketing of the Company's products entail risk of product liability. Although the Company has so far been able to obtain indemnification from pharmaceutical companies commercializing its products, there can be no assurance that other such companies will agree in the future to indemnify the Company for other of the Company's products or that such companies will, if obligated to do so, have adequate resources to fulfill their indemnity agreements. Further, to the extent the Company elects to test or market products independently, it will bear the risk of product liability directly. The Company presently has $15,000,000 of product liability insurance coverage in place. Any successful product liability claim made against the Company could substantially reduce or eliminate any stockholders' equity the Company may have and could have a significant adverse impact on the future of the Company. Volatility of Share Price. The market prices for securities of biotechnology companies, including the Company, have been volatile, and it is likely that the price of the Common Stock will fluctuate in the future. Factors such as announcements of technological innovations or new commercial products by the Company or its competitors, announcements by the Company or its competitors of results in preclinical testing and clinical trials, governmental regulation, patent or proprietary rights developments, public concern as to the safety or other implications of biotechnology products, changes in earnings estimates and recommendations by securities analysts, and market conditions in general may have a significant impact on the market price of the Common Stock. In addition, the market price of the Common Stock could be adversely affected by future exercises of outstanding warrants and options. At December 31, 1998 options and warrants to purchase an aggregate of approximately 6,332,000 shares and 406,000 shares, respectively, of Common Stock were outstanding. A substantial portion of these options have exercise prices below the current market price of the Common Stock. Additionally, all of the shares of Common Stock issuable upon exercise of these outstanding options and warrants have been registered for resale under the Securities Act of 1933, as amended, and, accordingly, when issued will be freely tradable without restriction. In addition, the Company may issue additional stock, warrants and/or options to raise capital in the future. The Company may also issue additional securities in connection with its employee benefit plans. During the terms of such options and warrants, the holders thereof are given the opportunity to profit from a rise in the market price of the Common Stock. The exercise of such options and warrants may have an adverse effect on the market value of the Common Stock. The existence of such options and warrants may adversely affect the terms on which the Company can obtain additional equity financing. To the extent the exercise prices of such options and warrants are less than the net tangible book value of the Common Stock at the time such options and warrants are exercised, the Company's stockholders will experience an immediate dilution in the net tangible book value of their investment. Further, 21 the future sale of a substantial number of shares of Common Stock by existing stockholders and option and warrant holders may have an adverse impact on the market price of the Common Stock. See "Item 5. Market for Registrant's Common Equity and Related Stockholder Matters." 22 EXECUTIVE OFFICERS OF THE COMPANY The executive officers and key personnel of the Company are as follows: Name Age Positions - ---------------------------------------------------- ---------- -------------------------------------------------- Sim Fass ........................................... 57 Chairman of the Board, President, Chief Executive Officer and Treasurer; President of BTG-Israel; Director Norman Barton, M.D., Ph.D........................... 51 Senior Vice President--Chief Medical Officer Zvi Ben-Hetz........................................ 53 Vice President--Operations and Logistics, BTG-Israel Lawrence Brown...................................... 40 Vice President--Business Development Meir Fischer, Ph.D.................................. 58 Vice President--Process Development, BTG- Israel Donald Fishbein..................................... 44 Vice President--Marketing Marian Gorecki, Ph.D................................ 58 Senior Vice President--Chief Technical Officer; Managing Director, BTG-Israel Abraham Havron, Ph.D................................ 51 Vice President--Product Development and Technology Transfer, BTG-Israel Dov Kanner, Ph.D.................................... 45 Vice President--Quality Assurance and Regulatory Affairs, BTG-Israel Ernest Kelly, Ph.D.................................. 49 Senior Vice President--Quality Assurance, Quality Control and Regulatory Affairs Avigdor Levanon, Ph.D............................... 52 Vice President--Research, BTG-Israel John Librie......................................... 41 Vice President--National Sales Amos Panet, Ph.D.................................... 57 Chief Scientist--BTG-Israel Annmarie Petraglia.................................. 60 Vice President--Regulatory Affairs Robert Shaw......................................... 45 Vice President--General Counsel Ronald Simko........................................ 48 Vice President--Manufacturing Yehuda Sternlicht................................... 44 Vice President--Finance, Chief Financial Officer Yehuda Zelig........................................ 46 Vice President--Manufacturing, BTG-Israel
- -------------- Sim Fass was elected a Director and Treasurer of the Company in August 1983 and served as Chief Operating Officer of BTG-Israel from August 1983 to May 1987 and as President of BTG-Israel from May 1984. Dr. Fass became President and Chief Executive Officer of the Company in May 1984 and Chairman of the Board in March 1997. From April 1980 to August 1983, he was Vice President, General Manager of Wampole Laboratories, a division of Carter-Wallace, Inc., a company that manufactures health care-related products. Prior to that, he held various positions at Pfizer Inc. from September 1969 until March 1980, including Director, Marketing Research and Planning, Pfizer Pharmaceutical, and Vice President, Marketing and Sales, Pfizer Diagnostics Division of Pfizer Pharmaceutical and Group Marketing Manager of Pfizer Laboratories. Dr. Fass received his Ph.D. in developmental biology/biochemistry from the Massachusetts Institute of Technology. 23 Norman Barton, M.D., Ph.D. joined the Company in April 1996 in the newly created position of Vice President--Medical Affairs and was appointed Senior Vice President--Chief Medical Officer in March 1998. Prior to joining the Company, from 1985 to 1996 Dr. Barton served as Chief of the Clinical Investigations and Therapeutics Section of the National Institute of Neurological Disorders and Stroke in Bethesda, Maryland. During that time, he was instrumental in the development and clinical investigation of macrophage-targeted glucocerebrosidase (CEREDASE(TM)), the first enzyme replacement product for Gaucher disease, a genetic disorder of lipid metabolism. Between 1978 and 1985, Dr. Barton held positions as a staff neurologist at The New York Hospital and the National Institute of Neurological Disorders and Stroke. Dr. Barton is a board-certified neurologist and holds a Ph.D. in Biological Chemistry. Zvi Ben-Hetz joined BTG-Israel in December 1980 as facility manager. His work included the organization and construction of the manufacturing facility and logistics system of the Company in Israel. Between 1986 and 1988, he headed the unit involved in the construction of the present facility in Israel. In 1988, he was appointed Operations and Logistics Manager of BTG-Israel and in 1992 was appointed Vice President--Operations and Logistics of BTG-Israel. From 1976 until he joined BTG-Israel, Mr. Ben-Hetz worked at the Volcani Institute, the National Institute for Agriculture Research in Israel, as a Junior Agricultural Engineer. Lawrence Brown joined the Company in October 1998 in the newly created position of Vice President --Business Development. Prior to joining the Company, Mr. Brown was employed by Centocor, Inc. from April 1987 to October 1998 in several capacities, most recently as Director, Business Development. Meir Fischer, Ph.D. was appointed to the newly-created position of Vice President--Process Development of BTG-Israel in January 1998. Dr. Fischer joined BTG-Israel in 1981 as group leader, served as Assistant Director of the Molecular Biology Department from 1984 to 1988, and as Department Head from 1988 to 1994 in the Research Division, and Department Head of Process Development from 1994 to 1997 in the Division of Manufacturing and Process Development. Dr. Fischer obtained his Ph.D. in Biochemical Genetics and Microbiology from Indiana University in 1974 and subsequently did post-doctoral research in the Department of Biochemistry of Duke University and at Burroughs Wellcome Company. Donald Fishbein joined BTG as Director of Marketing in June 1995 and was appointed Vice President--Marketing in July 1998. Prior to joining BTG, Mr. Fishbein spent four years as Director of Marketing Planning for Wyeth-Ayerst Laboratories. Prior to Wyeth-Ayerst Laboratories, Mr. Fishbein spent four years with Genentech, three years with the McNeil Pharmaceuticals division of Johnson & Johnson and four years with SmithKline Beecham Clinical Laboratories in various marketing, strategic planning and market research positions. Marian Gorecki, Ph.D. has served as Senior Vice President--Chief Technical Officer of the Company since June 1992 and as Managing Director of BTG-Israel since May 1998. Prior thereto, he served as Vice President and Chief Technical Officer of BTG-Israel from 1986 and as Vice President, Research and Development of BTG-Israel since August 1981. Prior to that, he was on the staff of the Weizmann Institute of Science for twelve years, during which time he was an associate professor for two years. Dr. Gorecki received his Ph.D. in biochemistry from the Weizmann Institute of Science in 1972. He has broad experience in the fields of molecular biology and genetic engineering as well as in peptide protein chemistry. Dr. Gorecki served as a director of the Company from June 1992 through December 1994. Abraham Havron, Ph.D. joined BTG-Israel in September 1987 as Director, Manufacturing and in 1992 was appointed Vice President--Manufacturing of BTG-Israel. Dr. Havron obtained his Ph.D. degree in bio-organic chemistry from the Weizmann Institute of Science in 1978 and subsequently did post-doctoral research in the Department of Radiology at Harvard Medical School. Before joining the Company, Dr. Havron served as Production and R&D Manager at InterPharm Laboratories Ltd., a subsidiary of Ares Serono, S.A., a multinational pharmaceutical company. Dov Kanner, Ph.D. was appointed to the newly created position of Vice President--Quality Assurance and Regulatory Affairs of BTG-Israel in September 1994. Dr. Kanner joined BTG-Israel in 1981 as a staff scientist, served as Head of Fermentation from 1984 to 1989 and as Deputy Director, Manufacturing and 24 Process Development, from 1989 to 1994. He obtained his Ph.D. in microbiology from Rutgers University in 1980. Ernest Kelly, Ph.D. joined the Company in February 1996 in the newly created position of Senior Vice President--Quality Assurance, Quality Control and Regulatory Affairs. Prior to joining the Company, he was Vice President, Worldwide Quality Assurance for Rhone-Poulenc Rorer Inc. ("RPR"). From 1979 to 1996, Dr. Kelly served in various positions at RPR in both research and development and industrial operation quality assurance. Prior to joining RPR, he served Merck Sharp and Dohme from 1974 to 1979 and McNeil Labs from 1972 to 1974 in quality assurance and analytical research positions. Dr. Kelly received his Ph.D. in Physical Chemistry from Villanova University, served on several United States Pharmacopeia Advisory Panels and also served as Adjunct Professor of Pharmaceutics at Temple University. Avigdor Levanon, Ph.D. joined BTG-Israel in 1980 as group leader, served as Head of the Molecular Biology Department from 1983 to 1995 and as assistant to the Chief Scientist from 1995 to 1998. In October 1998 Dr. Levanon was appointed to the newly-created position of Vice President--Research of BTG-Israel. Dr. Levanon obtained his Ph.D. in Medical Virology and Microbiology from The Tel-Aviv University Medical School in 1977 and subsequently did post-doctoral research at the Institute of Molecular Biology of Zurich University. John Librie joined BTG in October 1995 as the Executive Director of Sales and was appointed Vice President--National Sales in July 1997. Prior to joining BTG, Mr. Librie spent nine years with Genentech, holding positions in sales, marketing and sales management. Prior to joining Genentech, Mr. Librie spent five years with Marion Laboratories, a pharmaceutical company, in various sales positions. Amos Panet, Ph.D. joined BTG-Israel in September 1986 as Assistant to the Vice President, Research and Development. In March 1987, he was appointed Chief Scientist. Dr. Panet obtained his Ph.D. in the field of biochemistry from the Hebrew University of Jerusalem, and subsequently served as a post-doctoral fellow with Drs. D. Khorana and D. Baltimore at the Massachusetts Institute of Technology. Dr. Panet is a Professor of Virology at the Hadassah School of Medicine of the Hebrew University. Annmarie Petraglia joined BTG in May 1994 as Senior Director, Regulatory Affairs and was appointed Vice President--Regulatory Affairs in April 1995. Previously Ms. Petraglia was Director, Regulatory Affairs and Scientific Documentation, Daiichi Pharm. Corp. from 1991 to 1994; Vice President Regulatory Affairs, Zambon Corp. from 1988 to 1991; Senior Vice President, Regulatory Affairs, Advanced Therapeutics Communications from 1986 to 1988; and Director, Regulatory Affairs, American Home Products Corp. from 1984 to 1986. She served in various regulatory affairs capacities at Schering-Plough Corporation from 1980 to 1984; as Director, Medical Analysis/Writing at Bristol-Myers International from 1973 to 1978; and Product Manager at Hoffmann-La Roche, Inc. from 1967 to 1973. Ms. Petraglia is a registered pharmacist. Robert Shaw joined the Company in April 1998 as Vice President--General Counsel. Prior to joining BTG, Mr. Shaw was Vice President, Intellectual Property and Assistant Secretary at BASF Corporation. From 1984 to 1989, he was Associate General Counsel at Hoechst-Celanese Corporation. Between 1979 and 1984 he held Associate positions at the Fish & Neave and Synnestvedt & Lechner law firms. Mr. Shaw has a J.D. from Washington University School of Law. He is admitted to the Bar in New York, Pennsylvania and Missouri. Ronald Simko joined the Company in August 1994 as Vice President--Manufacturing. From 1977 to 1989, Mr. Simko worked in numerous manufacturing capacities at Schering-Plough Corporation managing the process validation organization as well as the sterile products and tablet production operations. From 1989 to 1994, he was at Enzon, Inc., where he served as Senior Director, Manufacturing and Materials Management. Yehuda Sternlicht joined BTG-Israel in July 1992 as financial manager and in January 1993 was appointed Chief Financial Officer of the Company. In June 1995, he was appointed Vice President--Finance and Chief Financial Officer of the Company. From 1988 until he joined BTG-Israel, he was financial manager of Bordeaux Textile Ltd., an Israeli company. From 1985 to 1988, he served as controller of Laser Industries 25 Ltd., an Israeli company listed on the American Stock Exchange. Prior to that, he held various positions at Haft & Haft, one of the largest CPA firms in Israel. From 1983 to 1985, he worked at Haft & Haft's affiliate's New York office. Mr. Sternlicht is qualified as a Certified Public Accountant in the State of Israel. Yehuda Zelig joined BTG-Israel in March 1983 as research assistant. In 1988 he was appointed as Manager-Protein Purification of BTG-Israel, and from 1989 to 1994 he served as Manager of BTG-Israel's Protein Purification Department. In 1994 Mr. Zelig was appointed Head of the Manufacturing Department of BTG-Israel and in September 1995 he was appointed Director of Manufacturing of BTG-Israel. In January 1998, Mr. Zelig was appointed Vice President--Manufacturing of BTG-Israel. William Pursley resigned as the Company's Senior Vice President--Marketing, Sales and Commercial Development effective March 31, 1999. ITEM 2. PROPERTY The Company's administrative offices are located in Iselin, New Jersey, where the Company has leased approximately 23,000 square feet of office space. The lease has a base average annual rental expense of approximately $415,000 and expires in October 2003. In addition, the Company leases approximately 2,000 square feet in New York City for its business activities, including its investor and public relations activities. This lease expires in September 2003. The Company's research, development and manufacturing facility is located in Rehovot, Israel, where BTG leases approximately 89,000 square feet at an annual rental of approximately $1,009,000. The lease term expires in December 2002. BTG also leases 5,000 square feet of warehouse space near its research and manufacturing facility. Although the Company believes its space is suitable and adequate for its current activities, the Company has determined that it will require a new, larger manufacturing facility in Israel within the next several years to meet anticipated increased demand for its products and increased regulatory requirements. Accordingly, the Company is currently in negotiations to purchase a manufacturing facility in Israel for approximately $6.5 million. The Company will initially locate its production activities for Bio-Hep-B and Fibrimage at this new facility, and will thereafter move the remainder of its production activities to this facility. The Company expects the initial production facility will be ready by the end of 2000. ITEM 3. LEGAL PROCEEDINGS On March 16, 1993, Genentech filed a complaint with the United States International Trade Commission (the "ITC") alleging, among other things, that BTG's importation of hGH into the United States violates Section 337 of the Tariff Act of 1930 because of the existence of certain claims in U.S. patents of Genentech. Genentech sought an immediate investigation and an order that BTG cease and desist from importing hGH into the United States. The trial on the Genentech complaint was held in April 1994. In January 1995, the ITC issued a final decision dismissing the complaint with prejudice as a sanction for Genentech's conduct which resulted in an incomplete record and violated the due process rights of BTG and Novo-Nordisk A/S, another respondent in the proceeding. The ITC also found no violation by BTG of Section 337 of the Tariff Act of 1930. Genentech appealed the ITC decision to the United States Court of Appeals for the Federal Circuit ("CAFC"). The appeal was heard in 1995, and in August 1997 the CAFC reversed the ITC decision and remanded the investigation to the ITC. However, Genentech then withdrew its complaint, the result of which is that Genentech is barred from asserting the patents at issue, regarding hGH, against BTG in the ITC. During 1993 and 1994, BTG incurred total legal fees of approximately $4.2 million relating to the ITC proceeding. On December 1, 1994, Genentech filed a lawsuit against BTG in the United States District Court for the District of Delaware alleging that BTG's importation of hGH infringed two Genentech process patents. In January 1995, BTG commenced an action against Genentech in the United States District Court for the Southern District of New York (the "U.S. District Court") seeking, among other things, declaratory judgments as to the non-infringement, invalidity and unenforceability of such Genentech patents as well as damages resulting from Genentech's actions in the ITC proceedings. The Delaware action was consolidated with the 26 New York action, and in August 1995 the U.S. District Court granted a preliminary injunction prohibiting the commercial introduction in the United States of BTG's hGH. In April 1996, the CAFC rejected BTG's appeal of the grant of the preliminary injunction. In May 1996, the CAFC rejected BTG's request for a rehearing and a rehearing en banc. BTG filed a petition for a writ of certiorari with the United States Supreme Court, which was denied in October 1996. BTG is now precluded from marketing and distributing its human growth hormone in the United States pending the outcome of the patent infringement action. Although BTG believes that it does not infringe any valid Genentech patent, there can be no assurance that BTG will not be found to be infringing Genentech's U.S. patents. If BTG is ultimately found by the district court to infringe one or more claims in Genentech's U.S. patents, it likely will be precluded from selling its hGH in the United States during the life of these Genentech patents. It is anticipated that a trial in the U.S. District Court will begin in October 1999. During 1995, the Company incurred total legal fees