U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
X Annual report under Section 13 or 15(d) of the Securities
--- Exchange Act of 1934. For the fiscal year ended June 30,
2005.
OR
Transition report under Section 13 or 15(d) of the
--- Securities Exchange Act of 1934 for the transition period
from ________________ to ________________.
Commission File Number: 0-18299
BIOENVISION, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 13-4025857
----------------------------- ------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
345 Park Avenue, 41st Floor
New York, New York 10154
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 750-6700
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ____
---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $4,651,174
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the last price at which the stock was sold, as of August 15,
2005, was $279,101,648.
The number of shares of common stock outstanding as of October 6, 2005 was
40,760,762.
Part III incorporates information by reference from the issuer's definitive
proxy statement to be filed with the Commission within 120 days after the close
of the registrant's fiscal year.
Transitional Small Business Disclosure Format (check one): Yes___ No X
---
BIOENVISION, INC.
Annual Report on Form 10-KSB
Fiscal Year Ended June 30, 2005
INDEX
PART I
ITEM 1. DESCRIPTION OF BUSINESS...............................................1
ITEM 2. DESCRIPTION OF PROPERTY..............................................23
ITEM 3. LEGAL PROCEEDINGS....................................................23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................24
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............25
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............27
ITEM 7. FINANCIAL STATEMENTS.................................................35
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.............................................35
ITEM 8(a) CONTROLS AND PROCEEDURES...........................................35
ITEM 8(b) OTHER INFORMATION..................................................37
PART III
ITEM 9. DIRECTORS AND OFFICERS OF THE REGISTRANT.............................38
ITEM 10. EXECUTIVE COMPENSATION..............................................38
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS..........................38
ITEM 12.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................38
ITEM 13. EXHIBITS............................................................38
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES..............................38
PART I
Except for historical information contained herein, this annual report
on Form 10-KSB contains forward-looking statements within the meaning of the
Section 21E of the Securities and Exchange Act of 1934, as amended, which
involve certain risks and uncertainties. Forward-looking statements are included
with respect to, among other things, the Company's current business plan,
"Factors that May Effect our Business", and Managements Discussion and Analysis
of Results of Operations". These forward-looking statements are identified by
their use of such terms and phrases as "intends," "intend," "intended," "goal,"
"estimate," "estimates," "expects," "expect," "expected," "project,"
"projected," "projections," "plans," "anticipates," "anticipated," "should,"
"designed to," "foreseeable future," "believe," "believes" and "scheduled" and
similar expressions. The Company's actual results or outcomes may differ
materially from those anticipated. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
the statement was made. The Company undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Item 1. Description of Business
Overview
We are a product-focused biopharmaceutical company with two approved cancer
therapeutics. In December 2004, the Food and Drug Administration, or FDA,
approved our lead cancer product, clofarabine, for the treatment of pediatric
acute lymphoblastic leukemia, or ALL, in patients who are relapsed or refractory
to at least two prior regimens of treatment. We believe clofarabine is the first
new medicine initially approved in the United States, or U.S., for children with
leukemia in more than a decade. Clofarabine has received Orphan Drug designation
in the U.S. and in the European Union, or E.U. Genzyme Corporation, our
co-development partner, contracted with us and acquired the U.S. and Canadian
marketing rights for clofarabine for certain cancer indications and Genzyme
currently controls U.S. development of clofarabine in these indications. Genzyme
is marketing clofarabine under the brand name Clolar(R) in the U.S. In Europe,
we filed for approval of clofarabine in pediatric ALL with the European
Medicines Evaluation Agency, or EMeA, in July 2004. If approved, we anticipate
commencing sales in Europe during the first quarter of calendar 2006 through a
dedicated European sales force.
We are selling our second product, Modrenal(R), in the United Kingdom, or
U.K., through our sales force of eight sales specialists. Modrenal(R) is
approved in the U.K. for the treatment of post-menopausal advanced breast cancer
following relapse to initial hormone therapy.
If we receive additional European approvals for our products, we intend to
expand our sales force by adding six to 10 sales specialists in each of five
other key regions within the E.U. which include the countries of France,
Germany, Italy, Spain, Portugal, Netherlands, Austria, Belgium, Denmark and
Sweden. Further, we intend to penetrate all of the other markets within the E.U.
upon establishing traction in the E.U.'s major markets. In addition to
clofarabine and Modrenal(R), we are currently developing Virostat for Hepatitis
C.
Products and pipeline
Candidate Indication Status U.S. and Ex-U.S. and
Canada rights Canada
rights
------------------- ---------------- ---------------------- --------------- -------------
Clofarabine Relapsed or Marketed in U.S. Genzyme Bioenvision
(Clolar(R)) Refractory (pediatric); Filed
Acute in E.U. (pediatric)
Lymphoblastic
Leukemia (ALL)
------------------- ---------------- ---------------------- --------------- -------------
Acute Phase II in E.U. Genzyme Bioenvision
Myelogenous (adult)
Leukemia (AML)
------------------- ---------------- ---------------------- --------------- -------------
Refractory Phase II in U.S. Genzyme Bioenvision
Chronic (adult)
Lymphocytic
Leukemia (CLL)
------------------- ---------------- ---------------------- --------------- -------------
Solid Tumors Phase I (Intravenous) Genzyme Bioenvision
------------------- ---------------- ---------------------- --------------- -------------
Solid Tumors Phase I (Oral) Genzyme Bioenvision
------------------- ---------------- ---------------------- --------------- -------------
Non-Cancer Developmental Bioenvision Bioenvision
------------------- ---------------- ---------------------- --------------- -------------
Modrenal(R) Breast Cancer Marketed in U.K.; Bioenvision Bioenvision
Phase IV in U.K.;
Phase II in U.K.
------------------- ---------------- ---------------------- --------------- -------------
Prostate Cancer Phase II in U.S. Bioenvision Bioenvision
------------------- ---------------- ---------------------- --------------- -------------
Virostat Hepatitis C Investigator Bioenvision Bioenvision
Sponsored Phase II
in Europe and Middle
East
------------------- ---------------- ---------------------- --------------- -------------
Our Products
Clofarabine (Clolar(R))
On December 28, 2004, clofarabine was approved by the FDA after a "fast
track" review for the treatment of pediatric patients, ages one to 21, with
relapsed or refractory ALL after at least two prior regimens. Genzyme currently
maintains rights to market the drug for certain cancer indications in the U.S.
and Canada and we are currently receiving royalties on these sales. Genzyme is
marketing clofarabine under the brand name Clolar(R). We also submitted a
Marketing Authorization Application, or MAA, the European equivalent of a U.S.
new drug application, or NDA, with the EMeA in July 2004 for European approval
of clofarabine in relapsed or refractory pediatric acute leukemia. We expect an
opinion from the EMeA in the second half of calendar 2005. Clofarabine received
Orphan Drug designation in the U.S. and in Europe, which provides ten years of
marketing exclusivity in Europe and seven years of marketing exclusivity in the
U.S. Further, in July 2004, the FDA granted a six-month extension of the
marketing exclusivity for clofarabine in pediatric ALL under the federal Best
Pharmaceuticals for Children Act.
Pediatric leukemia is the most prevalent form of cancer among children up
to age 19 in the U.S. It is estimated that approximately 3,400 children were
diagnosed with leukemia in the U.S. in 2004, with ALL accounting for over 75% of
the incidence rate. Although survival rates for childhood leukemia have improved
significantly since the early 1970's, approximately 20% of pediatric patients
with ALL and 60% of pediatric patients with AML do not achieve long-term
survival and we believe there is a medical need for new agents to treat this
population of patients. Clofarabine is approved for the treatment of pediatric
patients, ages one to 21, with relapsed or refractory ALL after at least two
prior regimens. The adult leukemia market represents a potentially significantly
larger commercial opportunity with over 11,500 patients with AML and over 8,000
patients with CLL, diagnosed each year within the U.S. Based on population and
incidence rates data, we believe that the E.U. patient population with pediatric
leukemias and adult AML and CLL approximates that of the U.S.
Clofarabine is a purine nucleoside analog, which is a small molecule, that
we are developing with Genzyme, our co-development partner, for the treatment of
acute and chronic leukemias, lymphomas and solid tumors. Clofarabine attacks
cancer cells by damaging DNA in cancer cells, preventing DNA repair by damaged
cancer cells, damaging the cancer cell's important control structures, and
initiating the process of programmed cell death,
2
or apoptosis, in cancer cells. Clofarabine appears to combine many of the
favorable properties of the two most commonly used purine nucleoside analog
drugs, fludarabine and cladribine, but appears to have greater potency at
damaging the DNA of leukemia cells and a broader range of clinical activity.
In the U.S., pivotal Phase II clinical trials were conducted for the
treatment of relapsed or refractory acute leukemia in children and a NDA was
filed by Genzyme with the FDA in March 2004, based upon the interim results of
70 patients enrolled in these two trials. In August of 2004, clinical data on an
additional cohort of 14 patients were submitted to the FDA and of the aggregate
ALL group of 49 patients, a 31% overall response rate was achieved, and of the
aggregate AML group of 35 patients, a 26% overall response rate was achieved.
In Europe, we facilitated an investigator sponsored trial, or an IST, of
clofarabine as first line therapy for older adult patients with AML who were
unsuitable for intensive chemotherapy. The IST was closed to recruitment in
August 2004 because a 67% overall response rate was achieved. This response rate
was more than three times greater than the expected response rate under the
current standard of care for this patient population and the investigator
determined that these positive results warranted accelerated initiation of the
Phase II regulatory study of clofarabine as a first-line treatment for older
adult patients newly diagnosed with AML. We expect to complete the Phase II
trial in calendar 2005 and anticipate that it will form the basis for an E.U.
regulatory submission for approval in this indication.
On December 1, 2004 the FDA's Oncologic Drug Advisory Committee, or ODAC,
convened to determine if clinical data from Phase II trials in relapsed and
refractory pediatric ALL and AML demonstrated a durable clinical response that
would predicate a clinical benefit in future clinical administration. The panel
voted in favor of the approval of clofarabine for pediatric ALL under its
accelerated approval pathway and voted against immediate marketing in pediatric
AML, requesting additional information. In connection with the approval that was
granted by the FDA, Genzyme is required to conduct further controlled clinical
studies of clofarabine to verify and describe its clinical benefit in ALL.
Clofarabine is currently being evaluated in an IST Phase II clinical trial
for refractory CLL in the U.S. In addition, commencing in Q1 2006, we intend to
investigate clofarabine in European Phase II clinical trials for CLL and
indolent lymphoma. In pre-clinical studies, clofarabine has shown anti-tumor
activity against several human cancers, including cancers of the lung, colon,
kidney, breast, pancreas and prostate, as well as its action against leukemia
cells. The initial data from the Phase I clinical trials indicate activity for
clofarabine in certain solid tumor types. We believe this level of activity
against solid tumors distinguishes clofarabine from other purine nucleoside
analogs. We intend to develop clofarabine as a potential drug for the treatment
of certain solid tumors, such as colon, pancreatic, lung, breast and prostate
cancer. Currently, we anticipate the initial Phase I clinical trials for
clofarabine, using both the oral and intravenous formulations, in solid tumors
will be completed by end of calendar year 2005.
Pursuant to the terms of our co-development agreement with Genzyme, the
successor-in-interest to ILEX Oncology, Inc., both parties are required to share
promptly all information, including clinical data, generated under the
co-development program and Genzyme is obligated to pay all of the U.S. and
Canadian research and development costs and 50% of all approved ex-U.S. and
Canada research and development costs (except for Japan and Southeast Asia and
except for non-cancer indications). If additional resources are required above
the agreed upon costs, we may elect to pay these additional costs and certain of
these payments will be credited against future royalty payments to Genzyme at
the rate of $1.50 for every $1.00 of additional expenditures. Under the
co-development agreement with Genzyme, we receive royalties on Genzyme's annual
net sales on a sliding scale based on the level of annual net sales. Similarly,
we pay a royalty to Genzyme and Southern Research Institute, or SRI, the
inventor of clofarabine, on our European annual net sales.
Pursuant to the terms of our co-development agreement with SRI, we have the
exclusive license to market and distribute clofarabine throughout the world for
all human applications except for certain U.S. and Canadian cancer indications
and except for any indications in Japan and Southeast Asia. Our exclusive
license expires upon the last to expire of the patents used or useful in
connection with the development and marketing of clofarabine, which we expect to
expire in 2021. In addition, we hold an exclusive option from SRI to market and
distribute clofarabine in Japan and Southeast Asia for all human applications.
We intend to convert the option to a license upon sourcing an appropriate
co-marketing partner to develop these rights in Japan and Southeast Asia.
Modrenal(R)
We currently market Modrenal(R) (trilostane) in the U.K. for the treatment
of post-menopausal advanced breast cancer following relapse to initial hormone
therapy. We have a team of eight sales specialists and two marketing executives
selling and marketing Modrenal(R) in the U.K.
3
Modrenal's(R) approved indication enables us to promote Modrenal(R) for use
immediately after relapse to initial hormone therapy such as tamoxifen or one of
a class of drugs known as aromatase inhibitors (including Faslodex and
Arimidex). However, we are initially positioning Modrenal(R) as a third or
fourth line treatment option in post-menopausal advanced breast cancer. In the
five largest E.U. countries (France, Germany, Italy, Spain and the U.K.), we
believe approximately 520,000 women are currently living with post-menopausal
advanced breast cancer of which over a third require third or fourth line agents
following prior treatment failure.
Modrenal(R) has been extensively studied in clinical trials in the U.S.,
Europe and Australia, and an analysis, known as a meta-analysis, of a series of
these clinical studies, that together included 714 patients with post-menopausal
advanced breast cancer who received Modrenal(R) has been conducted. Overall, a
clinical benefit rate of 35% was achieved in patients with both
hormone-sensitive and hormone-insensitive breast cancers. Generally, a clinical
benefit is achieved when a patient's disease disappears, is decreased by greater
than fifty percent or is stabilized for at least six months. In a sub-set
analysis of these clinical trial data, a clinical benefit rate of 46% was
achieved for 351 patients with hormone-sensitive breast cancer who had responded
to one or more prior hormonal therapies and were given Modrenal(R) upon relapse
of the cancer. In one of the studies which was conducted in Australia, a
clinical benefit rate of 55% was achieved for 64 patients who received
Modrenal(R) having previously responded to tamoxifen and subsequently relapsed.
We believe these data compare favorably to currently marketed aromatase
inhibitors and other agents given as second line or subsequent therapies.
Furthermore, Modrenal(R) has an acceptable side-effect profile. On the basis of
these data, Modrenal(R) was granted a product license in the U.K. for the
treatment of post-menopausal advanced breast cancer following relapse to initial
hormone therapy.
We began marketing Modrenal(R) in May 2004 in the U.K. for the treatment
of post-menopausal advanced breast cancer following relapse to initial hormone
therapy. We also intend to seek regulatory approval for Modrenal(R) in the U.S.
as a therapy for hormone-sensitive breast cancers and hormone independent
prostate cancers, but this strategy is dependent upon the results of the ongoing
clinical trials and the resource capability of the Company. Our ongoing clinical
trials in breast cancer target patients that have hormone-sensitive cancers and
have become refractory to prior hormone treatments, such as tamoxifen or any of
the aromatase inhibitors. In addition, there is an ongoing Phase II clinical
trial of Modrenal(R) in the U.S. that is focused on patients who have androgen
independent prostate cancer and have a rising prostate specific antigen, or PSA,
level.
In mid-2005 we began enrollment in a U.K., Phase IV study in
post-menopausal advanced breast cancer, a Phase II study in pre-menopausal
breast cancer and a Phase II study in neo-adjuvent, pre-operative breast cancer.
We plan to use the data from these clinical trials to support a filing process
for mutual recognition for approval of Modrenal(R) on a country-by-country basis
in Europe. Each such approval, if granted, would be based upon Modrenal's(R)
approval in the U.K. for post-menopausal advanced breast cancer following
relapse to initial hormone therapy. The grant of any such approval is entirely
within the control of the individual regulatory authorities.
We have the exclusive right to market and distribute Modrenal(R) throughout
the world for all human applications, except for South Africa and Japan where
the drug is marketed for the treatment of low-renin hypertension. Our exclusive
license expires upon the last to expire of the patents used or useful in
connection with the marketing of Modrenal(R). Given that we have new patent
applications filed, which are subject to issuance, we expect the last of our
underlying patents to expire in 2020.
Other Products and Technologies
We anticipate that revenues derived from our two lead drugs, clofarabine
and Modrenal(R) will permit us to further develop the other products currently
in our product pipeline. The work to date on these compounds has been limited
because of the need to concentrate on clofarabine and Modrenal(R) but management
believes these compounds have potential value.
Virostat
Virostat, especially when irradiated by light, acts by preventing
replication of nucleic acid (DNA and RNA) in pathogens. Investigator sponsored
Phase II clinical trials are ongoing in Europe and the Middle East to study
Virostat's use in treating hepatitis C virus infection and we announced interim
results at the UBS Global Life Sciences Conference in New York on September 28,
2005. Virostat was given to 25 patients with genotype 4 hepatitis C who had
failed a prior treatment, including interferon in many of the patients. Sixteen
(64%) of the patients had cirrhosis. Virostat was given orally for 100 days and
measurement of the viral load was made at 50 days. At 50 days, 22 (88%) patients
had shown a reduction in viral load of greater than 70%. Of these responders, 14
(64%) had a clearance of greater than 90%, with four responders having complete
viral clearance.
4
Seven of the 25 patients have had viral load measured at 100 days. Six of these
patients show continued reduction in viral load and the seventh patient, who had
been one of the three non-responders at 50 days, had a greater than 90%
reduction in viral load. No major adverse events were noted.
Methylene blue is currently used in several European countries to
inactivate pathogens, notably certain viruses, in fresh frozen plasma. Prior to
the fourth quarter of 2005, we tested for impairment our methylene blue
intangibles acquired in connection with the Pathagon acquisition and determined
that, based on our assumptions, the sum of the expected future cash flows,
undiscounted and pertaining solely and exclusively to approved indications,
exceeded the carrying value of its long-lived assets and therefore we did not
recognize an impairment. Due to the loss of an intellectual property patent suit
relating to the international use of methylene blue in fresh frozen plasma we
re-evaluated the intangible asset relating to methylene blue at June 30, 2005.
At that date, we estimated that our undiscounted future cash flows, again
relating solely and exclusively to approved uses of methylene blue, were less
than the carrying value. As a result, we recognized a non-cash impairment loss
of $5,276,000, equal to the difference between the estimated future cash flows
for approved uses of methylene blue, discounted at an appropriate rate, and the
carrying amount of the asset. Making the impairment determination and the amount
of impairment requires significant judgment by management and assumptions with
respect to the future cash flows. Changes in events or circumstances that may
affect long-lived assets makes judgments and assumptions with respect to the
future cash flows highly subjective.
Velostan
Velostan is a cytostatic drug we are investigating in Europe for bladder
cancer. Velostan is the first compound in a group of chemically related
compounds that are believed to work by blocking cell division and reversing the
malignant process in the cancer cell. We believe the optical isomer we have
developed is more active and less toxic than its parent compound.
OLIGON(R) Technology
With the acquisition of Pathagon in February 2002, we acquired patents,
technology and technology patents relating to OLIGON(R) anti-infective
technology, and have licensed rights from Oklahoma Medical Research Foundation
for the use of thiazine dyes, including methylene blue, for other anti-infective
uses.
The OLIGON(R) technology is based on the antimicrobial properties of silver
ions. The broad spectrum activity of silver ions against bacteria, including
antibiotic-resistant strains, has been known for decades. OLIGON(R) materials
have application in a wide range of devices and products, including vascular
access devices, urology catheters, pulmonary artery catheters and thoracic
devices, renal dialysis catheters, orthopedic devices and several other medical
and consumer product applications. One application of the OLIGON(R) technology
has been licensed to a third party, which is currently marketing the technology
in its line of short-term vascular access catheters. Six U.S. patents for the
OLIGON(R) technology have been granted and additional patents have been filed.
In addition, patents have been filed in Europe, Canada and Japan.
Gene Therapy Technology
Our product portfolio also includes a variety of gene therapy products
that, we believe, may offer advancements in the field of cancer treatment and
may have additional applications in certain non-cancer diseases such as
diabetes, cystic fibrosis and other auto-immune disorders. Pursuant to a
co-development agreement with the Royal Free and University College Medical
School and a Canadian biotechnology company, we are developing gene vector
technologies which, based on pre-clinical research and early Phase I clinical
trials, we believe have potential in a wide array of clinical conditions. To
date, the technology has undergone small-scale clinical testing with the albumin
and thrombopoietin genes. The results showed the technology is capable of
producing a prolonged elevation in serum albumin levels in cancer and cirrhosis
patients with hypo-albuminemia, a serious physiological disorder.
Animal Health Products
We also have one animal health product, Vetoryl(R) (trilostane), at market
in the United Kingdom for the treatment of Cushing's disease in dogs. In
November 2001, we granted to Arnolds Ltd., a major distributor of animal
products in the U.K., the right to market the drug for a six-month trial period,
after which time, if the results were satisfactory to Arnolds, we would enter
into a licensing arrangement whereby Arnolds would pay royalties to us on sales
from April 2002 onward. During the trial period, Arnolds posted more than
$400,000 of sales of the drug. Arnolds has licensed the drug from us for sale in
the U.K. market in consideration of a payment of a 5% royalty on sales.
Separately, in May 2003, we granted to Dechra Pharmaceuticals, PLC, an affiliate
of Arnolds
5
Ltd., the exclusive right to market the drug in the U.S. for $5.5 million of
total consideration (including milestone payments) and a royalty of 2%-4% of
annual net sales.
Patents and Proprietary Rights
Our success will depend, in part, upon our ability to obtain and enforce
protection for our products under U.S. and foreign patent laws and other
intellectual property laws, preserve the confidentiality of our trade secrets
and operate without infringing the proprietary rights of third parties. Our
policy is to file patent applications in the U.S. and/or foreign jurisdictions
to protect technology, inventions and improvements to our inventions that are
considered important to the development of our business. Also, we will rely upon
trade secrets, know-how, continuing technological innovations and licensing
opportunities to develop a competitive position.
Through our current license agreements, we have acquired the right to
utilize the technology covered by several issued patents and patent
applications, as well as additional intellectual property and know-how that
could be the subject of further patent applications in the future. We evaluate
the desirability of seeking patent or other forms of protection for our products
in foreign markets based on the expected costs and relative benefits of
attaining this protection. There can be no assurance that any patents will be
issued from any applications or that any issued patents will afford adequate
protection to us. Further, there can be no assurance that any issued patents
will not be challenged, invalidated, infringed or circumvented or that any
rights granted thereunder will provide competitive advantages to us. Parties not
affiliated with us have obtained or may obtain U.S. or foreign patents or
possess or may possess proprietary rights relating to our products. There can be
no assurance that patents now in existence or hereafter issued to others will
not adversely affect the development or commercialization of our products or
that our planned activities will not infringe patents owned by others.
