Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-27854
BONE CARE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Wisconsin 39-1527471
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1600 Aspen Commons 53562
Middleton, Wisconsin (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (608) 662-7800
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
Preferred Stock Purchase Rights
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of August 1, 2002, there were issued and outstanding 14,156,772
shares of Common Stock. The aggregate market value of the voting and non-voting
common equity held by nonaffiliates of the registrant was $84,657,497 as of
September 26, 2002, assuming solely for purposes of this calculation that all
directors and executive officers of the registrant are "affiliates." This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Bone Care International, Inc., Proxy Statement for its
2002 Shareholders Meeting to be held on November 15, 2002 (Part III).
1
BONE CARE INTERNATIONAL, INC.
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED JUNE 30, 2002
PAGE
----
PART I
Item 1 Business................................................................................... 4
Item 2 Properties................................................................................. 20
Item 3 Legal Proceedings.......................................................................... 20
Item 4 Submission of Matters to a Vote of Security Holders........................................ 20
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters...................... 22
Item 6 Selected Financial Data.................................................................... 23
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations...... 24
Item 7A Quantitative and Qualitative Disclosures about Market Risk................................. 28
Item 8 Financial Statements and Supplementary Data................................................ 29
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 45
PART III
Item 10 Directors and Executive Officers of the Registrant......................................... 45
Item 11 Executive Compensation..................................................................... 45
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters...................................................................... 45
Item 13 Certain Relationships and Related Transactions............................................. 45
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 45
Signatures. ............................................................................................ 46
Sarbanes-Oxley Certifications........................................................................... 47
Index to Exhibits....................................................................................... 48
In this Annual Report on Form 10-K, "Bone Care," "we," "us" and "our"
refer to Bone Care International, Inc., unless the context suggests otherwise.
Bone Care(R) and Hectorol(R) are registered trademarks of Bone Care
International, Inc., in the United States. A community trademark application for
Hectorol is pending in the European Community Trademark Office, Japan, and
selected other countries. Hectorol is the brand name for the active drug
substance, doxercalciferol. This filing also includes trademarks of other
companies.
2
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. We have based these forward-looking
statements largely on our current expectations and projections about future
events and financial trends affecting the financial condition of our business.
These forward-looking statements are subject to a number of risks, uncertainties
and assumptions about Bone Care, including, among other things:
- general economic and business conditions, both nationally and
in our markets;
- our expectations and estimates concerning future financial
performance, financing plans and the impact of competition;
- anticipated trends in our business;
- existing and future regulations affecting our business;
- our early stage of development;
- the uncertainty of our future profitability;
- our ability to satisfy the FDA's conditions for marketing
approval for Hectorol;
- our ability to commercialize Hectorol;
- our ability to avoid or minimize delays in or interruption of
the manufacture and supply of our products; and
- other risk factors set forth under "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" in this Annual Report.
In addition, in this Annual Report, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intend," "expect" and similar
expressions, as they relate to Bone Care, our business or our management, are
intended to identify forward-looking statements.
Unless otherwise required by law, we undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise after the date of this filing.
However, we acknowledge our obligation to disclose material developments related
to previously disclosed information. In light of these risks and uncertainties,
the forward-looking events and circumstances discussed in the filing may not
occur, and actual results could differ materially from those anticipated or
implied in the forward-looking statements.
3
ITEM 1. BUSINESS
OVERVIEW
Bone Care is a pharmaceutical company engaged in discovering,
developing and commercializing improved vitamin D-hormone therapies to treat
secondary hyperparathyroidism in patients with kidney (or renal) disease,
osteoporosis and other diseases, including psoriasis and cancers where vitamin D
therapy may be of benefit such as cancers of the prostate, breast and colon. We
were founded in 1984 as a subsidiary of Lunar Corporation, located in Madison,
Wisconsin, and we were spun off from Lunar in 1996.
We licensed our first product, doxercalciferol or Hectorol, as it is
known commercially, in 1987 from the University of Wisconsin, a leading vitamin
D research center. Hectorol is a vitamin D-hormone replacement therapy approved
by the FDA in two formulations to treat secondary hyperparathyroidism in
patients with end-stage renal disease, or ESRD. Hectorol is a safe and effective
therapy for reducing elevated levels of parathyroid hormone (PTH) in blood in
the management of secondary hyperparathyroidism, a disease characterized by
excessive secretion of PTH. Hyperparathyroidism, if left untreated, can
eventually result in cardiovascular compromise, reduced immunity, muscle
weakness, bone loss and fractures. Virtually all ESRD patients suffer from
secondary hyperparathyroidism. We obtained FDA approval for Hectorol Capsules in
June 1999, and we began selling this orally administered product in the United
States in October 1999. We filed a supplemental New Drug Application with the
FDA in December 2001 to treat secondary hyperparathyroidism in chronic kidney
disease (CKD) patients. If approved, this would expand the approved indications
for Hectorol Capsules. We obtained FDA approval for Hectorol Injection in April
2000, we launched this intravenous product in the United States in August 2000,
and we received a national Medicare reimbursement code for Hectorol Injection in
January 2002. We are also developing doxercalciferol and other vitamin
D-hormones to treat several other diseases.