relating to this litigation of approximately $824,000, which amount was initially capitalized but subsequently written off in the first quarter of 1996 following the CAFC decision. In September 1993, JCR received a letter from attorneys representing Genentech and its licensee, Kabi Pharmacia, claiming that JCR's sale of the Company's hGH infringed certain Genentech patents and patent applications and demanding that JCR cease the sale of the Company's hGH in Japan. JCR and BTG have filed oppositions to five Genentech patent applications in Japan; oppositions with respect to four of these patents were denied and the fifth is pending. There can be no assurance that the pending opposition will be successful. Although the Company does not believe that it is infringing or has ever infringed any valid Genentech patent or patent application, there can be no assurance that BTG's hGH will not be found to infringe certain Genentech patents in Japan. If the Company's hGH is found to infringe certain Genentech patents in Japan, JCR and/or the Company may be obligated to pay damages, and would need to obtain a license from Genentech in order to continue sales of hGH in Japan. There can be no assurance that such a license will be granted by Genentech, or that JCR will not be required to stop selling the Company's hGH in Japan. Sales of hGH to JCR in 1996, 1997 and 1998 were approximately $12.9 million, $10.1 million and $11.1 million, respectively, representing 32%, 19% and 16%, respectively, of the Company's total product sales in those periods and 71%, 60% and 64%, respectively, of the Company's total hGH product sales in those periods. BTG expects sales of its hGH in Japan to increase significantly as a result of Sumitomo beginning to market the Company's hGH in Japan in 1999. During 1991, BTG received notification from the United States Patent Office Board of Patent Appeals and Interferences (the "Patent Office") of the declaration of an interference between an issued patent assigned to BTG covering a method for producing enzymatically active human copper/zinc SOD in bacteria and a pending application of Chiron which claims an earlier filing date. While BTG is vigorously defending its patent, it cannot predict the outcome of such interference. However, should BTG's patent be disallowed and a corresponding patent be issued to Chiron, BTG's present method of producing enzymatically active human copper/zinc SOD in bacteria may need to be altered, which may or may not be possible; alternatively, BTG could seek a license to market under Chiron's patent, which may or may not be available. Subsequent to the interference being declared, Chiron was issued a U.S. patent for the bacterially produced form of recombinant human copper/zinc SOD. At BTG's request, the Patent Office in 1998 declared a second interference to determine whether BTG rather than Chiron should hold the patent for the bacterially produced form of recombinant human copper/zinc SOD on the basis that BTG scientists, not Chiron scientists, invented the method for producing recombinant human copper/zinc SOD in bacteria. Unless BTG is able to prevail in these interference actions or to obtain a license from Chiron, BTG may be unable to commercialize its OxSODrol product in the United States. These matters are currently under consideration by the Patent Office. BTG and Chiron are currently in discussions to settle these interference actions. In addition, the Israeli Patent Office has accepted a Chiron patent application covering a DNA construct having certain specified functions for expression of active copper/zinc SOD and a method for production of active copper/zinc SOD in a microorganism harboring this construct. BTG is opposing the grant of this patent; however, there can be no assurance that this opposition will be successful. If the opposition is unsuccessful, BTG may be precluded from manufacturing OxSODrol in Israel. In March 1993, the United States Patent Office issued a patent exclusively licensed to BTG containing broad claims for the gene encoding human copper/zinc SOD, related recombinant expression vectors and genetically engineered cells containing the gene. BTG believes that Chiron could not commercialize its yeast-produced SOD product in the United States without infringing this patent. 27 However, the issuance of this patent does not assure BTG's ability to commercialize its OxSODrol product. See "Item 1. Business -- Products and Applications -- OxSODrol (human superoxide dismutase)." In September 1991, the Company received a letter from Biogen stating that it believed that the Company's recombinant surface antigen of the hepatitis-B virus, which is an active ingredient of the Company's Bio-Hep-B vaccine, or the Company's intermediates for the process of making such antigen, falls within the claims of one or more of Biogen's patents and/or patent applications. The Company has made inquiries of Biogen and SmithKline Beecham (the exclusive licensee of all of Biogen's hepatitis-B patents except those in Japan) requesting that the Company be granted a license to the Biogen patents; however, such efforts were not successful. In January 1992, BTG-Israel filed an application in the Israeli Patent Office for a compulsory license to manufacture BTG's Bio-Hep-B vaccine under Biogen's Israeli patent. In September 1995, the Registrar ruled in an interlocutory decision that BTG-Israel is entitled to a compulsory license to the Biogen patent. Biogen's appeal of the interlocutory decision was rejected. In November 1996, the Registrar set the terms of the license, including royalties to be paid by BTG to Biogen. Biogen appealed the Registrar's decision to the District Court of Tel Aviv, Israel, and moved for a stay of the license, which was granted ex parte pending hearings with both parties. Following hearings which took place in December 1996, Biogen's motion was denied in January 1997; however, the ex parte stay was left in force pending Biogen's appeal to the Supreme Court and maintained by the Supreme Court pending the decision by the District Court on the merits of Biogen's appeal. The District Court heard the appeal in early March 1997, and in June 1997 the District Court denied Biogen's appeal and subsequent motion for a stay pending Biogen's appeal of the District Court decision to the Supreme Court on the merits. In March 1998 the Supreme Court granted Biogen the right to appeal the District Court's decision. The Court determined that the appeal proceedings would be in the form of written submissions, and the Company and Biogen concluded their respective submissions in early 1999. In the absence of any action by the Supreme Court, the compulsory license is now effective and allows BTG-Israel to produce the vaccine in Israel upon receipt of regulatory approval and to export the vaccine to countries in which neither Biogen nor others have been granted a blocking patent. There can be no assurance that the compulsory license will not be subsequently revoked by the Israeli Patent Office or by the Supreme Court. If the compulsory license is revoked, BTG may not be able to manufacture or sell its Bio-Hep-B vaccine in Israel or to export such product from Israel unless the Biogen patent expires or is revoked. Biogen's Israeli patent expires in December 1999. In August 1992, Biogen sued BTG-Israel for allegedly infringing its Israeli patent (which is the subject of the compulsory license) by virtue of its preparation of BTG's Bio-Hep-B vaccine for use in clinical trials, and applied for an interlocutory injunction restraining BTG-Israel from continuing research and development activities and clinical trials. In June 1993, the District Court of Tel Aviv, Israel denied Biogen's application for an interlocutory injunction in connection with research and development and clinical trials, but enjoined BTG-Israel from commercial marketing of its Bio-Hep-B vaccine unless permitted by Biogen or its exclusive licensee, until a compulsory license is obtained, or until the patent expires or is revoked. With the grant of the compulsory license, Biogen and BTG agreed to suspend the infringement suit until a decision is rendered on Biogen's appeal to the Supreme Court of the grant of the compulsory license. Biogen has notified the District Court that if the compulsory license is upheld by the Supreme Court, it will withdraw the infringement suit. If, however, the infringement proceedings continue, there can be no assurance that the outcome of these proceedings will be favorable to BTG. An outcome unfavorable to BTG may adversely affect the ability of BTG to commercialize and market the Bio-Hep-B vaccine. See "Item 1. Business -- Products and Applications -- Hepatitis-B Vaccine." The Company has been advised by SciGen, its Bio-Hep-B licensee in certain countries in the Far East, that in April 1993 Biogen initiated suit against SciGen in Singapore asserting that SciGen's conduct of clinical trials in Singapore with respect to the Company's hepatitis-B vaccine constitutes infringement of Biogen's patent rights in Singapore and claiming rights in the data obtained by SciGen through its clinical trials in Singapore and that an interlocutory hearing was held in September 1993. SciGen notified the Company that the application for the injunction was dismissed by the High Court in September 1994, but Biogen has not withdrawn its case against SciGen in Singapore. Biogen's Singapore patent rights are based on the registration of its corresponding U.K. patents, and the validity of patents in Singapore depends on the validity of the 28 corresponding U.K. patents. Biogen's broad U.K. patent (on which Singapore registration is based) was invalidated by the U.K. Court of Appeals in October 1994, which decision was upheld by the House of Lords in October 1996. Biogen is currently attempting to have amended claims allowed. Additionally, three claims of a narrower U.K. patent were upheld. The Company believes that none of these claims will affect commercialization of the Company's vaccine, although there can be no assurance of this. The Company is aware that certain other patents have been granted or are pending that may prevent the Company from selling its vaccine in the United States, Europe and certain other countries. The Company's failure to obtain any needed license, or a determination that its vaccine infringes the patent rights of Biogen or others, would substantially limit, if not prohibit, the commercialization of the Bio-Hep-B vaccine in those countries in which Biogen or others have a patent until such patent is revoked or expires. The ability of the Company to secure any necessary licenses or sublicenses to these patents or applications cannot be predicted. Three patent applications of Genentech in Israel which cover general methods relating to genetically engineered products and to human growth hormone were accepted in 1983 (two) and 1985 (one). BTG is opposing the grant of these patents. Two of these patent applications expired during 1998 without ever being granted. The third of these three Israeli applications, which will expire in June 2000, corresponds to the two U.S. patents which are the subject of the complaint asserted by Genentech against BTG in the United States District Court in Delaware (subsequently consolidated with related proceedings in New York). Hearings before the Israel Registrar of Patents have now been set for June 1999. There can be no assurance that BTG will be successful in its opposition to the grant of this patent. If BTG is unsuccessful in its opposition in Israel, then BTG may be unable to manufacture its products in Israel. Additionally, in 1984 an Israeli patent application of Biogen which relates to expression vectors was accepted; BTG is opposing the grant of this patent. There can be no assurance that BTG will be successful in its opposition to the grant of this patent. If BTG is unsuccessful in its opposition in Israel, then BTG may be unable to manufacture its products in Israel. The Company has also initiated proceedings in Israel, Europe and Japan to oppose the grant to several of its competitors of patents relating to vector systems, and may oppose corresponding patents in other jurisdictions. Although the outcome of these proceedings cannot be predicted with certainty and will likely not be determined for several years, the Company believes that the outcome will be favorable, although there can be no assurance of this. The Company is aware of patent applications filed by, or patents issued to, other entities with respect to technology potentially useful to the Company and, in some cases, related to products and processes being developed by the Company. The Company cannot presently assess the effect, if any, that these patents may have on its operations. The extent to which efforts by other researchers have resulted or will result in patents and the extent to which the issuance of patents to others would have a materially adverse effect on the Company or would force the Company to obtain licenses from others is currently unknown. See "Item 1. Business--Risk Factors--Uncertainty of Protection of Patents and Proprietary Rights." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 29 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is quoted on the National Association of Securities Dealers Automated Quotation System ("Nasdaq") National Market under the symbol BTGC. The following table sets forth, for the periods indicated, the high and low sale prices per share of the Company's common stock from January 1, 1997 through December 31, 1998 as reported by the Nasdaq National Market. 1997 High Low ---- ------- ------- First Quarter............................... $ 17.75 $ 11.88 Second Quarter.............................. 16.50 11.88 Third Quarter............................... 15.62 9.81 Fourth Quarter.............................. 15.37 10.62 1998 ---- First Quarter............................... $ 13.75 $ 7.81 Second Quarter.............................. 9.19 7.00 Third Quarter............................... 8.31 4.50 Fourth Quarter.............................. 7.50 5.62 The number of stockholders of record of the Company's common stock on March 15, 1999 was approximately 1,700. The Company has never declared or paid a cash dividend on its common stock, and it is not expected that cash dividends will be paid to the holders of common stock in the foreseeable future. 30 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE DATA)
For the year ended December 31, ---------------------------------------------------------------- 1994(1) 1995(2)(3) 1996(4) 1997(5) 1998 ---------------------------------------------------------------- STATEMENT OF OPERATIONS DATA: Total revenues............................... $ 17,440 $ 27,960 $ 47,738 $ 65,335 $ 76,855 Total expenses............................... 26,359 24,544 36,798 44,152 52,106 Extraordinary gain........................... 1,500 1,363 -- -- -- Net income (loss)............................ (7,419) 4,779 22,915 14,478 17,739 Extraordinary gain per share................. 0.04 0.03 -- -- -- Net income (loss) per share:(5) Basic...................................... (0.19) 0.11 0.52 0.31 0.37 Diluted.................................... -- 0.11 0.47 0.28 0.36 Weighted average shares outstanding:(5) Basic........................................ 38,725 43,174 44,195 46,767 48,184 Diluted...................................... -- 43,784 48,259 51,916 49,848 As of December 31, ----------------------------------------------------------------- 1994 1995 1996 1997 1998 ----------------------------------------------------------------- BALANCE SHEET DATA: Working capital.............................. $ 13,652 $ 15,309 $ 40,626 $ 68,271 $110,359 Total assets................................. 32,340 33,679 73,575 95,413 142,595 Long-term liabilities........................ 1,389 3,641 3,927 3,975 3,818 Stockholders' equity......................... 23,182 25,689 60,558 82,858 122,977
- ------------------------------------- (1) Net loss and net loss per share include an extraordinary gain of $1,500,000 and $0.04, respectively, resulting from the early extinguishment of debt incurred in connection with BTG's reacquisition of human growth hormone marketing rights for Europe. (2) In 1995, BTG terminated its research and development financing arrangement with Bio-Cardia Corporation ("Bio-Cardia"), entered into in December 1993, pursuant to which BTG had licensed rights to certain products to Bio-Cardia and Bio-Cardia had engaged BTG to perform research and development services with respect to such products. In connection with the termination of the relationship, BTG reacquired all rights licensed to Bio-Cardia. The relationship with Bio-Cardia had a significant effect on the Company's financial results in 1995, as follows: (i) revenues include $3,004,000 of research and development revenues under collaborative agreements resulting from the receipt by the Company of warrants to purchase 2,670,000 shares of the Company's Common Stock issued by BTG in connection with the financing with Bio-Cardia which were subsequently obtained by Bio-Cardia from its defaulted stockholders in partial satisfaction of amounts owed by Bio-Cardia to BTG for research and development; and (ii) expenses include research and development financing expenses of $806,000, representing the net funds provided to Bio-Cardia by BTG in respect of an exchange offer and the deferred revenues received from Bio-Cardia prior to such exchange offer. 31 (3) Net income and net income per share include an extraordinary gain of $1,363,000 and $0.03, respectively, resulting from the early extinguishment of debt incurred in connection with BTG's reacquisition of human growth hormone marketing rights for the United States. (4) Expenses include a write-off of $1,383,000 of previously capitalized legal fees and market launch preparation costs relating to the Company's human growth hormone product in the United States. See "Item 3. Legal Proceedings." In 1996, the Company reduced the valuation allowance recorded against its deferred income tax assets by $18,587,000, which resulted in an $11,975,000, or $0.24 per share, increase in net income. See Note 11 of Notes to Consolidated Financial Statements. (5) The share and per share information for the years ended December 31, 1994, 1995 and 1996 have been restated to reflect share and per share information in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share," which was adopted by the Company effective with its financial statements for the year ended December 31, 1997. See Note 1 of Notes to Consolidated Financial Statements. 32 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements in this Annual Report on Form 10-K concerning the Company's business outlook or future economic performance; anticipated profitability, revenues, expenses or other financial items; introductions and advancements in development of products, and plans and objectives related thereto; and statements concerning assumptions made or expectations as to any future events, conditions, performance or other matters, are "forward-looking statements" as that term is defined under the Federal Securities Laws. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. Such risks, uncertainties and factors include, but are not limited to, changes and delays in product development plans and schedules, changes and delays in product approval and introduction, customer acceptance of new products, changes in pricing or other actions by competitors, patents owned by the Company and its competitors, changes in healthcare reimbursement, risk of operations in Israel, risk of product liability, governmental regulation, dependence on third parties to manufacture products and commercialize products and general economic conditions, as well as other risks detailed in the Company's filings with the Securities and Exchange Commission, including this Annual Report on Form 10-K. See "Item 1. Business--Risk Factors." OVERVIEW The Company is engaged in the research, development, manufacture and marketing of biopharmaceutical products. Through a combination of internal research and development, acquisitions, collaborative relationships and licensing arrangements, BTG has developed a portfolio of therapeutic products, including six products that have received regulatory approval for sale, of which five are currently being marketed, five products that are in registration or clinical trials and several products that are in pre-clinical development. The Company seeks both broad markets for its products as well as specialized markets where it can seek Orphan Drug status and potential marketing exclusivity. The Company was founded in 1980 to develop, manufacture and market novel therapeutic products. The Company's overall administration, licensing, human clinical studies, marketing activities, quality assurance and regulatory affairs are primarily coordinated at the Company's headquarters in Iselin, New Jersey. Pre-clinical studies, research and development activities and manufacturing of the Company's genetically engineered products are primarily carried out through its wholly owned subsidiary in Rehovot, Israel. 33 RESULTS OF OPERATIONS The following table sets forth for the fiscal periods indicated the percentage of revenues represented by certain items reflected on the Company's statement of operations.