As a result of the licenses described above, we are the exclusive licensee
or sublicensee of three U.S. patents expiring in 2005, 2008 and 2014 relating to
compounds, pharmaceutical compositions and methods of use encompassing
clofarabine. We have also filed two United States patent applications relating
to the use of clofarabine in autoimmune diseases. Although the composition of
matter patents to trilostane have expired, we are the exclusive licensee of
several United States and foreign patent applications relating to the use of
trilostane alone or in combination with anticancer agents and the exclusive
licensee to a manufacturing process patent for trilostane. In addition, for Gene
Therapy we have international process and use patent applications filed which,
if patents are issued, will expire in April 2018 and for OLIGON we have process,
use and composition of matter patents in the U.S. and internationally which
expire on or before April 2019 and a patent application in Japan which expires
in October 2018.
We could incur substantial costs in defending ourselves in infringement
suits brought against us or any of our licensors or in asserting any
infringement claims that we may have against others. We could also incur
substantial costs in connection with any suits relating to matters for which we
have agreed to indemnify our licensors or distributors. An adverse outcome in
any litigation could have a material adverse effect on our business and
prospects. In addition, we could be required to obtain licenses under patents or
other proprietary rights of third parties. No assurance can be given that any of
these licenses would be made available on terms acceptable to us, or at all. If
we are required to, and do not obtain any required licenses, we could be
prevented from, or encounter delays in, developing, manufacturing or marketing
one or more of our products.
We also rely upon trade secret protection for our confidential and
proprietary information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets or disclose this
technology or that we can meaningfully protect our trade secrets.
It is our policy to require our employees, consultants and parties to
collaborative agreements to execute confidentiality agreements upon the
commencement of employment or consulting relationships or a collaboration with
us. These agreements provide that all confidential information developed or made
known during the course of the relationship with us is to be kept confidential
and not disclosed to third parties except in specific circumstances. In the case
of employees, the agreements provide that all inventions resulting from work
performed for us, utilizing our property or relating to our business and
conceived or completed by the individual during employment shall be our
exclusive property to the extent permitted by applicable law.
Sales and Marketing
Currently we have an arrangement in place with Genzyme for the
co-development and marketing of one of our lead products, clofarabine, and
another arrangement with Edwards Lifesciences for the marketing of short-term
vascular access catheters using the OLIGON(R) technology. We have also engaged
in our own marketing and sales efforts in connection with the marketing and sale
of Modrenal(R) in the U.K. If we receive additional European approvals for our
products, we intend to expand our sales force by adding up to six to 10 sales
specialists in each of
6
five other key regions within the E.U. However, in order to market any of our
products effectively, we would need to establish a much more integrated
marketing and sales force with technical expertise and distribution capability
or contract with other pharmaceutical and/or health care companies with
distribution systems and direct sales forces.
Our marketing policy is to generate awareness of our products and target
the two key audiences for our products, doctors and patients. Medical education
is also a priority, with the use of peer-opinion leaders, clinical trials at
major centers, satellite symposia and conferences, product advertising in
specific scientific journals and trained sales personnel. Patient education is
carefully controlled and is important to our marketing approach.
Manufacturing
Our strategy is to enter into collaborative arrangements with other
companies for the clinical testing, manufacture and distribution of the
products. Manufacturers of our products will be subject to Good Manufacturing
Practices prescribed by the FDA or other rules and regulations prescribed by
foreign regulatory authorities, which may change from time to time. We do not
have and do not intend to establish any internal product testing, manufacturing
or distribution capabilities.
Research and Development
In developing new products, we consider a variety of factors including: (i)
existing or potential marketing opportunities for these products; (ii) our
capability to arrange for these products to be manufactured on a commercial
scale; (iii) whether or not these products complement our existing products;
(iv) the opportunities to leverage these products with the development of
additional products; and (v) the ability to develop co-marketing relationships
with pharmaceutical and/or other companies with respect to the products. We
intend to fund future research and development activities at a number of medical
and scientific centers in Europe and the United States. Costs related to these
activities are expected to include: clinical trial expenses; drug production
costs; salaries and benefits of scientific, clinical and other personnel; patent
protection costs; analytical and other testing costs; professional fees; and
insurance and other administrative expenses. We have spent approximately
$10,895,000 and $4,883,000 on research and development activities for the fiscal
years ended June 30, 2005 and 2004 respectively.
Government Regulation
The FDA and comparable regulatory agencies in state and local jurisdictions
and in foreign countries impose substantial requirements upon the clinical
development, manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate research and
development activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our drug delivery products.
The process required by the FDA under the new drug provisions of the
Federal Food, Drug and Cosmetics Act before our products may be marketed in the
United States generally involves the following:
o pre-clinical laboratory and animal tests;
o submission to the FDA of an investigational new drug application,
or IND, which must become effective before clinical trials may
begin;
o adequate and well-controlled human clinical trials to establish
the safety and efficacy of the proposed pharmaceutical in our
intended use;
o submission to the FDA of a new drug application; and
o FDA review and approval of the new drug application.
The testing and approval process requires substantial time, effort, and
financial resources and we cannot be certain that any approval will be granted
on a timely basis, if at all.
Pre-clinical tests include laboratory evaluation of the product, its
chemistry, formulation and stability, as well as animal studies to assess the
potential safety and efficacy of the product. The results of the pre-clinical
tests, together with manufacturing information and analytical data, are
submitted to the FDA as part of an IND, which must become effective before we
may begin human clinical trials. The IND automatically becomes effective 30 days
after receipt by the FDA, unless the FDA, within the 30-day time period, raises
concerns or questions about
7
the conduct of the trials as outlined in the IND and imposes a clinical hold. In
such a case, the IND sponsor and the FDA must resolve any outstanding concerns
before clinical trials can begin. There is no certainty that pre-clinical trials
will result in the submission of an IND or that submission of an IND will result
in FDA authorization to commence clinical trials.
Clinical trials involve the administration of the investigational product
to human subjects under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol must be submitted to the FDA as
part of the IND. Further, each clinical study must be conducted under the
auspices of an independent institutional review board at the institution where
the study will be conducted. The institutional review board will consider, among
other things, ethical factors, the safety of human subjects and the possible
liability of the institution.
Human clinical trials are typically conducted in three sequential phases
which may overlap:
PHASE I: The drug is initially introduced into healthy human subjects or
patients and tested for safety, dosage tolerance, absorption, metabolism,
distribution and excretion;
PHASE II: Studies are conducted in a limited patient population to identify
possible short term adverse effects and safety risks, to determine the efficacy
of the product for specific targeted diseases and to determine dosage tolerance
and optimal dosage;
PHASE III: Phase III trials are undertaken to further evaluate clinical efficacy
and to further test for safety in an expanded patient population, often at
geographically dispersed clinical study sites. Phase III or IIb/III trials are
often referred to as pivotal trials, as they are used for the final approval of
a product.
In the case of products for life-threatening diseases such as cancer, the
initial human testing is often conducted in patients with disease rather than in
healthy volunteers. Since these patients already have the targeted disease or
condition, these studies may provide initial evidence of efficacy traditionally
obtained in Phase II trials and so these trials are frequently referred to as
Phase I/II trials. We cannot be certain that we will successfully complete Phase
I, Phase II or Phase III testing of our product candidates within any specific
time period, if at all. Furthermore, we, the FDA, the institutional review board
or the sponsor may suspend clinical trials at any time on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk.
The results of product development, pre-clinical studies and clinical
studies are submitted to the FDA as part of a new drug application for approval
of the marketing and commercial shipment of the product. The FDA may deny a new
drug application if the applicable regulatory criteria are not satisfied or may
require additional clinical data. Even if the additional data is submitted, the
FDA may ultimately decide that the new drug application does not satisfy the
criteria for approval. Once issued, the FDA may withdraw product approval if
compliance with regulatory standards for production and distribution is not
maintained or if safety problems occur after the product reaches the market. In
addition, the FDA requires surveillance programs to monitor approved products
which have been commercialized, and the agency has the power to require changes
in labeling or to prevent further marketing of a product based on the results of
these post-marketing programs.
The FDA has a Fast Track program intended to facilitate the development and
expedite the review of drugs that demonstrate the potential to address unmet
medical needs for treatment of serious or life-threatening conditions. Under
this program, if the FDA determines from a preliminary evaluation of clinical
data that a fast track product may be effective, the FDA can review portions of
a new drug application for a Fast Track product before the entire application is
complete, and undertakes to complete its review process within six months of the
filing of the new drug application. The FDA approval of a Fast Track product can
include restrictions on the product's use or distribution such as permitting use
only for specified medical procedures or limiting distribution to physicians or
facilities with special training or expertise. The FDA may grant conditional
approval of a product with Fast Track status and require additional clinical
studies following approval.
Satisfaction of FDA requirements or similar requirements of state, local
and foreign regulatory agencies typically takes several years and the actual
time required may vary substantially, based upon the type, complexity and
novelty of the pharmaceutical product. Government regulation may delay or
prevent marketing of potential products for a considerable period of time and
impose costly procedures upon our activities. Success in pre-clinical or early
stage clinical trials does not assure success in later stage clinical trials.
Data from pre-clinical and clinical activities is not always conclusive and may
be susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. Even if a product receives regulatory approval, the
approval may be significantly limited to specific indications. Further, even
after the FDA approves a product, later discovery of previously
8
unknown problems with a product may result in restrictions on the product or
even complete withdrawal of the product from the market.
Any products manufactured or distributed under FDA clearances or approvals
are subject to pervasive and continuing regulation by the FDA, including
record-keeping requirements and reporting of adverse experiences with the
products. Drug manufacturers and their subcontractors are required to register
with the FDA and state agencies, and are subject to periodic unannounced
inspections by the FDA and state agencies for compliance with good manufacturing
practices, which impose procedural and documentation requirements upon
manufacturers and their third party manufacturers
We are subject to numerous other federal, state, local and foreign laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or
potentially hazardous substances. We may incur significant costs to comply with
such laws and regulations now or in the future. In addition, we cannot predict
what adverse governmental regulations may arise from future United States or
foreign governmental action.
We also are subject to foreign regulatory requirements governing human
clinical trials and marketing approval for pharmaceutical products which we sell
outside the U.S. The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement vary widely from country to
country. Whether or not we obtain FDA approval, we must obtain approval of a
product by the comparable regulatory authorities of foreign countries before
manufacturing or marketing the product in those countries. The approval process
varies from country to country and the time required for these approvals may
differ substantially from that required for FDA approval. We cannot be assured
that clinical trials conducted in one country will be accepted by other
countries or that approval in one country will result in approval in any other
country. For clinical trials conducted outside the U.S., the clinical stages
generally are comparable to the phases of clinical development established by
the FDA.
Competition
The pharmaceutical industry is characterized by rapidly evolving technology
and intense competition. Many companies of all sizes, including a number of
large pharmaceutical companies as well as several specialized biotechnology
companies, are developing cancer drugs similar to ours. There are products on
the market that will compete directly with the products that we are seeking to
develop. In addition, colleges, universities, government agencies and other
public and private research institutions will continue to conduct research and
are becoming more active in seeking patent protection and licensing arrangements
to collect license fees, milestone payments and royalties in exchange for
license rights to technologies that they have developed, some of which may
directly compete with our technologies. These companies and institutions also
compete with us in recruiting qualified scientific personnel. Many of our
competitors have substantially greater financial, research and development,
human and other resources than we do. Furthermore, large pharmaceutical
companies have significantly more experience than we do in preclinical testing,
human clinical trials and regulatory approval procedures. Our competitors may
develop safer or more effective products than ours, obtain patent protection or
intellectual property rights that limit our ability to commercialize products,
or commercialize products more quickly than we can.
We expect technology developments in our industry to continue to occur at a
rapid pace. Commercial developments by our competitors may render some or all of
our potential products obsolete or non-competitive, which would materially harm
our business and financial condition.
Employees
As of August 15, 2005, we had 27 full-time employees based in New York, New
York, and Edinburgh, Scotland. Of these, 3 are in management, 4 are in
legal/accounting, 10 are in sales/marketing, 5 are in administration and 5 are
in research and development. We believe our relationships with our employees are
satisfactory.
Corporate Information
We were incorporated as Express Finance, Inc. under the laws of the State
of Delaware on August 16, 1996, and changed our name to Ascot Group, Inc. in
August 1998 and further to Bioenvision, Inc. in January 1999. Our principal
executive offices are located at 345 Park Avenue, 41st Floor, New York, New York
10154. Our telephone number is (212) 750-6700 and our fax number is (212)
750-6777. Our website is www.bioenvision.com.
9
Information included or referred to on our website is not incorporated by
reference in or otherwise a part of this prospectus. Our website address is
included in this annual report as an inactive textual reference only.
10
Factors that May Affect Our Business
You should carefully consider the following risks before you decide to buy
our common stock. Our business, financial condition or operating results may
suffer if any of the events described in the following risk factors actually
occur. All known risks are presented in this annual report on Form 10-KSB. These
risks may adversely affect our business, financial condition or operating
results. If any of the events we have identified occur, the trading price of our
common stock could decline, and you may lose all or part of the money you paid
to buy our common stock.
We have a limited operating history, which makes it difficult to evaluate our
business and to predict our future operating results.
Since our inception in August of 1996, we have been primarily engaged in
organizational activities, including developing a strategic operating plan,
entering into various collaborative agreements for the development of products
and technologies, hiring personnel and developing and testing our products. We
have not generated any material revenues to date. Accordingly, we have a limited
operating history upon which an evaluation of our performance and prospects can
be made.
We have incurred significant net losses since commencing business and expect
future losses.
To date, we have incurred significant net losses, including net losses of
approximately $24,263,000 for the fiscal year ended June 30, 2005. At June 30,
2005, we had an accumulated deficit of approximately $62,331,000. We anticipate
that we may continue to incur significant operating losses for the foreseeable
future. We may never generate material revenues or achieve profitability and, if
we do achieve profitability, we may not be able to maintain profitability.
Clinical trials for our products are expensive and time consuming, and may not
result in any viable products.
Before obtaining regulatory approval for the commercial sale of a product,
we must demonstrate through pre-clinical testing and clinical trials that a
product candidate is safe and effective for use in humans. Conducting clinical
trials is a lengthy, time-consuming and expensive process. We will incur
substantial expense for, and devote a significant amount of time to pre-clinical
testing and clinical trials. Even with Modrenal(R), which is approved and
marketed by us in the U.K. for the treatment of advanced, post-menopausal breast
cancer, we are conducting a Phase II clinical trial in the U.S. regarding its
treatment of prostate cancer and a Phase II clinical trial in the U.K. for its
treatment of pre-menopausal breast cancer, each of which is a new potential
indication for this approved drug.
The results from pre-clinical testing and early clinical trials have often
not been predictive of results obtained in later clinical trials as a number of
new drugs have shown promising results in clinical trials, but subsequently
failed to establish sufficient safety and efficacy data to obtain necessary
regulatory approvals. Data obtained from pre-clinical and clinical activities
are susceptible to varying interpretations, which may delay, limit or prevent
regulatory approval. Regulatory delays or rejections may be encountered as a
result of many factors, including changes in regulatory policy during the period
of product development. Regulatory authorities may require additional clinical
trials, which could result in increased costs and significant development
delays.
Completion of clinical trials for any product may take several or more
years. The length of time generally varies substantially according to the type,
complexity, novelty and intended use of the product candidate. Our commencement
and rate of completion of clinical trials may be delayed by many factors,
including:
o inability of vendors to manufacture sufficient quantities of
materials for use in clinical trials;
o slower than expected rate of patient recruitment or variability
in the number and types of patients in a study;
o inability to adequately follow patients after treatment;
o unforeseen safety issues or side effects;
11
o lack of efficacy during the clinical trials; or
o government or regulatory delays.
A significant portion of our assets relate to ancillary products, which may not
be successfully commercialized.
Our ancillary products include OLIGON, an anti-microbial compound, and
Virostat, an anti-viral agent, respectively, which we acquired in February 2002
in the Pathagon acquisition. At June 30, 2005, due to the loss of an
intellectual property patent suit relating to the international use of Virostat
in fresh frozen plasma, we re-evaluated the fair value of the intangible assets
relating to Virostat. At that date, we estimated that our undiscounted future
cash flows pertaining solely and exclusively to approved uses of Virostat were
less than the carrying value of our long-lived asset. As a result, we recognized
a non-cash impairment loss of $5,276,000, equal to the difference between the
estimated future cash flows related solely to approved uses of Virostat,
discounted at an appropriate rate, and the carrying amount of the asset. Making
the determinations of impairment and the amount of impairment requires
significant judgment by management and assumptions with respect to the future
cash flows of the assets. At June 30, 2005, subsequent to the recognition of the
impairment, the net intangible assets associated with these products amounted to
approximately $7.7 million and constituted approximately 9% of our total assets
and approximately 11% of our stockholders' equity.
We do not currently devote any significant time or resources to the
research and development of OLIGON and only intend to do so if, and to the
extent, we successfully commercialize our lead drugs, clofarabine and
Modrenal(R), over the next two years. Historically, we have not devoted
significant time or resource to the research and development of Virostat but our
management and board of directors is currently considering the appropriate level
of time and resource to be devoted to Virostat over the next two years. Based on
the estimated useful life of these assets of approximately 13 years and market
considerations, no assurance can be given that there will not be a further
impairment of these assets in the future, which could result in a material
impact on our future results of operations. Changes in events or circumstances
that may affect long-lived assets, particularly in the pharmaceutical industry,
makes judgments and assumptions with respect to the future cash flows highly
subjective and may include, but are not limited to, cancellations or
terminations of license agreements or the risk of competition that could render
our products noncompetitive or obsolete.
We depend on our development agreement with Genzyme and if it does not proceed
as planned, we may incur delay in the commercialization of clofarabine, which
would delay our ability to generate revenues and cash flow from the sale of
clofarabine.
We have a co-development agreement with Genzyme, and pursuant to that
agreement, Genzyme and any third party to which Genzyme grants a sublicense or
transfer its obligations, has primary responsibility for conducting clinical
trials and administering regulatory compliance and approval matters in the U.S.
and Canada. While there are target dates for completion, the agreement permits
Genzyme to continue working beyond those dates under certain circumstances. For
example, under the co-development agreement, ILEX (Genzyme's predecessor in
interest) was required to complete Pivotal Phase II Trials not later than
December 31, 2002, but ILEX failed to do so. In this situation the
co-development agreement provides that the milestone shall be adjusted such that
Genzyme (successor in interest to ILEX) receives more time to complete the
pivotal trials if the trials are ongoing at December 31, 2002 and progressing to
completion within a reasonable time thereafter. Further, ILEX was required under
the co-development agreement to have filed a NDA by August 31, 2003, subject to
extension if ILEX continues to use its reasonable efforts to promptly complete
the filing after August 31, 2003. ILEX continued to use its reasonable efforts
to complete the filing after August 31, 2003 and in October 2003, ILEX filed the
first part of a "rolling NDA" with the FDA.
If Genzyme fails to meet its obligations under the co-development
agreement, we could lose valuable time in developing clofarabine for
commercialization both in the U.S. and in Europe. We can not provide assurance
that Genzyme will not fail to meet its obligations under the co-development
agreement. Development of compounds to the stage of approval includes inherent
risk at each stage of development that FDA, in its discretion, will mandate a
requirement not foreseeable by us or by Genzyme. There would also be testing
delays if, for example, our sources of drug supply could not produce enough
clofarabine to support the then ongoing clinical trials being conducted. If this
were to occur, it could have a material adverse effect on our ability to develop
clofarabine, obtain necessary regulatory approvals, and generate sales and cash
flow from the sale of clofarabine.
If delays in completion constitute a breach by Genzyme or there are certain
other breaches of the co-development agreement by Genzyme, then, at our
discretion, the primary responsibility for completion would
12
revert to us, but there is no assurance that we would have the financial,
managerial or technical resources to complete such tasks in timely fashion or at
all.
We have limited experience in developing products and may be unsuccessful in our
efforts to develop products.
To achieve profitable operations, we, alone or with others, must
successfully develop, clinically test, market and sell our products. We are
developing clofarabine with Genzyme, our U.S. co-development partner since its
acquisition of ILEX Oncology, which occurred on December 21, 2004. No assurance
can be given that the operational and managerial relations with Genzyme will
proceed favorably or that the timeline for development of clofarabine will not
be elongated now that Genzyme has replaced ILEX as our U.S. cancer marketing
partner. If the U.S. regulatory timeline is elongated, this could materially and
adversely affect the European regulatory timeline for the approval of
clofarabine.
With respect to our co-lead drug, Modrenal(R), we currently have an
Investigational New Drug Application filed with the FDA to conduct a Phase II
Clinical Trial in the U.S. to determine efficacy of Modrenal(R) in prostate
cancer patients. This Phase II Clinical Trial is being conducted at the
Massachusetts General Hospital in Boston, MA. To our knowledge, Modrenal(R) has
not been tested in this indication in the past and there can be no assurance
that Modrenal(R) will be an effective therapy in prostate cancer. Further, our
long-term drug development objectives for Modrenal(R) include attempting to test
the drug and get approval in the U.S. for treatment of advanced post-menopausal
breast cancer patients. These trials will take significant time and resources
and no assurance can be given that developing the drug in this indication will
result in a U.S. approval for Modrenal(R) in advanced post-menopausal breast
cancer patients.
Generally, most products resulting from our or our collaborative partners'
product development efforts are not expected to be available for sale for at
least several years, if at all. Potential products that appear to be promising
at early stages of development may not reach the market for a number of reasons,
including:
o discovery during pre-clinical testing or clinical trials that the products
are ineffective or cause harmful side effects;
o failure to receive necessary regulatory approvals;
o inability to manufacture on a large or economically feasible scale;
o failure to achieve market acceptance; or
o preclusion from commercialization by proprietary rights of third parties.
Most of the existing and future products and technologies developed by us
will require extensive additional development, including pre-clinical testing
and clinical trials, as well as regulatory approvals, prior to
commercialization. Our product development efforts may not be successful. We may
fail to receive required regulatory approvals from U.S. or foreign authorities
for any indication. Any products, if introduced, may not be capable of being
produced in commercial quantities at reasonable costs or being successfully
marketed. The failure of our research and development activities to result in
any commercially viable products or technologies would materially adversely
affect our future prospects.
Our industry is subject to extensive government regulation and our products
require other regulatory approvals which makes it more expensive to operate our
business.
Regulation in General. Virtually all aspects of our business are regulated
by federal, state and local statutes and governmental agencies in the U.S. and
other countries. Failure to comply with applicable statutes and government
regulations could have a material adverse effect on our ability to develop and
sell products which would have a negative impact on our cash flow. The
development, testing, manufacturing, processing, quality, safety, efficacy,
packaging, labeling, record-keeping, distribution, storage and advertising of
pharmaceutical products, and disposal of waste products arising from these
activities, are subject to regulation by one or more federal agencies. These
activities are also regulated by similar state and local agencies and equivalent
foreign authorities. In our material contracts with vendors providing any
portion of these types of services, we seek assurances that our vendors comply
and will continue to maintain compliance with all applicable rules and
regulations. This is the case, for example, with respect to our contracts with
Ferro Pfanstiehl and Penn Pharmaceuticals. No assurance can be given that our
most significant vendors will continue to comply with these rules and
regulations.