BACKGROUND
D-hormones are produced in the body from vitamin D that is either
ingested or generated in the skin from sunlight exposure. D-hormones have
essential roles in human health; they regulate (1) parathyroid hormone (PTH)
secretion by the parathyroid glands, (2) the absorption of calcium by the small
intestine, (3) muscle function, and (4) the proliferation and maturation of
several types of normal and abnormal cells. D-hormone deficiency in CKD occurs
when the kidneys are unable to produce D-hormones. Without sufficient D-hormone
levels, PTH secretion is increased and calcium absorption in the small intestine
is reduced, leading to hypocalcemia and eventually to bone disease.
Hyperparathyroidism is a disease characterized by excessive secretion
of PTH by the parathyroid glands. The medical community classifies
hyperparathyroidism as either "primary" or "secondary," depending on the
underlying cause. Primary hyperparathyroidism is less common and is caused by a
disorder in one or more of the parathyroid glands, usually a tumor. Surgical
removal of the affected parathyroid glands is the only effective treatment.
Secondary hyperparathyroidism is the more common type of hyperparathyroidism and
is caused by diseases unrelated to the parathyroid glands. It is seen in varying
severity in virtually all ESRD patients, in whom normal kidney function is lost
and dialysis is required for survival. Secondary hyperparathyroidism in renal
disease continues and worsens unless treated with D-hormone therapy.
The goals of D-hormone therapy in this setting are to decrease blood
PTH levels and to normalize blood calcium, thereby treating or preventing bone
disease, and other adverse effects of elevated PTH. There are other vitamin
D-hormones on the market which have been approved for the treatment of secondary
hyperparathyroidism and are competing with Hectorol. The three key competing
products are calcitriol, paricalcitol and alfacalcidol. The challenge in
administering vitamin D hormone therapy is to deliver a sufficiently high dose
to be effective without causing toxic side effects, including:
- Excessive phosphorus and/or calcium in the blood, which
increases the risk that mineral deposits will develop in soft
tissues, such as in the heart and arteries, contributing to
cardiac disease, or in the kidneys, accelerating kidney
failure in CKD patients.
- Excessive phosphorus in the blood, which stimulates secretion
of PTH by the parathyroid glands and exacerbates secondary
hyperparathyroidism.
- Excessive calcium in the urine, which increases the risk that
calcium-rich deposits will develop in the kidneys and
accelerate kidney failure in CKD patients.
4
Due to the risks of these side effects, D-hormones are customarily administered
at low dosages. Starting dosages are increased cautiously, to minimize the
chance of these toxic side effects and optimize therapeutic response. The
pharmacokinetic profiles of calcitriol and paricalcitol typically demonstrate
supraphysiological spikes occurring rapidly after administration, followed by
trough levels at concentrations below the physiologic range of activated vitamin
D. This is in contrast to the relatively constant blood levels of D-hormones
that are maintained in individuals with normal kidney function without side
effects, yielding consistent, efficient regulation of PTH secretion.
Currently United States physicians and dialysis providers favor
intravenous products because of several factors: (1) Medicare reimbursement is
only available for intravenous products; (2) repeated oral delivery of active
D-hormones promotes their breakdown in the intestine, thereby increasing
intestinal absorption of calcium and reducing the amount delivered to the
parathyroid glands; and (3) healthcare professionals can assure patient
compliance with drug administration at the time of dialysis.
THE BONE CARE SOLUTION
We have two FDA approved products to treat secondary
hyperparathyroidism in ESRD patients: Hectorol Injection and Hectorol Capsules.
Hectorol offers:
- Safe and Effective Treatment. Data obtained from our clinical
trials have demonstrated that Hectorol is a safe and effective
therapy for treating secondary hyperparathyroidism in ESRD
patients. In these trials, Hectorol reduced blood levels of
PTH in more than 90% of the treated patients with minimal side
effects. Based on these and other trials, we believe that
Hectorol compares favorably to competitive D-hormones,
including calcitriol, paricalcitol and alfacalcidol; however,
we have not performed comparative trials to demonstrate these
conclusions.
- Oral Delivery that Expands Market Opportunities. Hectorol
Capsules provide a safe, convenient and effective oral vitamin
D therapy for the management of PTH levels in patients with
CKD. Oral Hectorol has the potential to be used in other
clinical settings besides CKD. Intravenous D-hormone products
are used only in hemodialysis patients under medical
supervision. Competitive intravenous D-hormones may be less
well suited for oral delivery because they are fully active on
delivery, which can cause certain cells lining the small
intestine to absorb too much calcium and phosphorus, leading
to side effects. Hectorol, on the other hand, is an inactive
pro-hormone that, after oral delivery, is not available to
these intestinal cells.