1996 1997 1998 ---- ---- ---- Revenues: Product sales................................... 84.6% 82.2% 88.8% Contract fees................................... 10.2 12.8 3.5 Royalties ...................................... - - 2.8 Other revenues.................................. 2.9 2.3 1.0 Interest and finance............................ 2.3 2.7 3.9 ----- ---- ---- Total revenues......................... 100% 100% 100% ===== ==== ==== Expenses: Research and development........................ 26.0% 24.4% 24.0% Cost of product sales........................... 15.2 13.0 14.0 General and administrative...................... 15.7 13.0 11.1 Marketing and sales............................. 12.8 14.2 17.3 Commissions and royalties....................... 4.2 2.5 1.2 Interest and finance............................ 0.3 0.4 0.2 Write off in connection with litigation......... 2.9 -- -- ----- ---- ---- Total expenses......................... 77.1 67.5 67.8 ----- ---- ---- Income before income taxes........................ 22.9 32.5 32.2 Income tax (benefit) expense...................... (25.1) 10.3 9.1 ----- ---- ---- Net income ....................................... 48.0% 22.2% 23.1% ===== ==== ====
The Company has historically derived its revenues from product sales as well as from collaborative arrangements with third parties, under which the Company may earn up-front contract fees, may receive funding for additional research (including funding from the Chief Scientist of the State of Israel ("Chief Scientist")), is reimbursed for producing certain experimental materials, may be entitled to certain milestone payments, may sell product at specified prices and may receive royalties on sales of product. The Company anticipates that product sales will constitute the majority of its revenues in the future. Revenues have in the past displayed and will in the immediate future continue to display significant variations due to changes in demand for its products, new product introductions by the Company and its competitors, the obtaining of new research and development contracts and licensing arrangements, the completion or termination of such contracts and arrangements, the timing and amounts of milestone payments, and the timing of regulatory approvals of products. 34 The following table summarizes the Company's sales of its commercialized products as a percentage of total product sales for the periods indicated: Year ended December 31, ----------------------- 1996 1997 1998 ---- ---- ---- Oxandrin................. 37% 52% 59% Bio-Tropin............... 45 31 25 BioLon................... 12 13 10 Other.................... 6 4 6 ---- ---- ---- Total.............. 100% 100% 100% ==== ==== ==== The Company believes that its product mix will change significantly as it continues to focus on: (i) increasing market penetration of its existing products; (ii) expanding into new markets; and (iii) commercializing additional products. The following table summarizes the Company's United States and international product sales as a percentage of total product sales for the periods indicated: Year ended December 31, ----------------------- 1996 1997 1998 ---- ---- ---- Domestic.................. 39% 54% 64% Foreign................... 61 46 36 --- --- --- Total................ 100% 100% 100% === === === The Company's product mix on a percentage basis has shifted significantly since the Company became profitable in 1995 as Oxandrin sales have outpaced sales growth of other products. Domestic sales have also increased as a percentage of total product sales due to the introduction of Oxandrin in the United States in December 1995. Comparison of Years Ended December 31, 1998, 1997 and 1996 Revenues. Revenues increased 18% in 1998 to $76,855,000 from $65,335,000 in 1997, which itself represented a 37% increase over 1996 revenues of $47,738,000. Product sales increased by 27% in 1998 to $68,246,000 from $53,723,000 in 1997, following a 33% increase in 1997 from $40,356,000 in 1996. The increase in product sales in each period was primarily driven by increased sales of Oxandrin in the United States. Oxandrin accounted for approximately 87% and 96% of the increase in product sales in 1998 and 1997, respectively. The increase in Oxandrin sales resulted primarily from the Company's increased marketing efforts and growing awareness of the product. Although sales of human growth hormone ("hGH") accounted for approximately 32% and 4% of the increase in product sales in 1996 and 1998, respectively, product sales of hGH decreased approximately 8% in 1997, primarily due to the timing of orders of bulk hGH by JCR Pharmaceuticals Co., Ltd. ("JCR"), the Company's licensee in Japan, in 1996 and 1997. Sales of Oxandrin in 1998, 1997 and 1996 were approximately $40,521,000, $27,904,000 and $15,098,000, respectively, representing 59%, 52% and 37%, respectively, of the Company's total product sales in those periods. Sales of hGH in 1998, 1997 and 1996 were approximately $17,316,000, $16,745,000 and $18,218,000, respectively, representing 25%, 31% and 45%, respectively, of the Company's total product sales in those periods. Sales of hGH to JCR in 1998, 1997 and 1996 were approximately $11,056,000, $10,095,000 and $12,906,000, respectively, representing 16%, 19% and 32%, respectively, of the Company's total product sales in those periods and 64%, 60% and 71%, respectively, of the Company's total hGH sales in those periods. The decrease in sales to JCR in 1997 was principally the result of timing of orders of bulk hGH by JCR. Sales of hGH to the Ferring Group, were approximately $3,823,000, $4,520,000 and $3,162,000 in 1998, 1997 and 35 1996, respectively, representing 6%, 8% and 8%, respectively, of the Company's total product sales in those periods and 22%, 27% and 17%, respectively, of the Company's total hGH sales in those periods. For the years ended December 31, 1998, 1997 and 1996, contract fees, which consist of licensing and option to license fees, amounting to $2,686,000, $8,369,000 and $4,887,000, or 3%, 13% and 10%, respectively, of total revenues, were earned from certain of the Company's collaborative partners. Of the contract fees earned in 1998, $1,000,000, or 37% of total contract fees, was earned in respect of the license of distribution rights of BioLon in the United States, and $900,000 and $493,000, or 34% and 18% of total contract fees, respectively, were earned in respect of the Company's hepatitis-B vaccine and insulin products, respectively. Of the contract fees earned in 1997, $3,000,000 represents an initial licensing fee received in connection with the licensing of worldwide distribution rights (other than the United States, Canada, Israel and Japan) for the Company's superoxide dismutase ("SOD") product for bronchopulmonary dysplasia and other respiratory indications to Ares Trading S.A. ("Serono"), $1,500,000 represents fees from the grant to SciGen Pte Ltd of a license to use BTG's technical information to establish a manufacturing facility for Bio-Hep-B and $3,000,000 represents fees from the grant of an exclusive right to a third party to evaluate one of the Company's products under development. This third party subsequently determined not to pursue a license of the product for reasons that the Company believes do not relate to the safety and efficacy of the product. Of the contract fees earned in 1996, $2,500,000 was earned in respect of Silkis, of which $2,000,000 was earned in respect of a fee paid in lieu of royalties in connection with termination of a European sublicense and $500,000 was earned in connection with the license of distribution rights in the United States, $500,000 was earned in respect of the license of marketing rights of BioLon in Japan, $400,000 was earned in respect of the license of marketing rights of SOD in Japan, and $1,000,000 represents a one-time payment by a third-party for the exclusive right to evaluate one of the Company's products under development. This third-party subsequently determined not to pursue a license of the product for reasons that the Company believes do not relate to the safety and efficacy of the product. Royalties in 1998 consist of net royalties derived from a co-promotion agreement relating to Serono's recombinant human growth hormone, Saizen, in the amount of $1,560,000 and net royalties in respect of the Mircette product in the amount of $600,000. Other revenues consist primarily of funding from the Chief Scientist, which represented 100%, 99% and 98% of other revenues in the years ended December 31, 1998, 1997 and 1996, respectively. Interest income was $2,965,000, $1,719,000 and $1,105,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The increase in interest income in 1998 and 1997 was derived primarily from an increase in cash balances resulting from option and warrant exercises and cash flow from operations in 1998 and 1997. Research and Development Expense. Expenditures for research and development were $18,450,000, $15,946,000 and $12,431,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The increase in research and development expenditures in 1998 was primarily due to certain research and development activities as well as Phase III and post approval Phase IV clinical studies relating to OxSODrol and Oxandrin, respectively, which studies began mainly in 1997. The increase in research and development expenditures in 1997 was primarily attributable to expenses associated with the Company's Phase III clinical trials, principally for OxSODrol and new dosage formulations for Oxandrin, and post-approval Phase IV clinical studies to provide additional clinical support for the use of Oxandrin to treat disease-related weight loss conditions other than AIDS-related weight loss. Cost of Product Sales. Cost of product sales was $10,744,000, $8,493,000 and $7,264,000 in the years ended December 31, 1998, 1997 and 1996, respectively. The increase in each year was primarily attributable to increased product sales. Cost of product sales as a percentage of product sales was 16%, 16% and 18% in 1998, 1997 and 1996, respectively. The decrease from 1996 was primarily due to increased sales of Oxandrin as a percentage of total product sales. Oxandrin has a relatively low cost of manufacture as a percentage of product sales, while BioLon has the highest cost to manufacture as a percentage of product sales. Cost of product sales as a percentage of product sales varies from year to year and quarter to quarter depending on the quantity and mix of products sold. 36 General and Administrative Expense. General and administrative expense was $8,504,000, $8,509,000 and $7,458,000 in the years ended December 31, 1998, 1997 and 1996, respectively. The increase in 1997 was primarily due to an increase in salaries and an increase in expenses associated with public relations. Marketing and Sales Expense. Marketing and sales expense was $13,312,000, $9,290,000 and $6,107,000 in the years ended December 31, 1998, 1997 and 1996, respectively. These expenses primarily related to the sales and marketing force in the United States that the Company established principally in the second half of 1995 and during 1996 to promote distribution of Oxandrin in the United States. The increase in each year was primarily due to additional marketing and sales expenses, primarily resulting from increased personnel and increased advertising, promotional and market research activities, arising from the growth of the Company's product sales. Other Expense. In 1996, the Company wrote off $1,383,000 of capitalized expenses relating to human growth hormone as a result of the affirmation by the United States Court of Appeals for the Federal Circuit of a preliminary injunction obtained by Genentech prohibiting the Company from marketing its human growth hormone in the United States. The write-off consisted of legal costs related to the litigation with Genentech and hGH launch preparation costs in the United States. The remainder of other expense consisted of interest and finance charges, commissions and royalties (which consist primarily of royalties to entities from which the Company licensed certain of its products and to the Chief Scientist). Income Taxes. Provision for income taxes for the years ended December 31, 1998 and 1997 was $7,010,000 and $6,705,000, representing approximately 28.3% and 31.7% of income before income taxes. The Company's consolidated tax rate differs from the statutory rate because of Israeli tax benefits, research and experimental tax credits, state and local taxes and similar items that reduce the tax rate. In 1996, management determined that it had become more likely than not that the Company would realize its net deferred tax assets (other than approximately $4,096,000) and BTG therefore reduced the valuation allowance by approximately $18,587,000. The determination that the net tax asset was realizable was based on 1996 being BTG's first full year of profitability in each quarter, and the performance and penetration of Oxandrin, which was first introduced in December 1995. The Company's reversal of the valuation allowance against its net deferred tax assets resulted in a realization of income tax benefit of approximately $11,975,000, net of income tax expense, in 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at December 31, 1998, was $110,359,000 as compared to $68,271,000 at December 31, 1997. The cash flows of the Company have fluctuated significantly due to the impact of net income and losses, capital spending, working capital requirements, the issuance of common stock and other financing activities. The Company expects that cash flow in the near future will be primarily determined by the levels of net income, working capital requirements, and financings, if any, undertaken by the Company. Net cash increased by $102,000, $2,324,000 and $119,000 in the years ended December 31, 1998, 1997 and 1996, respectively. Net cash (used in) provided by operating activities was $(7,318,000), $14,142,000 and $4,246,000 in the years ended December 31, 1998, 1997 and 1996, respectively. Net income was $17,739,000, $14,478,000, and $22,915,000 in the same periods, respectively. In 1998 the Company used cash in operating activities primarily because of an increase in accounts receivable of $40,856,000 partially offset by a non-cash provision for deferred income taxes of $6,374,000, depreciation and amortization of $3,125,000 and an increase in accounts payable of $7,295,000. In 1997, net income and net cash provided by operating activities were approximately the same, as income taxes of $6,297,000, depreciation and amortization of $2,636,000 and an increase in other current liabilities of $1,494,000 were completely offset by a $9,267,000 increase in receivables and a $1,713,000 decrease in accounts payable. In 1996, net cash provided by operating activities was substantially less than net income, primarily because of a non-cash deferred income tax benefit of 37 $12,435,000 and an increase in receivables and inventory of $11,926,000 and $3,210,000, respectively, resulting from increased product sales, partially offset by an increase in current liabilities of $4,676,000, depreciation and amortization of $2,745,000 and a write-off of capitalized expenses of $1,383,000. Net cash used in investing activities was $16,649,000, $17,672,000 and $12,759,000 in the years ended December 31, 1998, 1997 and 1996, respectively. Net cash used in investing activities included capital expenditures of $3,594,000, $3,134,000 and $2,945,000 in these periods, respectively, primarily for laboratory and manufacturing equipment and infrastructure. The remainder of the net cash used in investing activities was primarily for purchases and sales of short-term investments. Net cash provided by financing activities was $24,069,000, $5,854,000 and $8,632,000 in the years ended December 31, 1998, 1997 and 1996, respectively. Cash flows from financing activities were primarily affected by net proceeds from issuances of common stock of $24,069,000 (of which $17,221,000 resulted from the exercise of warrants which expired on December 31, 1998), $5,872,000 and $8,655,000 in these periods, respectively. Net proceeds from the sale of common stock result mainly from option and warrant exercises. The Company is currently in negotiations to purchase a manufacturing facility in Israel for approximately $6.5 million. The Company will initially locate its production activities for Bio-Hep-B and Fibrimage at this new facility, and will thereafter move the remainder of its production activities to this facility. The Company expects the initial production facility will be ready by the end of 2000. The Company expects it will cost approximately $30 million to complete the production facility (excluding the cost of purchasing the facility). The Company maintains its funds in money market funds, commercial paper and other liquid debt instruments. See Notes 1c and 1e of Notes to Consolidated Financial Statements. The Company manages its Israeli operations with the objective of protecting against any material net financial loss in U.S. dollars from the impact of Israeli inflation and currency devaluations on its non-U.S. dollar assets and liabilities. The cost of the Company's operations in Israel, as expressed in dollars, is influenced by the extent to which any increase in the rate of inflation in Israel is not offset (or is offset on a lagging basis) by a devaluation of the Israeli Shekel in relation to the dollar. The rate of inflation (as measured by the consumer price index) was approximately 11% in 1996, 7% in 1997 and 9% in 1998, while the Shekel was devalued by approximately 4%, 9% and 18%, respectively. As a result, for those expenses linked to the Israeli Shekel, such as salaries and rent, this resulted in corresponding increases in these costs in U.S. dollars in 1996, but a decrease in 1997 and 1998. To the extent that expenses in Shekels exceed BTG's revenues in Shekels (which to date have consisted primarily of research funding from the Chief Scientist and product sales in Israel), the devaluations of Israeli currency have been and will continue to be a benefit to BTG's financial condition. However, should BTG's revenues in Shekels exceed its expenses in Shekels in any material respect, the devaluation of the Shekel will adversely affect BTG's financial condition. Further, to the extent the devaluation of the Shekel with respect to the U.S. dollar does not substantially offset the increase in the costs of local goods and services in Israel, BTG's financial results will be adversely affected as local expenses measured in U.S. dollars will increase. At December 31, 1998, intangibles, net, consist of (i) $1,299,000 (net of amortization) relating to the purchase of all rights to hGH previously licensed to The Du Pont Merck Pharmaceutical Company, together with all rights to all data generated in pharmacological, toxicological and clinical studies and encompassed in the IND and NDA files then pending with the FDA for the treatment of human growth hormone-deficient children, and (ii) $429,000 (net of amortization) relating to the reacquisition of all rights to human growth hormone licensed to SmithKline Beecham Intercredit B.V. The Company believes that its remaining cash resources as of December 31, 1998, together with anticipated product sales, scheduled payments to be made to BTG under its current agreements with pharmaceutical partners and third parties and continued funding from the Chief Scientist at current levels, will be sufficient to fund the Company's ongoing operations for the foreseeable future. There can, however, be no assurance that product sales will occur as anticipated, that scheduled payments will be made by third parties, that current agreements will not be canceled, that the Chief Scientist will continue to provide funding at current 38 levels, or that unanticipated events requiring the expenditure of funds will not occur. The satisfaction of the Company's future cash requirements will depend in large part on the status of commercialization of the Company's products, the Company's ability to enter into additional research and development and licensing arrangements, and the Company's ability to obtain additional equity investments, if necessary. There can be no assurance that the Company will be able to obtain additional funds or, if such funds are available, that such funding will be on favorable terms. The Company continues to seek additional collaborative research and development and licensing arrangements, in order to provide revenue from sales of certain products and funding for a portion of the research and development expenses relating to the products covered, although there can be no assurance that the Company will be able to obtain such agreements. See "Item 1. Business--Risk Factors --Capital Needs" and "--Variability of Operating Results." YEAR 2000 The Company uses and relies on a variety of information technologies, computer systems and scientific and manufacturing equipment containing computer-related components (such as programmable logic controllers and other embedded systems). Certain of the Company's computer systems and equipment use two digit fields rather than four digit fields to define the applicable year. As a result, such systems may not be able to distinguish between dates in the 20th century and the 21st century. This could cause system or equipment shutdowns, failures or miscalculations resulting in inaccuracies in computer output or disruptions of operations, including inaccurate processing of financial information and/or temporary inabilities to process transactions, manufacture products or engage in normal business activities. The Company has conducted an evaluation of the actions necessary to ensure that its business critical computer systems and equipment will be able to function without disruption with respect to the application of dating systems in the Year 2000. This evaluation was completed by the end of 1998, following which the Company upgraded, replaced and tested its computer systems and equipment so as to be able to operate without disruption due to Year 2000 issues. The Company expects to complete all its remediation efforts before the end of 1999. However, there can be no assurance that any required remedial actions will be able to be completed on a timely basis. If the Company is unable to complete its remedial actions in the necessary time frame, contingency plans will be developed to address those business critical systems which may not be Year 2000 compliant. In addition to risks associated with the Company's own computer systems and equipment, the Company has relationships with, and is to varying degrees dependent upon, a number of third parties that provide goods, services and information to the Company. These include contract manufacturers, suppliers, licensees, vendors, research partners and financial institutions. If any of these third parties experience failures in their computer systems or equipment due to Year 2000 non-compliance, which systems and equipment are outside the control of the Company, it could affect the Company's ability to manufacture products or engage in normal business activities. The Company has made contact with all of its significant customers, suppliers, vendors and partners to determine the extent to which the Company is vulnerable to their failures and to ascertain their Year 2000 compliance and risk. Based on these responses, the Company believes that its significant customers, suppliers, vendors and partners will be Year 2000 compliant. The total cost of the Year 2000 systems evaluation and remediation is being funded through operating cash flows and the Company is expensing these costs. While the total cost to obtain Year 2000 compliance is not known at this time, the Company currently expects the cost to be less than $100,000, of which approximately $25,000 has been expended through December 31, 1998. The actual cost, however, could exceed this estimate. The Company believes that such cost will not have a material effect on the Company's financial position, results of operations or cash flows. 39 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Page Report of Independent Public Accountants................... 41 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1997 and 1998................................. 42 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998............... 43 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998..................... 44 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998........... 45 Notes to Consolidated Financial Statements................. 46 40 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Bio-Technology General Corp.: We have audited the accompanying consolidated balance sheets of Bio-Technology General Corp. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These 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 generally accepted auditing standards. 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 financial position of Bio-Technology General Corp. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP New York, New York February 2, 1999 41 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands, except share data) December 31, --------------------- 1997 1998 -------- -------- ASSETS Current Assets: Cash and cash equivalents....................................... $ 9,329 $ 9,431 Short-term investments.......................................... 26,178 37,602 Accounts receivable - trade.................................... 27,070 52,429 - other 471 15,968 Inventories..................................................... 5,401 4,978 Deferred income taxes (Note 11)................................. 8,000 5,407 Prepaid expenses ............................................... 402 344 -------- -------- Total current assets........................................ 76,851 126,159 Deferred income taxes (Note 11) ................................. 2,148 -- Severance pay funded (Note 2) ................................... 2,435 2,233 Property and equipment, net (Note 3).............................. 7,545 9,442 Intangibles, net of accumulated amortization of $3,442 in 1997 and $4,303 in 1998...................................... 2,590 1,728 Patents, net of accumulated amortization of $426 in 1997 and $487 in 1998................................................ 551 404 Other assets...................................................... 3,293 2,629 -------- -------- Total assets................................................ $ 95,413 142,595 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term bank loans........................................... $ 362 $ 288 Accounts payable................................................ 1,645 5,359 Other current liabilities (Note 8).............................. 6,573 10,153 -------- -------- Total current liabilities................................... 8,580 15,800 -------- -------- Long-term liabilities (Note 2).................................... 3,975 3,818 -------- -------- Commitments and contingent liabilities (Note 7) Stockholders' Equity (Notes 4 and 5): Preferred stock - $.01 par value; 4,000,000 shares authorized; no shares issued ........................ -- -- Common stock - $.01 par value; 150,000,000 shares authorized; issued: 47,304,000 in 1997 and 51,934,000 in 1998...................................... 473 519 Capital in excess of par value.................................. 136,662 161,164 Accumulated deficit............................................. (54,135) (36,396) Treasury stock at cost (83,000 shares).......................... (340) (340) Accumulated other comprehensive income (loss)................... 198 (1,970) -------- ------- Total stockholders' equity.................................... 82,858 122,977 -------- -------- Total liabilities and stockholders' equity.................. $ 95,413 $142,595 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. 42 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