13
FDA Regulation. All pharmaceutical manufacturers in the U.S. are subject to
regulation by the FDA under the authority of the Federal Food, Drug, and
Cosmetic Act. Under the Act, the federal government has extensive administrative
and judicial enforcement powers over the activities of pharmaceutical
manufacturers to ensure compliance with FDA regulations. Those powers include,
but are not limited to the authority to:
o initiate court action to seize unapproved or non-complying products;
o enjoin non-complying activities;
o halt manufacturing operations that are not in compliance with current good
manufacturing practices prescribed by the FDA;
o recall products which present a health risk; and
o seek civil monetary and criminal penalties.
Other enforcement activities include refusal to approve product
applications or the withdrawal of previously approved applications. Any
enforcement activities, including the restriction or prohibition on sales of
products marketed by us or the halting of manufacturing operations of us or our
collaborators, would have a material adverse effect on our ability to develop
and sell products which would have a negative impact on our cash flow. In
addition, product recalls may be issued at our discretion or by the FDA or other
domestic and foreign government agencies having regulatory authority for
pharmaceutical product sales. Recalls may occur due to disputed labeling claims,
manufacturing issues, quality defects or other reasons. Recalls of
pharmaceutical products marketed by us may occur in the future. Any product
recall could have a material adverse effect on our revenue and cash flow.
FDA Approval Process. We have a variety of products under development,
including line extensions of existing products, reformulations of existing
products and new products. All "new drugs" must be the subject of an
FDA-approved new drug application before they may be marketed in the U.S. All
generic equivalents to previously approved drugs or new dosage forms of existing
drugs must be the subject of an FDA-approved abbreviated new drug application
before they may by marketed in the U.S. In both cases, the FDA has the authority
to determine what testing procedures are appropriate for a particular product
and, in some instances, has not published or otherwise identified guidelines as
to the appropriate procedures. The FDA has the authority to withdraw existing
new drug application and abbreviated application approvals and to review the
regulatory status of products marketed under the enforcement policy. The FDA may
require an approved new drug application or abbreviated application for any drug
product marketed under the enforcement policy if new information reveals
questions about the drug's safety or effectiveness. All drugs must be
manufactured in conformity with current good manufacturing practices and drugs
subject to an approved new drug application or abbreviated application must be
manufactured, processed, packaged, held and labeled in accordance with
information contained in the new drug application or abbreviated application.
The required product testing and approval process can take a number of
years and require the expenditure of substantial resources. Testing of any
product under development may not result in a commercially-viable product.
Further, we may decide to modify a product in testing, which could materially
extend the test period and increase the development costs of the product in
question. Even after time and expenses, regulatory approval by the FDA may not
be obtained for any products we develop. In addition, delays or rejections may
be encountered based upon changes in FDA policy during the period of product
development and FDA review. Any regulatory approval may impose limitations in
the indicated use for the product. Even if regulatory approval is obtained, a
marketed product, its manufacturer and its manufacturing facilities are subject
to continual review and periodic inspections. Subsequent discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on the product or manufacturer, including withdrawal of the product
from the market.
Foreign Regulatory Approval. Even if required FDA approval has been
obtained with respect to a product, foreign regulatory approval of a product
must also be obtained prior to marketing the product internationally. Foreign
approval procedures vary from country to country and the time required for
approval may delay or prevent marketing. In certain instances, we or our
collaborative partners may seek approval to market and sell some of our products
outside of the United States before submitting an application for approval to
the FDA. The clinical testing requirements and the time required to obtain
foreign regulatory approvals may differ from that required for FDA approval.
Although there is now a centralized European Union approval mechanism for new
pharmaceutical products in place, each European Union country may nonetheless
impose its own procedures and requirements, many of which are time consuming and
expensive, and some European Union countries require price approval as part of
the regulatory process. Thus, there can be substantial delays in obtaining
required approval from both the FDA and foreign regulatory authorities after the
relevant applications are filed.
14
Changes in Requirements. The regulatory requirements applicable to any
product may be modified in the future. We cannot determine what effect changes
in regulations or statutes or legal interpretations may have on our business in
the future. Changes could require changes to manufacturing methods, expanded or
different labeling, the recall, replacement or discontinuation of certain
products, additional record keeping and expanded documentation of the properties
of certain products and scientific substantiation. Any changes or new
legislation could have a material adverse effect on our ability to develop and
sell products and, therefore, generate revenue and cash flow.
The products under development by us may not meet all of the applicable
regulatory requirements needed to receive regulatory marketing approval. Even
after we expend substantial resources on research, clinical development and the
preparation and processing of regulatory applications, we may not be able to
obtain regulatory approval for any of our products. Moreover, regulatory
approval for marketing a proposed pharmaceutical product in any jurisdiction may
not result in similar approval in other jurisdictions. Our failure to obtain and
maintain regulatory approvals for products under development would have a
material adverse effect on our ability to develop and sell products and,
therefore, generate revenue and cash flow.
We may not be successful in receiving orphan drug status for certain of our
products or, if that status is obtained, fully enjoying the benefits of orphan
drug status.
Under the Orphan Drug Act, the FDA may grant orphan drug designation to
drugs intended to treat a rare disease or condition. A disease or condition that
affects populations of fewer than 200,000 people in the U.S. generally
constitutes a rare disease or condition. We may not be successful in receiving
orphan drug status for certain of our products. Orphan drug designation must be
requested before submitting a new drug application. After the FDA grants orphan
drug designation, the generic identity of the therapeutic agent and its
potential orphan use are publicized by the FDA. Under current law, orphan drug
status is conferred upon the first company to receive FDA approval to market the
designated drug for the designated indication. Orphan drug status also grants
marketing exclusivity in the U.S. for a period of seven years following approval
of the new drug application, subject to limitations. Orphan drug designation
does not provide any advantage in, or shorten the duration of, the FDA
regulatory approval process. Although obtaining FDA approval to market a product
with orphan drug status can be advantageous, the scope of protection or the
level of marketing exclusivity that is currently afforded by orphan drug status
and marketing approval may not remain in effect in the future.
Our business strategy involves obtaining orphan drug designation for
certain of the oncology products we have under development. Although clofarabine
has received orphan drug designation with the FDA and EMeA, we do not know
whether any of our other products will receive an orphan drug designation.
Orphan drug designation does not prevent other manufacturers from attempting to
develop similar drugs for the designated indication or from obtaining the
approval of a new drug application for their drug prior to the approval of our
new drug application. If another sponsor's new drug application for a competing
drug in the same indication is approved first, that sponsor is entitled to
exclusive marketing rights if that sponsor has received orphan drug designation
for its drug. In that case, the FDA would refrain from approving an application
by us to market our competing product for seven years, subject to limitations.
Competing products may receive orphan drug designations and FDA marketing
approval before the products under development by us.
New drug application approval for a drug with an orphan drug designation
does not prevent the FDA from approving the same drug for a different
indication, or a molecular variation of the same drug for the same indication.
Because doctors are not restricted by the FDA from prescribing an approved drug
for uses not approved by the FDA, it is also possible that another company's
drug could be prescribed for indications for which products developed by us have
received orphan drug designation and new drug application approval, and the same
is true with the EMeA in Europe. Prescribing of approved drugs for unapproved
uses, commonly referred to as "off label" sales, could adversely affect the
marketing potential of products that have received an orphan drug designation
and new drug application approval. In addition, new drug application approval of
a drug with an orphan drug designation does not provide any marketing
exclusivity in foreign markets.
The possible amendment of the Orphan Drug Act by the United States Congress
has been the subject of frequent discussion. Although no significant changes to
the Orphan Drug Act have been made for a number of years, members of Congress
have from time to time proposed legislation that would limit the application of
the Orphan Drug Act. The precise scope of protection that may be afforded by
orphan drug designation and marketing approval may be subject to change in the
future.
15
The use of our products may be limited or eliminated by professional guidelines
which would decrease our sales of these products and, therefore, our revenue and
cash flows.
In addition to government agencies, private health/science foundations and
organizations involved in various diseases may also publish guidelines or
recommendations to the healthcare and patient communities. These private
organizations may make recommendations that affect the usage of therapies, drugs
or procedures, including products developed by us. These recommendations may
relate to matters such as usage, dosage, route of administration and use of
concomitant therapies. Recommendations or guidelines that are followed by
patients and healthcare providers and that result in, among other things,
decreased use or elimination of products developed by us could have a material
adverse effect on our revenue and cash flows. For example, if clofarabine is
definitively determined in clinical trials to be an active agent to treat solid
tumor cancer patients, but the required dose is high, private healthcare/science
foundations could recommend various other regimens of treatment which may from
time to time show activity at lower doses.
Generic products which third parties may develop may render our products
noncompetitive or obsolete.
An increase in competition from generic pharmaceutical products could have
a material adverse effect on our ability to generate revenue and cash flow. For
example, many of the indications in which clofarabine and Modrenal(R), our
co-lead drugs, have demonstrated activity are areas of unmet clinical need, such
as clofarabine's application to pediatric acute leukemias in which, initially,
the drug will be used as a salvage therapy, after other regimens of treatment
have failed. Our lead investigators, who have assisted with the development of
Modrenal(R), envision, initially, that Modrenal(R) would be used as second or
third line therapy, only after patients with advanced post-menopausal breast
cancer receive regimens of tamoxifen and/or aromatase inhibitors (or similar
drug) treatments. If generic drug companies develop a compound which is more
effective than either clofarabine or Modrenal(R) in these areas of unmet
clinical need, or equally as effective but at lower doses, it could adversely
affect our market and/or render our drugs obsolete.
Because many of our competitors have substantially greater capabilities and
resources than us, they may be able to develop products before us or develop
more effective products or market them more effectively, which would adversely
affect our ability to generate revenue and cash flow.
Competition in our industry is intense. Potential competitors in the U.S.
and Europe are numerous and include pharmaceutical, chemical and biotechnology
companies, most of which have substantially greater capital resources, marketing
experience, research and development staffs and facilities than us. Potential
competitors for certain indications of our lead drugs include, with respect to
clofarabine, Schering AG, which markets fludarabine, and certain generic drug
companies in Europe which could market fludarabine upon expiry of the patent
protections held by Schering AG. Potential competitors with respect to
Modrenal(R) include Astra-Zeneca and Novartis, which market tamoxifen and other
aromatase inhibitors, which could be used by clinicians as first and second line
therapies in patients with hormone sensitive, advanced, post-menopausal breast
cancer prior to a Modrenal(R) regimen of treatment. No assurance can be given
that the ongoing business activities of our competitors will not have a material
adverse effect on our business prospects and projections going forward.
Although we seek to limit potential sources of competition by developing
products that are eligible for orphan drug designation and new drug application
approval or other forms of protection, our competitors may develop similar
technologies and products more rapidly than us or market them more effectively.
Competing technologies and products may be more effective than any of those that
are being or will be developed by us. The generic drug industry is intensely
competitive and includes large brand name and multi-source pharmaceutical
companies. Because generic drugs do not have patent protection or any other
market exclusivity, our competitors may introduce competing generic products,
which may be sold at lower prices or with more aggressive marketing. Conversely,
as we introduce branded drugs into our product portfolio, we will face
competition from manufacturers of generic drugs which may claim to offer
equivalent therapeutic benefits at a lower price. The aggressive pricing
activities of our generic competitors could have a material adverse effect on
our operations, revenue and cash flow.
If we are unable to respond to rapid technological change and evolving
therapies, our technologies and products could become less competitive or
obsolete and our revenues and results of operations will be adversely affected.
The pharmaceutical industry is characterized by rapid and significant
technological change. We expect that pharmaceutical technology will continue to
develop rapidly, and our future success will depend on our ability to develop
and maintain a competitive position. Technological development by others may
result in products developed by us, branded or generic, becoming obsolete before
they are marketed or before we recover a significant portion of the development
and commercialization expenses incurred with respect to these products.
16
Alternative therapies or new medical treatments could alter existing treatment
regimes, and thereby reduce the need for one or more of the products developed
by us, which would adversely affect our revenue and cash flow. See also
"--Generic products which third parties may develop may render our products
noncompetitive or obsolete" above.
We depend on others for clinical testing of our products which could delay our
ability to develop products.
We do not currently have any internal product testing capabilities. Our
inability to retain third parties for the clinical testing of products on
acceptable terms would adversely affect our ability to develop products. Any
failures by third parties to adequately perform their responsibilities may delay
the submission of products for regulatory approval, impair our ability to
deliver products on a timely basis or otherwise impair our competitive position.
Our dependence on third parties for the development of products may adversely
affect our potential profit margins and our ability to develop and deliver
products on a timely basis.
We rely on a limited number of manufacturers to operate our business and our
products have not been manufactured in significant quantities. If these
manufacturers experience problems or favor our competitors, we could fail to
obtain sufficient quantities of products we require to operate our business
successfully.
We have never manufactured any products in commercial quantities, and the
products being developed by us may not be suitable for commercial manufacturing
in a cost-effective manner. Manufacturers of products developed by us will be
subject to current good manufacturing practices prescribed by the FDA or other
rules and regulations prescribed by foreign regulatory authorities. We may not
be able to enter into or maintain relationships either domestically or abroad
with manufacturers whose facilities and procedures comply or will continue to
comply with current good manufacturing practices or applicable foreign
requirements. Failure by a manufacturer of our products to comply with current
good manufacturing practices or applicable foreign requirements could result in
significant time delays or our inability to commercialize or continue to market
a product and could have a material adverse effect on our sales of products and,
therefore, our cash flow. In the U.S., failure to comply with current good
manufacturing practices or other applicable legal requirements can lead to
federal seizure of violative products, injunctive actions brought by the federal
government, and potential criminal and civil liability on the part of a company
and our officers and employees.
We have limited sales and marketing capability, and may not be successful in
selling or marketing our products.
The creation of infrastructure to commercialize oncology products is a
difficult, expensive and time-consuming process. We may not be able to establish
direct or indirect sales and distribution capabilities outside of the UK or be
successful in gaining market acceptance for proprietary products or for other
products. We currently have very limited sales and marketing capabilities
outside of the UK. We currently employ eight full-time sales employees and two
full-time marketing employees. To market any products directly, we will need to
develop a more fulsome marketing and sales force with technical expertise and
distribution capability or contract with other pharmaceutical and/or health care
companies with distribution systems and direct sales forces. To the extent that
we enter into co-promotion or other licensing arrangements, any revenues to be
received by us will be dependent on the efforts of third parties. The efforts of
third parties may not be successful. Our failure to establish marketing and
distribution capabilities or to enter into marketing and distribution
arrangements with third parties could have a material adverse effect on our
revenue and cash flows.
We are dependent on certain key personnel and the loss of one or more these
individuals could disrupt our operations and adversely affect our financial
results.
We are highly dependent on our Chief Executive Officer to develop our lead
drug. Dr. Wood has an employment agreement with us, dated December 31, 2002, for
an initial term of one year which automatically extends for additional one year
periods until either party gives the other written notice of termination at
least 90 days prior to the end of the current term. Dr. Wood is not near
retirement age and he does not, to our knowledge, plan on leaving us in the near
future. Dr. Wood is one of our founders and he is intimately familiar with the
science that underlies our lead drugs and ancillary technologies. He also
maintains a position on the clofarabine management team that is responsible for
all drug development activities relating to that lead drug, and has been
instrumental in the development and maintenance of our key relationships within
the scientific research and medical communities, and those with our vendors,
inventors, co-development partners and licensors. If Dr. Wood was no longer
employed by us, the development of our drugs would be significantly delayed and
otherwise would be adversely impacted, and we may be unable to maintain and
develop these important relationships.
In addition, we will be required to hire additional qualified scientific
and technical personnel, as well as personnel with expertise in clinical testing
and government regulation to expand our research and development
17
programs and pursue our product development and marketing plans. There is
intense competition for qualified personnel in the areas of our activities, and
there can be no assurance that we will be able to attract and retain the
qualified personnel necessary for the development of its business. We face
competition for qualified individuals from numerous pharmaceutical and
biotechnology companies, universities and research institutions. The failure to
attract and retain key scientific, marketing and technical personnel would have
a material adverse effect on the development of our business and our ability to
develop, market and sell our products. See also "- We have limited sales and
marketing capability, and may not be successful in selling or marketing our
products" above.
Our management and internal systems might be inadequate to handle our potential
growth.
Our success will depend in significant part on the expansion of our
operations and the effective management of growth. This growth has and will
continue to place a significant strain on our management and information systems
and resources and operational and financial systems and resources. To manage
future growth, our management must continue to improve our operational and
financial systems and expand, train, retain and manage our employee base. Our
management may not be able to manage our growth effectively. If our systems,
procedures, controls, and resources are inadequate to support our operations,
our expansion would be halted or delayed and we could lose our opportunity to
gain significant market share or the timing with which we would otherwise gain
significant market share. Any inability to manage growth effectively may harm
our ability to institute our business plan. The strain on our systems,
procedures, controls and resources is further heightened by the fact that our
executive office and operational development facilities are located in separate
time zones (New York, New York and Edinburgh, Scotland, respectively).
We depend on patent and proprietary rights to develop and protect our
technologies and products, which rights may not offer us sufficient protection.
The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and processes.
Our success will depend on our ability to obtain and enforce protection for
products that we develop under U.S. and foreign patent laws and other
intellectual property laws, preserve the confidentiality of our trade secrets
and operate without infringing the proprietary rights of third parties. Through
our current license agreements, we have acquired the right to utilize the
technology covered by issued patents and patent applications, as well as
additional intellectual property and know-how that could be the subject of
further patent applications in the future. Several of the original patents to
Modrenal(R) have expired in the U.S. and foreign countries. Thus, we and our
licensor, Stegram Pharmaceutical Ltd., are pursuing patent applications to
specific uses, combination therapy and dosages or formulations of Modrenal(R).
We cannot guarantee that such applications will result in issued patents or that
such patents if issued will provide adequate protection against competitors.
Patents may not be issued from these applications and issued patents may not
give us adequate protection or a competitive advantage. Issued patents may be
challenged, invalidated, infringed or circumvented, and any rights granted
thereunder may not provide us with competitive advantages. Parties not
affiliated with us have obtained or may obtain U.S. or foreign patents or
possess or may possess proprietary rights relating to products being developed
or to be developed by us. Patents now in existence or hereafter issued to others
may adversely affect the development or commercialization of products developed
or to be developed by us. Our planned activities may infringe patents owned by
others. Our patents to clofarabine are licensed from SRI. The current projected
expiration date of the license is March 2021. These patents cover pharmaceutical
compositions and methods of using clofarabine. We cannot guarantee that these
patents would survive an attack on their validity or that they will provide a
competitive advantage over our competitors. Moreover, we cannot guarantee that
SRI was the first to invent the subject matter of these patents. In addition, we
are aware of a third party U.S. patent which is directed to the treatment of
chronic myeloid leukemia, or CML, using specific doses of clofarabine. We
believe that our development and marketing of clofarabine for treatment of acute
leukemias will not infringe any of the claims of this U.S. patent. Further, we
believe that our development and marketing of clofarabine for treatment of
chronic lymphocytic leukemia will not infringe any of the claims of this U.S.
patent. If this patent is asserted against us, even though we may be successful
in defending against such an assertion, our defense would require substantial
financial and human resources. In addition, we may need a license to this patent
to use the claimed dose in the treatment of CML. However, we do not know if such
a license is available at commercially reasonable terms, if at all.
We could incur substantial costs in defending infringement suits brought
against us or any of our licensors or in asserting any infringement claims that
we may have against others. We could also incur substantial costs in connection
with any suits relating to matters for which we have agreed to indemnify our
licensors or distributors. An adverse outcome in any litigation could have a
material adverse effect on our ability to sell products or use patents in the
future. In addition, we could be required to obtain licenses under patents or
other proprietary rights of third parties. These licenses may not be made
available on terms acceptable to us, or at all. If we are required to,
18
and do not obtain any required licenses, we could be prevented from, or
encounter delays in, developing, manufacturing or marketing one or more
products.
We also rely upon trade secret protection for our confidential and
proprietary information. Others may independently develop substantially
equivalent proprietary information and techniques or gain access to our trade
secrets or disclose our technology. We may not be able to meaningfully protect
our trade secrets which could limit our ability to exclusively produce products.
We require our employees, consultants, members of the scientific advisory
board and parties to collaborative agreements to execute confidentiality
agreements upon the commencement of employment or consulting relationships or a
collaboration with us. These agreements may not provide meaningful protection of
our trade secrets or adequate remedies in the event of unauthorized use or
disclosure of confidential and proprietary information.
Our international operations subject us to social, political and economic risks
of doing business in foreign countries.
We have the right to manufacture, market and distribute our lead drugs,
clofarabine and Modrenal(R), in territories outside of the U.S. Specifically, we
currently market Modrenal(R) in the United Kingdom and upon receiving European
approval for clofarabine, we intend to market the drug throughout Europe.
Further, nearly half of our employees are employed by Bioenvision Limited, our
wholly-owned subsidiary with offices in Edinburgh, Scotland.
Because we have international operations in the conduct of our business, we
are subject to the risks of conducting business in foreign countries, including:
o difficulty in establishing or managing distribution relationships;
o different standards for the development, use, packaging, pricing and
marketing of our products and technologies;
o our inability to locate qualified local employees, partners, distributors
and suppliers;
o the potential burden of complying with a variety of foreign laws, trade
standards and regulatory requirements, including the regulation of
pharmaceutical products and treatment; and
o general geopolitical risks, such as political and economic instability,
changes in diplomatic and trade relations, and foreign currency risks.
We do not engage in forward currency transactions which means we are
susceptible to fluctuations in the U.S. dollar against foreign currencies such
as the pound sterling. Accordingly, as the value of the dollar becomes weaker
against the pound sterling, ongoing services provided by our UK employees,
Clinical research organizations and other service providers become more
expensive to us. No assurance can be given that the U.S. dollar will not
continue to weaken which could have a material adverse effect on the costs
associated with our drug development activities.
We cannot predict our future capital needs and we may not be able to secure
additional financing which could affect our ability to operate as a going
concern.
As of June 30, 2005, we had stockholders' equity of approximately
$66,614,000 and net working capital of approximately $60,112,000. However, we
may need additional financing to continue to fund the research and development
and marketing programs for our products and to generally expand and grow our
business. For example, we will need to employ a European sales force within the
next twelve months to capitalize on the commercial potential for clofarabine and
Modrenal(R) if and to the extent our lead drugs are at market in Europe by the
end of calendar year 2005. To the extent that we will be required to fund
operating losses, our financial position would deteriorate. There can be no
assurance that we will be able to find significant additional financing at all
or on terms favorable to us. If equity securities are issued in connection with
a financing, dilution to our stockholders would result, and if additional funds
are raised through the incurrence of debt, we may be subject to restrictions on
our operations and finances. Furthermore, if we do incur debt, we may be
limiting our ability to repurchase capital stock, engage in mergers,
consolidations, acquisitions and asset sales, or alter our lines of business or
accounting methods, even though these actions would otherwise benefit our
business.
19
If adequate financing is not available, we may be required to delay, scale
back or eliminate some of our research and development programs, to relinquish
rights to certain technologies or products, or to license third parties to
commercialize technologies or products that we would otherwise seek to develop.
Any inability to obtain additional financing, if required, would have a material
adverse effect on our ability to continue our operations and implement our
business plan.
The prices we charge for our products and the level of third-party reimbursement
may decrease and our revenues could decrease.