- A Pro-Hormone that Provides Consistent Levels of Natural
D-Hormones. Hectorol is a vitamin D pro-hormone, an inactive
vitamin D analog that is metabolized by the liver into two
active and naturally occurring D-hormones. Activated Hectorol
is released into the bloodstream at a rate which mimics the
normal physiologic production of active D-hormones by normal
kidneys. Normal physiologic blood levels of D-hormones allow
efficient regulation of PTH secretion by the parathyroid
glands with few side effects.
- A Potentially Wider Therapeutic Window. We believe that there
is indirect evidence that Hectorol has a wider range, or
therapeutic window, between a minimum effective dose and a
dose with significant side effects as compared to other
D-hormone therapies. Animal studies have demonstrated that
Hectorol has fewer side effects than calcitriol or
alfacalcidol when delivered at doses of equivalent potency. No
clinical trials directly comparing Hectorol to any other
D-hormone therapy in ESRD patients have been conducted. We
have not conducted any comparative trials of D-hormones in any
human subjects. A wider therapeutic window would improve
safety and facilitate patient management.
OUR STRATEGY
Our strategy is to develop new D-hormone products and commercialize our
two approved products, Hectorol Injection and Hectorol Capsules, by:
- Expanding Our Sales and Marketing Infrastructure. We will
continue to develop our internal sales and marketing
capabilities to address the over $500 million D-hormone market
in the United States for ESRD patients and for related markets
that could be effectively addressed with a small, highly
targeted sales and marketing effort. We will seek to establish
mutually beneficial alliances or marketing agreements with
partners who can rapidly penetrate geographic markets and
therapeutic areas where we have no current or planned sales
presence.
- Competitively Pricing Hectorol. Hectorol Injection is priced
in the United States at a modest premium to the older
D-hormone, calcitriol, but below the more recently launched
D-hormone, paricalcitol. We believe Hectorol's competitive
pricing will create interest by third-party payors and
facilitate its acceptance in the United States market.
Hectorol
5
Capsules also represent an attractive cost-effective
alternative to intravenous D-hormone therapies. While oral
D-hormone therapies are not reimbursed by Medicare, they are
favored outside of the United States. We are the only company
with both an oral and intravenous D-hormone product approved
for treatment of dialysis patients in the United States, and
we believe we are well positioned to take advantage of changes
in preference for the method of delivery.
- Expanding the Approved Indications for Hectorol Capsules. We
filed a supplemental New Drug Application with the FDA in
December 2001 to treat secondary hyperparathyroidism in CKD
patients. We do not have plans to request FDA approvals for
other new indications in the next two years.
- Developing Additional Product Offerings. We will continue to
use our research, clinical and regulatory expertise to seek to
develop our other patented D-hormones for targeted diseases,
such as osteoporosis in elderly patients, as well as for
psoriasis and cancers where vitamin D therapy may be of
benefit, such as cancers of the prostate, breast and colon.
OUR PRODUCTS
Our objective is to discover, develop and commercialize vitamin
D-hormone therapies with improved safety and efficacy profiles to treat a
variety of diseases where current treatments are either unavailable or
inadequate. Comparative studies in several animal species have demonstrated that
our vitamin D technologies potentially have an improved therapeutic index as
compared to other vitamin D analogs. In pre-clinical models, Hectorol and/or
LR-103 are 3 to 30 times less toxic when administered at doses with equivalent
potency as compared to calcitriol and/or alfacalcidol. Additional animal studies
have shown that, unlike Hectorol and LR-103, competitive D-hormone therapies
cause significant calcium deposits in the kidneys when delivered in doses
equivalent to those used to treat patients. We cannot be certain, however, that
additional clinical studies will support our conclusion that Hectorol has a
wider therapeutic window than other D-hormone therapies.
HECTOROL INJECTION
We developed Hectorol Injection for use in the approximately 315,000 ESRD
patients in the United States who undergo hemodialysis three times per week. Our
FDA submission included data from two Phase III trials which included a total of
70 patients and consisted of an eight-week monitoring period in which no
D-hormone therapies were given, followed by a 12-week period in which patients
received open-label treatment with Hectorol Injection at hemodialysis. The study
endpoint for effectiveness was the observed reduction in blood PTH levels, and
the endpoints for safety were the observed rates of hypercalcemia and
hyperphosphatemia. In both trials, after 12 weeks of open-label treatment, mean
blood PTH levels were reduced 40 to 50%. These reductions were statistically
significant (p<0.01). In both studies, blood PTH reached a predetermined optimal
range in more than 70% of treated patients. Hectorol Injection normalized blood
calcium but also caused infrequent episodes of hypercalcemia and
hyperphosphatemia. We obtained FDA approval for Hectorol Injection in April
2000, and we began selling the product in August 2000. We must complete and
submit a post-approval Phase IV trial in pediatric patients with ESRD by August
2004. The FDA allowed us to market Hectorol Injection to ESRD patients, but
requires us to complete a post-approval Phase IV trial in pediatric patients
with ESRD by August 2004. We plan to commence these trials by March 2003,
although the actual start date is contingent on receiving additional supply of
Hectorol Injection from either the current supplier or an additional supplier.