December 31, ------------------------------------- 1996 1997 1998 --------- -------- ------- Revenues (Note 9): Product sales.............................................. $ 40,356 $53,723 $68,246 Contract fees.............................................. 4,887 8,369 2,686 Royalties.................................................. - - 2,160 Other revenues............................................. 1,390 1,524 798 Interest and finance....................................... 1,105 1,719 2,965 -------- ------- ------- 47,738 65,335 76,855 -------- ------- ------- Expenses: Research and development................................... 12,431 15,946 18,450 Cost of product sales...................................... 7,264 8,493 10,744 General and administrative................................. 7,458 8,509 8,504 Marketing and sales........................................ 6,107 9,290 13,312 Commissions and royalties.................................. 1,994 1,650 929 Interest and finance....................................... 161 264 167 Write-off in connection with litigation (Note 10)................................................ 1,383 -- -- -------- ------- ------- 36,798 44,152 52,106 -------- ------- ------- Income before income taxes....................................... 10,940 21,183 24,749 Income tax (benefit) expense, net (Note 11)...................... (11,975) 6,705 7,010 -------- ------- ------- Net income....................................................... $ 22,915 $14,478 $17,739 ======== ======= ======= Earnings per common share: Basic...................................................... $0.52 $0.31 $0.37 ===== ===== ===== Diluted.................................................... $0.47 $0.28 $0.36 ==== ==== ==== Weighted average number of common and common equivalent shares: Basic...................................................... 44,195 46,767 48,184 ====== ====== ====== Diluted.................................................... 48,259 51,916 49,848 ====== ====== ======
The accompanying notes are an integral part of these consolidated financial statements. 43
BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands) Common Stock ---------------- Capital in Par Excess of Accumulated Treasury Shares Value Par Value Deficit Stock - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1995 43,275 433 117,390 (91,528) (340) Net income for 1996 22,915 Total comprehensive income Issuance of common stock 9 74 Issuance of common stock on series A and B note conversions (including capitalized interest) and on conversion of convertible debentures 41 91 Tax benefit derived from exercise of stock options 2,944 Exercise of stock options 1,790 18 5,236 Exercise of warrants 567 6 3,395 Amortization of deferred compensation ------ ---- -------- -------- ----- BALANCE, DECEMBER 31, 1996 45,682 457 129,130 (68,613) (340) Comprehensive income: Net income for 1997 14,478 Unrealized gain on marketable securities, net Total comprehensive income Issuance of common stock 4 59 Issuance of common stock on series A and B note conversions (including capitalized interest) and on conversion of convertible debentures 133 1 550 Tax benefit derived from exercise of stock options 1,066 Exercise of stock options 1,433 14 5,597 Exercise of warrants 52 1 260 Amortization of deferred compensation ------ ---- -------- -------- ----- BALANCE, DECEMBER 31, 1997 47,304 473 136,662 (54,135) (340) Comprehensive income: Net income for 1998 17,739 Unrealized loss on marketable securities, net Total comprehensive income Issuance of common stock 60 1 324 Tax benefit derived from exercise of stock options 420 Exercise of stock options 660 6 2,718 Exercise of warrants 3,910 39 21,040 ------ ---- -------- ------- ----- BALANCE, DECEMBER 31, 1998 51,934 $519 $161,164 $(36,396) $(340) ====== ==== ======== ========= ====== Accumulated other Total Deferred comprehensive Stockholders' Compensation income (loss) Equity - ------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 (266) -- $ 25,689 Net income for 1996 22,915 -------- Total comprehensive income 22,915 -------- Issuance of common stock 74 Issuance of common stock on series A and B note conversions (including capitalized interest) and on conversion of convertible debentures 91 Tax benefit derived from exercise of stock options 2,944 Exercise of stock options 5,254 Exercise of warrants 3,401 Amortization of deferred compensation 190 190 ----- ------- -------- BALANCE, DECEMBER 31, 1996 (76) -- 60,558 Comprehensive income: Net income for 1997 14,478 Unrealized gain on marketable securities, net 198 ------- Total comprehensive income 14,676 ------- Issuance of common stock 59 Issuance of common stock on series A and B note conversions (including capitalized interest) and on conversion of convertible debentures 551 Tax benefit derived from exercise of stock options 1,066 Exercise of stock options 5,611 Exercise of warrants 261 Amortization of deferred compensation 76 76 ----- ------- -------- BALANCE, DECEMBER 31, 1997 -- 198 82,858 Comprehensive income: Net income for 1998 17,739 Unrealized loss on marketable securities, net (2,168) (2,168) ------- Total comprehensive income 15,571 ------ Issuance of common stock 325 Tax benefit derived from exercise of stock options 420 Exercise of stock options 2,724 Exercise of warrants 21,079 ----- ------- -------- BALANCE, DECEMBER 31, 1998 $ -- $(1,970) $122,977 ===== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 44 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, ------------------------------------------------ 1996 1997 1998 - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income.................................................................... $ 22,915 $ 14,478 $ 17,739 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Deferred income tax (benefit) expense...................................... (12,435) 6,297 5,160 Depreciation and amortization.............................................. 2,745 2,636 3,125 Write-off in connection with litigation.................................... 1,383 -- -- Provision for severance pay................................................ 665 326 (157) Loss (gain) on disposal of fixed assets ................................... (18) (4) 3 Gain on sales of short-term investments, net............................... (33) (38) (92) Common stock as payment for services....................................... 74 59 59 Changes in: accounts receivable .................................................... (11,926) (9,267) (40,856) inventories............................................................. (3,210) (73) 423 prepaid expenses and other current assets............................... (590) (53) 58 accounts payable........................................................ 2,235 (1,713) 3,714 other current liabilities............................................... 2,441 1,494 3,506 -------- -------- -------- Net cash provided by (used in) operating activities........................... 4,246 14,142 (7,318) -------- -------- -------- Cash flows from investing activities: Purchases of short-term investments........................................... (18,258) (22,107) (27,742) Capital expenditures.......................................................... (2,945) (3,134) (3,594) Intangibles................................................................... (61) -- -- Severance pay funded.......................................................... (376) (117) 202 Other assets.................................................................. (531) (1,159) 348 Change in patents............................................................. (191) (121) (144) Proceeds from sales of short-term investments................................. 9,520 8,924 14,243 Proceeds from sales of fixed assets........................................... 83 42 38 -------- -------- -------- Net cash investing activities................................................. (12,759) (17,672) (16,649) -------- -------- -------- Cash flows from financing activities: Proceeds from issuances of common stock....................................... 8,655 5,872 24,069 Other......................................................................... (23) (18) -- -------- -------- -------- Net cash provided by financing activities..................................... 8,632 5,854 24,069 -------- -------- -------- Net increase in cash and cash equivalents..................................... 119 2,324 102 Cash and cash equivalents at beginning of year................................ 6,886 7,005 9,329 -------- -------- -------- Cash and cash equivalents at end of year...................................... $7,005 $9,329 $9,431 ======== ======== ======== Supplementary Information Non-cash investing and financing activities: Series A and B note conversions (including capitalized interest) and conversion of convertible debentures.......................... $ 91 $551 $ -- Other information: Interest paid................................................................. $ 55 $ 35 $ 2 Income taxes paid............................................................. $260 $356 $515
The accompanying notes are an integral part of these consolidated financial statements. 45 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Bio-Technology General Corp. ("BTG") and its wholly owned subsidiary, Bio-Technology General (Israel) Ltd. ("BTG-Israel"), were formed in 1980 to research, develop, manufacture and market products through the application of genetic engineering and related biotechnologies. A substantial amount of research and development activities has been conducted on behalf of the parent by BTG-Israel. a. Basis of consolidation: The consolidated financial statements include the accounts of BTG, BTG-Israel and BTG Pharmaceuticals Corp. (through March 15, 1996, the date it was merged into BTG), hereinafter collectively referred to as the "Company". All material intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform with current year presentation. b. Translation of foreign currency: The functional currency of BTG-Israel is the U.S. dollar. Accordingly, its accounts are remeasured in dollars, and translation gains and losses (which are immaterial) are included in the statements of operations. c. Cash and cash equivalents: At December 31, 1997 and 1998, cash and cash equivalents included cash of $2,386,000 and $2,959,000, respectively, and money market funds, commercial paper and other liquid short-term debt instruments (with maturities as at acquisition of ninety days or less) of $6,943,000 and $6,472,000, respectively. d. Accounts receivable - other: As of December 31, 1998, accounts receivable - other, consist primarily of proceeds due from the exercise of warrants, which proceeds were subsequently received by the Company in January 1999. e. Short-term investments: The Company applies Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Under SFAS No. 115, marketable debt and equity securities are reported at fair value, with unrealized gains and losses from those securities, which are classified as "trading securities", included in net income and unrealized gains and losses from those securities, which are classified as "available-for-sale securities", reported as a separate component of stockholders' equity. Debt securities classified as "held to maturity" are reported at amortized cost. Short-term investments consist primarily of investments in mutual funds and U.S. Treasury and corporate bonds that have been classified as "available-for-sale securities". At December 31, 1997 and 1998, the aggregate fair value of the securities was $26,178,000 and $37,602,000, with a cost of $25,980,000 and $39,572,000, respectively. 46 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES f. Inventories: Inventories are stated at the lower of average cost or market on the weighted average method. At December 31, 1997 and 1998, inventories include raw materials of $717,000 and $1,063,000, work-in-process of $932,000 and $736,000, and finished goods of $3,752,000 and $3,179,000, respectively. g. Property and equipment, accumulated depreciation and amortization: Depreciation has been calculated using the straight-line method over the estimated useful lives of the assets, ranging from 5 to 17 years. Leasehold improvements are amortized over the lives of the respective leases, which are shorter than the useful life. The cost of maintenance and repairs is expensed as incurred. h. Intangibles: Intangibles consist of capitalized marketing rights and are amortized, using the straight-line method over the shorter of the life of the related revenue stream or seven years, commencing with the initial sale of the related product. i. Patents: Patent costs related to products approved by any regulatory agency worldwide or being sold have been capitalized. Amortization has been calculated using the straight-line method over 17 years commencing the date of grant with respect to each project. j. Long-lived assets: The Company's policy is to record long-lived assets at cost, amortizing these costs over the expected useful lives of related assets. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of", these assets are reviewed on a quarterly and annual basis for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable. Furthermore, the assets are evaluated for continuing value and proper useful lives by comparison with expected future cash flows. k. Revenue recognition: Product sales are recognized when the product is shipped. Contract fees for grants of licenses and other rights are recognized when the relevant terms of each contract have been performed by the Company. Other revenues represent funds received by the Company for research and development projects that are partially funded by collaborative partners and the Chief Scientist of the State of Israel, respectively. The Company recognizes revenue upon performance of such funded research. In general, these contracts are cancelable by the Company's collaborative partners at any time. l. Stock-based compensation: The Company grants stock options for a fixed number of shares to employees. The Company accounts for stock option grants in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". The Company has not adopted the measurement requirements of SFAS No. 123, "Accounting for Stock-Based Compensation", for stock option grants to employees and, accordingly, has made all of the required pro forma disclosures for the years ended December 31, 1996, 1997 and 1998 in Note 5. 47 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES m. Income taxes: Deferred income taxes are recognized for the tax consequences of temporary differences by applying the enacted statutory tax rates to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. BTG-Israel files separate income tax returns and provides for taxes under Israeli regulations. n. Comprehensive income (loss): In 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income". This statement establishes rules for the reporting of comprehensive income and its components. Other comprehensive income (loss) consists of unrealized gains (losses) on marketable securities. In 1997 Other comprehensive income was reported net of tax. In 1998 any tax benefit recorded in connection with Other comprehensive loss was offset by a valuation allowance due to the uncertainty of future utilization. o. Earnings per common share: Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share." In accordance with SFAS No. 128, net earnings per common share amounts ("basic EPS") were computed by dividing net earnings by the weighted average number of common shares outstanding and excluded any potential dilution. Net earnings per common share amounts assuming dilution ("diluted EPS") were computed by reflecting potential dilution from the exercise of stock options and warrants. SFAS No. 128 requires the presentation of both basic EPS and diluted EPS on the face of the consolidated statements of operations. Earnings per share amounts for the same prior-year periods have been restated to conform with the provisions of SFAS No. 128. A reconciliation between the numerators and denominators of the basic and diluted EPS computations for net earnings is as follows: 48
BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES Year Ended December 31, 1996 ---------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amounts --------- ----------- --------- (In thousands, except per share data) NET EARNINGS.................................. $22,915 BASIC EPS Net earnings attributable to common stock......................................... 22,915 44,195 $0.52 EFFECT OF DILUTIVE SECURITIES Stock options................................. 2,659 Stock warrants................................ 1,405 ------ DILUTED EPS Net earnings attributable to common stock and assumed option and warrant exercises..................................... $22,915 48,259 $0.47 ======= ====== ===== Year Ended December 31, 1997 ---------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amounts --------- ----------- --------- (In thousands, except per share data) NET EARNINGS.................................. $14,478 BASIC EPS Net earnings attributable to common stock......................................... 14,478 46,767 $0.31 EFFECT OF DILUTIVE SECURITIES Stock options................................. 2,421 Stock warrants................................ 2,728 ------ DILUTED EPS Net earnings attributable to common stock and assumed option and warrant exercises..................................... $14,478 51,916 $0.28 ======= ====== ===== Year Ended December 31, 1998 ---------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amounts --------- ----------- --------- (In thousands, except per share data) NET EARNINGS.................................. $17,739 BASIC EPS Net earnings attributable to common stock......................................... 17,739 48,184 $0.37 EFFECT OF DILUTIVE SECURITIES Stock options................................. 1,090 Stock warrants................................ 574 ------ DILUTED EPS Net earnings attributable to common stock and assumed option and warrant exercises..................................... 17,739 49,848 $0.36 ======= ====== =====
49 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES Options to purchase 1,970,000 shares of common stock out of the total number of options outstanding as of December 31, 1998, were not included in the computation of diluted EPS because of their anti-dilutive effect. p. Use of estimates in preparation of financial statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These assets and liabilities include BTG's marketing rights, patents, prepaid and deferred expenses, fixed assets and severance accruals, as management has made estimates as to their useful lives and realizability and future obligations. Actual results could differ from those estimates. NOTE 2 - LONG-TERM LIABILITIES Long-term liabilities consist of provision for severance pay. BTG-Israel participates in a defined contribution pension plan and makes regular deposits with a pension fund to secure pension rights on behalf of some of its employees. The custody and management of the amounts so deposited are independent of the Company and accordingly such amounts funded (included in expenses on an accrual basis) and related liabilities are not reflected in the balance sheets. The Company's obligation for severance pay, in addition to the amount funded, is included within long-term liabilities in the accompanying balance sheets. In respect of its other employees, BTG-Israel purchases individual insurance policies intended to cover its severance obligations. The amount funded in the insurance policy and its obligation for severance pay to those employees are reflected in the balance sheets as severance pay funded and included in the provision for severance pay, respectively. The liability of the Company for severance pay is calculated on the basis of the latest salary paid to its employees and the length of time they have worked for the Company. The liability is covered by the amounts deposited, including accumulated income thereon, as well as by the unfunded provision. The expense related to severance and pension pay for the years ended December 31, 1996, 1997 and 1998, was $844,000, $936,000, and $715,000, respectively. 50 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES NOTE 3 - PROPERTY AND EQUIPMENT, NET
December 31, ----------------------- 1997 1998 -------- -------- (in thousands) Cost: Laboratory and manufacturing equipment................. $11,766 $14,446 Office equipment....................................... 2,968 3,536 Air conditioning and other............................. 2,067 2,156 Leasehold improvements................................. 7,580 7,613 ----- ----- 24,381 27,751 Accumulated depreciation and amortization.............. (16,836) (18,309) ------- ------- Total............................................ $ 7,545 $ 9,442 ======= =======