Our ability to commercialize products successfully depends in part on the
price we may be able to charge for our products and on the extent to which
reimbursement for the cost of our products and related treatment will be
available from government health administration authorities, private health
insurers and other third-party payors. We believe that Government officials and
private health insurers are increasingly challenging the price of medical
products and services. Significant uncertainty exists as to the pricing
flexibility which distributors will have with respect to newly approved health
care products as well as the reimbursement status for such approved healthcare
products.
Third-party payors may attempt to control costs further by selecting
exclusive providers of their pharmaceutical products. If third-party payors were
to make this type of arrangement with one or more of our competitors, they would
not reimburse patients for purchasing our competing products. For example, if a
third-party payor in the U.K. were to pay patients for regimens of aromatase
inhibitor treatment but not treatments of Modrenal(R), this would cause a
decline in sales of Modrenal(R). This lack of reimbursement would diminish the
market for products developed by us and would have a material adverse effect on
us.
Our products may be subject to recall.
Product recalls may be issued at our discretion or by the FDA, the FTC or
other government agencies having regulatory authority for product sales. Product
recalls, if any in the future, may harm our reputation and cause us to lose
development opportunities, or customers or pay refunds. Products may need to be
recalled due to disputed labeling claims, manufacturing issues, quality defects,
or other reasons. We do not carry any insurance to cover the risk of potential
product recall. Any product recall could have a material adverse effect on us,
our prospects, our financial condition and results of operations.
We may face exposure from product liability claims and product liability
insurance may not be sufficient to cover the costs of our liability claims
related to technologies or products.
We face exposure to product liability claims if the use of our technologies
or products or those we license from third parties is alleged to have resulted
in adverse effects to users of such products. Product liability claims may be
brought by clinical trial participants, although to date, no such claims have
been brought against us. If any such claims were brought against us, the cost of
defending such claims may adversely affect our business. Regulatory approval for
commercial sale of our products does not mitigate product liability risks. Any
precautions we take may not be sufficient to avoid significant product liability
exposure. Although we have obtained product liability and clinical trial
insurance on our technologies and products at levels with which management deems
reasonable, no assurance can be given that this insurance will cover any
particular claim or that we have obtained an appropriate level of liability
insurance coverage for our development activities. We currently maintain three
million dollars per year, claims made product liability insurance coverage which
we believe is adequate. Existing coverage may not be adequate as we further
develop our products. In the future, adequate insurance coverage or
indemnification by collaborative partners may not be available in sufficient
amounts, or at acceptable costs, if at all. To the extent that product liability
insurance, if available, does not cover potential claims, we will be required to
self-insure the risks associated with those claims. The successful assertion of
any uninsured product liability or other claim against us could limit our
ability to sell our products or could cause monetary damages. In addition,
future product labeling may include disclosure of additional adverse effects,
precautions and contra indications, which may adversely impact product sales.
The pharmaceutical industry has experienced increasing difficulty in maintaining
product liability insurance coverage at reasonable levels, and substantial
increases in insurance premium costs, in many cases, have rendered coverage
economically impractical.
Complying with changing corporate governance regulations, including an
evaluation of our internal controls, may adversely affect our business and
operations.
Changing laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC
regulations and NASDAQ market rules, are creating uncertainty for companies such
as ours. These new or changed laws, regulations and standards are subject to
varying interpretations in many cases due to their lack of specificity. As a
result, their application in practice may evolve
20
over time as new guidance is provided by regulatory and governing bodies, which
could result in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and governance practices.
We are committed to maintaining high standards of corporate governance, internal
control and public disclosure. As a result, we intend to invest resources to
comply with evolving laws, regulations and standards, and this investment may
result in increased administrative expenses and a diversion of management time
and attention from revenue-generating activities to compliance activities. If
our efforts to comply with new or changed laws, regulations and standards differ
from the activities intended by regulatory or governing bodies, our reputation
may be harmed and our operations and revenues may be adversely affected.
We need to improve our internal controls over financial reporting.
In connection with its review of our consolidated financial statements as
of and for the three and nine month periods ended March 31, 2004, Grant Thornton
LLP, then our registered independent public accounting firm, advised the Audit
Committee and management of certain significant internal control deficiencies
that they considered to be, in the aggregate, a material weakness, under
standards established by the American Institute of Certified Public Accountants,
including, inadequate staffing and supervision leading to the untimely
identification and resolution of certain accounting matters, failure to perform
timely reviews, substantiation and evaluation of certain general ledger account
balances, lack of procedures or expertise needed to prepare all required
disclosures and evidence that employees lack the qualifications and training to
fulfill their assigned functions. A material weakness is a significant
deficiency in one or more of the internal control components that alone or in
the aggregate precludes the entity's internal control from reducing to an
appropriately low level the risk that material misstatements in the financial
statements will not be prevented or detected on a timely basis. In response to
the observations made by Grant Thornton LLP, we undertook a re-evaluation of our
internal controls and procedures relating to those observations and implemented
such enhancements as the review suggested were appropriate including the hiring
a controller and a director of financial reporting.
As of March 31, 2005, the Company identified the following material
weakness:
o Failure to ensure the correct application of SFAS 109 "Accounting for
Income Taxes" with respect to purchase business combinations and
failure to correct that error subsequently resulting from the lack of
personnel knowledgeable in the accounting for income taxes.
As of June 30, 2005 the Company identified the following material weakness:
o We did not maintain effective controls relating to the timely
identification, evaluation and accurate resolution of non-routine or
complex accounting matters, specifically, (i) we did not timely
identify and evaluate a change of circumstances that resulted in an
impairment of our intangible assets relating to certain patents, (ii)
we did not timely identify and accurately resolve an accounting issue
related to contractual revenue recognition and (iii) we did not timely
evaluate our accounts receivable for the need of a valuation
allowance, each of which resulted in a material adjustment to our
consolidated financial statements for the fiscal year ended June 30,
2005.
In an effort to remediate the identified material weaknesses we continue to
implement a number of changes to our internal controls over financial reporting,
including, improved training and education for all relevant internal personnel
and the hiring of additional internal resources. If these remedial initiatives
are insufficient to address these material weaknesses, or if additional material
weaknesses or significant deficiencies in our internal controls are discovered
in the future, we may fail to meet our future reporting obligations on a timely
basis, our financial statements may contain material misstatements, and our
common stock may be delisted from the Nasdaq National Market.
We are exposed to potential risks from recent legislation requiring companies to
evaluate their internal control over financial reporting under Section 404 of
the Sarbanes-Oxley Act of 2002.
We are evaluating our internal controls systems in order to allow
management to report on the effectiveness of our internal control over financial
reporting and our registered independent public accounting firm to attest to
this report, as required by Section 404 of the Sarbanes-Oxley Act. We are
performing the system and process evaluation and testing, and implementing any
necessary remediation, required in an effort to comply with the management
report and public accounting firm attestation requirements and continue to incur
additional expenses and devote significant management time towards completing
actions required for management's evaluation. The evaluation and attestation
processes required by Section 404 are new and neither public companies nor
public accounting firms have significant experience in testing or complying with
these requirements. While we have developed and are implementing plans to fully
implement the requirements relating to internal controls and all other aspects
of Section 404 in a timely fashion, we cannot be certain as to the timing of
completion of our evaluation, testing and
21
remediation actions or the impact of the same on our operations since, like
other public companies, we and our registered independent public accounting firm
are undergoing the process for the first time in a regulatory environment where
the standards to assess adequacy of compliance are under development. We cannot
assure you that there may not be significant deficiencies or material weaknesses
that would be required to be reported as a result of the process.
The price of our common stock is likely to be volatile and subject to wide
fluctuations.
The market price of the securities of biotechnology companies has been
especially volatile. Thus, the market price of our common stock is likely to be
subject to wide fluctuations. For the twelve month period ended June 30, 2005,
our closing stock price has ranged from a high of $11.74 to a low of $5.17. If
our revenues do not grow or grow more slowly than we anticipate, or, if
operating or capital expenditures exceed our expectations and cannot be adjusted
accordingly, or if some other event adversely affects us, the market price of
our common stock could decline. In addition, if the market for pharmaceutical
and biotechnology stocks or the stock market in general experiences a loss in
investor confidence or otherwise fails, the market price of our common stock
could fall for reasons unrelated to our business, results of operations and
financial condition. The market price of our stock also might decline in
reaction to events that affect other companies in our industry even if these
events do not directly affect us. In the past, companies that have experienced
volatility in the market price of their stock have been the subject of
securities class action litigation. If we were to become the subject of
securities class action litigation, it could result in substantial costs and a
diversion of management's attention and resources.
Future sales or the possibility of future sales of substantial amount of our
common stock by stockholders or by our officers and directors may cause the
price of our common stock to decline.
Officers, directors and employees, and certain other stockholders hold
significant numbers of shares of our common stock. Some of those shares are
freely tradable without restriction under the federal securities laws, and those
that are not may be sold in the future pursuant to newly filed effective
registration statements, in compliance with the requirements of Rule 144 under
the Securities Act. Sales in the public market of substantial amounts of our
common stock, whether by our officers, directors, employees or others, or the
perception that such sales could occur, could materially adversely affect
prevailing market prices for our common stock and our ability to raise
additional capital through the sale of equity securities.
Anti-takeover laws, our shareholder rights plan, and provisions of our
certificate of incorporation may discourage, delay, or prevent a merger or
acquisition that our stockholders may consider favorable.
Section 203 of the Delaware General Corporation Law contains provisions
that may delay or prevent a third party from acquiring control of us, even if
doing so might be beneficial to our stockholders by providing them an
opportunity to sell their shares at a premium to the then current market price.
In general, Section 203 prohibits designated types of business combinations,
including mergers, for a period of three years between us and any third party
who owns 15% or more of our common stock. This provision does not apply if:
o our board of directors approves the transaction before the third party
acquires 15% of our common stock;
o the third party acquires at least 85% of our common stock at the time its
ownership exceeds the 15% level; or
o our board of directors and two-thirds of the shares of our common stock not
held by the third party vote in favor of the transaction.
We also adopted a shareholder rights plan on November 17, 2004 to deter
hostile or coercive attempts to acquire us. Under the plan, if any person or
group acquires more than 15% of our common stock without approval of the board
of directors under specified circumstances, our other stockholders have the
right to purchase shares of our common stock, or shares of the acquiring
company, at a substantial discount to the public market price. This plan makes
an acquisition much more costly to a potential acquirer, which may deter a
potential acquisition.
Our certificate of incorporation also authorizes us to issue up to
20,000,000 shares of preferred stock in one or more different series with terms
fixed by the board of directors. Stockholder approval is not necessary to issue
preferred stock in this manner. Thus, our board of directors can authorize and
issue shares of preferred stock with voting or conversion rights that could
adversely affect the voting or other rights of holders of our common stock and
thereby reduce its value. These rights could have the effect of making it more
difficult for a person or group to acquire control of us, as well as prevent or
frustrate any attempt by stockholders to change our direction or
22
management. While our board of directors has no current intention to issue any
preferred stock, the issuance of these shares may deter potential acquirors.
Our existing principal stockholders, executive officers and directors will
continue to have substantial control over our company after this offering, which
may prevent you or other stockholders from influencing significant corporate
decisions.
Our existing principal stockholders, executive officers and directors
beneficially own, in the aggregate, approximately 52% of our outstanding common
stock. As a result, these stockholders will, if they so choose, be able to
substantially control all matters requiring stockholder approval. These matters
include the election of directors and approval of significant corporate
transactions, such as a merger, consolidation, takeover or other business
combination involving us. Our existing principal stockholders, executive
officers and directors may have interests that differ from yours and may vote in
a way with which you disagree and which may be adverse to your interests. This
concentration of ownership could also adversely affect the market price of our
common stock or reduce any premium over market price that an acquirer might
otherwise pay.
Certain events could result in a dilution of holders of our common stock.
As of June 30, 2005, we had 40,558,948 shares of common stock outstanding,
2,250,000 shares of Series A Convertible Preferred Stock outstanding which are
currently convertible into 4,500,000 shares of common stock and common stock
equivalents, and warrants and stock options, convertible or exercisable into
11,472,413 shares of our common stock. The exercise and conversion prices of the
common stock equivalents range from $0.74 to $8.87 per share. We have also
reserved for issuance an aggregate of 4,500,000 shares of common stock for a
stock option plan for our employees. Historically, from time to time, we have
awarded our common stock to our officers, in lieu of cash compensation, although
we do not expect to do so in the future. As of June 30, 2005, we have the sale
of shares of common stock underlying 4,500,000 options are registered under the
Securities Act on Form S-8. The future resale of these shares underlying stock
options will result in a dilution to your percentage ownership of our common
stock and could adversely affect the market price of our common stock.
The terms of our Series A Convertible Preferred Stock include antidilution
protection upon the occurrence of sales of our common stock below certain
prices, stock splits, redemptions, mergers and other similar transactions. If
one or more of these events occurs the number of shares of our common stock that
may be acquired upon conversion or exercise would increase. If converted or
exercised, these securities will result in a dilution to your percentage
ownership of our common stock. The resale of many of the shares of common stock
which underlie these options and warrants are registered under this prospectus
and the sale of such shares may adversely affect the market price of our common
stock.
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. This information is available at the SEC's Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information about Bioenvision and other
issuers that file electronically with the SEC at http://www.sec.gov.
Item 2. Description of Property
Facilities
As of the date of this report we do not own any interest in real property.
We currently lease 5,549 square feet of office space at our principal executive
offices at 345 Park Avenue, 41st Floor, New York, New York 10154 for base rent
of approximately $26,351 per month. These facilities are the center for all of
our administrative functions in the United States. Also, we rent approximately
2,437 square feet of office space in Edinburgh, Scotland for approximately
GBP 14,400 per month. To date, most of our drug development programs have
been conducted at scientific institutions around the world. It is our policy to
continue development at leading scientific institutions in the U.S. and Europe.
We do not plan to conduct laboratory research in any of our facilities in the
near future, rather, we plan to conduct research through collaborative
arrangements with SRI and others.
Item 3. Legal Proceedings
On December 19, 2003, the Company filed a complaint against Dr. Deidre
Tessman and Tessman Technology Ltd. (the "Tessman Defendants") in the Supreme
Court of the State of New York, County of New York (Index No.
23
03-603984). An amended complaint alleges, among other things, breach of contract
and negligence by Tessman and Tessman Technology and demands judgment against
Tessman and Tessman Technology in an amount to be determined by the Court. The
Tessman Defendants removed the case to federal court, then remanded it to state
court and served an answer with several purported counterclaims. The Company
denies the allegations in the counterclaims and intends to pursue its claims
against the Tessman Defendants vigorously. Each of the parties has moved for
summary judgment dismissing all but one of the claims of the other parties.
Those motions have not been decided by the Court.
Item 4. Submission of Matters to a Vote of Security Holders
None.
24
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
Our common stock trades on the Nasdaq National Market under the symbol
"BIVN". The following table sets forth the high and low sales of our common
stock for the periods indicated, as reported by Nasdaq:.
High Low
---------------- ----------------
Fiscal year ended June 30, 2004
First Quarter.......................... $5.20 $1.70
Second Quarter......................... 5.40 3.13
Third Quarter.......................... 10.25 3.74
Fourth Quarter......................... 12.00 8.00
Fiscal year ended June 30, 2005
First Quarter.......................... $9.24 $5.90
Second Quarter......................... 11.74 6.86
Third Quarter.......................... 9.18 5.17
Fourth Quarter ........................ 7.50 5.30
The last reported sale price of our common stock on the Nasdaq National
Market on October 6, 2005 was $7.25.
As of October 6, 2005, there were approximately 162 holders of record of
our common stock.
Dividend Policy
We have never declared or paid cash dividends on our common stock, and our
board of directors does not intend to declare or pay any dividends on the common
stock in the foreseeable future. However, we are required to accrue for and pay
a dividend of 5%, subject to certain adjustments, on our cumulative Series A
Convertible Participating Preferred Stock. Our earnings, if any, are expected to
be retained for use in expanding our business. The declaration and payment in
the future of any cash or stock dividends on the common stock will be at the
discretion of the board of directors and will depend upon a variety of factors,
including our ability to service our outstanding indebtedness and to pay our
dividend obligations on securities ranking senior to the common stock, our
future earnings, if any, capital requirements, financial condition and such
other factors as our Board of Directors may consider to be relevant from time to
time.
25
Equity Compensation Plan Information
The following table provides information about the securities authorized
for issuance under the Company's equity compensation plans as of June 30, 2005:
Number of Number of securities
securities to be remaining available for
issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation
outstanding outstanding plans (excluding
options, warrants options, warrants securities reflected in
and rights and rights column (a))
Plan category (a) (b) (c)
----------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 2,463,167 $4.56 1,543,500
Equity compensation plans
not approved by security
holders(1) -- -- --
Total 2,463,167 $4.56 1,543,500
(1) We have no equity compensation plans not approved by security holders.
The Board of Directors adopted, and our stockholders approved our 2003
Stock Incentive Plan at the Annual Meeting held in January of 2004. The plan was
adopted to recognize the contributions made by our employees, officers,
consultants, and directors, to provide those individuals with additional
incentive to devote themselves to our future success and to improve our ability
to attract, retain and motivate individuals upon whom our growth and financial
success depends. There are 4,500,000 shares reserved for grants of options under
the plan and at June 30, 2005, 2,956,500 of these options had been issued.
26
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of our results of
operations and financial condition. The discussion should be read together with
our audited consolidated financial statements and notes included under Item 7 of
this annual report on Form 10-KSB, which consolidated financial statements are
presented beginning at page F-1.
Summary of Critical Accounting Policies
Financial Reporting Release No. 60, which was released by the SEC, requires
all companies to include a discussion of critical accounting policies or methods
used in the preparation of the consolidated financial statements. In addition,
Financial Reporting Release No. 61 was released by the SEC, which requires all
companies to include a discussion to address, among other things, liquidity,
off-balance sheet arrangements, contractual obligations and commercial
commitments. The following discussion is intended to supplement the summary of
significant accounting policies as described in Note 1 of the Notes To
Consolidated Financial Statements for the year ended June 30, 2005 included
under Item 7 in this annual report on Form 10-KSB, which are presented beginning
at page F-1.
These policies were selected because they represent the critical accounting
policies and methods that are broadly applied in the preparation of the
consolidated financial statements.
Revenue Recognition
In accordance with SEC Staff Accounting Bulletin No. 104, or SAB 104,
upfront nonrefundable fees associated with research and development
collaboration agreements where the Company has continuing involvement in the
agreement, are recorded as deferred revenue and recognized over the estimated
research and development period using the straight-line method. If the estimated
period is subsequently modified, the period over which the up-front fee is
recognized is modified accordingly on a prospective basis using the
straight-line method. Continuation of certain contracts and grants are dependent
upon the Company and/or its co-development partners' achieving specific
contractual milestones; however, none of the payments received to date are
refundable regardless of the outcome of the project. Upfront nonrefundable fees
associated with licensing arrangements are recorded as deferred revenue and
recognized over the term of the licensing arrangement using the straight line
method, which approximates the life of the patent.
Royalty revenue from product licensees is recorded when persuasive evidence
of an arrangement exists, the price is fixed or determinable, the goods have
been delivered and collectibility is reasonably assured.
The Company currently sells its products to wholesale distributors and
directly to hospitals, clinics, and retail pharmacies. Revenue from product
sales is recognized when the risk of loss is passed to the customer, the sales
price is fixed and determinable, and collectibility is reasonably assured. As
the customer does not have the right of return the Company does not record a
reserve for sales returns.
Revenue related to research and development with our corporate
co-development partner is recognized as research and development contract
revenue when persuasive evidence of an arrangement exists, the services are
performed, and collectibility is reasonably assured. Research & development
contract revenue represents payments due from our co-development partner
relating to the reimbursement of 50% for certain of our ongoing research costs
in the development of clofarabine outside the United States.
The Company follows the guidance of Emerging Issues Task Force, or ETIF,
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent" in the
presentation of revenues and direct costs of revenues. This guidance requires
the Company to assess whether it acts as a principal in the transaction or as an
agent acting on behalf of others. The Company records revenue transactions gross
in its statements of operations if it is deemed the principal in the
transaction, which includes being the primary obligor and having the risks and
rewards of ownership.
Stock Based Compensation
In accordance with the provisions of SFAS No. 123, "Accounting for Stock
Based Compensation," or SFAS 123, the Company accounts for stock based
compensation arrangements with employees in accordance with provisions of
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees, " or APB 25. Compensation expense for stock options issued to
employees is based on the difference on the date of grant, between the fair
value of the Company's stock and the exercise price of the option. The Company
accounts for
27
equity instruments issued to non-employees in accordance with the provisions of
SFAS 123 and Emerging Issues Task Force No. 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling Goods or Services," or EITF 96-18. Under EITF No.
96-18, where the fair value of the equity instrument is more reliably measurable
than the fair value of services received, such services will be valued based on
the fair value of the equity instrument.
We utilize the Black-Scholes model to measure the value of an employee
option. The Black-Scholes model is a trading options-pricing model that neither
considers the non-traded nature of employee stock options, nor the restrictions
on such trading, the lack of transferability or the ability of employees to
forfeit the options prior to expiry. If the model adequately permitted
consideration of the unique characteristics of employee stock options, the
resulting estimate of the fair value of the stock options could be different.
Our estimates of employee stock option values rely on estimates of factors we
input into the Black-Scholes model. The key factors involve an estimate of
future uncertain events. We determine expected volatility based on historical
activity. We believe that these market-based inputs provide a better estimate of
our future stock price movements. We also use historical exercise patterns as
our best estimate of future exercise patterns.
Impairment of Long-Lived Assets
We believe that the accounting estimate relating to impairment of our
intangible assets involves a critical accounting estimation methodology. The
estimate is highly susceptible to change from period to period because it
requires management to make significant judgments and assumptions about future
revenue, operating costs and development expenditures. Some of the more
significant estimates and assumptions inherent in the intangible asset
impairment estimation process include: the timing and amount of projected future
cash flows; the discount rate selected to measure the risks inherent in the
future cash flows; and the competitive trends impacting the asset, including
consideration of any technical, legal, regulatory, or economic barriers to entry
as well as expected changes in standard of practice for indications addressed by
the asset. Changes in events or circumstances that may affect long-lived assets,
particularly in the pharmaceutical industry, makes judgments and assumptions
with respect to the future cash flows highly subjective and may include, but are
not limited to, cancellations or terminations of license agreements or the risk
of competition that could render our products noncompetitive or obsolete.
Overview and Company Status
We are a product-focused biopharmaceutical company with two approved cancer
therapeutics. In December 2004, the FDA approved our lead cancer product,
clofarabine, for the treatment of ALL in patients who are relapsed or refractory
to at least two prior regimens of treatment. We believe clofarabine is the first
new medicine initially approved in the United States for children with leukemia
in more than a decade. Clofarabine has received Orphan Drug designation in the
U.S. and the E.U. Genzyme Corporation, our co-development partner, currently
holds marketing rights in the U.S. and Canada for clofarabine for certain cancer
indications and currently controls U.S. development of clofarabine in these
indications. Genzyme is marketing clofarabine under the brand name Clolar(R) in
the U.S. In Europe, we have filed for approval of clofarabine in pediatric ALL
with the EMeA. If approved, we anticipate commencing sales in Europe during the
first quarter of calendar 2006 through a dedicated European sales force.