Depreciation and amortization expense was approximately $1,637,000, $1,590,000 and $1,617,000 for the years ended December 31, 1996, 1997 and 1998, respectively. NOTE 4 - STOCKHOLDERS' EQUITY In the years ended December 31, 1996, 1997 and 1998, the Company issued 567,000 shares, 52,000 shares and 3,910,000 shares, respectively, of the Company's common stock upon the exercise of outstanding warrants having an aggregate purchase price of $3,401,000, $260,000 and $21,079,000, respectively. In the years ended December 31, 1996, 1997 and 1998, the Company issued 1,790,000 shares, 1,433,000 shares and 660,000 shares, respectively, of the Company's common stock upon the exercise of outstanding stock options having an aggregate purchase price of $5,254,000, $5,611,000 and $2,724,000, respectively. As of December 31, 1998, 406,000 Class B warrants to purchase the Company's common stock at an exercise price of $9.84 per common share were outstanding and will expire in March 1999. In April 1998, the Company adopted the 1998 Employee Stock Purchase Plan (the "1998 ESPP"). The 1998 ESPP is qualified as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The total number of shares reserved for issuance under the 1998 ESPP is 3,000,000 shares. All full-time employees of the Company are eligible to participate in the 1998 ESPP. From time to time, the Board of Directors may fix a date or a series of dates on which the Company will grant rights to purchase shares of Common Stock under the 1998 ESPP ("Rights") at prices not less than 85% of the lesser of (i) the fair market value of the shares on the date of grant of such Right or (ii) the fair market value of the shares on the date such Right is exercised. Rights granted under the 1998 ESPP will run for a maximum of 27 months. No employee may be granted a Right which permits such employee to purchase shares under the 1998 ESPP having a fair market value which exceeds $25,000 (determined at the time such Right is granted) for each calendar year in which such Right is outstanding, and no Right granted to any participating employee may cover more than 12,000 shares. 51 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES NOTE 5 - STOCK OPTIONS The Company's Stock Option Plan (the "Plan") permits the granting of options to purchase up to an aggregate of 3,900,000 shares of the Company's common stock to employees, consultants and directors of the Company. Under the Plan, the Company may grant either incentive stock options, at an exercise price of not less than 100% of the fair market value of the underlying shares ("market value") on the date of grant, or restricted stock options, at an exercise price of not less than the lower of (i) 50% of the book value per share of the Company's common stock, or (ii) 50% of the market value on the date of grant. Options generally become exercisable ratably over a four-year period, with unexercised options expiring shortly after employment termination. Terminated options are available for reissuance. No additional options can be granted under the Plan. In 1992, the Company adopted the Bio-Technology General Corp. 1992 Stock Option Plan (the "1992 Stock Option Plan"). The 1992 Stock Option Plan currently permits the granting of options to purchase up to an aggregate of 12,000,000 shares of the Company's common stock to key employees (including employees who are directors) and consultants of the Company. Under the plan, the Company may grant either incentive stock options, at an exercise price of not less than 100% of the fair market value of the underlying shares on the date of grant, or non-qualified stock options, at an exercise price not less than the par value of the common stock on the date of grant. Options generally become exercisable ratably over a four-year period, with unexercised options expiring shortly after employment termination. Terminated options are available for reissuance. The Company also established a Stock Option Plan for New Directors (the "New Director Plan") that, upon an individual's initial election or appointment to the Board of Directors, provides for the grant of an option to purchase 20,000 shares of common stock at an exercise price equal to the market value of the common stock on the date of grant. Options become exercisable over a three-year period. In June 1997 the Company adopted the Bio-Technology General Corp. 1997 Stock Option Plan for Non-Employee Directors (the "Directors Plan"). The Directors Plan provides that each non-employee director will automatically receive an option to purchase 7,500 shares of the Company's common stock on each date such person is re-elected a director of the Company. In addition, the Directors Plan provided that each person who was re-elected as a non-employee director at the time the Directors Plan was adopted by the stockholders automatically received an option to purchase 7,500 shares of the Company's common stock on the date the Directors Plan was adopted. The exercise price of each option is equal to the market value of the common stock on the date of grant. Options become exercisable over a three-year period. An aggregate of 500,000 shares of common stock has been reserved for issuance under the Directors Plan. The Company accounts for all plans under APB Opinion No. 25, under which no compensation cost has been recognized as all options granted during 1996, 1997 and 1998 have been granted at the fair market value of the Company's common stock. Had compensation cost for these plans and the Company's 1998 ESPP 52 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES been determined in accordance with SFAS No. 123, the Company's net income and EPS would have been reduced as follows: Year Ended December 31, ----------------------- 1996 1997 1998 ---- ---- ---- (in thousands except per share data) Net income: As reported ............... $22,915 $14,478 $17,739 Pro forma ............... 21,575 10,361 9,810 Basic EPS: As reported ............... $ 0.52 $ 0.31 $ 0.37 Pro forma ............... 0.49 0.22 0.20 Diluted EPS: As reported ............... $ 0.47 $ 0.28 $ 0.36 Pro forma ............... 0.45 0.20 0.20 Under SFAS No. 123, the fair value of each option is estimated on the date of grant using the Black Scholes option-pricing model with the following weighted average assumptions used for grants in 1996, 1997 and 1998: (1) expected life of option of seven years; (2) dividend yield of 0%; (3) expected volatility of 72%, 64% and 56%; and (4) risk-free interest rate of 6.66%, 6.43% and 5.46%, respectively. Because SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Transactions under the Plan, the New Director Plan, the 1992 Stock Option Plan, the Directors Plan and other plans during 1996, 1997 and 1998 were as follows:
Year ended December 31, ------------------------------------------------ 1996 1997 ----------------------- -------------------- Weighted Weighted Average Average Shares Exercise Shares Exercise ('000s) Price ('000s) Price -------- -------- ------- ----- Options outstanding at beginning of year............. 6,004 $3.83 4,933 $4.79 Granted.............................................. 751 8.04 1,975 14.08 Exercised............................................ (1,790) 2.93 (1,433) 3.92 Terminated........................................... (32) 5.40 (75) 6.13 ------- ------- Options outstanding at end of year................... 4,933 4.79 5,400 8.40 ======= ======= Exercisable at end of year .......................... 2,808 2,333 ======= ======= Weighted average fair value of options granted....... 5.90 9.65 ===== ===== Weighted average fair value of options repriced...... Year ended December 31, 1998 ------------------------ Weighted Average Shares Exercise ('000s) Price ------ -------- Options outstanding at beginning of year............. 5,400 $8.40 Granted.............................................. 1,874 7.49 Exercised............................................ (660) 4.13 Terminated........................................... (282) 9.10 ----- Options outstanding at end of year................... 6,332 7.33 ===== Exercisable at end of year .......................... 2,714 ===== Weighted average fair value of options granted....... 4.71 ===== Weighted average fair value of options repriced...... 3.96(1) =====
(1) On June 15, 1998 1,398,000 previously-granted options were repriced. The additional compensation cost in respect thereof is reflected in the pro forma disclosures for the year ended December 31, 1998. 53 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES Of the 6,332,000 options outstanding as of December 31, 1998: - 2,130,000 have exercise prices between $1.06 and $7.00 with a weighted average exercise price of $4.46 and a weighted average remaining contractual life of 5.67 years. Of these 2,130,000 options, 1,635,000 are exercisable; their weighted average exercise price is $4.44. - 2,262,000 options have exercise prices between $7.19 and $8.44 with a weighted average exercise price of $7.71 and a weighted average remaining contractual life of 8.41 years. Of these 2,262,000 options, 538,000 are exercisable; their weighted average exercise price is $7.79. - 1,940,000 options have exercise prices between $8.45 and $14.12 with a weighted average exercise price of $10.03 and a weighted average remaining contractual life of 8.49 years. Of these 1,940,000 options, 541,000 are exercisable; their weighted average exercise price is $10.22. Subsequent to December 31, 1998, options to purchase an aggregate of 57,000 shares of common stock have been exercised, having an aggregate purchase price of $241,000. NOTE 6 - FOREIGN OPERATIONS The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information", at December 31, 1998. SFAS 131 establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Under SFAS 131, the Company's operations are treated as one operating segment as it only reports profit and loss information on an aggregate basis to chief operating decision makers of the Company. Information about the Company's operations in the United States and Israel is presented below: 54 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES
U.S. Israel Eliminations Consolidated --------- -------- ------------ ------------ (in thousands of U.S. dollars) ------------------------------ Year ended December 31, 1996: Revenues.................................................. ss.43,833 3,905 47,738 Intercompany transactions................................. 1,213 7,329 (8,542) Reimbursement of subsidiary's expenses 8,994 (8,994) Depreciation and amortization............................. 1,316 1,429 2,745 Interest income........................................... 1,072 33 1,105 Income tax benefit........................................ (11,975) (11,975) Net income................................................ 21,908 1,231 (224) 22,915 Identifiable assets(o).................................... 73,706 9,775 (9,906) 73,575 Foreign liabilities(o).................................... ++4,643 4,643 Investment in subsidiaries (cost basis)(o)................ 5,797 (5,797) Year ended December 31, 1997: Revenues.................................................. ss.61,834 3,501 65,335 Intercompany transactions................................. 1,143 7,730 (8,873) Reimbursement of subsidiary's expenses................... 9,946 (9,946) Depreciation and amortization............................. 1,438 1,198 2,636 Interest income........................................... 1,611 108 1,719 Income tax expense........................................ 6,705 6,705 Net income................................................ 13,448 1,538 (508) 14,478 Identifiable assets(o).................................... 94,513 9,074 (8,174) 95,413 Foreign liabilities(o).................................... ++4,334 4,334 Investment in subsidiaries (cost basis)(o)................ 5,797 (5,797) Year ended December 31, 1998: Revenues.................................................. ss.66,810 10,045 76,855 Intercompany transactions................................. 4,363 1,599 (5,962) Reimbursement of subsidiary's expenses 10,770 (10,770) Depreciation and amortization............................. 1,989 1,136 3,125 Interest income........................................... 2,870 95 2,965 Income tax expense........................................ 7,010 7,010 Net income................................................ 17,223 3,404 (2,888) 17,739 Identifiable assets(o).................................... 140,290 20,330 (17,944) 142,676 Foreign liabilities(o).................................... ++5,939 5,939 Investment in subsidiaries (cost basis)(o)................ 5,797 (5,797)
- --------------------------- ss. Includes export sales of $22,334,000, $24,713,000 and $27,723,000 in 1996, 1997 and 1998, respectively. (o) At year end. ++ Excludes liability to parent. 55 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES a. The Company has leased approximately 23,000 square feet of office space in New Jersey for its executive office, having an average annual rental expense of approximately $415,000. The lease expires in October 2003. In addition, the Company is obligated to pay its proportional share of any annual increase in taxes and operating expenses. The Company also leases approximately 2,000 square feet in New York City, primarily for its investor and public relations activities having an average annual rental expense of $98,000. BTG-Israel currently leases approximately 89,000 square feet of space for its research, development and production facilities in Israel. This lease will expire in December 2002. BTG-Israel also leases 5,000 square feet of warehouse space near its research and manufacturing facility pursuant to a lease that expires in September 1999. Rent expense was approximately $1,450,000, $1,609,000 and $1,684,000 for the years ended December 31, 1996, 1997 and 1998, respectively. The future consolidated annual minimum rentals (exclusive of amounts for real estate taxes, maintenance, etc.) for each of the next five years are as follows: 1999--$1,544,000; 2000--$1,520,000; 2001--$1,522,000; 2002--$1,524,000; and 2003--$417,000. There is also a bank guarantee outstanding in favor of the lessor for $694,000 secured by the assets of BTG-Israel. b. The Company is obligated, for products resulting from research and development projects partially funded by the Chief Scientist, to pay royalties to the Israeli government of 3%-5% on commercial sales, if any, of these products if produced in Israel up to the amount so funded, or royalties of 4%-6% if produced outside Israel up to 120%-300% of the amount so funded. As of December 31, 1998, the Company is obligated to repay to the Chief Scientist, out of revenue from future product sales, a minimum of $3,653,000 of research and development funding for products that are currently being sold and a minimum of $9,088,000 of research and development funding for products currently under development if these products will be sold. During the years ended December 31, 1996, 1997 and 1998, the Company accrued approximately $907,000, $413,000 and $385,000, respectively, as royalties to the Chief Scientist. The Company is also committed to pay royalties on future sales, if any, of certain of its products to licensees from which the Company licensed these products. c. The Company currently has employment agreements with five senior officers. Under these agreements, the Company has committed to total aggregate base compensation per year of approximately $1,193,000 plus other normal customary fringe benefits and bonuses as well as a minimum annual increase in compensation. These employment agreements generally have a term of two years and are automatically renewed for successive two-year periods unless either party gives the other notice of non-renewal. d. The Company has received notification of claims filed against certain of its patents. Management believes that these claims have no merit, and the Company intends to defend them vigorously. 56 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES NOTE 8 - OTHER CURRENT LIABILITIES December 31, ----------------------------- 1997 1998 ------ ------- (in thousands) Salaries and related expenses $1,894 $ 2,295 Accrued subcontracting payable 2,725 4,558 Governmental and state agencies 240 1,001 Legal and professional fees 698 265 Royalties and commissions 419 1,645 Other 597 389 ------ ------- $6,573 $10,153 ====== ======= NOTE 9 - CONCENTRATIONS In 1996, 1997 and 1998, one customer for human growth hormone, located solely in Japan, represented $12,906,000, $10,095,000 and $11,056,000, or 28%, 16% and 15% of revenues (exclusive of interest income), respectively. In 1996, 1997 and 1998, one customer for Oxandrin and Delatestryl, located solely in the United States, represented $15,540,000, $29,013,000 and $43,171,000, or 33%, 46% and 58% of revenues (exclusive of interest income), respectively. In 1998, the Company's product sales consisted primarily of sales of Oxandrin, human growth hormone and BioLon in the amount of approximately $40,521,000, $17,316,000 and $6,799,000, or 59%, 25% and 10% of total product sales, respectively. One customer accounted for 69% and 74% of total accounts receivable-trade as of December 31, 1997 and 1998, respectively. As of December 31, 1997 and 1998, another customer accounted for 10% and 12% of total accounts receivable-trade, respectively. BTG has one supplier for its Oxandrin product. NOTE 10 - WRITE-OFF IN CONNECTION WITH LITIGATION In 1996, the Company wrote off $1,383,000 of capitalized expenses relating to human growth hormone, as a result of the affirmation by the U.S. Court of Appeals for the Federal Circuit of a preliminary injunction obtained by Genentech, Inc. prohibiting the Company from marketing its human growth hormone in the United States. The write-off consists of legal costs related to the litigation with Genentech and hGH launch preparation costs in the United States. NOTE 11 - INCOME TAXES Taxable income for the years ended December 31, 1996, 1997 and 1998 was substantially offset by the utilization of net operating loss carryforwards ("NOLs") and research and experimental ("R&E") credits. At December 31, 1998, BTG has a capital loss carryover of approximately $6,800,000 available to offset future capital gains, which expires in 2000, and an R&E credit carryover of approximately $3,278,000 available to reduce future income taxes, which expires at various times with respect to various amounts through 2018. In 1996, management determined that it had become more likely than not that it would realize its net deferred tax assets (other than approximately $4,096,000) and it therefore reduced the valuation allowance by 57 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES approximately $18,587,000. The determination that the net tax asset was realizable was based on 1996 being BTG's first full year of profitability in each quarter, and the performance and penetration of Oxandrin, which was first introduced in December 1995. The Company's reversal of the valuation allowance against its net deferred tax assets resulted in a realization of income tax benefit of approximately $12,435,000 in 1996 and increased capital in excess of par value by approximately $2,944,000, representing, for tax purposes, the deductible compensation resulting from the exercise of stock options. The components of current and deferred income tax (benefit) expense are as follows:
Year Ended December 31, ------------------------------------------- 1996 1997 1998 -------- ------ ------ (in thousands) Current: State............................. $ 1,155 $ -- $336 Federal........................... 3,156 408 1,514 Benefit of NOLs................... (3,851) -- -- -------- ------ ------ 460 408 1,850 -------- ------ ------ Deferred: State............................. (1,840) 2,035 464 Federal........................... (10,595) 4,262 4,696 -------- ------ ------ (12,435) 6,297 5,160 -------- ------ ------ Total income tax (benefit) expense........ $(11,975) $6,705 $7,010 ======== ====== ======
The domestic and foreign components of income before income taxes are as follows:
Year Ended December 31, ------------------------------------------ 1996 1997 1998 ------- ------- -------- (in thousands) Domestic.......................... $9,654 $19,663 $21,435 Foreign........................... 1,286 1,520 3,314 ------- ------- ------- $10,940 $21,183 $24,749 ======= ======= =======
58 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES The components of deferred income tax (benefit) expense are:
Year Ended December 31, ---------------------------------- 1996 1997 1998 --------- ------- ------ (in thousands) R&E credit.................................... $ -- $(1,419) $ (393) Net operating loss ........................... 4,989 7,738 7,290 Change in valuation allowance exclusive of stock options........................... (16,286) -- -- Alternate minimum tax credit............... (218) (381) (28) Accrued amounts............................ (739) 793 (1,429) Depreciation and amortization.............. (181) (434) (280) --------- ------- ------ $(12,435) $ 6,297 $5,160 ========= ======= ======
A reconciliation of income taxes between the statutory and effective tax rates on income before income taxes is as follows:
Year Ended December 31, ---------------------------------- 1996 1997 1998 --------- ------ ------- (in thousands) Income tax at U.S. statutory rate........................... $3,720 $7,414 $8,662 Current year benefit of NOLs ............................... (3,851) -- -- State and local income taxes (net of federal benefit) 850 1,222 520 Change in valuation allowance exclusive of stock options......................................... (12,435) -- -- R&E credit.................................................. -- (1,419) (1,189) Foreign income not subject to tax........................... (340) (350) (1,371) Other....................................................... 81 (162) 388 ------- ------ ------- Income tax (benefit) expense................................ $(11,975) $6,705 $7,010 ======== ====== ======
59 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES The components of deferred income tax assets (liabilities) are as follows: December 31, --------------------------- 1997 1998 ------- ------- (in thousands) NOLs ............................. $ 7,391 $ -- Capital loss carryforward............... 4,096 2,632 R&E credit.............................. 2,365 3,278 Accrued amounts......................... 965 2,422 ------- ------- 14,817 8,332 Depreciation and amortization........... (573) (293) ------- ------- 14,244 8,039 Valuation allowance..................... (4,096) (2,632) ------- ------- $10,148 $5,407 ======= ====== 60 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors The section entitled "Proposal No. 1 - Election of Directors" in the Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated herein by reference. Executive Officers See "Part I - Item 1. Business - Executive Officers of the Company". ITEM 11. EXECUTIVE COMPENSATION The section entitled "Executive Compensation" in the Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Beneficial Ownership of Common Stock" in the Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The sections entitled "Executive Compensation - Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" in the Company's Proxy Statement for the Annual Meeting of Stockholders is incorporated herein by reference. 61 BIO-TECHNOLOGY GENERAL CORP. AND SUBSIDIARIES PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements (1) and (2) See "Index to Consolidated Financial Statements" at Item 8 of this Annual Report on Form 10-K. (3) Exhibits Certain exhibits presented below contain information that has been granted or is subject to a request for confidential treatment. Such information has been omitted from the exhibit. Exhibit Nos. 10(a), (j), (k), (l), (n), (q), (v), (w), (x) and (y) are management contracts, compensatory plans or arrangements. Exhibit No. Description - ----------- ----------- 3(a) Certificate of Incorporation of the Registrant, as amended. *(1) (b) By-laws of the Registrant, as amended.*(2) 4.1 Rights Agreement, dated as of October 7, 1998, by and between Bio-Technology General Corp. and American Stock Transfer & Trust Company, as Rights Agent, which includes the form of Certificate of Designations setting forth the terms of the Series A Junior Participating Cumulative Preferred Stock, par value $0.01 per share, as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C.*(2) 4.2 Certificate of Designations of the Series A Junior Participating Cumulative Preferred Stock.*(2) 10(a) Bio-Technology General Corp. Stock Option Plan, as amended through May 29, 1991.*(3) (b) Agreement, dated January 25, 1981, between Bio-Technology General (Israel) Ltd. and Yeda Research and Development Co., Ltd. ("Yeda"). *(4) (c) Letter from the Chief Scientist to Bio-Technology General (Israel) Ltd. *(4) (d) Letter from the Company to Yeda relating to bGH and hSOD. *(5) (e) Agreement, dated January 20, 1984, between Bio-Technology General (Israel) Ltd., and the Chief Scientist with regard to certain projects. *(6) (f) Agreement, dated July 9, 1984, between the Company and Yeda. *(6) (g) Agreement, dated as of January 1, 1984, between the Company and Yissum. *(7) (h) Form of Indemnity Agreement between the Company and its directors and officers. *(8) 62 EXHIBIT NO. DESCRIPTION - ----------- ----------- (i) Agreement, dated November 18, 1988, between the Company and Yeda. *(9) (j) Employment Agreement, dated as of January 1, 1990, between the Company and Dr. Sim Fass.*(10) (k) Bio-Technology General Corp. Stock Compensation Plan for Outside Directors, as amended through March 1991. *(3) (l) Bio-Technology General Corp. Stock Option Plan for New Directors, as amended through March 1991. *(3) (m) Reacquisition of Rights Agreement, effective June 12, 1991 between the Company and The Du Pont Merck Pharmaceutical Company. *(11) (n) Employment Agreement, dated as of September 5, 1990, between Bio-Technology General (Israel) Ltd. and Marian Gorecki. *(12) (o) Agreement, dated as of November 9, 1992, between the Company and SmithKline Beecham Intercredit B.V. *(12) (p) Exclusive Distribution Agreement, dated as of November 9, 1992, between the Company and Ferring B.V. *(12) (q) Bio-Technology General Corp. 1992 Stock Option Plan, as amended.