We are selling our second product, Modrenal(R), in the U.K., through our
sales force of eight sales specialists. Modrenal(R) is approved in the U.K. for
the treatment of post-menopausal advanced breast cancer following relapse to
initial hormone therapy.
If we receive additional European approvals for our products, we intend to
expand our sales force by adding up to six to 10 sales specialists in each of
five other key regions within the E.U. which include the countries of France,
Germany, Italy, Spain, Portugal, Netherlands, Austria, Belgium, Denmark and
Sweden. Further, we intend to penetrate all of the other markets within the E.U.
upon establishing traction in the E.U's major markets.
Over the next 12 months, we intend to continue our internal growth strategy
to provide the necessary regulatory, sales and marketing capabilities which will
be required to pursue the expanded development programs for clofarabine and
Modrenal(R) described above.
We have made significant progress in developing our product portfolio over
the past twelve months, and have multiple products in clinical trials. We have
incurred losses during this early stage of our operations. Our management
believes that we have the opportunity to become a leading oncology-focused
pharmaceutical company
28
in the next four years if we successfully bring clofarabine to market in Europe
and successfully develop certain of our other product candidates.
We anticipate that revenues derived from our two lead drugs, clofarabine
and Modrenal(R) will permit us to further develop the other products currently
in our product pipeline. In addition to clofarabine and Modrenal(R), we are
performing initial development work Virostat for the treatment of Hepatitis C
and Velostan, initially for the treatment of bladder cancer. The work to date on
these compounds has been limited because of the need to concentrate on
clofarabine and Modrenal(R) but management believe these compounds have
potential value. With Virostat the Company has commenced a phase II clinical
trial in patients with hepatitis C viral infection and with Velostan the Company
has been developing a process for the separation of optical isomers of the
compound. We have had discussions with potential product co-development partners
from time to time, and plan to continue to explore the possibilities for
co-development and sub-licensing in order to implement our development plans. In
addition, we believe that some of our products may have applications in treating
non-cancer conditions in humans and in animals. Those conditions are outside our
core business focus and we do not presently intend to devote a substantial
portion of our resources to addressing those conditions.
In May 2003, we entered into a License and Sub-License Agreement with
Dechra Pharmaceuticals, plc, or Dechra, pursuant to which we sub-licensed the
marketing and development rights to Vetoryl(R) (trilostane), solely with respect
to animal health applications, in the U.S. and Canada, to Dechra. We received
$1.25 million in cash, together with future milestone and royalty payments which
are contingent upon the occurrence of certain events. We intend to continue to
try and capitalize on these types of opportunities as they arise. The Company
also owns rights to OLIGON(R) technology and we have had discussions with
potential product licensing partners from time to time, and plan to continue to
explore the possibilities for co-development and sub-licensing in order to
implement our development plans.
You should consider the likelihood of our future success to be highly
speculative in light of our limited operating history, as well as the limited
resources, problems, expenses, risks and complications frequently encountered by
similarly situated companies. To address these risks, we must, among other
things:
o satisfy our future capital requirements for the implementation of our
business plan;
o commercialize our existing products;
o complete development of products presently in our pipeline and obtain
necessary regulatory approvals for use;
o implement and successfully execute our business and marketing strategy to
commercialize products;
o establish and maintain our client base;
o continue to develop new products and upgrade our existing products;
o continue to establish and maintain relationships with manufacturers for our
products;
o respond to industry and competitive developments; and
o attract, retain, and motivate qualified personnel.
We may not be successful in addressing these or any risks associated with
our business and/or products. If we were unable to do so, our business
prospects, financial condition and results of operations would be materially
adversely affected. The likelihood of our success must be considered in light of
the development cycles of new pharmaceutical products and technologies and the
competitive and regulatory environment in which we operate.
Results of Operations
Year Ended June 30, 2005 Compared to Year Ended June 30, 2004
We reported revenues of approximately $4,651,000 and $3,102,000 for the
years ended June 30, 2005 and 2004, respectively, representing an increase of
approximately $1,549,000. This increase primarily was due to an increase
29
in license and royalty revenue from milestone payments and royalties received
from certain of our co-development partners in the amount of approximately
$450,000, an increase in research and development contract revenue due to
increased sales in the Named Patient Program, increased reimbursements from
Genzyme related to clofarabine research and development expenses, in the amount
of approximately $488,000, and revenue from the sale of Modrenal(R) of
approximately $611,000.
The cost of products sold for years ended June 30, 2005 and June 30, 2004
were approximately $921,000 and $0, respectively. The cost of products sold
reflects the direct costs associated with our sales of Modrenal(R) including
royalties due on the sale of our lead products of approximately $525,000.
Research and development costs for the years ended June 30, 2005 and 2004
were approximately $10,895,000 and $4,883,000 respectively, representing an
increase of $6,012,000.
Our research and development costs include costs associated with the six
projects shown in the table below, five of which the Company currently devotes
time and resources:
Product 2005 2004 Change from prior year
-------- ---- ---- ----------------------
(in thousands)
Clofarabine $8,697 $2,650 $6,047
Modrenal $1,972 $2,026 $(54)
Virostat $131 $48 $83
Velostan $79 $152 $(73)
OLIGON $16 $6 $10
Gene Therapy - - -
Clofarabine research and development costs for the years ended June 30,
2005 and 2004 were approximately $8,697,000 and $2,650,000, respectively,
representing an increase of approximately $6,047,000. The increase primarily
reflects costs which are associated with our increased development activities
and clinical trials of clofarabine being conducted in Europe, certain of which
are partially reimbursed by Genzyme.
Modrenal(R) research and development costs for the years ended June 30,
2005 and 2004 were approximately $1,972,000 and $2,026,000, respectively,
representing a decrease of $54,000. The decrease primarily reflects the
Company's primary focus on clofarabine during this period.
Virostat research and development costs for the years ended June 30, 2005
and 2004 were approximately $131,000 and $48,000, respectively, representing an
increase of $83,000. The increase primarily reflects the costs associated with
the ongoing, multi-center investigator sponsored Phase II clinical trial being
conducted in Egypt and Southern Europe during the year ended June 30, 2005.
Velostan research and development costs for the years ended June 30, 2005
and 2004 were approximately $79,000 and $152,000, respectively, representing a
decrease of $73,000. The decrease primarily reflects the Company's primary focus
on clofarabine during this period.
OLIGON research and development costs for the years ended June 30, 2005
and 2004 were $16,000 and $6,000, respectively, representing an increase of
$10,000. The increase primarily reflects pre-development costs incurred in
connection with continuing co-partnering discussions.
There were no research and development costs associated with Gene Therapy
for the years ended June 30, 2005 and 2004 due to the Company's focus on
clofarabine during this period.
The clinical trials and development strategy for the clofarabine and
Modrenal(R) projects, in each case, is anticipated to cost several million
dollars and will continue for several years based on the number of clinical
indications within which we plan to develop these drugs. Currently, management
cannot estimate the timing or costs associated with these projects because many
of the variables, such as interaction with regulatory authorities and response
rates in various clinical trials, are not predictable. Total costs to date for
each of our projects is as
30
follows: (i) clofarabine research and development costs have been approximately
$14,315,000; (ii) Modrenal(R) research and development costs have been
approximately $6,369,000; (iii) Velostan research and development costs have
been approximately $380,000; (iv) Virostat research and development costs have
been approximately $189,000; (v) OLIGON research and development costs have been
approximately $25,000; and (vi) Gene Therapy research and development costs have
been approximately $451,000.
Selling, general and administrative expenses for the years ended June 30,
2005 and 2004 were approximately $10,182,000 and $9,082,000, respectively,
representing an increase of $1,100,000. This increase primarily is due to:
o an increase in payroll due to the significant increase in employee
headcount in both New York and Edinburgh offices of approximately
$800,000;
o an increase in consulting and legal fees due to the Company's
expansion of regulatory and investor relations initiatives, and the
restatement of the Company's financial statements included in the
Company's 2004 annual report on Form 10-KSB, in the amount of
$1,559,000;
o an increase in sales and marketing costs of approximately $592,000
related to the Company's development of a sales and marketing force in
the UK;
o an increase of approximately $250,000 due to an increase in the
Company's annual rent expense; and
o an increase of approximately $97,000 due to an increase in insurance
premiums paid by the Company.
These increases are substantially offset by a decrease in costs associated
with the variable accounting treatment of options issued to an officer of the
Company in the amount of approximately $2,200,000.
Depreciation and amortization expense for the years ended June 30, 2005 and
2004 were approximately $1,439,000 and $1,348,000, respectively, representing an
increase of $91,000. This increase primarily reflects the corresponding increase
in our net asset base.
Provision for bad debts for the years ended June 30, 2005 and 2004 were
approximately $869,000 and $0, respectively. The increase is due to the Company
recording a valuation allowance relating to certain of the outstanding
receivable balances from our co-development partner totaling $869,000 in the
current year. Management believes the amounts billed to its co-development
partner and previously recorded as revenue through March 31, 2005 are
supportable and continues to actively pursue collection of the outstanding
balances. During its quarterly closing process the Company further evaluated the
collectibility of such amounts and concluded that based upon the available
information a valuation allowance was required. Additionally, based on the delay
in payment from our co-development partner and other information, management
concluded that collectibility was no longer reasonably assured and therefore,
did not recognize revenue on amounts billed in the quarter ended June 30, 2005.
Prior to the fourth quarter of 2005, we tested for impairment our methylene
blue intangibles acquired in connection with the Pathagon acquisition and
determined that, based on our assumptions, the sum of the expected future cash
flows, undiscounted and pertaining solely and exclusively to approved
indications, exceeded the carrying value of its long-lived assets and therefore
we did not recognize an impairment. Due to the loss of an intellectual property
patent suit relating to the international use of methylene blue in fresh frozen
plasma, we re-evaluated the intangible asset relating to methylene blue at June
30, 2005. At that date, we estimated that our undiscounted future cash flows,
again relating solely and exclusively to approved uses of methylene blue, were
less than the carrying value. As a result, we recognized a non-cash impairment
loss of $5,276,000, equal to the difference between the estimated future cash
flows for approved uses of methylene blue, discounted at an appropriate rate,
and the carrying amount of the asset. Making the impairment determination and
the amount of impairment requires significant judgment by management and
assumptions with respect to the future cash flows. Changes in events or
circumstances that may affect long-lived assets makes judgments and assumptions
with respect to the future cash flows highly subjective.
Year Ended June 30, 2004 Compared to Year Ended June 30, 2003
We reported revenues of approximately $3,102,000 and $505,000 for the years
ended June 30, 2004 and 2003, respectively. Revenues reflect recognition of
consideration received pursuant to our agreements with co-development and
sub-licensing partners in connection with our platform of drugs and
technologies. Of the revenues recorded for the year ended June 30, 2004,
approximately $2,100,000 was recognized from ILEX (predecessor to Genzyme),
pursuant to the Co-Development Agreement, and approximately $600,000 was
recognized from Stegram Pharmaceuticals under the Stegram Co-Development
Agreement.
Research and development costs for the years ended June 30, 2004 and 2003
were approximately $4,883,000 and $1,689,000 and respectively, representing an
increase of $3,194,000.
Our research and development costs include costs associated with six
projects of which the Company devotes significant time and resource. Clofarabine
research and development costs for the year ended June 30, 2004 and 2003 were
approximately $2,651,000 and $871,000, respectively, representing an increase of
approximately
31
$1,780,000. The increase primarily reflects costs which are associated with our
increased development activities and clinical trials being conducted in Europe.
Modrenal(R) research and development costs for the year ended June 30, 2004
and 2003 were approximately $2,026,000 and $913,000, respectively, representing
an increase of $1,113,000. The increase primarily reflects increased development
activities associated with the Modrenal(R) development plan, including costs
associated with the U.S. prostate cancer trial which is ongoing.
Velostan research and development costs were approximately $152,000 and
$30,000, respectively, representing an increase of $122,000. The increase
primarily reflects preparation of a protocol and other preparatory activities in
advance of the Phase I Clinical Trial which has not yet commenced to date.
Gene Therapy research and development costs for the year ended June 30,
2004 and 2003 were approximately $0 and ($130,000), respectively. The 2003
amount primarily reflects a reversal of an accrued expense in the year ended
2002 of $200,000 which was determined to be less than originally estimated by
the Company in the year ended June 30, 2003.
The clinical trials and development strategy for the clofarabine and
Modrenal(R) projects, in each case, is anticipated to cost several million
dollars and will continue for several years based on the number of clinical
indications within which we plan to develop these drugs. Currently, management
cannot estimate the timing or costs associated with these projects because many
of the variables, such as interaction with regulatory authorities and response
rates in various clinical trials, are not predictable. Total costs to date for
each of these four projects is as follows: (i) clofarabine research and
development costs have been approximately $5,600,000; (ii) Modrenal(R) research
and development costs have been approximately $4,400,000; (iii) Velostan
research and development costs have been approximately $302,000; and (iv) Gene
Therapy research and development costs have been approximately $450,000. Our
other two research and development projects involve our two ancillary
technologies; OLIGON and Virostat. We do not currently devote any significant
time or resources to these research and development projects, but we intend to
do so if and to the extent we successfully commercialize our lead drugs,
clofarabine and Modrenal(R), over the next two years.
Selling, general and administrative expenses for the year ended June 30,
2004 and 2003 were approximately $9,082,000 and $4,567,000, respectively,
representing an increase of $4,515,000. Of this amount, approximately $2,400,000
of this increase was due to the re-pricing of 380,000 options granted to an
employee pursuant to the terms of his Employment Agreement (see Note 7 to the
Financial Statements); approximately $1,000,000 of the increase was due to an
increase in sales and marketing expenses related to pre-marketing activities
with clofarabine and marketing costs associated with Modrenal(R); and
approximately $1,100,000 of the increase was due to increases in our consulting
and legal expenses as the result of our recent growth.
We reported interest and finance charges of $0 for the year ended June 30,
2004, representing a decrease of $325,000 from the year ended June 30, 2003.
This decrease reflects the retirement of our credit facility in May 2002 and the
fact that we carried no long term debt during the year ended June 30, 2004.
Depreciation and amortization expense totaled approximately $1,348,000 for
the year ended June 30, 2004, representing an increase of $3,100 from the year
ended June 30, 2003. The increase is primarily due to the amortization of
certain intangible assets we acquired in the Pathagon transaction which we
acquired during the year ended June 30, 2002.
The Company has been incurring losses since inception and therefore has not
recorded an income tax provision for the years ended June 30, 2005 and 2004. The
Company has recorded a deferred income tax benefit of approximately $0 and
$1,460,000 for the years ended June 30, 2005 and 2004, respectively.
Liquidity and Capital Resources
We anticipate that we may continue to incur significant operating losses
for the foreseeable future. There can be no assurance as to whether or when we
will generate material revenues or achieve profitable operations.
On June 30, 2005, we had cash and cash equivalents of approximately
$31,408,000, short-term securities of $32,747,000 and working capital of
$60,112,000. Management believes the Company has sufficient cash and cash
equivalents and working capital to continue currently planned operations over
the next 12 months. Although we do not currently plan to acquire or obtain
licenses for new technologies, if any such opportunity arises and we deem
32
it to be in our interests to pursue such an opportunity, it is possible that
additional financing would be required for such a purpose.
On February 8, 2005, we completed a secondary public offering in which we
sold 7,500,000 common shares at $8.00 per share, with net proceeds to the
Company of approximately $55.7 million, after deducting underwriting discounts
and commissions and estimated offering expenses. We intend to use the net
proceeds for further development of our lead products, for sales and marketing
expenses related to the commercial launch of our lead products, for working
capital and other general corporate purposes.
On March 22, 2004, we consummated a private placement transaction, pursuant
to which we raised $12.8 million and issued 2,044,514 shares of our common stock
and warrants to purchase an additional 408,903 shares of our common stock at a
conversion price of $7.50 per share. We recorded proceeds of $11,792,801 net of
all legal, professional and financing fees incurred in connection with the
offering. We consummated a second closing for this financing on May 13, 2004 in
order to comply with certain contractual obligations to our holders of Series A
Convertible Preferred Stock which hold preemptive rights for equity offerings.
We raised an additional $3.2 million (net of all legal, professional and
financial services incurred) from the second closing and issued an additional
558,384 shares of our common stock and warrants to purchase 111,677 shares of
our common stock at a conversion price of $7.50 per share.
On May 7, 2002, we authorized the issuance and sale of up to 5,920,000
shares of Series A Convertible Preferred Stock. The Series A Convertible
Preferred Stock may be converted into shares of common stock at an initial
conversion price of $1.50 per share of common stock, subject to adjustment for
stock splits, stock dividends, mergers, issuances of cheap stock and other
similar transactions. Holders of Series A Convertible Preferred Stock also
received, in respect of each share of Series A Convertible Preferred Stock
purchased in a private placement which took place in May 2002, one warrant to
purchase one share of our common stock at an initial exercise price of $2.00
subject to adjustment. We sold an aggregate of 5,916,666 shares of Series A
Convertible Preferred Stock in the May 2002 private placement for $3.00 per
share and warrants to purchase an aggregate of 5,916,666 shares of common stock,
resulting in aggregate gross proceeds of approximately $17,750,000. A portion of
the proceeds were used to repay in full the Jano Holdings and SCO Capital
obligations upon which such facilities were terminated as well as to repay fees
amounting to $1,610,000 related to the transaction.
The Company received a nonrefundable upfront payment of $1.35 million when
it entered into the co-development agreement with Genzyme and received an
additional $3.5 million in December 2003 when it converted Genzyme's option to
market clofarabine in the U.S. into a sublicense. Upon Genzyme's filing the New
Drug Application for clofarabine with FDA, the Company received an additional
(i) $2 million in April 2004 and (ii) $2 million in September 2004. The Company
deferred the upfront payment and recognized revenues ratably, on a straight-line
basis over the related service period, through December 2002. The Company has
deferred the milestone payments received to date and recognizes revenues
ratably, on a straight line basis over the related royalty period, through March
2021. For the years ended June 30, 2005 and 2004, the Company recognized
revenues of approximately $438,000 and $161,000 respectively, in connection with
the milestone payments received to date.
Deferred costs include royalty payments that became due and payable to SRI
upon the Company's execution of the co-development agreement with Genzyme. The
Company defers payments made to SRI and recognizes these costs ratably, on a
straight-line basis concurrent with revenue that is recognized in connection
with research and development costs including approximately $219,000 and $81,000
for the years ended June 30, 2005 and 2004, respectively, related to such
charges.
The Company received a nonrefundable upfront payment of $1.25 million when
it entered into the License and Sublicense Agreement with Dechra in May 2003.
The Company deferred the upfront payment and recognizes revenues ratably, on a
straight-line basis over the related royalty period, currently through September
2022. The Company recognized revenues of approximately $87,000 and $114,000 in
connection with the upfront payment from Dechra for the years ended June 30,
2005 and 2004, respectively.
Deferred costs include royalty payments that became due and payable to
Stegram Pharmaceuticals Ltd. upon the Company's execution of the License and
Sub-License Agreement with Dechra in May 2003. The Company defers payments made
to Stegram and recognizes these costs ratably, on a straight-line basis
concurrent with revenue that is recognized in connection with the Dechra
agreement. Research and development costs related to this agreement include
approximately $17,400 and $23,000 for the years ended June 30, 2005 and 2004,
respectively.
33
Restatement
On May 23, 2005, management and the audit committee of the Company
concluded that financial statements included in its annual report on Form 10-KSB
for the fiscal year ended June 30, 2004, should not be relied upon because of a
requirement to correct the Company's tax accounting related to the acquisition
of Pathagon, Inc. in February 2002 which was identified during the review
process of the financial statements to be included in the Company's quarterly
report on Form 10-QSB for the quarter ended March 31, 2005. Accordingly, the
Company restated its financial statements included in its annual report on Form
10-KSB for the year ended June 30, 2004 (the "10-KSB/A"). The Company's 10-KSB/A
was filed on June 29, 2005.
On May 24, 2005, the Company received a notice from the Nasdaq staff
indicating that the Company was not in compliance with Nasdaq's requirements for
the continued listing due to its failure to timely file its Form 10-QSB for the
period ended March 31, 2005, as required under Marketplace Rule 4310(c)(14) and
that therefore its common stock was subject to delisting from The Nasdaq Stock
Market. The notice does not by itself result in immediate delisting of the
common stock, although Nasdaq stated that unless the Company timely requested a
hearing, the Company's securities would be delisted from The Nasdaq Stock Market
at the opening of business on June 2, 2005. The Company made a timely request
for a hearing with the Nasdaq Listing Qualifications Panel to review the Nasdaq
staff's determination which stayed the delisting pending the hearing and a
determination by the Nasdaq Listing Qualifications Panel. On June 29, 2005, the
Nasdaq Listings Qualifications Panel approved Bioenvision's request for
continued listing on the Nasdaq National Market and the fifth character "E" was
removed from Bioenvision's trading symbol on the opening of trading on Friday,
July 1, 2005.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board, or FASB, issued
SFAS, No. 123 (R), a revision of SFAS 123. SFAS 123 (R) supersedes APB 25 and
amends SFAS No. 95 "Statement of Cash Flows". SFAS 123(R) is similar to the
approach described in SFAS 123 except that SFAS 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the consolidated statements of income, in lieu of pro-forma
disclosure as provided above. SFAS 123 (R) is effective for fiscal years
beginning after June 15, 2005. The Company has adopted the provisions of SFAS
123 (R) as of July 1, 2005, the first day of fiscal 2006, and applied the
modified-prospective method using the Black-Scholes model for estimating the
fair value of equity compensation.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107
"Share-Based Payment" ("SAB No.107"), which provides interpretive guidance
related to the interaction between SFAS 123R (reivsed 2004) and certain SEC
rules and regulations, as well as provides the SEC staff's views regarding the
valuation of share-based payment arrangements. The Company is currently
assessing the effect of SAB No. 107 on its implementation and adoption of SFAS
123R.
In December 2004, the FASB issued SFAS 153 "Exchange of Nonmonetary
Assets". This statement was a result of a joint effort by the FASB and the
International Accounting Standards Board, or IASB, to improve financial
reporting by eliminating certain narrow differences between their existing
accounting standards. One such difference was the exception from fair value
measurement in APB Opinion No. 29, "Accounting for Non-Monetary Transactions",
for non-monetary exchanges of similar productive assets. SFAS 153 replaces this
exception with a general exception from fair value measurement for exchanges of
non-monetary assets that do not have commercial substance. A non-monetary
exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. This statement is
effective for non-monetary assets exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of SFAS 153 did not have a material
impact on the results of operations or financial position of the company.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". SFAS 151
amends Accounting Research Bulletin, or ARB, No. 43, Chapter 4. This statement
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). SFAS 151 is the result of a
broader effort by the FASB and the IASB to improve financial reporting by
eliminating certain narrow differences between their existing accounting
standards. This statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The adoption of SFAS 151 did not
have a material impact on the results of operations or financial position of the
company.
34
Item 7. Financial Statements
The consolidated financial statements of Bioenvision, Inc. and its
subsidiaries including the notes thereto and the report thereon, is presented
beginning at page F-1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
As more fully disclosed in Bioenvision's current report on Form 8-K filed
on April 7, 2005, on April 4, 2005, Bioenvision, Inc. notified Grant Thornton
LLP ("GT") of GT's dismissal in connection with its decision to engage new
auditors as its independent registered public accounting firm. On that date,
Bioenvision appointed Deloitte & Touche LLP ("Deloitte") as its new independent
registered public accounting firm for the fiscal year ending June 30, 2005. The
decision to engage Deloitte was made by the Audit Committee of Bioenvision's
Board of Directors on April 4, 2005. The appointment was effective as of such
date.
Item 8a. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended) as of the end of the period covered
by this annual report on Form 10-KSB. Based on this evaluation, except as set
forth in this Item 8a, our principal executive officer and principal financial
officer concluded that these disclosure controls and procedures are effective
and designed to ensure that the information required to be disclosed in our
reports filed or submitted under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the requisite
time periods.
Changes in Internal Controls
In May 2005, the Company appointed a Director of Financial Reporting who is
involved with assisting the Controller with the administration of all accounting
functions including Sarbanes-Oxley compliance, preparation of all monthly,
quarterly and annual financial statements and further enhancements of the
Company's internal controls. Our Director of Financial Reporting most recently
served as a Supervising Senior Associate in the audit department of KPMG (New
York office), an internationally recognized public accounting firm. In addition,
in May 2005 the Company also added an Assistant Accountant to its UK office to
assist with certain basic accounting and bookkeeping responsibilities. Our
Assistant Accountant most recently served as an Intercompany Accountant with
Quintiles, an international pharmaceutical company.
In April 2005, the Company implemented a new accounting system to support
its general ledger, accounts payable, inventory, and revenue processes. The
implementation of the system has enhanced our internal controls by automating
certain approval processes and strengthening our segregation of duties through
limiting the performance of certain accounting functions performed by each
employee in the accounting department.
Unless otherwise disclosed, we made no other change in our internal control
over financial reporting during the quarter that materially affected or is
reasonably likely to materially affect our internal control over financial
reporting.
Description of Material Weaknesses in Internal Controls Over Financial Reporting
(a) Restatement of the Company's 10-KSB for the fiscal year ended June 30, 2004.
In connection with the preparation and filing of our quarterly report on
Form 10-QSB for the three-month period ended March 31, 2005, our internal
corporate staff identified errors with respect to our tax accounting treatment
associated with the acquisition of Pathagon, Inc. which was consummated in
February 2002. Our initial accounting concluded that the realization of our
deferred tax assets related to the net operating losses and other deductible
temporary differences existing at the acquisition date, and generated after the
acquisition date, did not meet the "more likely than not" criteria and, as a
result, a valuation allowance was established on the deferred tax assets of the
Company. The Company subsequently determined that the deferred tax liability
recorded in connection with the Pathagon acquisition creates taxable income as
the taxable temporary differences reverse and, therefore, a portion of the
valuation allowance previously established on our deferred tax assets was not
required.
35
Management reported its findings to the Audit Committee of the Board of
Directors. After initial discussions with the Audit Committee, management
reviewed these matters in further detail, and after completing its analysis on
May 15, 2005, recommended to the Audit Committee that previously reported
financial results be restated to reflect correction of these errors. The Audit
Committee agreed with this recommendation. Pursuant to the recommendation of the
Audit Committee, the Board of Directors determined at its meeting on May 15,
2005, that previously reported results be restated to correct the income tax
treatment associated with the Pathagon acquisition.
In connection with the restatement, under the direction of our Chief
Executive Officer and Chief Financial Officer, we reevaluated our disclosure
controls and procedures. We identified the following material weakness in our
internal control over financial reporting with respect to accounting for income
taxes associated with a purchase business combination:
o a failure to ensure the correct application of SFAS 109 "Accounting for
Income Taxes" with respect to purchase business combinations and failure to
correct that error subsequently resulting from the lack of personnel
knowledgeable in the accounting for income taxes.
Solely as a result of this material weakness, we concluded that our
disclosure controls and procedures were not effective as of March 31, 2005.
As of June 30, 2005, we had taken the following measures to remediate the
material weakness in our internal control over financial reporting with respect
to accounting for income taxes that existed as of March 31, 2005. The remedial
actions included:
o improving training, education and accounting reviews designed to ensure
that all relevant personnel involved in income tax transactions understand
and apply accounting in compliance with SFAS 109;
o hiring additional internal resources, including a Director of Financial
Reporting, to perform internal control activities previously completed by
outside consultants; and
o engaging an outside tax consultant to supplement our internal tax staff and
enhance our internal controls over income tax accounting.
(b) In connection with this annual report on Form 10-KSB, under the direction of
our principal executive officer and principal financial officer, we have
evaluated our disclosure controls and procedures as currently in effect and we
have concluded that as of June 30, 2005, the following material weakness in
internal control over financial reporting existed:
o we did not maintain effective controls relating to the timely
identification, evaluation and accurate resolution of non-routine or
complex accounting matters, specifically, (i) we did not timely identify
and evaluate a change of circumstances that resulted in an impairment of
our intangible assets relating to certain patents, (ii) we did not timely
identify and accurately resolve an accounting issue related to contractual
revenue recognition and (iii) we did not timely evaluate our accounts
receivable for the need of a valuation allowance, each of which resulted in
a material adjustment to our consolidated financial statements for the
fiscal year ended June 30, 2005.
Management has discussed this material weakness with our audit committee.
In an effort to remediate the identified material weakness we continue to
implement a number of changes to our internal controls over financial reporting,
including, improved training and education for all relevant internal personnel
and the hiring of additional internal resources.
Notwithstanding the above mentioned weaknesses, we believe that the
consolidated financial statements included in this report fairly present our
consolidated financial position as of, and the consolidated results of
operations for the year ended, June 30, 2005.
36
Item 8b. Other information.
Prior to the fourth quarter of 2005, we tested for impairment our Virostat
intangibles acquired in connection with the Pathagon acquisition and determined
that, based on our assumptions, the sum of the expected future cash flows,
undiscounted and pertaining solely and exclusively to approved indications,
exceeded the carrying value of its long-lived assets and therefore we did not
recognize an impairment. Due to the loss of an intellectual property patent suit
relating to the international use of virostat in fresh frozen plasma, we
re-evaluated the intangible asset relating to Virostat at June 30, 2005. At that
date, we estimated that our undiscounted future cash flows, again relating
solely and exclusively to approved uses of Virostat, were less than the carrying
value. As a result, we recognized a non-cash impairment loss of $5,276,000,
equal to the difference between the estimated future cash flows for approved
uses of Virostat, discounted at an appropriate rate, and the carrying amount of
the asset. Making the impairment determination and the amount of impairment
requires significant judgment by management and assumptions with respect to the
future cash flows. Changes in events or circumstances that may affect long-lived
assets makes judgments and assumptions with respect to the future cash flows
highly subjective.
37
PART III
The information required for Part III in this Annual Report on Form
10-KSB is incorporated by reference from the Company's definitive proxy
statement for the Company's 2005 Annual Meeting of Stockholders.
Items 13. Exhibits
Exhibit
Number Description
------- -----------
2.1 Acquisition Agreement between Registrant and Bioenvision,
Inc. dated December 21, 1998 for the acquisition of
7,013,897 shares of Registrant's Common Stock by the
stockholders of Bioenvision, Inc. (1)
2.2 Amended and Restated Agreement and Plan of Merger, dated as
of February 1, 2002, by and among Bioenvision, Inc.,
Bioenvision Acquisition Corp. and Pathagon, Inc. (5)
3.1 Certificate of Incorporation of Registrant. (2)
3.1(a) Amendment to Certificate of Incorporation filed January 29,
1999. (3)
3.1(b) Certificate of Correction to the Certificate of
Incorporation, filed March 15, 2002 (6)
3.1(c) Certificate of Amendment to the Certificate of
Incorporation, filed April 30, 2002 (6)
3.1(d) Certificate of Designations, Preferences and Rights of
series A Preferred Stock (6)
3.1(e) Certificate of Amendment to the Certificate of
Incorporation, filed January 14, 2004 (15)
3.2 Amended and Restated By-Laws of the Registrant. (13)
4.1 Registration Rights Agreement, dated as of February 1, 2002,
by and among Bioenvision, Inc., the former shareholders of
Pathagon, Inc. party thereto, Christopher Wood,
Bioaccelerate Limited, Jano Holdings Limited and Lifescience
Ventures Limited. (8)
4.2 Stockholders Lock-Up Agreement, dated as of February 1,
2002, by and among Bioenvision, Inc., the former
shareholders of Pathagon, Inc. party thereto, Christopher
Wood, Bioaccelerate Limited, Jano Holdings Limited and
Lifescience Ventures Limited. (8)
4.3 Form of Securities Purchase Agreement by and among
Bioenvision, Inc. and certain purchasers, dated as of May 7,
2002. (6)
4.4 Form of Registration Rights Agreement by and among
Bioenvision, Inc. and certain purchasers, dated as of May 7,
2002. (6)
4.5 Form of Warrant (6)
4.6 Registration Rights Agreement, dated April 2, 2003, by and
between Bioenvision, Inc. and RRD International, LLC (14)
38
4.7 Warrant, dated April 2, 2003, made by Bioenvision, Inc. in
favor of RRD International, LLC (14)
4.8 Common Stock and Warrant Purchase Agreement, dated as of
March 22, 2004, by and among Bioenvision, Inc. and the
Investors set forth on Schedule I thereto (16)
4.9 Registration Rights Agreement, dated March 22, 2004, by and
between Bioenvision, Inc. and the Investors set forth on
Schedule I thereto (16)
4.10 Form of Warrant (16)
4.11 Bioenvision, Inc. 2003 Stock Incentive Plan (17)
10.1 Pharmaceutical Development Agreement, dated as of June 10,
2003, by and between Bioenvision, Inc. and Ferro Pfanstiehl
Laboratories, Inc.
10.2 Co-Development Agreement between Bioheal, Ltd. and
Christopher Wood dated May 19, 1998. (3)
10.3 Master Services Agreement, dated May 14, 2003, by and
between PennDevelopment Pharmaceutical Services Limited and
Bioenvision, Inc.
10.4 Co-Development Agreement between Stegram Pharmaceuticals,
Ltd. and Bioenvision, Inc. dated July 15, 1998. (3)
10.5 Co-Development Agreement between Southern Research Institute
and Eurobiotech Group, Inc. dated August 31, 1998. (3)
10.5(a) Agreement to Grant License from Southern Research Institute
to Eurobiotech Group, Inc. dated September 1, 1998. (3)
10.6 License and Sub-License Agreement, dated as of May 13, 2003,
by and between Bioenvision, Inc. and Dechra Pharmaceuticals,
plc
10.7 Employment Agreement between Bioenvision, Inc. and
Christopher B. Wood, M.D., dated December 31, 2002 (3)
10.8 Employment Agreement between Bioenvision, Inc. and David P.
Luci, dated March 31, 2003 (14)
10.9 Securities Purchase Agreement with Bioaccelerate Inc dated
March 24, 2000. (4)
10.10 Engagement Letter Agreement, dated as of November 16, 2001,
by and between Bioenvision, Inc. and SCO Securities LLC. (7)
10.11 Security Agreement, dated as of November 16, 2001, by
Bioenvision, Inc. in favor of SCO Capital Partners LLC. (7)
10.12 Commitment Letter, dated November 16, 2001, by and between
SCO Capital Partners LLC and Bioenvision, Inc. (7)
10.13 Senior Secured Grid Note, dated November 16, 2001, by
Bioenvision, Inc. in favor of SCO Capital Partners LLC. (7)
10.14 Exclusive License Agreement by and between Baxter Healthcare
Corporation, acting through its Edwards Critical-Care
division, and Implemed, dated as of May 6, 1997. (12)
10.15 License Agreement by and between Oklahoma Medical Research
39
Foundation and bridge Therapeutic Products, Inc., dated as
of January 1, 1998. (12)
10.16 Amendment No. 1 to License Agreement by and among Oklahoma
Medical Research Foundation, Bioenvision, Inc. and Pathagon,
Inc., dated May 7, 2002. (12)
10.17 Inter-Institutional Agreement between Sloan-Kettering
Institute for Cancer Research and Southern Research
Institute, dated as of August 31, 1998. (12)
10.18 License Agreement between University College London and
Bioenvision, Inc., dated March 1, 1999. (12)
10.19 Research Agreement between Stegram Pharmaceuticals Ltd.,
Queen Mary and Westfield College and Bioenvision, Inc.,
dated June 8, 1999 (12)
10.20 Research and License Agreement between Bioenvision, Inc.,
Velindre NHS Trust and University College Cardiff
Consultants, dated as of January 9, 2001. (12)
10.21 Co-Development Agreement, between Bioenvision, Inc. and ILEX
Oncology, Inc., dated March 9, 2001. (12)
10.22 Amended and Restated Agreement and Plan of Merger, dated as
of February 1, 2002, among Bioenvision, Inc., Bioenvision
Acquisition Corp. and Pathagon Inc. (5)
10.23 Master Services Agreement, dated as of April 2, 2003, by and
between Bioenvision, Inc. and RRD International, LLC(14)
10.24 Employment Agreement between Bioenvision Limited and Hugh
Griffith, made effective as of October 23, 2002 (18)
10.25 Employment Agreement between Bioenvision Limited and Ian
Abercrombie, made effective as of January 6, 2003 (18)
10.26 Amendment # 2 to the Co-Development Agreement between
Bioenvision and ILEX Oncology, Inc. dated December 30, 2003.
10.27 Amendment to the Co-Development Agreement between
Bioenvision, Inc. and SRI, dated as of March 12, 2001.
10.28 Letter Agreement For Co-Development Of An Oral Clofarabine
Formulation and First Amendment to Co-Development Agreement
dated March 12, 2001 between Bioenvision, Inc. and ILEX .
14.1 Bioenvision Inc.'s Code of Business Conduct and Ethics (19)
16.1 Letter from Graf Repetti & Co., LLP to the Securities and
Exchange Commission, dated September 30, 1999. (9)
16.2 Letter from Ernst & Young LLP to the Securities and Exchange
Commission, dated July 6, 2001. (10)
16.3 Letter from Ernst & Young LLP to the Securities and Exchange
Commission, dated August 16, 2001. (11)
16.4 Letter from Grant Thornton LLP to the Securities and
Exchange Commission , dated April 7, 2005 (20)
40
21.1 Subsidiaries of the registrant (4)
23.1 Consent of Independent Registered Public Accounting Firm
23.2 Consent of Prior Independent Registered Public Accounting
Firm
24.1 Power of Attorney (appears on signature page)
31.1 Certification of Christopher B. Wood, Chief Executive
Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of David P. Luci, Chief Accounting Officer, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Accounting Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
-----------------------
(1) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K filed with the SEC on January 12, 1999.
(2) Incorporated by reference and filed as an Exhibit to Registrant's
Registration Statement on Form 10-12g filed with the SEC on September 3,
1998.
(3) Incorporated by reference and filed as an Exhibit to Registrant's Form
10-KSB/A filed with the SEC on October 18, 1999.
(4) Incorporated by reference and filed as an Exhibit to Registrant's Form
10-KSB filed with the SEC on November 13, 2000.
(5) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K filed with the SEC on April 16, 2002.
(6) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K, filed with the SEC on May 28, 2002.
(7) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K, filed with the SEC on January 8, 2002.
(8) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K, filed with the SEC on February 21, 2002.
(9) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K, filed with the SEC on October 1, 1999.
(10) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K/A, filed with the SEC on July 26, 2001.
(11) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K, filed with the SEC on December 6, 2001.
(12) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K, filed with the SEC on June 24, 2002.
(13) Incorporated by reference and filed as an Exhibit to Registrant's
Quarterly Report on Form 10-QSB for the three-month period ended December
31, 2002.
41
(14) Incorporated by reference and filed as an Exhibit to Registrant's
Quarterly Report on Form 10-QSB for the three-month period ended March 31,
2003.
(15) Incorporated by reference and filed as an Exhibit to Registrant's
Quarterly Report on Form 10-QSB for the three-month period ended
December 31, 2004.
(16) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K, filed with the SEC on March 24, 2004.
(17) Registrant's definitive proxy statement on Schedule 14-A, filed in
connection with the annual meeting held on January 14, 2004.
(18) Incorporated by reference and filed as an Exhibit to Registrant's
Quarterly Report on Form 10-QSB for the three- month period ended
September 30, 2003.
(19) Incorporated by reference and filed as an Exhibit to Registrant's Annual
Report on Form 10-KSB for the year ended June 30, 2004.
(20) Incorporated by reference and filed as an Exhibit to Registrant's Current
Report on Form 8-K, filed with the SEC on April 7, 2005.
42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-1
Report of Prior Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of June 30, 2005 and 2004 F-3
Consolidated Statements of Operations for years ended June 30, 2005 and 2004 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for years ended June 30, F-5
2005 and 2004
Consolidated Statements of Cash Flows for years ended June 30, 2005 and 2004 F-6
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Bioenvision, Inc.:
We have audited the accompanying consolidated balance sheet of Bioenvision, Inc.
and subsidiaries (the "Company") as of June 30, 2005, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2005 consolidated financial statements present fairly, in
all material respects, the financial position of Bioenvision, Inc. and
subsidiaries as of June 30, 2005, and the results of its operations and its cash
flows for the year ended June 30, 2005, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
October 12, 2005
F-1
REPORT OF PRIOR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of Bioenvision, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Bioenvision, Inc.
and Subsidiaries as of June 30, 2004 and the related consolidated statement of
operations, stockholders' equity (deficit), and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bioenvision, Inc.
and Subsidiaries as of June 30, 2004, and the consolidated result of their
operations and cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
As more fully described in Note 10, the June 30, 2004 financial statements have
been restated.
/s/ Grant Thornton LLP
New York, New York
September 16, 2004 (except for paragraph 13 of Note 1 and Note 10, as to which
the date is May 27, 2005)
F-2
BIOENVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
2005 2004
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 31,407,533 $ 18,875,675
Restricted cash 290,000 290,000
Short-term securities 32,746,948 -
Accounts receivable (less allowances for bad debts of
$869,220 and $0, respectively) 1,785,779 2,627,773
Inventory 277,908 -
Other current assets 342,628 253,311
------------- -------------
Total current assets 66,850,796 22,046,759
Property and equipment, net 279,778 47,857
Intangible assets, net 8,252,936 14,563,660
Goodwill 1,540,162 1,540,162
Security Deposits 209,665 79,111
Deferred costs 3,656,798 3,893,295
------------- -------------
Total assets $ 80,790,135 $ 42,170,844
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,602,267 $ 1,495,866
Accrued expenses and other current liabilities 4,581,444 1,322,584
Accrued dividends payable 56,404 90,141
Deferred revenue 498,607 551,828
------- -------
Total current liabilities 6,738,722 3,460,419
Deferred revenue 7,437,598 7,909,598
------------- -------------
Total liabilities 14,176,320 11,370,017
------------ -----------
Stockholders' equity
Convertible Preferred stock - $0.001 par value; 20,000,000 shares authorized;
2,250,000 and 3,341,666 shares issued and outstanding at June 30, 2005
and June 30, 2004, respectively (liquidation preference
$6,750,000 and $10,024,998, respectively) 2,250 3,342
Common stock - $0.001 par value; 70,000,000 shares
authorized; 40,558,948 and 28,316,163 shares issued and
outstanding at
June 30, 2005 and June 30, 2004, respectively 40,559 28,316
Additional paid-in capital 128,946,717 68,517,702
Deferred compensation (145,646) (223,990)
Accumulated deficit (62,331,005) (37,664,141)
Accumulated other comprehensive income 100,940 139,598
------------- -------------
Stockholders' equity 66,613,815 30,800,827
------------ -----------
Total liabilities and stockholders' equity $ 80,790,135 $ 42,170,844
============ ===========
The accompanying notes are an integral part of these financial statements.
F-3
BIOENVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended
June 30,
------------------------------
2005 2004
------------ ------------
Revenue
License and royalty revenue $1,463,326 $ 1,014,717
Product sales 611,346 -
Research and development contract revenue 2,576,502 2,087,497
------------ ------------
Total revenue 4,651,174 3,102,214
Costs and expenses
Cost of products sold (including royalty expense of $524,755
for the year ended June 30, 2005) 921,262 -
Research and development 10,894,925 4,882,574
Provision for bad debts 869,220 -
Selling, general and administrative 10,181,711 9,082,420
(includes stock based compensation expense of $793,761
and $3,491,252 for the years ended June 30, 2005 and 2004,
respectively)
Depreciation and amortization 1,438,517 1,348,064
Loss on impairment
5,276,162 -
------------ ------------
Total costs and expenses 29,581,797 15,313,058
------------ ------------
Loss from operations (24,930,623) (12,210,844)
Interest income (expense)
Interest and finance charges (79,484) -
Interest income 747,322 99,763
------------ ------------
Net loss before income tax benefit (24,262,785) (12,111,081)
Income tax benefit - 1,459,814
-------------- --------------
Net loss (24,262,785) (10,651,267)
Cumulative preferred stock dividend (404,079) (856,776)
-------------- --------------
Net loss available to common stockholders $(24,666,864) $(11,508,043)
=========== ===========
Basic and diluted net loss per share of common stock $ (0.72) $ (.57)
============ ===========
Weighted-average shares used in
computing basic and diluted
net loss per share of common stock 34,042,391 20,257,482
========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
BIOENVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumu-
lated Total
Other Stock-
Convertible Additional Compre- holders'
Preferred Stock Common Stock Paid In Deferred Accumulated hensive Equity
------
Shares $ Shares $ Capital Compensation Deficit Income (Loss)
------ - ------ - ------- ------------ ------- -------------
Balance at July 1, 2003 5,916,966 $5,917 17,122,739 $17,123 $47,304,449 $ - $(26,156,098) $152,346 $21,323,737
Net loss for the period (10,651,267) (10,651,267)
Cumulative preferred stock
dividend for the period (856,776) (856,776)
Currency translation
adjustment (12,748) (12,748)
Deferred compensation (223,990) (223,990)
Shares issued in
connection with private
placement 2,602,898 2,603 16,265,495 16,268,098
Costs related to March
private placement financing (1,301,035) (1,301,035)
Preferred stock converted
to common stock (2,575,300) (2,575) 5,150,000 5,150 (2,575) -
Expense related to
repricing of options 2,381,066 2,381,066
Cashless exercise of
options to shares 2,122,682 2,122 (2,122) -
Warrants issued in
connection with services - 671,601 671,601
Shares issued to
consultants for services 14,510 15 305,972 305,987
Shares issued to employee 20,000 20 28,380 28,400
Options issued in
connection with services 93,987 93,987
Options issued to employees 262,601 262,601
Shares issued from warrant
conversions 1,283,334 1,283 2,509,883 2,511,166
--------- ------ ---------- ------- ----------- --------- ------------ -------- -----------
Balance at June 30, 2004 3,341,666 $3,342 28,316,163 $28,316 $68,517,702 $(223,990) $(37,664,141) $139,598 $30,800,827
Net loss for the period (24,262,785) (24,262,785)
Cumulative preferred stock
dividend for the period (404,079) (404,079)
Currency translation
adjustment (38,658) (38,658)
Deferred compensation 78,344 78,344
Options exercised to
common stock 685,833 686 707,638 708,324
Income related to
repricing of options (314,950) (314,950)
Warrants issued in
connection with services 524,928 524,928
Warrants exercised to
common stock 1,811,120 1,811 3,277,151 3,278,962
Shares issued in
connection with services 62,500 63 496,188 496,250
Preferred stock converted
to common stock (1,091,666) (1,092) 2,183,332 2,183 (1,092) -
Shares issued in
connection with public
offering, net of related
expenses 7,500,000 7,500 55,739,152 55,746,652
--------- ------ ---------- ------- ------------ --------- ------------ -------- -----------
Balance at June 30, 2005 2,250,000 $2,250 40,558,948 $40,559 $128,946,717 $(145,646) $(62,331,005) $100,940 $66,613,815
========= ====== ========== ======= ============ ========= ============ ======== ===========
The accompanying notes are an integral part of these financial statements.