*(13) (r) Purchase and Supply Agreement, dated as of December 1, 1995, between Bio-Technology General Corp. and Quantum Health Resources. *+(14) (s) Support Services Agreement, dated as of December 1, 1995, between Bio-Technology General Corp. and Quantum Health Resources. *+(14) (t) Research and Development Services Agreement, dated as of January 1, 1996 by and between Bio-Technology General Corp. and Bio-Technology General (Israel) Ltd. (u) Manufacturing Services Agreement, dated as of January 1, 1996, by and between Bio- Technology General Corp. and Bio-Technology General (Israel) Ltd. (v) Employment Agreement, dated as of January 29, 1996, between Bio-Technology General Corp. and Ernest L. Kelly. *(14) (w) Employment Agreement, dated as of April 24, 1995, between Bio-Technology General Corp. and William Pursley. *(15) 63 EXHIBIT NO. DESCRIPTION - ----------- ----------- (x) Bio-Technology General Corp. 1997 Stock Option Plan for Non-Employee Directors.*(13) (y) Bio-Technology General Corp. 1998 Employee Stock Purchase Plan.*(16) 21 Subsidiaries of Bio-Technology General Corp.+(17) 23 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. Exhibits have been included in copies of this Report filed with the Securities and Exchange Commission. Stockholders of the Company will be provided with copies of these exhibits upon written request to the Company. - ------------------- + Confidential treatment has been granted for portions of such document. * Previously filed with the Commission as Exhibits to, and incorporated herein by reference from, the following documents: (1) Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994. (2) Company's Current Report on Form 8-K, dated October 7, 1998. (3) Company's Annual Report on Form 10-K for the year ended December 31, 1991. (4) Registration Statement on Form S-1 (File No. 2-84690). (5) Company's Annual Report on Form 10-K for the year ended December 31, 1983. (6) Registration Statement on Form S-1 (File No. 33-2597). (7) Registration Statement on Form S-2 (File No. 33-12238). (8) Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1987. (9) Company's Annual Report on Form 10-K for the year ended December 31, 1988. (10) Company's Annual Report on Form 10-K for the year ended December 31, 1989. (11) Registration Statement on Form S-3 (File No. 33-39018). (12) Company's Annual Report on Form 10-K for the year ended December 31, 1992. (13) Company's Annual Report on Form 10-K for the year ended December 31, 1997. (14) Company's Annual Report on Form 10-K for the year ended December 31, 1995. (15) Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. (16) Company's Registration Statement on Form S-8 (File No. 333-64541). (17) Company's Annual Report on Form 10-K for the year ended December 31, 1996. 64 (b) Reports on Form 8-K Current Report on Form 8-K dated October 7, 1998, reporting the Company's adoption of a Shareholder Rights Plan and By-law amendments. (c) Exhibits See (a) (3) above. (d) Financial Statement Schedule See "Index to Consolidated Financial Statements and Supplemental Schedule" at Item 8 of this Annual Report on Form 10-K. Schedules not included herein are omitted because they are not applicable or the required information appears in the Consolidated Financial Statements or notes thereto. 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Bio-Technology General Corp. (Registrant) By: /s/ Sim Fass -------------------- (Sim Fass) Chairman of the Board, President and CEO March 19, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Sim Fass Chairman of the Board, March 19, 1999 - --------------------- President, CEO and Director (Sim Fass) (Principal Executive Officer) /s/ Herbert Conrad Director March 19, 1999 - --------------------- (Herbert Conrad) /s/ Carl Kaplan Director March 19, 1999 - --------------------- (Carl Kaplan) /s/ Allan Rosenfield Director March 19, 1999 - --------------------- (Allan Rosenfield) /s/ David Tendler Director March 19, 1999 - --------------------- (David Tendler) 66 Signature Title Date - --------- ----- ---- /s/ Virgil Thompson Director March 19, 1999 - --------------------- (Virgil Thompson) /s/ Dan Tolkowsky Director March 19, 1999 - --------------------- (Dan Tolkowsky) /s/ Faye Wattleton Director March 19, 1999 - --------------------- (Faye Wattleton) /s/ Herbert Weissbach Director March 19, 1999 - --------------------- (Herbert Weissbach) /s/ Yehuda Sternlicht Vice President-Finance and March 19, 1999 - --------------------- Chief Financial Officer (Yehuda Sternlicht) (Principal Financial and Accounting Officer) 67 EX-10.(T) 2 RESEARCH AND DEVELOPMENT SERVICES AGREEMENT RESEARCH AND DEVELOPMENT SERVICES AGREEMENT THIS AGREEMENT, made and entered into as of this 1st day of January, 1996, by and between BIO-TECHNOLOGY GENERAL CORP., a Delaware corporation ("BTG U.S."), and BIO-TECHNOLOGY GENERAL (ISRAEL) LTD., an Israeli corporation ("BTG ISRAEL"). W I T N E S S E T H : WHEREAS, BTG ISRAEL has experience in the research and development of genetically engineered and other products and has the facilities, equipment and employees that will permit it to carry out research and development activities on behalf of BTG U.S.; and WHEREAS, BTG U.S. has engaged BTG ISRAEL to render research and development services to BTG U.S. in connection with BTG U.S.' research and development activities, and BTG ISRAEL is willing to provide such services; and WHEREAS, BTG U.S. and BTG ISRAEL desire to amend and restate the terms under which BTG ISRAEL will continue to provide research and development services to BTG U.S. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. The following terms used in this Agreement shall have the meanings set forth below: 1.1. "Affiliate" shall mean an entity or person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, BTG U.S. For this purpose "control" means the direct or indirect beneficial ownership of fifty percent (50%) or more of an entity's voting stock or equity. 1.2. "Chief Scientist" shall mean the office of the Chief Scientist of the State of Israel or any successor entity. 1.3. "Margin" shall mean a specified percentage of Reimbursable Costs determined annually by good faith negotiation between BTG ISRAEL and BTG U.S. based upon the percentage an unrelated party would charge BTG U.S. on an arms' length basis for the services rendered by BTG ISRAEL hereunder. -1- 1.4. "Principal Investigators" shall mean those scientists and technicians at Research Institutions who engage or participate in the conduct or supervision of a Sponsored Research Program. 1.5. "Product" shall mean each and every product which embodies or is manufactured by the use of, or which contains components which embody or are produced by, the Technology. 1.6. "Reimbursable Costs" shall mean all direct and indirect costs (including without limitation an allocable share of BTG ISRAEL's administrative expenses) incurred by BTG ISRAEL in conducting the Sponsored Research Program or in providing technical assistance pursuant to Section 4 hereof, all as determined in accordance with United States generally accepted accounting principles. Such costs shall include, without limitation, salaries and wages, payroll taxes, contract labor, fringe benefits, facilities (including leasehold improvements) and equipment repair and maintenance expenses, recruitment and relocation expenses, communication expense, supplies, development and prototype materials, freight and transportation, training, education, travel expenses, data processing costs, license fees, insurance, professional or other outside purchased services (including, without limitation, services performed by the Principal Investigators), depreciation and amortization of, and financing charges for, capital acquisitions made on or after January 1, 1994, sales and use taxes, and periodic lease payments under capital or financing leases of assets acquired by BTG ISRAEL or any Research Institution for use in conducting the Sponsored Research Program. Such costs shall not include any exchange losses incurred as a result of any fluctuation in the rate of exchange between the Israel Shekel and the U.S. dollar. BTG ISRAEL shall document the allocation of indirect costs, which allocations shall be submitted to BTG U.S. for its review and approval, which approval shall not be unreasonably withheld. Such allocation of indirect costs shall be reviewed by the parties from time to time to determine whether such allocation should be revised. Notwithstanding the foregoing, Reimbursable Costs shall not include the direct and indirect costs of the Sponsored Research Program which are funded by the Chief Scientist unless and until BTG ISRAEL is obligated to reimburse the Chief Scientist for such funding, in which event Reimbursable Costs shall include the amounts due the Chief Scientist in respect of such Sponsored Research Program, up to 100% of the amount of the Sponsored Research Program funded by the Chief Scientist (denominated in U.S. Dollars). All third party costs shall be charged to BTG U.S. in an amount equal to the payments made by BTG ISRAEL to any such third party in respect of the research and development. 1.7. "Research Institutions" shall mean those universities, research institutions and other organizations which, pursuant to written agreements with BTG ISRAEL, will undertake to conduct, supervise or participate in a Sponsored Research Program. 1.8. "Sponsored Research Program" shall mean a research and development program which is conducted by BTG ISRAEL or by one or more Research Institution(s) under an agreement with BTG ISRAEL pursuant to the terms and conditions of this Agreement. -2- 1.9. "Technology" shall mean all information and know-how (general and specific) including, without limitation, developments, discoveries, inventions, improvements, designs, methods, processes, techniques, devices, formulae and trade secrets which hereafter are developed, acquired, conceived, result from or arise in connection with a Sponsored Research Program. 2. Research and Development Services. 2.1. From time to time during the term of this Agreement, BTG ISRAEL agrees to undertake, at BTG U.S.'s request, Sponsored Research Programs in accordance with the terms of this Agreement. Each such Sponsored Research Program shall be initiated by the submission by BTG U.S. to BTG ISRAEL of a written proposed project plan which shall include: (i) the estimated budget for the first year of the Sponsored Research Program; and (ii) a proposed development plan setting forth the activities to be carried out, the objectives sought to be achieved, and the projected duration of the Sponsored Research Program. Any such Sponsored Research Program shall be considered effective and in full force upon written concurrence thereto from an authorized representative of both parties. BTG U.S. may make changes to and amend the Sponsored Research Program and the project plan from time to time after consulting with BTG ISRAEL. BTG ISRAEL hereby agrees to use its best efforts to accomplish the research contemplated by such Sponsored Research Program, directly and/or by arrangement with Research Institutions, including without limitation expending sufficient time and effort and allocating sufficient staff, but does not guarantee or warrant the results of the Sponsored Research Program. 2.2. At least ninety (90) days prior to the end of the first year of any Sponsored Research Program (or any subsequent year if any Sponsored Research Program is extended), BTG ISRAEL and BTG U.S. shall commence good faith discussions of the budget and any revisions in the project plan with the intent of establishing a one-year budget therefor no later than sixty (60) days prior to the end of the current year. 2.3. During the term of this Agreement, BTG ISRAEL shall devote such time and effort to the performance of services pursuant to this Agreement as may be necessary or appropriate to fulfill its duties as described in Section 2; however, it is specifically understood and agreed by BTG U.S. that BTG ISRAEL shall not be required to devote full time to such services and that BTG ISRAEL shall have the right to engage in its own research and development activities, which may include research and development activities which may be competitive with the Sponsored Research Programs and in other business activities with other persons, and BTG U.S. shall not, by virtue of this -3- Agreement, have any right, title or interest in or to such independent activities or to the income or profits derived therefrom and, without limiting BTG ISRAEL's obligation to use commercially reasonable efforts to provide certain services hereunder, nothing set forth in this Agreement shall limit or reduce the ability of BTG ISRAEL to carry on such other activities. 2.4. BTG ISRAEL shall maintain its research and development facilities, and shall conduct its research and development services, in accordance with Good Laboratory Practices as required from time to time. 3. Payment for Services. 3.1. As compensation for the services to be performed by BTG ISRAEL hereunder on behalf of BTG U.S., BTG U.S. agrees to pay to BTG ISRAEL its Reimbursable Costs incurred in each Sponsored Research Program, all as set forth in this Section 3, plus the Margin. 3.2. At the beginning of each fiscal quarter, BTG U.S. shall advance to BTG ISRAEL one quarter of the total budget for each Sponsored Research Program for the fiscal year or such other amount as indicated in the budget for the particular quarter. Within thirty (30) days after the end of each quarter, BTG ISRAEL shall furnish to BTG U.S. a written report of its Reimbursable Costs for each Sponsored Research Program for that quarter. If the Reimbursable Costs plus the Margin exceed the advance, BTG U.S. shall promptly pay the difference to BTG ISRAEL; if such Reimbursable Costs plus the Margin are less than the advance, such difference shall be credited in U.S. dollars toward the advance for the subsequent fiscal quarter. All revenue received by BTG ISRAEL from pre-commercial sales of products in accordance with Section 5 hereof shall be treated as an advance to BTG ISRAEL pursuant to this Section 3 and shall be credited in U.S. Dollars toward the advance for the subsequent fiscal quarter due BTG ISRAEL pursuant to this Section 3. BTG ISRAEL shall keep full and true books of account and other records in sufficient detail so that the Reimbursable Costs payable to BTG ISRAEL hereunder can be properly ascertained. BTG ISRAEL agrees, at the request of and expense of BTG U.S., to permit an independent certified public accountant selected by BTG U.S. (except one to whom BTG ISRAEL has some reasonable objection) to have access, once each calendar year, during ordinary business hours, to such books and records as may be necessary to determine in respect to invoices for Reimbursable Costs delivered not more than two (2) years prior to the date of such request the correctness of any determination of the Reimbursable Costs contained in such invoice, but in no event shall any invoice be reviewed more than once. The basis for any determination of such accountant shall be made available for review and comment by BTG ISRAEL and reconsidered if BTG ISRAEL so requests, and a further determination made at BTG ISRAEL's expense by another nationally recognized independent certified public accountant selected by BTG U.S. from among three proposed by BTG ISRAEL and such accountant shall make a final determination. Such final determination shall be binding upon the parties hereto. -4- 3.3. BTG ISRAEL shall use its reasonable best efforts to obtain funding on an annual basis for a portion of each Sponsored Research Program from the Chief Scientist. 3.4. BTG U.S. shall bear all risks of loss attributable to the research and development activities performed on its behalf by BTG ISRAEL. BTG ISRAEL shall be entitled to retain the entire amount of Reimbursable Costs plus the Margin received pursuant to this Section, whether or not the research and development work is successful and accomplished the results contemplated by any Sponsored Research Program. 4. Technical Assistance. BTG ISRAEL agrees to make available to BTG U.S. or its designee, at reasonable times and places and on reasonable notice, the services of technical personnel to consult with, instruct and assist BTG U.S. or its designee in utilizing the Technology. 5. Pre-Commercial Sales. BTG ISRAEL shall, at the request of BTG U.S., sell products to third parties who have obtained license or distribution rights in respect of such products for use by such third parties in conducting clinical tests and obtaining regulatory approval to market such products. All amounts received by BTG ISRAEL in respect of such sales shall, for purposes of this Agreement, be treated as advances of payments due BTG ISRAEL hereunder. 6. Reports and Records. 6.1. BTG ISRAEL shall furnish BTG U.S. within sixty (60) days of the end of each of BTG ISRAEL's fiscal quarters a report in such reasonable detail as BTG U.S. may request setting forth: (a) the work performed by BTG ISRAEL during such quarter with respect to such Sponsored Research Program; and (b) the status of such Sponsored Research Program at the end of such quarter. In addition, BTG ISRAEL shall furnish to BTG U.S. such information regarding the status of the sponsored Research Program as BTG U.S. may from time to time reasonably request. 6.2. Within ninety (90) days after the completion of such Sponsored Research Program, BTG ISRAEL shall provide to BTG U.S. a final report in such reasonable detail as BTG U.S. may request setting forth all Reimbursable Costs incurred by BTG ISRAEL in connection therewith. 6.3. BTG ISRAEL shall keep complete, accurate and authentic accounts, notes, data and records relating to such Sponsored Research Program in the manner and form approved by -5- BTG U.S. Such accounts, notes, data and records shall be available for inspection and copying by BTG U.S. and its authorized representative during regular business hours. 6.4. BTG ISRAEL shall provide to BTG U.S. such data and information resulting from its conduct of the Sponsored Research Program and such reasonable assistance as BTG U.S. may reasonably require in connection with preparing applications required for governmental approval of, and obtaining approval of, the use, marketing and distribution of the product(s) resulting from the Sponsored Research Program. 7. Ownership and Patents. 7.1. BTG U.S. shall have exclusive right, title and interest in and to the Technology, and BTG ISRAEL shall have no rights with respect thereto. The parties hereto recognize and agree that BTG ISRAEL is merely rendering research and development services to BTG U.S., and that BTG U.S. is the developer of the Technology. Nothing herein is intended to derogate from BTG ISRAEL's ownership of the real property, tools, machinery and equipment acquired by it in furtherance of, or incidental to, any Sponsored Research Program, whether or not the research and development work is successful and accomplishes the results contemplated by any such Sponsored Research Program. 7.2. Any patent applications or patents for the Technology shall be owned by BTG U.S., and BTG ISRAEL shall have no rights with respect thereto. BTG U.S. shall have sole control over filing and prosecuting applications for United States and foreign patents covering the Technology and shall file and prosecute the same in BTG U.S.'s name. The cost for all such filings and prosecutions shall be borne by BTG U.S. BTG ISRAEL agrees to use its best efforts to cause each of its employees and consultants and each Research Institution (and each Principal Investigator thereat) working on a Sponsored Research Program to enter into a binding written agreement, reasonably acceptable to BTG U.S., to the effect that (i) if such person is a sole inventor or joint inventor of Technology, such employee, consultant or Principal Investigator will, without further compensation, provide BTG U.S. with the necessary authorizations, powers of attorney and other documents and assistance reasonably requested by BTG U.S. to secure and maintain BTG U.S.'s patent rights in the United States and/or foreign countries and (ii) such person shall safeguard the secrecy and confidentiality of, and the proprietary rights of BTG U.S. in and to, the Technology and any information relating thereto, and to use the Technology and any information relating thereto solely in connection with such Sponsored Research Program. BTG ISRAEL will use its reasonable efforts to cause such employee(s), consultant(s), Research Institution(s) and Principal Investigator(s) to fulfill their obligations under such agreements. Notwithstanding anything herein to the contrary, the parties acknowledge that under certain agreements previously entered into by BTG ISRAEL with Research Institutions, patent rights with respect to certain Technology are, and will continue to be, owned by such Research Institutions. -6- 7.3. Within sixty (60) days of (i) delivering a certificate signed by an officer of BTG ISRAEL certifying completion of a Sponsored Research Program or (ii) termination of such Sponsored Research Program pursuant to Section 9 hereof, BTG ISRAEL will transfer and deliver to BTG U.S. all property and property rights in which BTG U.S. has ownership rights pursuant to Section 7.1 above held by or under the control of BTG ISRAEL relating to such Sponsored Research Program. 8. Disclosure of Information. 8.1. BTG ISRAEL shall not furnish copies of documents, patents, patent applications, copyrights, drawings, specifications, bills of materials, devices, equipment, prototypes and other information relating to the Technology other than as contemplated by this Agreement and shall not, without prior written approval of BTG U.S., disclose such information to any third party except to the extent that such disclosure is necessary to BTG ISRAEL's performance of a Sponsored Research Program, and then only if (i) such disclosure is subject to the same limitations on the recipient as on BTG ISRAEL, and (ii) such limitations are set forth in a written agreement in form and substance satisfactory to BTG U.S. 8.2. Unless previously so delivered, within sixty (60) days after the termination of this Agreement for any reason, BTG ISRAEL shall deliver to BTG U.S. all information and all other property in which BTG U.S. has ownership rights pursuant to Section 7 of this Agreement. 8.3. No publication with respect to any activity undertaken pursuant to any Sponsored Research Program shall be made, nor any manuscript submitted for publication, without the prior review and written approval of BTG U.S. 8.4. The parties hereto agree that remedies at law may be inadequate to protect against the breach of this Section 8, and in any case of such a breach BTG ISRAEL hereby consents to the granting of injunctive relief, whether temporary, preliminary or final, in favor of BTG U.S. without proof of actual damages. 8.5. The provisions of this Section 8 shall survive the termination of this Agreement notwithstanding the reason for such termination. 9. Term and Termination. 9.1. This Agreement shall commence as of the date first written above, and shall continue in full force and effect unless terminated pursuant to this Section 9. 9.2. This Agreement shall terminate upon: (a) the mutual consent of the parties hereto; or -7- (b) a party sending notice to the other party of termination of this Agreement upon the occurrence of any of the following events: (i) the other party institutes bankruptcy, insolvency, liquidation or receivership proceedings or proceedings for reorganization under bankruptcy or comparable laws; (ii) a petition is filed against the other party for any such proceedings listed in (i) above, the effectiveness of which is not stayed or dismissed within ninety (90) days after the filing thereof; (iii) the other party shall make a general assignment for the benefit of creditors; or (iv) the other party shall commit any material breach of any of the terms or conditions hereof, and also shall fail to remedy such default or breach within ninety (90) days after receipt of written notice thereof from the other party. 9.3. Notwithstanding the termination of this Agreement as provided in this Section 9, the rights and obligations of the parties under Sections 7 and 8 hereof shall survive such termination and remain in full force and effect. 10. Research Institutions and Principal Investigators. BTG ISRAEL may enter into agreements with Research Institutions whereby such institutions and/or the Principal Investigators undertake to perform all or any portion of a Sponsored Research Program; provided, however, that (except with prior written approval of BTG U.S.) no such agreement shall contain any provision which restricts the rights conferred upon BTG U.S. hereunder or diminishes the obligations of BTG ISRAEL hereunder which would be required to be performed by BTG ISRAEL if no such agreement had been made. Nothing in this Section 10 is intended to derogate from the provisions of Section 7.2. 