F-5
BIOENVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
June 30,
-----------------------------------
2005 2004
------------ ------------
Cash flows from operating activities
Net loss $(24,262,785) $(10,651,267)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,438,517 1,348,064
Provision for bad debts 869,220 -
Deferred tax benefit - (1,459,814)
Stock based compensation 793,761 3,491,252
Changes in net deferred revenues and expenses (288,723) 3,577,474
Loss on impairment 5,276,162 -
Changes in assets and liabilities
Accounts payable 121,966 1,084,474
Inventory (286,089) -
Other current assets (94,797) (147,335)
Security deposits (132,072) -
Accounts receivable (56,596) (2,602,773)
Other long term assets - 126,870
Accrued expenses and other liabilities 3,203,998 591,862
------------ ------------
Net cash used in operating activities (13,417,438) (4,641,193)
------------
Cash flows from investing activities
Purchase of intangible assets (359,411) (112,580)
Capital expenditures (278,044) (18,337)
Purchase of short-term securities (32,746,948) -
------------ ------------
Net cash used in investing activities (33,384,403) (130,917)
------------ ------------
Cash flows from financing activities
Proceeds from issuance of common stock, net of
related expenses 55,746,652 14,967,064
Proceeds from exercise of options and warrants 3,987,286 2,539,565
Dividends paid (437,816) (1,775,782)
------------ ------------
Net cash provided by financing activities 59,296,122 15,730,847
Effect of exchange rate on cash 37,577 (12,748)
------------ ------------
Net increase in cash and cash equivalents 12,531,858 10,945,989
Cash and cash equivalents, beginning of period 18,875,675 7,929,686
------------ ------------
Cash and cash equivalents, end of period $ 31,407,533 $ 18,875,675
============ ============
The accompanying notes are an integral part of these financial statements.
F-6
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1 - Description of Business and Summary of Significant Accounting Policies
Description of business
Bioenvision, Inc., or Bioenvision or the Company, is a product-focused
biopharmaceutical company with two approved cancer therapeutics. On December 29,
2004, the Food and Drug Administration, or FDA, approved the Company's lead
cancer product, clofarabine, for the treatment of pediatric acute lymphoblastic
leukemia, or ALL, in patients who have received two or more prior regimens.
Clofarabine has received Orphan Drug designation in the United States, or U.S.,
and the European Union, or E.U. Genzyme Corporation, the Company's
co-development partner, currently holds marketing rights in the U.S. and Canada
for clofarabine for certain cancer indications and controls U.S. development of
clofarabine in these indications. Genzyme is selling clofarabine under the brand
name Clolar(R) in the U.S. In Europe, the Company has filed for approval of
clofarabine in pediatric ALL and pediatric acute myelogenous leukemia, or AML,
with the European Medicines Evaluation Agency, or EMeA.
The Company is currently selling its second product, Modrenal(R), in the United
Kingdom, or U.K. Modrenal(R) is approved in the U.K. for the treatment of
post-menopausal advanced breast cancer following relapse to initial hormone
therapy.
We anticipate that revenues derived from our two lead drugs, clofarabine and
Modrenal(R) will permit us to further develop the other products currently in
our product pipeline. In addition to clofarabine and Modrenal(R), we are
performing initial development work on Virostat for the treatment of Hepatitis C
and Velostan, initially for the treatment of bladder cancer.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. Inter-company accounts and
transactions have been eliminated. Certain reclassifications of balances
previously reported have been made to conform to current presentation.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles of the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates, and such differences may be material to the financial statements.
F-7
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1 - Description of Business and Summary of Significant Accounting Policies
- continued
Revenue Recognition
In accordance with SEC Staff Accounting Bulletin No. 104, or SAB 104, upfront
nonrefundable fees associated with research and development collaboration
agreements where the Company has continuing involvement in the agreement, are
recorded as deferred revenue and recognized over the estimated research and
development period using the straight-line method. If the estimated period is
subsequently modified, the period over which the up-front fee is recognized is
modified accordingly on a prospective basis using the straight-line method.
Continuation of certain contracts and grants are dependent upon the Company
and/or its co-development partners' achieving specific contractual milestones;
however, none of the payments received to date are refundable regardless of the
outcome of the project. Upfront nonrefundable fees associated with licensing
arrangements are recorded as deferred revenue and recognized over the licensing
arrangement using the straight line method, which approximates the life of the
patent.
Royalty revenue from product licensees is recorded as earned.
The Company currently sells its products to wholesale distributors and directly
to hospitals, clinics, and retail pharmacies. Revenue from product sales is
recognized when the risk of loss is passed to the customer, the sales price is
fixed and determinable, and collectibility is reasonably assured.
Research & development contract revenue represent payments due from our
co-development partner relating to the reimbursement of 50% for certain of our
ongoing research costs in the development of clofarabine outside the United
States.
Currently, the Company has billed but not recorded approximately $1,142,000 of
revenues relating to the reimbursement from our co-development partner for
certain of our ongoing research costs in the development of clofarabine outside
the United States. When the Company has determined that the criteria relating to
revenue recognition has been met, the Company will record the revenue.
Provision for bad debts for the years ended June 30, 2005 and 2004 were
approximately $869,000 and $0, respectively. The increase is due to the Company
recording a valuation allowance relating to certain of the outstanding
receivable balances from our co-development partner totaling $869,000 in the
current year.
The Company follows the guidance of Emerging Issues Task Force 99-19, or EITF,
"Reporting Revenue Gross as a Principal versus Net as an Agent" in the
presentation of revenues and direct costs of revenues. This guidance requires
the Company to assess whether it acts as a principal in the transaction or as an
agent acting on behalf of others. The Company records revenue transactions gross
in its statements of operations if it is deemed the principal in the
transaction, which includes being the primary obligor and having the risks and
rewards of ownership.
Research and development
Research and development costs are charged to expense as incurred. Research and
development costs include the cost of clofarabine sold prior to product approval
through our named patient program.
Stock based compensation
As permitted by SFAS No. 123, "Accounting for Stock Based Compensation," or SFAS
123, the Company accounts for stock based compensation arrangements with
employees in accordance with provisions of Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees," or APB 25. Compensation
expense for stock options issued to employees is based on the difference on the
date of grant, between the fair value of the Company's stock and the exercise
price of the option. For year ended June 30, 2005, the Company recognized stock
based employee compensation income of $315,000 as a result of the re-pricing of
380,000 options granted to an employee pursuant to the terms of his Employment
Agreement (see Note 6). The Company also recognized a compensation expense of
$88,000 for the year ended June 30, 2005 as a result of 505,000 options granted
to certain employees on January 20, 2004.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS 123 and Emerging Issues Task Force No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services," or
EITF 96-18. Under EITF No. 96-18, where the fair value of the equity instrument
is more reliably measurable than the fair value of services received, such
services will be valued based on the fair value of the equity instrument.
F-8
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1 - Description of Business and Summary of Significant Accounting Policies
- continued
The following table illustrates the effect on net loss and loss per share as if
the fair value based method had been applied to all outstanding and unvested
awards in each period.
Year Ended June 30,
---------------------
2005 2004
------- -------
Net loss available to common stockholders, as reported $(24,666,864) $(11,508,043)
Add: Stock based employee compensation (income) expense
as reported (227,417) 2,419,677
Deduct: Total stock based employee compensation
expense determined under fair value based method
for all awards (2,427,771) (861,297)
----------- ---------
Pro forma net loss $(27,322,052) $(9,949,663)
Loss per share
Basic and diluted - as reported $(0. 72) $(0.57)
Basic and diluted - pro forma $(0.80) $(0.49)
The fair value of options at the date of grant was established using the Black-Scholes model with the following assumptions:
2005 2004
---- ----
Expected average life (years) 3.87 3.50
Risk free interest rate 3.37% 2.35%
Expected volatility 80% 80%
Expected dividend yield 0% 0%
In December 2004, FASB issued SFAS No. 123 (R), "Share-Based Payment", a
revision of SFAS 123. SFAS 123 (R) supersedes APB 25 and amends SFAS No. 95
"Statement of Cash Flows". SFAS 123(R) is similar to the approach described in
SFAS 123 except that SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the consolidated
statements of income, in lieu of pro-forma disclosure as provided above. SFAS
123 (R) is effective for fiscal periods beginning after June 15, 2005. The
Company has adopted the provisions of SFAS 123 (R) as of July 1, 2005, the first
day of fiscal 2006, and applied the modified-prospective method using the
Black-Scholes model for estimating the fair value of equity compensation.
As permitted by SFAS 123, through June 30, 2005 the Company accounted for
share-based payments to employees using the intrinsic value method set forth in
APB 25 and, as such, generally recognized no compensation cost for employee
stock options. Accordingly, the adoption of the fair value method under SFAS
123(R) will have a significant impact on the Company's consolidated statements
of income. However, the Company's overall cash position will not be affected by
the adoption of SFAS 123(R). The actual impact of SFAS 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments
granted in the future and other factors.
However, had the Company adopted SFAS 123(R) in prior periods, the impact of
that standard and therefore, the disclosure of pro forma net income and earnings
per share above would remain the same. SFAS 123(R) also requires that tax
deductions in excess of recognized compensation cost be reported as a financing
cash flow, rather than as operating cash flow. This requirement will reduce net
operating cash flow
F-9
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1 - Description of Business and Summary of Significant Accounting Policies
- continued
and increase net financing cash flow in periods after the adoption of SFAS
123(R). Estimation of the increase in net financing cash flow and decrease in
net operating cash flow depends on the timing and exercise of stock options and
is difficult to predict. The amount of operating cash flow recognized in prior
periods for such excess tax deductions was $0 and $890,000 for years ended June
30, 2005 and 2004, respectively.
Income taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes". Under SFAS 109, deferred tax assets and liabilities are determined based
on the differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates that will be in effect
when the differences are expected to reverse. The Company records a valuation
allowance for certain temporary differences for which it is more likely than not
that it will not receive future tax benefits.
Net loss per share
Basic net loss per share is computed using the weighted average number of common
shares outstanding during the periods. Diluted net loss per share is computed
using the weighted average number of common shares and potentially dilutive
common shares outstanding during the periods. Options and warrants to purchase
11,472,414 and 13,674,242 shares of common stock have not been included in the
calculation of net loss per share for the years ended June 30, 2005 and 2004,
respectively, as their effect would have been anti-dilutive.
Comprehensive Loss
Total comprehensive loss for the years ended June 30, 2005 and 2004 was
$24,705,522 and $11,520,791, respectively.
Foreign currency translation
The reporting currency of the Company is the US dollar. The functional currency
of Bioenvision Limited, the Company's wholly-owned subsidiary, organized under
the laws of the United Kingdom with offices in Edinburgh, Scotland, is the Pound
Sterling. We translate assets and liabilities to their U.S. dollar equivalents
at rates in effect at the balance sheet date and record translation adjustments
in accumulated other comprehensive income (loss). We translate statement of
income accounts at average rates for the period. For the year ended June 30,
2005, foreign currency transaction gains and losses included in selling, general
and administrative expense were $33,000 and $6,000, respectively.
Cash and cash equivalents and Short-term securities
The Company considers all highly liquid financial instruments with a maturity of
three months or less when purchased to be cash equivalents. All funds invested
in a Certificate of Deposit with maturities greater than three months and less
than one year are classified as short-term securities determined by management
to be available-for-sale securities.
Deferred costs
Deferred costs represent payments to Southern research Institute, or SRI, and to
Stegram Pharmaceutical Ltd, which directly relate to milestone payments received
in connection with the Genzyme Co-Development Agreement and the Dechra
Sub-License Agreement, respectively. The amortization of these costs have been
presented in research and development on the statement of operations.
Credit Risk
Our accounts receivable are primarily due from wholesale distributors and our
co-development partners. One customer comprises approximately 62% of revenues
earned at June 30, 2005. Based on our evaluation of the collectibility of these
accounts receivable, we believe that this balance may not be collectible and
therefore have reserved 100% of the balance outstanding at June 30, 2005.
F-10
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1 - Description of Business and Summary of Significant Accounting Policies
- continued
Inventory
Inventories are stated at the lower of cost or market, cost being determined
under the first-in, first-out method. We only capitalize inventory that is
produced for commercial sale. The Company periodically reviews inventories and
items considered outdated or obsolete are reduced to their estimated net
realizable value. Inventories consisted of $171,000 of work-in-progress and
$107,000 of finished goods at June 30, 2005.
Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment are depreciated on a straight-line basis
over their estimated useful lives, which range from 3 to 7 years.
Estimated
Asset Description Useful Life 2005 2004
Property and equipment
Computer equipment and software 3 to 5 years 304,892 43,879
Furniture and fixtures 7 years 49,364 35,052
------- ------
354,256 78,931
------- ------
Less: accumulated depreciation (74,478) (31,074)
-------- --------
Net Property and equipment $ 279,778 $ 47,857
============== =============
The Company recorded depreciation expense for the years ended June 30, 2005 and
2004 of approximately $45,000 and $20,000 respectively.
Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments using
available market information and other valuation methodologies in accordance
with SFAS No. 107, "Disclosures About Fair Value of Financial Instruments."
Management of the Company believes that the fair value of financial instruments,
consisting of cash, cash equivalents, short term securities, accounts
receivable, accounts payable and accrued liabilities, approximates carrying
value due to the immediate or short-term maturity associated with these
instruments.
Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over the fair value of identifiable net
assets of Pathagon. Intangible assets include patents and licensing rights
acquired in connection with the acquisition of Pathagon. The Company accounts
for these assets in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets. Goodwill is not amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets.
For goodwill, each year and whenever impairment indicators are present, we will
calculate the implied fair value of each goodwill amount and record an
impairment loss for the excess of book value over the implied fair value, if
any.
F-11
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 1 - Description of Business and Summary of Significant Accounting Policies
- continued
Impairment of Long-Lived Assets
The Company adopted the provisions of SFAS No. 144 on July 1, 2003. In
accordance with SFAS No. 144, long-lived assets, such as property and equipment
and intangible assets subject to amortization are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of
the asset exceeds the fair value of the asset (see Note 3).
Note 2 - Acquisition of Pathagon
On February 1, 2002, the Company completed the acquisition of Pathagon. The
acquisition was accounted for as a purchase business combination in accordance
with SFAS 141. The Company issued 7,000,000 shares of common stock to complete
the acquisition, which was valued at $12,600,000 based on the 5-day average
trading price of the stock ($1.80) surrounding November 22, 2001, the day of the
Company's announcement of the agreed upon acquisition. The acquired patents and
licensing rights of OLIGON(R) and methylene blue (collectively referred to as
"Purchased Technologies"), were recorded at their fair market value which was
approximately $17,576,000. The patent and licensing rights acquired are being
amortized over 13 years, which is the estimated remaining contractual life of
these assets. Since the estimated fair value of the Purchased Technologies was
at least equal to the amount paid, the purchase price, net of assumed
liabilities, was allocated to Purchased Technologies. The transaction qualified
as a tax-free merger which resulted in a difference between the tax basis value
of the assets acquired and the fair market value of the patents and licensing
rights. As a result, a deferred tax liability was recorded for approximately
$7,909,000. The purchase price exceeded the fair market value of the net assets
acquired resulting in the recording of Goodwill of $2,341,000. The Company
recorded a charge to goodwill of $801,395 for fiscal year ended June 30, 2003 as
a result of a change in tax rates used to compute the deferred tax liability
arising as a result of this acquisition. Pathagon had no operations other than
holding the patents and licenses acquired. As Pathagon had no operations, its
pro-forma financials would not be meaningful and thus are not presented.
The Company now has the worldwide rights to the use of thiazine dyes, including
methylene blue, for in vitro and in vivo inactivation of pathogens in biological
fluids. Methylene blue is one of only two compounds used commercially to
inactivate pathogens in blood products, and is currently used in many European
countries to inactivate pathogens in fresh frozen plasma. The Company believes
that, as a result of the mechanism of action of its proprietary technology, its
systems also have the potential to inactivate many new pathogens before they are
identified and before tests have been developed to detect their presence in the
blood supply. Because the Company's systems are being designed to inactivate
rather than merely test for pathogens, the Company's systems also have the
potential to reduce the risk of transmission of pathogens that would remain
undetected by testing.
The OLIGON(R) technology is a patented anti-microbial technology that can be
incorporated into the manufacturing process of many implantable devices. The
patented process, involving two dissimilar metals (silver and platinum) creates
an electrochemical reaction that releases silver ions that destroy bacteria,
fungi and other pathogens. The Company intends to commercialize the technology
in partnership with leading medical devices manufacturers.
On May 6, 1997, Baxter Healthcare Corporation acting through its Edwards
Clinical-Care Division ("Edwards") entered into an Exclusive License Agreement
with Implemed, Inc. ("Implemed"), a predecessor in interest to Pathagon and, by
virtue of the acquisition of Pathagon, a predecessor in interest to the Company.
Pursuant to the terms of the License Agreement, among other things, Edwards
licensed certain intellectual property technology relating to the manufacture of
anti-microbial polymers from Implemed.
On May 7, 2002, the Company executed an amendment to the original license
agreement between Oklahoma Medical Research Foundation ("OMRF") and Bridge
Therapeutic Products, Inc. ("BTP"), a predecessor of Pathagon, relating to the
licensing of methylene blue. Under the terms of the amendment, OMRF agreed to
the assignment of the original license agreement by BTP to Pathagon. Pursuant to
the amendment, the Company paid OMRF $100,000 and issued 200,000 shares of the
Company's common stock and a five-year warrant to purchase an additional 200,000
shares of common stock. The exercise price of the warrant is $2.33 per share,
subject to adjustment. The Company capitalized the costs of approximately
$1,145,600 related to this amendment as an intangible asset and will amortize
this asset over the remaining life of the methylene blue license agreement.
F-12
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 3 - Intangible Assets
As of June 30
-------------
Intangible assets consist of the following: 2005 2004
---- ----
Patents and licensing rights $9,514,026 $17,757,101
Less: accumulated amortization (1,261,090) (3,193,441)
----------- ------------
$8,252,936 $14,563,660
=========== ============
Amortization of patents and licensing rights amounted to $1,394,000 and
$1,328,000 for the years ended June 30, 2005 and June 30, 2004, respectively.
Other intangible assets are recorded at cost and amortized over periods
generally ranging from 10-20 years. Amortization for each of the next five
fiscal years will amount to approximately $900,000 annually.
At June 30, 2005, we recognized an impairment of approximately $5,276,000
relating to the methylene blue intangible acquired in connection with the
Pathagon acquisition. Due to the loss of an intellectual property patent suit
which occurred during the Company's fourth quarter, relating to the
international use of virostat in fresh frozen plasma, we re-evaluated the
intangible asset relating to Virostat at June 30, 2005. At that date, we
estimated that our undiscounted future cash flows, relating solely and
exclusively to approved uses of Virostat, were less than the carrying value of
our long-lived asset. As a result, we recognized a non-cash impairment loss of
$5,276,000, equal to the difference between the estimated future cash flows for
approved uses of Virostat, discounted at an appropriate rate, and the carrying
amount of the asset. Making the determinations of impairment and the amount of
impairment requires significant judgment by management and assumptions with
respect to the future cash flows of the assets. Changes in events or
circumstances that may affect long-lived assets makes judgments and assumptions
with respect to the future cash flows highly subjective.
Note 4 - License and Co-Development Agreements
Clofarabine
The Company has a license from SRI to develop and market purine nucleoside
analogs which, based on third-party studies conducted to date, may be effective
in the treatment of leukemia, lymphoma and certain solid tumor cancers. The lead
compound of these purine-based nucleosides is known as clofarabine. Under the
terms of the agreement with SRI, the Company was granted the exclusive worldwide
license, excluding Japan and Southeast Asia, to make, use and sell products
derived from the technology for a term expiring on the date of expiration of the
last patent covered by the license (subject to earlier termination under certain
circumstances), and to utilize technical information related to the technology
to obtain patent and other proprietary rights to products developed by the
Company and by SRI from the technology. Initially, the Company is developing
clofarabine for the treatment of leukemia and lymphoma and studying its
potential role in treatment of solid tumors.
In August 2003, SRI granted the Company an irrevocable, exclusive option to
make, use and sell products derived from the technology in Japan and Southeast
Asia. The Company intends to convert the option to a license upon sourcing an
appropriate co-marketing partner to develop these rights in such territory.
To facilitate the development of clofarabine, in March 2001, the Company entered
into a co-development agreement with ILEX Oncology, Inc., our sub-licensor until
it was acquired by Genzyme Corporation on December 21, 2004, for the development
of clofarabine in cancer indications. Under the terms of the co-development
agreement, Genzyme is required to pay all development costs in the United States
and Canada, and 50% of approved development costs worldwide outside the U.S. and
Canada (excluding Japan and Southeast Asia), in each case, for the development
of clofarabine in cancer indications. Genzyme is responsible for conducting all
clinical trials and the filing and prosecution of applications with applicable
regulatory authorities in the United States and Canada for certain cancer
indications. The Company retains the right to handle those matters in all
territories outside the United States and Canada (excluding Japan and Southeast
Asia) and retains the right to handle these matters in the U.S. and Canada in
all non-cancer indications. The Company retained the exclusive manufacturing and
distribution rights in Europe and elsewhere worldwide, except for the United
States, Canada, Japan and Southeast Asia. Under the co-development agreement,
Genzyme will have certain rights if it performs its development obligations in
accordance with that agreement. The Company would be required to pay Genzyme a
royalty on sales outside the U.S., Canada, Japan and Southeast Asia. In turn,
Genzyme, which would have U.S. and Canadian distribution rights in cancer
F-13
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 4 - License and Co-Development Agreements - continued
indications, would pay the Company a royalty on sales in the U.S. and Canada.
Under the terms of the co-development agreement, Genzyme also pays royalties to
SRI based on certain milestones. The Company also is obligated to pay certain
royalties to SRI with respect to clofarabine.
The Company received a nonrefundable upfront payment of $1.35 million when it
entered into the co-development agreement with Genzyme and received an
additional $3.5 million in December 2003 when it converted Genzyme's option to
market clofarabine in the U.S. into a sublicense. Upon Genzyme's filing the New
Drug Application for clofarabine with the FDA, the Company received an
additional (i) $2 million in April 2004 and (ii) $2 million in September 2004.
The Company deferred the upfront payment and recognized revenues ratably, on a
straight-line basis over the related initial service period, through December
2002. The Company has deferred the milestone payments received to date and
recognizes revenues ratably, on a straight line basis over the related service
period, through March 2021. For the years ended June 30, 2005 and 2004, the
Company recognized revenues of approximately $438,000, and $161,000,
respectively, in connection with the milestone payments received to date.
Deferred costs include royalty payments that became due and payable to SRI upon
the Company's execution of the co-development agreement with Genzyme. The
Company defers all royalty payments made to SRI and recognizes these costs
ratably, on a straight-line basis concurrent with revenue that is recognized in
connection with research and development costs including approximately $219,000
and $81,000 for the years ended June 30, 2005 and 2004, respectively related to
such charges.
Modrenal(R)
The Company holds an exclusive license, until the expiration of existing and new
patents related to Modrenal(R), to market Modrenal(R) in major international
territories, and an agreement with a United Kingdom company to co-develop
Modrenal(R) for other therapeutic indications. Management believes that
Modrenal(R) currently is manufactured by third-party contractors in accordance
with good manufacturing practices. The Company has no plans to establish its own
manufacturing facility for Modrenal(R), but will continue to use third-party
contractors.
The Company received a nonrefundable upfront payment of $1.25 million when it
entered into the License and Sublicense Agreement with Dechra Pharmaceuticals in
May 2003. The Company deferred the upfront payment and recognizes revenues
ratably, on a straight-line basis over the related service period, currently
through September 2022. The Company recognized revenues of approximately $87,000
and $114,000 in connection with the upfront payment from Dechra for the years
ended June 30, 2005 and 2004, respectively.
Deferred costs include royalty payments that became due and payable to Stegram
Pharmaceuticals Ltd. upon the Company's execution of the License and Sub-License
Agreement with Dechra in May 2003. The Company defers all royalty payments made
to Stegram and recognizes these costs ratably, on a straight-line basis
concurrent with revenue that is recognized in connection with the Dechra
agreement. Research and development costs related to this agreement include
approximately $17,400 and $23,000 for the years ended June 30, 2005 and 2004,
respectively.
F-14
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 5 - Income Taxes
The components of the income tax benefit are as follows:
June 30,
-------------------
2005 2004
---------- ----------
Current:
Federal $ -- $ --
---------- ----------
State -- --
Deferred:
Federal -- (1,099,000)
State -- (361,000)
---------- ----------
-- (1,460,000)
---------- ----------
Total benefit $ -- $(1,460,000)
========== ============
The domestic and foreign components of loss before income taxes are as follows:
June 30,
-------------------
2005 2004
---------- ----------
Domestic $(22,601,000) $(10,781,000)
Foreign (1,662,000) (1,330,000)
---------- ----------
Loss before
taxes $(24,263,000) $(12,111,000)
============ ============
F-15
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 5 - Income taxes - continued
The following is a reconciliation of benefit for income taxes from continuing
operations computed at the federal statutory rates to the effective rates for
the years ended June 30, 2005 and 2004
June 30,
---------------------------
2005 2004
----------- -----------
Consolidated tax benefit at federal
statutory rate (34.0%) (34.0%)
Non-deductible expenses (0.3%) 6.8%
State income tax benefit, net of federal
provision (6.1%) (4.5%)
Valuation allowance 40.1% 19.3%
Foreign rate differential 0.3% 0.4%
Other, net 0.0% (0.1%)
----------- -----------
Effective tax rate 0.0% (12.1%)
=========== ===========
Significant components of the company's deferred tax assets and liability at
June 30, are as follows:
June 30,
---------------------------
2005 2004
----------- -----------
Deferred tax liability
Acquired intangibles $(2,923,000) $(5,781,000)
Deferred costs (1,481,000) (1,577,000)
Amortization (115,000) (43,000)
Depreciation (33,000) (30,000)
Other (3,000) (3,000)
------------ ------------
Total deferred tax liability (4,555,000) (7,434,000)
Deferred tax assets
Net operating loss 14,344,000 6,384,000
Options, warrants and shares
issued to non-employees 534,000 345,000
Options issued to employees 164,000 104,000
Deferred revenue 3,214,000 3,427,000
Provision for bad debts 352,000 -
Accrued expenses 126,000 68,000
------------ -----------
Total deferred tax assets 18,734,000 10,328,000
Valuation allowance for deferred
tax assets (14,179,000) (2,894,000)
------------ -----------
Net deferred tax asset 4,555,000 7,434,000
------------ -----------
Net deferred tax liability $ - $ -
============ ===========
F-16
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 5 - Income Taxes - continued
At June 30, 2005 and 2004, the Company had approximately $32,524,000 and
$14,087,000 of net operating loss carryforwards for U.S. Federal and state
income tax purposes, respectively that begin to expire in fiscal year ending
2020, with a tax value of $13,172,000 and $5,705,000, respectively. At June 30,
2005 and 2004, the Company also had approximately $3,906,000 and $2,263,000 of
net operating loss carryforwards relating to foreign operations, respectively,
with no expiration date, with a tax value of $1,172,000 and $679,000,
respectively.
At June 30, 2005 and 2004, the Company has recorded a valuation allowance of
$14,179,000 and $2,894,000 respectively, relating to the net deferred tax asset
due the uncertainty of both the foreign and domestic companies being more likely
than not to utilize these deferred tax assets. Of these amounts, a valuation
allowance of $650,000 was recorded at June 30, 2005 and 2004 for certain US
deferred tax assets which will be recognized after the period in which the
Pathagon deferred tax liability reverses. The remaining allowance relates to the
net operating loss of the foreign operations due to the uncertainty that the
Company will realize taxable income in the foreign jurisdiction to utilize the
net operating loss carryforward.
Included in the June 30, 2005 and 2004 net operating loss is $3,857,000 and
$415,000, respectively related to exercise of non-qualified stock options or
disqualifying dispositions of stock acquired with incentive stock options. A
valuation allowance has been established against this loss. When the valuation
allowance is removed, the tax affected benefit of $1,562,000 and $168,000,
respectively, related to this loss will be credited to equity.
The Tax Reform Act of 1986 enacted a complex set of rules (Internal Revenue Code
Section 382) limiting the utilization of net operating losses to offset future
taxable income following a corporate "ownership change." Generally, this occurs
when there is a greater than 50 percentage point change in ownership.
Accordingly, such change could limit the amount of net operating losses
available in a given year, which could ultimately cause net operating losses to
expire prior to utilization.
Note 6 - Stockholders' Transactions
Stock Options
The Board of Directors adopted, and the stockholders approved the 2003 Stock
Incentive Plan at the Annual Meeting held in January of 2004. The plan was
adopted to recognize the contributions made by the Company's employees,
officers, consultants, and directors, to provide those individuals with
additional incentive to devote themselves to our future success and to improve
the Company's ability to attract, retain and motivate individuals upon whom the
Company's growth and financial success depends. Under the plan, stock options
may be granted as approved by the Board of Directors or the Compensation
Committee. There are 4,500,000 shares reserved for grants of options under the
plan and at June 30, 2005, options to purchase 2,956,500 shares of common stock
had been issued. Stock options vest pursuant to individual stock option
agreements. No options granted under the plan are exercisable after the
expiration of ten years (or less in the discretion of the Board of Directors or
the Compensation Committee) from the date of the grant. The plan will continue
in effect until terminated or amended by the Board of Directors or until
expiration of the plan on November 17, 2013.
In June 2002, the Company granted options to an officer of the Company to
purchase 380,000 shares of common stock at an exercise price of $1.95 per share,
which equaled the stock price on the date of the grant. Of this amount, 50,000
options vested on June 28, 2002 and the remaining 330,000 options vest ratably
over a three-year period on each anniversary date. On March 31, 2003 the Company
entered into an Employment Agreement with such officer of the Company, pursuant
to which, among other things, the exercise price for all 380,000 options were
changed to $0.735 per share, which equaled the stock price on that date. In
addition, the Company issued an additional 120,000 options at an exercise price
of $0.735 per share which vested immediately. As a result of the re-pricing of
380,000 options, the Company will re-measure the intrinsic value of these
options at the end of each reporting period and will adjust compensation
F-17
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 6 - Stockholders' Transactions - continued
expense based on changes in the stock price. Stock based compensation income
(expense) recognized as a result of this re-pricing amounted to $315,000 and
$(2,381,000) for the years ended June 30, 2005 and 2004, respectively.
During the year ended June 30, 2005, certain option holders of the Company
exercised with cash their options to acquire 685,833 shares of the Company's
common stock. The Company received proceeds of approximately $708,000 during the
year ended June 30, 2005, from the exercise of these options.
During the year ended June 30, 2005, certain non-employee holders of options
exercised pursuant to the cashless exercise feature available to such option
holders and the Company issued approximately 212,709 shares of its common stock
in connection therewith.
On January 20, 2004, the Company granted 25,000 options to a member of the Board
of Directors, for serving as a member of the Board of Directors, at an exercise
price of $4.55 per share which vest ratably on the first and second
anniversaries of the grant date. The Company recognized $47,000 and $21,000 as
consulting expenses for the years ended June 30, 2005 and June 30, 2004,
respectively.
The Company recorded a compensation expense of $88,000 and $38,611 for the years
ended June 30, 2005 and June 30, 2004, respectively, as a result of 505,000
options granted to certain employees on January 20, 2004 at a strike price that
was lower than the exercise price.
On January 6, 2005, the Company granted 7,500 options to a board member for
serving as a member of the Board of Directors, at an exercise price of $8.17 per
share which 1,875 vest immediately on the grant date and the remaining 5,625
vest ratably on the first, second and third anniversaries of the grant date. The
Company recognized approximately $13,000 as consulting expense for the year
ended June 30, 2005.
F-18
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 6 - Stockholders' Transactions - continued
A summary of the Company's stock option activity for options issued to
employees and related information follows:
Number Weighted Average
of Shares Exercise Price
---------- ----------------
------------------------------------
Balance - June 30, 2003 3,570,000 $ 1.23
Granted during 2004 720,000 $ 5.02
Exercised during 2004 20,000 $ 1.42
------------------------------------
Balance - June 30, 2004 4,270,000 $ 1.87
Granted during 2005 784,000 $ 7.99
Exercised during 2005 885,500 $ 1.08
Forfeiture during 2005 12,500 $ 3.53
------------------------------------
Balance - June 30, 2005 4,156,000 $ 3.18
====================================
Stock Options Outstanding Options Exercisable
----------------------------------------------------------------------------------------------
Weighted
Weighted Average Number of Weighted
Average Remaining Stock Average
Exercise Number of Contractual Options Exercise
Exercise Price Range price Options Life Exercisable Price
----------------------------------------------------------------------------------------------
$0.74 - $1.45 $ 1.29 2,685,000 3.21 2,283,000 $ 1.18
$4.05 - $4.05 $ 4.05 497,000 8.56 166,000 $ 4.05
$5.44 - $6.50 $ 5.93 111,000 9.26 29,000 $ 6.05
$7.87 - $8.87 $ 8.21 863,000 9.41 243,000 $ 8.20
------------- -------------
$0.74 - $8.87 $ 3.18 4,156,000 5.30 2,721,000 $ 2.03
============= =============
The weighted-average grant date fair value of options granted for the periods
ended June 30, 2005 and 2004 was $4.75 and $3.13, respectively
Convertible Preferred Stock
On May 7, 2002 the Company authorized the issuance and sale of up to 5,920,000
shares of Series A Convertible Preferred Stock, par value $0.001 per share
("Series A Preferred Stock"). Series A Preferred Stock may be converted into two
shares of common stock at an initial conversion price of $1.50 per share of
common stock, subject to adjustment for stock splits, stock dividends, mergers,
issuances of cheap stock and other similar transactions. In May 2002, the
Company consummated a Private Placement of Series A Preferred Stock and received
gross proceeds of $17.7 million. Holders of Series A Preferred Stock also
received, in respect of each share of Series A Preferred Stock purchased in the
May 2002 Private Placement by the Company, one warrant to purchase one share of
the Company's common stock at an initial exercise price of $2.00, subject to
adjustment. The purchasers of Series A Preferred Stock also received certain
registration rights. The preferred stock generally carries rights to vote with
the holders of common stock as one class on a two-for-one basis. The preferred
stock is convertible into the Company's common stock, at the holder's option, on
a two-for-one basis subject to certain adjustments at the earlier to occur of
(i) at the election of each holder from and after the issuance date, or (ii) the
date at any time after the one year anniversary of the issuance date upon which
both (x) the average of the market price for a share of common stock for thirty
consecutive
F-19
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 6 - Stockholders' Transactions - continued
trading days exceeds $10.00 per share, subject to certain adjustments, and (y)
the average of the trading volume for the Company's common stock during such
period exceeds 150,000, subject to certain adjustments.
The Company is required to accrue for and pay a dividend of 5%, subject to
certain adjustments, on its cumulative Series A Convertible Preferred Stock. The
Company has paid the dividend in cash to holders of Series A Convertible
Preferred Stock through July 30, 2005.
In the event of a voluntary or involuntary liquidation or dissolution of the
Company, before any distribution of assets shall be made to the holders of the
Company's securities which are junior to the preferred stock (such as the common
stock), holders of the preferred stock shall be paid out of the assets of the
Company legally available for distribution to the Company's stockholders an
amount per share equal to the initial original issue price ($3.00) subject to
certain adjustments plus all accrued but unpaid dividends on such preferred
stock.
During the year ended June 30, 2005, certain holders of 1,091,666 shares of the
Company's preferred stock converted such shares into 2,183,332 shares of the
Company's common stock. In addition, during the year ended June 30, 2005,
certain warrant holders of the Company exercised their warrants to acquire
1,598,411 shares of the Company's common stock. The Company received proceeds of
approximately $3,278,963 during the year ended June 30, 2005 from the exercise
of these warrants.
Common Stock
On December 18, 2004, the Company issued 62,500 shares of its common stock to a
consultant to the Company for services rendered to the Company. The Company
recorded compensation expense of approximately $497,000 for the year ended June
30, 2005 in connection with such issuance.
On February 8, 2005, the Company completed a secondary public offering in which
it sold 7,500,000 common shares at $8.00 per share, with net proceeds to the
Company of approximately $55.7 million, after deducting underwriting discounts
and commissions and offering expenses.
Warrants
On June 22, 2004 the Company entered into a consulting agreement pursuant to
which consultant will provide certain investor relation services on behalf of
the Company. In connection therewith, the Company issued a warrant to said
consultant pursuant to which said consultant has the right to purchase 50,000
shares of Company's common stock at a price of $8.25 per share upon the
completion of certain milestones, as set forth in such agreement. The Company
recognized approximately $243,000 as a consulting expense for the year ended
June 30, 2005.
On August 4, 2004, the Company issued a warrant to a consultant pursuant to
which said consultant has the right to purchase 40,000 shares of the Company's
common stock at a price of $7.22 per share upon satisfaction of certain
milestones included in the warrant. The Company recognized approximately $75,000
as consulting expense for the year ended June 30, 2005, relating to said
warrants.
On August 9, 2004, the Company issued two warrants to a consultant pursuant to
which said consultant has the right to purchase 45,000 shares of the Company's
common stock at a price of $6.10 per share. The Company recognized approximately
$138,000 as consulting expense for year ended June 30, 2005 relating to said
warrants.
F-20
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 7- Geographic Information
We have one operating segment and define geographical regions as countries in
which we operate. Our corporate headquarters in the United States collects
licensing, royalties and research & development contract revenue from our
arrangements with external customers and our co-development partners. Our wholly
owned subsidiary, Bioenvision Limited, located in the United Kingdom manages our
product sales (including the named patient program). The following table
reconciles our revenues by geographic region to the consolidated total:
Year ended June 30,
2005 2004
Region
------
United States $ 3,373,547 $ 2,929,719
United Kingdom 1,277,627 172,495
--------------------------------
$ 4,651,174 $ 3,102,214
Note 8 - Related Party Transactions
In May 2002, we completed a private placement pursuant to which we issued an
aggregate of 5,916,666 shares of Series A convertible participating preferred
stock for $3.00 per share and warrants to purchase an aggregate of 5,916,666
shares of common stock and in March of 2004 we consummated a private placement
of our common stock pursuant to which we raised $12.8 million with a second
closing in May 2004 in which we raised an additional $3.5 million. An affiliate
of SCO Capital Partners LLC, one of our stockholders, served as financial
advisor to the Company in connection with these financings and earned a
placement fee of approximately $1.2 million in connection with May 2002 private
placement and a placement fee of $1.1 million and warrants to purchase 260,290
shares of common stock for $6.25 per share for the March and May 2004
financings.
Note 9 - Commitments and Contingencies
Leases
The Company leases 5,549 square feet of office space for its New York, New York
headquarters under a non-cancelable operating lease expiring on December 29,
2009 and approximately 2,437 square feet in Edinburgh, Scotland under a lease
agreement for its subsidiary Bioenvision Ltd. which expires February 28, 2006.
Rent expense for both facilities in the aggregate for the year ended June 30,
2005, was approximately $421,000. Further, the Company leases two vehicles under
leases which expire November 29, 2005 and February 28, 2007. Lease expense was
approximately $34,000 and $37,000 for the years ended June 30, 2005 and June 30,
2004, respectively. At June 30, 2005, total minimum rentals under operating
leases with initial or remaining non-cancelable lease terms of more than one
year were approximately:
Year ended June 30,
2006 $773,000
2007 546,000
2008 316,000
2009 316,000
2010 159,000
-----------
$ 2,110,000
-----------
F-21
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 9 - Commitments and Contingencies - continued
Litigation
On December 19, 2003, the Company filed a complaint against Dr. Deidre Tessman
and Tessman Technology Ltd. (the "Tessman Defendants") in the Supreme Court of
the State of New York, County of New York (Index No. 03-603984). An amended
complaint alleges, among other things, breach of contract and negligence by
Tessman and Tessman Technology and demands judgment against Tessman and Tessman
Technology in an amount to be determined by the Court. The Tessman Defendants
removed the case to federal court, then remanded it to state court and served an
answer with several purported counterclaims. The Company denies the allegations
in the counterclaims and intends to pursue its claims against the Tessman
Defendants vigorously. Each of the parties has moved for summary judgment
dismissing all but one of the claims of the other parties. Those motions have
not been decided by the Court.
Note 10 - Restatements
In May of 2005, the Company identified an error with respect to the accounting
for income taxes in connection with the Pathagon acquisition completed on
February 1, 2002. The Company had originally concluded that the realization of
the deferred tax asset related to the net operating losses and other deductible
temporary differences existing at the acquisition date, and generated after the
acquisition date, did not meet the "more likely than not" criteria and, as a
result, a valuation allowance was established on the deferred tax assets of the
Company. The Company's restated accounting treatment determined that the
deferred tax liability recorded in connection with the Pathagon acquisition
creates taxable income as the taxable temporary differences reverse.
Consequently, the ability to realize the deferred tax assets is "more likely
than not" and a valuation allowance is not required against the deferred tax
assets, to the extent the deferred tax liability offsets the deferred tax
assets. This restated accounting treatment resulted in the recognition of our
deferred tax assets to the extent of our deferred tax liabilities. The deferred
tax asset, in excess of the deferred tax liability, is not "more likely than
not" to be realized, and therefore, is fully valued.
The Company restated its previously reported financial statements and all
interim periods as of and for the years ended June 30, 2004 and 2003, to record
additional benefit relating to the recognition of deferred tax assets as
indicated in the first paragraph of this note. In years ended June 30, 2004,
June 30, 2003, and June 30, 2002, the Company previously recorded the reduction
to the deferred tax liability and a corresponding tax benefit of $537,000,
$537,000 and $253,000, respectively. In the restated financial statements for
years ended June 30, 2004 and June 30, 2003, the Company recorded deferred tax
assets, with a corresponding additional deferred tax benefit of $923,000 and
$1,580,000, respectively, offsetting the deferred tax liability resulting from
the Pathagon acquisition. Additionally, as of the acquisition date on February
1, 2002, a deferred tax asset was recorded for $2,363,000 with a corresponding
reduction to goodwill. This represented the deferred tax assets that existed at
the date of acquisition and for which the previously recorded valuation
allowance was eliminated.
As a result of the above, the Company previously restated its consolidated
financial statements as of June 30, 2004 in its Form 10-KSB/A. The following is
a summary of the effects of the income tax accounting corrections on the
Company's consolidated financial statements for the years ended June 30, 2004
and 2003.
F-22
BIOENVISION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
Note 10 - Restatements - continued
June 30 2004 2003
As Reported As Restated As Reported As Restated
------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets:
Goodwill $ 3,902,705 $ 1,540,162 $ 3,902,705 $ 1,540,162
Total assets 44,533,387 42,170,844 28,535,675 26,173,132
Deferred tax liability 5,780,799 - 6,317,702 1,459,814
Total liabilities 17,150,816 11,370,017 9,707,283 4,849,395
Accumulated deficit (41,082,397) (37,664,141) (28,651,443) (26,156,098)
Total shareholders' equity 27,382,571 30,800,827 18,828,392 21,323,737
Year Ended June 30 2004 2003
As Reported As Restated As Reported As Restated
------------------------------------------------------------------------------------------------------------
Consolidated Statements of
Operations:
Income tax benefit $ 536,903 $ 1,459,814 $ 536,903 $ 2,117,103
Net loss (11,574,178) (10,651,267) (6,746,326) (5,166,126)
Net loss available to common (12,430,954) (11,508,043) (7,624,144) (6,043,944)
stockholders
Basic and diluted net loss per $ (0.61) $ (0.57) $ (0.45) $ (0.36)
share of common stock
The restatement has no effect on total cash flows from operating, investing, or
financing activities as shown in the Consolidated Statement of Cash Flows.
However, the restatement did affect the individual components of net loss and
deferred tax benefit within the net cash from operating activities.
Additionally, the Company restated the pro-forma stock based compensation
disclosures required under SFAS 123 determined under fair value based method due
to the correction of an error noted during February 2005.
F-23
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned on
October 13, 2005, thereunto duly authorized.
BIOENVISION, INC.
By /s/ Christopher B. Wood, M.D.
----------------------------------
Christopher B. Wood, M.D.
Chairman and Chief Executive Officer
(Principal Executive Officer)
By /s/ David P. Luci
----------------------------------
David P. Luci
Chief Financial Officer, General Counsel and
Corporate Secretary
(Principal Financial and Accounting
Officer)
Each person whose signature appears below hereby constitutes and
appoints either Christopher B. Wood, M.D. or David P. Luci his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this report, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying all that said attorney-in-fact and agent or his
substitute or substitutes, or any of them, may lawfully do or cause to be done
by virtue hereof. In accordance with the requirements of the Exchange Act, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Christopher B. Wood, M.D. Chairman and Chief Executive October 13, 2005
----------------------------- Officer and Director
Christopher B. Wood, M.D. (Principal Executive Officer)
/s/ David P. Luci Chief Financial Officer, General October 13, 2005
----------------- Counsel and Corporate Secretary
David P. Luci (Principal Financial and
Accounting Officer)
/s/ Thomas S. Nelson Director October 13, 2005
--------------------
Thomas S. Nelson, C.A.
/s/ Michael Kauffman Director October 13, 2005
---------------------
Michael Kauffman
/s/ Andrew N. Schiff Director October 13, 2005
--------------------
Andrew N. Schiff
/s/ Steven A. Elms Director October 13, 2005
------------------
Steven A. Elms