11. Relationship of the Parties. Nothing in this Agreement or in the performance hereof shall have the effect of making BTG U.S. and BTG ISRAEL partners, joint venturers or each other's agents, and neither shall have the right to act on behalf of or bind the other except as expressly provided hereunder or otherwise expressly agreed in writing, and each party shall indemnify and hold harmless the other against and from any liability arising from any such act by such party. BTG ISRAEL will render the research and development services provided for herein as an independent contractor. 12. Headings. All section headings used in this Agreement are solely for the convenience of the parties and shall not affect the meaning or interpretation of the provisions thereof. -8- 13. Governing Law; Consent to Jurisdiction. This Agreement shall be governed by and construed in accordance with the laws of the State of New York (not including its choice of law principles). The parties hereto submit to the exclusive jurisdiction and venue of the Supreme Court of the State of New York and the Federal District Court for the Southern District of New York for purposes of any legal action arising out of this Agreement. 14. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes and replaces all prior agreements, understandings, writings and discussions between the parties, including without limitation that certain Research and Development Services Agreement, dated as of May 9, 1983, and that certain Amended and Restated Research and Development Services Agreement, dated as of December 28, 1995. 15. Amendment; Nonwaiver. This Agreement, and any of the terms hereof, shall not be modified, amended or waived except by a written instrument executed by the parties or, in the case of a waiver, by the waiving party. The failure of either party at any time to require performance of any term hereof shall not affect its right at a later time to enforce such term. The waiver by either party of any condition or term hereof in any one or more instances shall not be construed as a further or continuing waiver of such condition or term. 16. Unenforceable Provision. If any provision of this Agreement is, or becomes or is deemed to be invalid, illegal or unenforceable in any respect in any jurisdiction, such provision shall be deemed amended to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the parties, it shall be stricken and the remainder of this Agreement shall remain in full force and effect. In case any one or more of the provisions contained in this Agreement shall be held invalid, illegal or unenforceable in any respect in any jurisdiction, the validity, legality and enforceability of such provision or provisions shall not in any way be affected or impaired thereby in any other jurisdiction; and the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be otherwise affected or impaired thereby. 17. Notices. All notices and other communications required or desired to be given or sent by one party to the other party shall be in writing, in the English language, and shall be deemed to have been given (a) on the date of delivery, if delivered to the persons identified below, (b) five calendar days after mailing if mailed, with proper postage, by certified or registered airmail, postage prepaid, return receipt requested, addressed as set forth below, (c) on the date of receipt if sent by telex or telecopy, and confirmed in writing in the manner set forth in (b) on or before the next day after the sending of the telex or telecopy, or (d) two business days after delivered to an internationally recognized overnight courier service marked for overnight delivery, as follows: -9- To BTG U.S.: Bio-Technology General Corp. 70 Wood Avenue South Iselin, New Jersey 08830 Attn: President Telecopier: 908-632-8844 To BTG ISRAEL: Bio-Technology General (Israel) Ltd. Kiryat Weizmann Rehovot 76326, Israel Attn: President Telecopier: 972-8-409041 Any party may change such party's address for notices by notice duly given pursuant to this Section 17. 18. Assignment. Neither this Agreement nor any right or obligation arising hereunder may be assigned by BTG ISRAEL in whole or in part, without the prior written consent of BTG U.S., which consent may be withheld in the absolute discretion of BTG U.S. BTG U.S. may, upon written notice to BTG ISRAEL, assign this Agreement or any part hereof without the prior consent of BTG ISRAEL, subject to any limitation imposed by any agreement (approved by BTG U.S.) to which BTG ISRAEL is a party. This Agreement shall be binding upon any assignee and, subject to the restrictions on assignment herein set forth, inure to the benefit of the successors and assigns of each of the parties hereto. 19. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original; but such counterparts shall together constitute but one and the same instrument. -10- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. BIO-TECHNOLOGY GENERAL CORP. By: /s/ --------------------------------------- Title: ------------------------------------ BIO-TECHNOLOGY GENERAL (ISRAEL) LTD. By: /s/ --------------------------------------- Title: ------------------------------------ -11- EX-10.(U) 3 MANUFACTURING SERVICES AGREEMENT MANUFACTURING SERVICES AGREEMENT THIS AGREEMENT (the "AGREEMENT") is entered into effective as of January 1, 1996, by and between Bio-Technology General (Israel) Ltd., a corporation formed under the laws of Israel, having an address at Kiryat Weizmann, Rehovot 76326, Israel ("BTG Israel"), and Bio-Technology General Corp. ("BTG U.S."), a Delaware corporation, having an address at 70 Wood Avenue South, Iselin, New Jersey 08830 (collectively, the "Parties"). W I T N E S S E T H : WHEREAS, BTG U.S. requires manufacturing for commercial sale of its products and has need for processing capacity for a specified time and in a specified manner; WHEREAS, BTG Israel possesses suitable drug substance manufacturing facilities for product required by BTG U.S., and will use its best efforts to manufacture product in a timely manner according to BTG U.S.'s specifications and in accordance with good manufacturing practices and the terms of this Agreement; WHEREAS, BTG U.S. has engaged BTG Israel to process certain quantities of product; and WHEREAS, BTG U.S. and BTG Israel desire to amend and restate the terms under which BTG Israel will continue to provide manufacturing services to BTG U.S. NOW THEREFORE, in consideration of the foregoing premises, which are incorporated into and made a part of this Agreement, and of the mutual covenants which are recited herein, the parties agree as follows: ARTICLE I - DEFINITIONS Each of the following defined terms means the singular or the plural as required by the context in which the term appears: 1.1 "AFFILIATE" shall mean a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with, such Person. "CONTROL" (and, with correlative meanings, the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") shall mean the possession of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting stock, by contract or otherwise. In the case of a corporation "CONTROL" shall mean, among other things, the direct or indirect ownership of more than fifty percent (50%) of such corporation's outstanding voting stock. 1.2 "APPROVAL DATE" as applied to each Batch, shall mean the date on which BTG Israel's Quality Control Department approves the related Batch records and releases the Product for delivery. 1.3 "BATCH" shall mean all material intended to have uniform character and quality that is produced from a single manufacturing procedure in accordance with established parameters and according to a single manufacturing order during that same cycle of manufacture. 1.4 "COST OF MANUFACTURING" shall mean the sum of: (i) the direct labor costs, including benefits, associated with making and fully packaging each Product; and (ii) the manufacturing plant overhead costs associated with making and fully packaging each Product, including without limitation: manufacturing plant administrative salaries, including benefits; rent; equipment and manufacturing plant maintenance; real estate taxes; utilities; insurance; depreciation; amortization; and quality control costs. All such costs shall be calculated in accordance with United States generally accepted accounting principles consistently applied. 1.5 "FACILITY" shall mean BTG Israel's manufacturing facility located at Kiryat Weizmann, Rehovot, Israel. 1.6 "FDA" shall mean the United States Food and Drug Administration. 1.7 "MARGIN" shall mean a specified percentage of the Cost of Manufacturing determined annually by good faith negotiation between BTG Israel and BTG U.S. based upon the percentage an unrelated third party would charge BTG U.S. on an arms' length basis for the services rendered by BTG Israel hereunder. 1.8 "MASTER BATCH RECORD" shall mean the criteria, methodology, manufacturing Process, Specifications and formulae for each Product, which includes the identity and quantities of the Raw Materials and other components, as set forth in a schedule hereto to be agreed to by the Parties at the time BTG U.S. engages BTG Israel to manufacture a particular Product, as such may be amended by mutual agreement of the Parties from time to time. 1.9 "PERSON" shall mean any individual, partnership, association, governmental instrumentality, corporation, trust or other legal person or entity. -2- 1.10 "PROCESSING," "PROCESS," and "PROCESSED" shall have comparable meanings and shall mean the act of manufacturing and inspecting Product in accordance with the Master Batch Record and specified procedures. 1.11 "PROCESSING FEE" shall mean the consideration payable to BTG Israel for Processing each Batch of Product as specified in Section 4.1.2. 1.12 "PRODUCT" shall mean those products from time to time set forth in a schedule hereto which BTG U.S. requests that BTG Israel Process and BTG Israel agrees to Process. 1.13 "PROPRIETARY INFORMATION" shall mean all confidential information disclosed by one Party to the other at any time prior to or during the term of this Agreement pursuant to or in furtherance of this Agreement, except that which the Party receiving such Proprietary Information can establish by competent evidence: (i) was known to the receiving Party or any of its Affiliates at the time of disclosure; (ii) was generally available to the public or was otherwise part of the public domain at the time of disclosure; (iii) became generally available to the public or became otherwise part of the public domain after disclosure other than through any act or omission of the receiving Party in breach of this Agreement; (iv) was independently developed by the receiving Party or any of its Affiliates without the aid, application or use of the Proprietary Information disclosed; or (v) became known to the receiving Party after disclosure from a source who had the lawful right to disclose such information, other than the disclosing Party and other than from a third party who had an obligation to the disclosing Party not to disclose such information to others. The Specifications and all Batch Records and other information generated by BTG Israel with respect to Processing shall be deemed the Proprietary Information of BTG U.S., with the exception of information (other than know-how of BTG U.S.) relating to Process improvements made by BTG Israel in its existing technology which are generally applicable to the manufacture of pharmaceutical products. 1.14 "PURCHASE ORDER" shall mean the document originated by BTG U.S. which sets forth the quantities of each Product ordered and delivery dates mutually agreed to by the Parties. -3- 1.15 "RAW MATERIALS" shall mean excipients and associated manufacturing components, as all of the foregoing are utilized in Processing. 1.16 "REGULATORY AUTHORITIES" shall mean the FDA and all other governmental or regulatory authorities having jurisdiction over the manufacture and commercial sale of any Product. 1.17 "SPECIFICATIONS" shall mean, with respect to each Product, those specifications and services set forth in a Schedule supplied by BTG U.S. at the time BTG Israel is engaged to manufacture such Product. 1.18 "TECHNOLOGY" shall mean all the technical information, whether tangible or intangible, including (without limitation) any and all data, techniques, discoveries, inventions, processes, know-how, patents (including any continuation, extension, re-issue or renewal patents), patent applications, inventor certificates, trade secrets, methods of production and other proprietary information, that BTG U.S. has rights to (as either owner, licensee or sublicensee), or may hereafter obtain rights to, relating to the Products. 1.19 "WASTE" shall mean all rejects or waste relating to the manufacture of a Batch, including but not limited to rejected, excess or unusable Raw Materials or Product. 1.20 "WORKING BATCH RECORD" shall mean the record, for each Batch, of the criteria, methodology, manufacturing Process, Specifications and formulae for the Product, which includes the identity and quantities of the Raw Materials and other components, as set forth in the Master Batch Record, and serves as the official documentation of that specific manufacturing process as it was performed. ARTICLE II - SUPPLY AND PROCESSING OF MATERIALS 2.1 BTG ISRAEL SERVICES Upon receipt of a Purchase Order, BTG Israel shall order required Raw Materials and furnish all labor, validated equipment and facilities necessary to Process Product in the amounts set forth in the Purchase Order and BTG Israel shall ship the Product in accordance with the terms set forth in such Purchase Order. BTG Israel shall make the Facility and appropriate BTG Israel personnel available in order to comply with the Processing schedule established pursuant to written Purchase Orders. Upon completion of Processing, BTG Israel shall store the Product under mutually agreed to conditions after the BTG Israel Approval Date. For each Batch Processed by BTG Israel, BTG Israel agrees to exercise its best efforts to meet the following Processing schedule: -4- 1. BTG Israel will ship test samples of quantities of Product specified by BTG U.S. to BTG U.S. within 3 working days of the completion of each lot if required by BTG U.S. Shipment will be via overnight courier in accordance with specified shipping instructions set forth in the Purchase Order. 2. BTG Israel will quality inspect and endeavor to release Product within thirty (30) calendar days of the completion of Processing. 3. BTG Israel quality control will review and, if requested by BTG U.S., release via overnight courier the Working Batch Record to BTG U.S. within 3 days from final Approval Date. 4. BTG Israel will have Product available for shipment to BTG U.S. or BTG U.S.'s designated destination within 2 calendar days following BTG U.S.'s quality control review and lot release notification. 5. BTG Israel shall Process as close as possible to the schedule established pursuant to this Section 2.1. Notification of any necessary schedule change or delay will be forwarded via facsimile to BTG U.S., attention: Vice President-Manufacturing. BTG Israel may, without the consent of BTG U.S., arrange for any Product to be formulated, vialed, labelled and packaged by an Affiliate of BTG Israel, or, with the consent of BTG U.S., such consent not to be unreasonably withheld, by a third party under a contract with BTG Israel, in either case at facilities which comply with current good manufacturing practices as established by the applicable Regulatory Authorities in the countries in which such Product is approved for commercial sale; provided that nothing herein shall be construed to diminish or limit BTG Israel's responsibilities to fulfill its obligations hereunder. BTG Israel shall, at BTG U.S.'s request, cause the Product to be labelled and packaged in accordance with the applicable requirements of the appropriate Regulatory Authorities of each country and BTG U.S.'s reasonable instructions. Nothing in this Agreement shall preclude BTG Israel from performing manufacturing services for third parties other than BTG U.S. 2.2 FORECASTS On the first day of each calendar quarter, BTG U.S. will provide BTG Israel with a written rolling forecast of the quantities of each Product that BTG U.S. requires for the coming four calendar quarters (not including the calendar quarter beginning on such date), which forecast may be the forecast provided to BTG U.S. by any licensee or distributor of BTG U.S. Products. The first -5- calendar quarter of each rolling forecast may not be changed except pursuant to Section 2.4 or with BTG Israel's prior consent, and shall be used by BTG Israel, among other things, to determine the quantities of Raw Materials required to prepare for manufacturing each Product. BTG Israel will promptly notify BTG U.S. if it will be unable to manufacture any Product in accordance with any written rolling forecast provided to BTG Israel pursuant to this Section 2.2. 2.3 PURCHASE ORDERS All Purchase Orders shall be provided to BTG Israel at least two months prior to the start date of the first calendar quarter of forecasted manufacture for the Product set forth in the BTG Israel manufacturing schedule. The quantities indicated will be no more than ten (10) percent above the forecast for such calendar quarter or an additional Batch of Product, whichever is greater, provided Raw Materials are available. BTG Israel will use its reasonable and diligent efforts, but will be under no obligation, to supply Product in excess of such amount. If BTG U.S. requests reduced production less than one month prior to the scheduled start of production, BTG Israel shall make every reasonable effort to reschedule replacement production to fill the capacity left open by the reduced BTG U.S. production. If BTG Israel is not able to schedule replacement production, BTG U.S. shall be obligated to pay BTG Israel fifty (50) percent of the Processing Fee which would otherwise be payable for the manufacturing that is not undertaken as scheduled pursuant to the Purchase Order. If there is a conflict between this Agreement and the Purchase Order, this Agreement shall take precedence. 2.4 RAW MATERIALS 2.4.1 SUPPLY OF RAW MATERIALS For administrative convenience, BTG Israel will order the Raw Materials required to Process the Products. BTG Israel will order Raw Materials from vendors specified on Exhibit A and any other high quality vendors chosen by BTG Israel and reasonably acceptable to BTG U.S.; provided, however, that if BTG Israel proposes to use a vendor not specified on Exhibit A, it shall notify BTG U.S., and such vendor shall be deemed acceptable to BTG U.S. unless, within 10 days of such notice, BTG U.S. notifies BTG Israel that such vendor is not acceptable. All shipments of Raw Materials shall be accompanied by a vendor's Certificate of Analysis confirming that, at the time of shipment to BTG Israel for Processing, the Raw Materials meet all applicable Specifications. The vendor will be required to warrant that the Raw Materials have been produced in compliance with applicable laws and regulations, including without limitation, the current Good Manufacturing Practices Regulations of the FDA ("CGMPS") in effect at the time of Processing. BTG Israel shall store the Raw Materials from time of receipt under appropriate room temperature conditions until use, in accordance with all applicable regulatory requirements and cGMP guidelines and the Specifications. -6- 2.4.2 VERIFICATION BY BTG ISRAEL BTG Israel shall verify the quantity and identity of all Raw Materials according to BTG U.S. approved methods and procedures and shall inspect all Raw Materials in accordance with BTG Israel's written incoming inspection procedures. BTG Israel shall inform the vendor of any discrepancies in quantity and identity testing of the Raw Materials discovered by BTG Israel within five (5) working days after receipt of the Raw Materials. BTG Israel shall confirm receipt of Raw Materials immediately upon receipt and shall also inform the vendor of any damage to the Raw Materials received (e.g., damaged or punctured containers) which is visually obvious immediately upon receipt or when discovered, and will file the appropriate claims with the shipping company within the required notice period. Rejected Raw Materials will be returned to the vendor at vendor's expense and direction or disposed of at vendor's expense and direction. 2.5 WASTE DISPOSAL Based upon instructions from BTG U.S., BTG Israel shall hire, direct and pay for a qualified waste contractor to remove, in accordance with established environmental and other regulatory regulations, all BTG U.S. Waste from BTG Israel's Facility. All costs incurred pursuant to this section shall be charged to and paid for by BTG U.S. Disposal of Waste generated as a result of BTG Israel's negligence shall be disposed of and paid for by BTG Israel. BTG Israel shall obtain and maintain all waste generator licenses, disposal manifests and other records, which shall be provided to BTG U.S. upon BTG U.S.'s written request. BTG Israel will segregate, or keep records to account for, Waste arising from the Processing of Product from waste generated on behalf of other BTG Israel clients. ARTICLE III - DELIVERY AND TITLE 3.1 BTG Israel shall ship the Product at BTG U.S.'s expense and in accordance with BTG U.S.'s written instructions, FOB BTG Israel's Facility. For purposes of this Agreement, delivery of Product by BTG Israel to BTG U.S. shall be deemed to have taken place upon delivery to a BTG U.S.-designated carrier at BTG Israel's Facility. 3.2 Title to all work in process to produce Product, and all completed Product, shall at all times remain in BTG U.S. BTG Israel shall assume liability for, and defend, indemnify and hold BTG U.S., its employees, agents, officers and directors harmless from and against any loss or damage relating to the Raw Materials, the work in process to produce Product and completed Product arising from BTG Israel's negligence or willful misconduct while BTG Israel has custody and control over the Raw Materials, work in process to produce the Product and/or the completed Product. -7- 3.3 After the BTG Israel Approval Date, BTG Israel shall send all complete and approved Working Batch Records to BTG U.S. BTG U.S. has sixty (60) days from receipt of such records to accept or reject the Product. Upon such receipt, BTG U.S. may reject Product on a Batch-by-Batch basis only (i) in the event such Batch of Product fails to meet the Specifications as set forth in Exhibit B, and (ii) by giving written notice of rejection to BTG Israel within sixty (60) days following receipt by BTG U.S. of the Master Batch Records. The failure of BTG U.S. to reject Product in the manner set forth above shall constitute acceptance thereof. Acceptance of a Batch by BTG U.S. shall be deemed final disposition, and a subsequent rejection of the Batch by BTG U.S. shall not be allowed. 3.4 (a) Any claim by BTG U.S. submitted to BTG Israel pursuant to Section 3.3 shall be accompanied by a report of analysis (including an adequate Product sample from the Batch analyzed), and shall be handled as hereafter set forth in this Section 3.4. (b) Should BTG U.S. reject any Batch pursuant to Section 3.3, and BTG Israel agrees that such rejection was justified, BTG Israel shall promptly credit BTG U.S.'s account for the Processing Fee paid pursuant to Section 4.1. (c) Should BTG U.S. reject any Batch pursuant to Section 3.3, and should BTG Israel, after good faith negotiation, fail to agree that such rejection was justified, the Parties shall each appoint an independent third party and these two shall select a qualified third to test samples of such Batch and to review records and test data and other relevant information developed by both Parties relating thereto to ascertain liability for the breach. The findings of such third party shall be binding upon both Parties. If the Product is found to meet BTG U.S.'s specifications in all material respects, including processing in conformance with cGMPs and Master Batch Records, BTG U.S. shall pay the costs of such tests and shall be deemed to have accepted the Product. If the Product is not found to meet Specifications or Master Batch Records in all material respects, BTG Israel shall pay the costs of such tests and shall promptly credit BTG U.S.'s account for the Processing Fee paid pursuant to Section 4.1. ARTICLE IV - PROCESSING FEE AND PAYMENT 4.1 The Processing Fee payable to BTG Israel for Processing each Batch of BTG U.S.'s Product is specified as follows: 4.1.1 The Raw Materials that are ordered by BTG Israel are not part of the Processing Fee. Raw Materials purchased by BTG Israel and used in the Processing of each Batch will be invoiced separately at cost, and shall be furnished to BTG U.S. on a complete cost breakdown. BTG Israel will forward originals of receiving documents to BTG U.S. and will provide BTG U.S. such quality control documentation that accurately tracks all accepted and/or rejected materials so that BTG U.S. may track the associated invoices and/or credits from the supplying -8- vendor. BTG Israel shall invoice BTG U.S. for the Raw Materials used in each Batch following completion of Processing of each Batch, and shall detail the quantity of each Raw Material used. All invoices shall be due and payable within thirty (30) calendar days after receipt of the invoice by BTG U.S. 4.1.2 The price per Batch for Processing each Product will be BTG Israel's Cost of Manufacturing such Product plus the Margin. 4.2 BTG Israel shall invoice BTG U.S. for the full Processing Fee after the BTG Israel Approval Date. All invoices shall be due and payable within thirty (30) calendar days after receipt of the invoice by BTG U.S. If BTG U.S. disagrees for any reason with the amount of an invoice submitted by BTG Israel, BTG U.S. shall notify BTG Israel in writing of such disagreement within thirty (30) calendar days of receipt of such invoice, and the Parties shall promptly attempt to resolve the difference. BTG Israel shall reference BTG U.S.'s Purchase Order on all invoices. 4.3 BTG U.S. shall reimburse BTG Israel for all actual costs incurred by BTG Israel in having the Product formulated, vialed, packaged and labelled by a third-party. BTG Israel shall invoice BTG U.S. following receipt of an invoice from such third-party, and shall include a copy of such third-party's invoice. All invoices shall be due and payable within thirty (30) calendar days after receipt of the invoice by BTG U.S. 4.4 BTG Israel shall keep full and true books of account and other records in sufficient detail so that the Processing Fee payable to BTG Israel hereunder can be properly ascertained. BTG Israel agrees, at the request of and expense of BTG U.S., to permit an independent certified public accountant selected by BTG U.S. (except one to whom BTG Israel has some reasonable objection) to have access, during ordinary business hours, to such books and records as may be necessary to determine in respect of invoices for Product delivered not more than two (2) years prior to the date of such request the correctness of any determination of the Processing Fee for the Product contained in such invoice, but in no event shall any invoice be subject to such accountant's determination more than once. The basis for any determination of such accountant shall be made available for review and comment by BTG Israel and reconsidered if BTG Israel so requests, and if the parties do not agree as to the determination of such Processing Fee, a further determination shall be made at BTG Israel's expense by another internationally recognized independent certified public accountant selected by BTG U.S. from among three proposed by BTG Israel and such accountant shall make a final determination. Such final determination shall be binding upon the parties hereto. Such accountant shall not disclose to BTG U.S. any information relating to the business of BTG Israel except that which should properly have been contained in any invoice or other report required hereunder. -9- ARTICLE V - LICENSE GRANT 5.1 BTG U.S. hereby grants to BTG Israel, with the right to sublicense pursuant to Section 2.1 hereof, a non-exclusive worldwide royalty-free license to use the Technology solely in connection with the performance of its obligations hereunder. ARTICLE VI - TERMS AND CONDITIONS 6.1 BTG Israel shall perform services under this Agreement in compliance with current Good Manufacturing Practices and follow the BTG Israel standard operating procedures in effect as of the date of this Agreement, and any written revisions as may later be required by BTG U.S. and agreed to by BTG Israel. BTG Israel shall not implement any changes, material or otherwise, relating to any Product or its Process procedures without first obtaining the written approval of BTG U.S., which approval shall not be unreasonably withheld. A change is defined as any variation in the written procedures currently in place that (a) impacts the regulatory commitments for the Product, (b) may require revalidation, (c) may affect the quality, purity, identity or strength of the Raw Materials or Product, or (d) would necessarily result in changing, altering or modifying the BTG U.S. or BTG Israel Specifications, test methods, sampling procedures, validation procedures or Master Batch Record relating to the Product. 6.2 BTG U.S. will inform BTG Israel in writing of any modifications to the Specifications; the relevant documents and related schedules to this Agreement will be revised accordingly without requiring any formal mutual amendment. Upon written acceptance of said modifications, BTG Israel shall immediately implement the modified documents and procedures pertinent to the modified Specifications. Similarly, BTG Israel shall advise BTG U.S. in writing of any proposed or required changes in procedures prior to their implementation. 6.3 BTG Israel warrants that each Product shall be Processed in accordance with the Specifications for such Product and shall be Processed in accordance with applicable regulations of the FDA and applicable Regulatory Authorities in the other countries in which such Product is approved for commercial sale pertaining to cGMPs and in accordance with the Drug Master File (DMF) pertaining to the BTG Israel Facility. BTG Israel shall provide to BTG U.S. such information as BTG U.S. may require with respect to the Facility and the Process in connection with BTG U.S. or its licensees or distributors obtaining regulatory approval for commercial sale of the Products. 6.4 BTG Israel shall permit BTG U.S. representatives to enter BTG Israel's Facility upon reasonable notice and at reasonable intervals during regular business hours for the purpose of making quality control inspections of the facilities used in manufacturing, receiving, sampling, analyzing, storing, handling, packaging, shipping and disposing of the Raw Materials, Product and Waste relative to BTG U.S.'s Product as BTG U.S. may reasonably request. BTG U.S. shall also have the -10- right to have suitable representatives present in BTG Israel's plant to observe the Processing of the Product, storing, shipping and disposal processes relevant to BTG U.S.'s Product. 6.5 BTG Israel shall have primary responsibility for adopting and enforcing safety procedures for the handling and production of the Raw Materials, compounded bulk and Product that comply in all material respects with all environmental and occupational safety and health requirements and any other applicable regulatory requirements. Such responsibilities shall terminate as to Product upon delivery to a BTG U.S.-designated carrier pursuant to Section 3.1 and as to Waste upon delivery thereof to the approved waste contractor pursuant to Section 2.5. ARTICLE VII - CONFIDENTIAL INFORMATION 7.1 Except to the extent expressly authorized by this Agreement, during the term of this Agreement and following the expiration or termination of this Agreement, neither Party shall: (a) Disclose, publish or make available any Proprietary Information disclosed to it by the other to any third party, including employees who do not need to know or have access to such Proprietary Information. (b) Sell, transfer or otherwise use or exploit any such Proprietary Information disclosed to it by the other Party. (c) Knowingly permit the sale, transfer, use or exploitation by a third party of any such Proprietary Information disclosed to it by the other Party which may have been disclosed to such third party, including employees who do not need to know or have access to such Proprietary Information. 7.2 During the term of this Agreement, neither Party shall make any press release or other disclosure of the terms of this Agreement without the prior written consent of the other Party, except as required by a court of competent jurisdiction and pursuant to the disclosure requirements of Regulatory Authorities, including the Securities and Exchange Commission. 7.3 Notwithstanding the provisions of Section 7.1 hereof, BTG Israel and BTG U.S. may, to the extent necessary, disclose and use Proprietary Information (a) for the purpose of securing institutional or government approval to clinically test or market any Product, (b) to the extent necessary or useful to commercialize any Product if such Proprietary Information is disclosed in a manner that preserves the confidentiality thereof upon terms reasonably equivalent to those set forth herein; provided, however, that in each such instance any such disclosure shall be made to persons which either have agreed to be bound by or are already subject to a duty of confidentiality, for the benefit of a party hereto, substantially the same as that set forth in Section 7.1 hereof, wherever reasonably possible. -11- ARTICLE VIII - INDEMNIFICATION AND INSURANCE 8.1 BTG U.S. shall defend, indemnify and hold harmless BTG Israel, its officers, agents, employees and Affiliates from any loss, claim, action, damage, expense or liability (including defense costs and attorneys' fees) ("CLAIM") including, but not limited to, the costs for environmental sampling, cleanup and remediation, arising out of BTG Israel's disposal of BTG U.S.'s Waste in accordance with this Agreement, or the breach of any representation or warranty made by BTG U.S. herein or the handling, possession or use of the Product following delivery to a common carrier pursuant to Section 3.1, except to the extent that the Claim is based on, arises out of, or is due to the negligence or misconduct of, or breach of this Agreement by, BTG Israel or its officers, agents, employees or Affiliates. 8.2 BTG Israel shall defend, indemnify and hold harmless BTG U.S., its officers, agents, employees and Affiliates from any Claim, including, but not limited to, the costs for environmental sampling, cleanup and remediation, arising out of or related to the breach of any representation or warranty made by BTG Israel herein, BTG Israel's negligence or misconduct, or the failure to Process the Product in accordance with the Specifications, except to the extent that the Claim is based on, arises out of, or is due to the negligence or misconduct of, or breach of this Agreement by, BTG U.S. or its officers, agents, employees or Affiliates. 8.3 In any case under this Agreement where one Party has indemnified the other against any Claim or legal action, indemnification shall be conditioned on compliance with the procedure outlined below. Provided that prompt notice is given of any Claim or suit for which indemnification might be claimed, the indemnifying Party will defend, contest or otherwise protect any such Claim or suit at its own cost and expense. The indemnified Party may, but will not be obligated to, participate at its own expense in a defense thereof by counsel of its own choosing, but the indemnifying Party shall be entitled to control the defense unless the indemnified Party has relieved the indemnifying Party from liability with respect to the particular Claim. If the indemnifying Party fails to timely defend, contest or otherwise protect against any such Claim or suit, the indemnified Party may, but will not be obligated to, defend, contest or otherwise protect against the same, and make any compromise or settlement thereof and recover the entire costs thereof from the indemnifying Party, including reasonable attorneys' fees, disbursements and all amounts paid as a result of such Claim or suit or the compromise or settlement thereof; provided, however, that if the indemnifying Party undertakes the timely defense of such Claim or suit, the indemnified Party shall not be entitled to recover from the indemnifying Party for its costs incurred in the defense thereof. The indemnified Party shall cooperate and provide such assistance as the indemnifying Party may reasonably request in connection with the defense of the matter subject to indemnification. 8.4 BTG U.S. and BTG Israel each represent that they are sufficiently self-insured or insured against any liability arising under this Article VIII. -12- ARTICLE IX - RECALLS 9.1 If any Raw Materials or Product must be recalled by reason of failure to meet any applicable Specifications, requirements of the FDA or any other applicable Regulatory Authority or any other requirements of law, BTG U.S. shall have the sole responsibility to effect the recall. BTG Israel shall cooperate as reasonably required in BTG U.S.'s efforts, and shall notify BTG U.S. if it is determined by BTG Israel that such a recall is warranted based on BTG Israel's quality control findings. 9.2 BTG U.S. shall reimburse BTG Israel for any costs reasonably expended by BTG Israel to effect the recall. ARTICLE X - RECORDS AND AUDITS 10.1 During the term of this Agreement and for seven (7) years after the expiration date of any particular Batch of Product manufactured by BTG Israel for BTG U.S., BTG Israel shall maintain records and samples relating to such Batch(es) sufficient to substantiate and verify its duties and obligations hereunder, including but not limited to records of orders received, Raw Materials provided, Product manufactured, work in progress, validation reports, Processing analyses and quality control tests, disposal of Waste, and the like. 10.2 BTG U.S. shall be responsible for all obligations under the regulations of all applicable Regulatory Authorities, except for routine stability testing and sample retention. Stability testing shall be included in the Cost of Manufacturing. BTG U.S. shall immediately inform BTG Israel of all FDA or other regulatory audits pertinent to BTG U.S.'s Raw Materials, Product or Specifications. BTG U.S. shall inform BTG Israel in advance of planned FDA or other regulatory audits as soon as the schedule therefor is known. BTG U.S. shall provide BTG Israel with copies of any regulatory letters or other documents issued by the FDA or other Regulatory Authorities in connection with the audit or inspection within five (5) days of BTG U.S.'s receipt of such a document. 10.3 BTG Israel shall allow BTG U.S. representatives, upon reasonable notice and at reasonable intervals during normal business hours, to enter BTG Israel's plant for the purpose of taking inventories. BTG Israel shall further allow BTG U.S. representatives, upon reasonable notice and at such intervals as may be reasonably necessary, to examine and copy the records referenced in Section 10.1 during normal business hours for product liability, regulatory and quality control purposes. -13- ARTICLE XI - TERM AND TERMINATION 11.1 Subject to the termination provisions of Section 11.2, the initial term of this Agreement shall commence as of January 1, 1996 ("EFFECTIVE DATE") and end on December 31, 2000, and shall thereafter be automatically renewed for successive one (1) year terms and shall continue in full force and effect until terminated by either Party by written notice to the other at least nine (9) months before the end of the initial term or on nine (9) months' written notice thereafter. 11.2 In addition to each Party's right to terminate this Agreement under Section 11.1 above, each Party shall have the right to terminate this Agreement by giving the other Party written notice only if: (a) the other Party fails to perform or violates any material provision of this Agreement in any material respect, and such failure continues unremedied for a period of thirty (30) days after the date the notifying Party gives written notice to the defaulting Party with respect thereto; or (b) the other Party is declared insolvent or bankrupt by a court of competent jurisdiction, or a voluntary petition of bankruptcy is filed in any court of competent jurisdiction by the other Party, or the other Party makes or executes any assignment for the benefit of creditors, or a receiver is appointed to control the business of the other Party; or (c) the FDA orders that BTG Israel cease Processing Product. This Agreement shall terminate immediately upon the giving of notice of termination pursuant to this Section 11.2. 11.3 The termination of this Agreement shall not operate to relieve BTG Israel from its obligation to Process and deliver all Product ordered through firm Purchase Orders received from BTG U.S. prior to receipt of notice of such termination, unless such termination is effected pursuant to Section 11.2, or of BTG U.S.'s obligation to accept delivery of Product and pay for such Processing, unless such termination is effected as a result of Section 11.2(c) or a breach of this Agreement by BTG Israel pursuant to Section 11.2(a). XII - REGULATORY MATTERS 12.1 BTG U.S. shall be responsible for obtaining FDA or other regulatory approval for each Product and shall own the all regulatory approvals. BTG Israel agrees to comply with all commitments made in any New Drug Application or similar filing regarding BTG Israel's manufacturing responsibilities as described herein. BTG Israel shall be responsible for the maintenance of the Drug Master File covering the BTG Israel Facility. -14- 12.2 The vendors specified by BTG U.S. shall be responsible for ensuring compliance of the Raw Materials with all applicable cGMP standards. BTG U.S. shall be responsible for ensuring compliance of the Product Specifications (including but not limited to the text of any labeling proposed by BTG U.S.) with all applicable cGMP standards. BTG Israel shall be responsible for compliance of the bulk manufacturing and Processing procedures with the Specifications and cGMP standards. Each Party will provide reasonable assistance to the other, at no charge, if necessary to respond to FDA or other regulatory audits, inspections, inquiries or requests concerning the Raw Materials or Product. 12.3 BTG Israel and BTG U.S. shall each give the other prompt notice of any information either of them receives regarding the safety of the Raw Materials or Product, including any confirmed or unconfirmed information on adverse, serious or unexpected events associated with the use of the Product. For serious or unexpected events, notice must be given by telephone within one (1) business day after receipt of the information and followed by written notice not less than one (1) week thereafter. All responsibility, including responses due and cost for filing any reports with the FDA or other Regulatory Authorities concerning such reactions (including Drug Experience Reports) caused by the Product manufactured for BTG U.S. shall be BTG U.S.'s. Further to the above, BTG U.S. will be responsible at its cost for handling Product complaints involving commercial goods which contain Product. BTG Israel will provide timely assistance in responding to any complaints including reviews of Batch records and retained samples as well as testing of Product engendering a complaint if required, and BTG U.S. will reimburse BTG Israel for reasonable expense incurred therewith. The costs of such testing shall be borne by BTG U.S.; however, if it is determined that the Product complaint was directly or indirectly caused by BTG Israel's failure to Process the Product in accordance with the Specifications, BTG Israel shall reimburse BTG U.S. for the actual and reasonable costs of such testing and other Claims arising therefrom. ARTICLE XIII - TRADEMARKS AND LABELING 13.1 BTG Israel shall not affix to the Product, or any packaging thereof, any label, stamp or other mark identifying BTG Israel as the source of the Product except as may be required by applicable laws or regulations. 13.2 Nothing contained herein shall give BTG Israel any right to use any BTG U.S. copyright or trademark, and BTG Israel shall not obtain any right, title, or interest in any BTG U.S. trademark by virtue of this Agreement or its performance of services hereunder. ARTICLE XIV - RELATIONSHIP OF PARTIES 14.1 It is not the intent of the Parties hereto to form any partnership or joint venture. Each Party shall, in relation to its obligations hereunder, act as an independent contractor, and nothing in -15- this Agreement shall be construed to give such party the power or authority to act for, bind or commit the other Party in any way whatsoever. ARTICLE XV - WARRANTIES 15.1 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, BTG ISRAEL MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING ANY EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 15.2 OTHER THAN AS EXPRESSLY SET FORTH ELSEWHERE IN THE AGREEMENT, NEITHER BTG ISRAEL NOR BTG U.S. SHALL BE LIABLE FOR DIRECT, INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOSS OF PROFITS) WHETHER BASED ON CONTRACT, TORT OR ANY OTHER LEGAL THEORY. ARTICLE XVI - ASSIGNMENT AND DELEGATION 16.1 This Agreement shall be binding upon and inure to the benefit of the Parties, their successors and permitted assigns. Neither Party may assign this Agreement without the prior written consent of the non-assigning Party. Except as permitted by Section 2.1 hereof, BTG Israel shall Process all Product at the Facility. ARTICLE XVII - GOVERNING LAW 17.1 This Agreement shall be governed by and interpreted in accordance with the laws of the State of New Jersey. ARTICLE XVIII - FORCE MAJEURE 18.1 Neither Party hereto shall be liable to the other in damages for, nor shall this Agreement be terminable by reason of, any delay or default in such Party's performance hereunder, if such delay or default is caused by conditions beyond such Party's control including, but not limited to, acts of God, war, insurrection, civil commotion, destruction of production facilities or materials by earthquake, fire, flood or storm, labor disturbances including strikes or lockouts, epidemic or failure of suppliers, public utilities or common carriers. -16- 18.2 BTG Israel shall have no liability for any loss to Raw Materials or Product stored by BTG Israel pursuant to Article II, unless caused by BTG Israel's negligence. 18.3 Each Party hereto agrees to promptly notify the other Party of any event of force majeure under Section 18.1 above and to employ all reasonable efforts toward prompt resumption of its performance hereunder when possible if such performance is delayed or interrupted by reason of such event. ARTICLE XIX - NOTICES 19.1 All notices and other communications required or desired to be given or sent by one party to the other party shall be in writing, in the English language, and shall be deemed to have been given (a) on the date of delivery, if delivered to the persons identified below, (b) five calendar days after mailing if mailed, with proper postage, by certified or registered airmail, postage prepaid, return receipt requested, addressed as set forth below, (c) on the date of receipt if sent by telex or telecopy, and confirmed in writing in the manner set forth in (b) on or before the next day after the sending of the telex or telecopy, or (d) two business days after delivered to an internationally recognized overnight courier service marked for overnight delivery, as follows: To BTG U.S.: Bio-Technology General Corp. 70 Wood Avenue South Iselin, New Jersey 08830 Attention: President Telecopier: 908-632-8844 To BTG Israel: Bio-Technology General (Israel) Ltd. Kiryat Weizmann Rehovot 76326, Israel Attention: President Telecopier: 972-8-9409041 Any party may change such party's address for notices by notice duly given pursuant to this Article XIX. ARTICLE XX - ENTIRE AGREEMENT 20.1 This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes and replaces all prior agreements, understandings, writings and discussions between the parties, including without limitation that certain Manufacturing Services Agreement, dated as of January 1, 1995. -17- ARTICLE XXI - CAPTIONS 21.1 The captions in this Agreement are solely for convenience of reference and shall not be used for purposes of interpreting or construing the provisions hereof. ARTICLE XXII - COUNTERPARTS 22.1 This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their duly authorized representatives, effective on this date first set forth above. BIO-TECHNOLOGY GENERAL CORP. By: /s/ --------------------------------------- Its: --------------------------------------- BIO-TECHNOLOGY GENERAL (ISRAEL) LTD. By: /s/ --------------------------------------- Its: --------------------------------------- -18- EX-23 4 CONSENT OF ARTHUR ANDERSON CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Form 10-K, into the Company's previously filed Registration Statement File Numbers 333-33077, 33-83902, 333-02685, 333-36121, 333-33073, 33-51202, 33-83904, 33-69870, 33-41591, 33-4468, 33-41592, 333-33075, 333-64541 and 33-41593. /s/ ARTHUR ANDERSEN LLP ------------------------------------ Arthur Andersen LLP New York, New York March 18, 1999 EX-27 5 FDS
5 YEAR DEC-31-1998 DEC-31-1998 9,431 37,602 68,397 0 4,978 126,159 27,751 18,309 142,595 15,800 0 0 0 519 122,458 142,595 68,246 76,855 10,744 51,939 0 0 167 24,749 7,010 17,739 0 0 0 17,739 0.37 0.36
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