Any further delay in receiving product for this clinical trial could cause us to
miss the deadline for completion. If we fail to timely satisfy this requirement,
the FDA could withdraw its existing approval.
HECTOROL CAPSULES
Hectorol Capsules are approved for use in the approximately 315,000
ESRD patients in the United States. In addition, we have completed clinical
trials of Hectorol Capsules to gain FDA approval for use in CKD patients, which
is a larger disease population. The FDA approved Hectorol Capsules in June 1999
based on the results of two Phase III trials involving a total of 211 subjects,
of which 138 were dosed with Hectorol Capsules. Each trial consisted of an
eight-week monitoring period in which no D-hormone therapies were given,
followed by a 16-week period in which patients received open-label treatment
with Hectorol Capsules at hemodialysis, and an eight-week period in which
patients received, in a double-blinded randomized fashion, continuing treatment
with either Hectorol Capsules or a matching placebo. The study endpoint for
effectiveness was the observed reduction in blood PTH levels, and the endpoints
for safety were the observed rates of hypercalcemia and hyperphosphatemia. In
both trials, after 16 weeks of open-label treatment, mean blood PTH levels were
reduced more than 50%. These reductions were statistically significant (p<0.01).
In addition, blood PTH reached a pre-determined optimal range in 83% of the
treated patients. At the end of the eight additional weeks of blinded treatment,
mean blood PTH levels in patients receiving Hectorol Capsules remained
approximately 50% below those receiving a matching placebo. Differences in mean
blood PTH levels between patients receiving Hectorol Capsules and those
receiving placebo treatments were clinically and statistically significant.
Hectorol Capsules normalized blood calcium levels but caused infrequent episodes
of hypercalcemia and hyperphosphatemia.
6
Hectorol Capsules compete with calcitriol (brand name Rocaltrol(R))
sold by Roche Pharmaceuticals and the generic form of calcitriol sold by TEVA
Pharmaceuticals. The total annual sales of these two competitive products in the
United States are approximately $34 million. The competitive products are
approved in the United States for the treatment of elevated PTH in both ESRD and
CKD patients, while Hectorol is not yet approved for the treatment of CKD
patients.
SECONDARY HYPERPARATHYROIDISM IN CKD PATIENTS. Secondary
hyperparathyroidism begins to develop in patients with modest
reductions in kidney function and becomes more severe as CKD
progresses. Evidence from published clinical research suggests that
early intervention with D-hormone replacement therapy can slow the
progression and enhance the treatment of secondary hyperparathyroidism
in CKD patients. Calcitriol is approved in the United States, and we
believe oral alfacalcidol is used in certain foreign markets to treat
CKD patients. As with their use in dialysis patients, however, these
competitive oral products can cause toxic side effects at the doses
required for effective treatment and can hasten the onset of dialysis.
We have completed two randomized, double-blind,
placebo-controlled Phase III trials for Hectorol Capsules to treat
secondary hyperparathyroidism in CKD patients. The trials consisted of
an eight-week monitoring period in which no D-hormone therapies were
given, followed by a 24-week period in which patients were treated with
either Hectorol Capsules or a matching placebo. The study endpoint for
effectiveness was the observed reduction in blood PTH levels, and the
endpoints for safety were the observed rates of hypercalcemia,
hyperphosphatemia and hypercalciuria, and significant decreases in
kidney function. In both studies, Hectorol significantly reduced blood
PTH levels relative to a matching placebo without significant side
effects. We used the results from these two trials as the basis for
filing a supplemental New Drug Application with the FDA in December
2001, requesting approval to market Hectorol Capsules for secondary
hyperparathyroidism in CKD patients.
The National Kidney Foundation (NKF) published the Clinical
Practice Guideline for Chronic Kidney Disease (CKD); Evaluation,
Classification and Stratification through their Dialysis Outcomes
Quality Initiative Program (DOQI or K-DOQI) in February 2002. This
guideline stratifies patients with kidney disease into five ranges
based on kidney function as measured by the Glomerular Filtration Rate
(GFR) of the patient. GFR is widely accepted as the best overall
measure of kidney function. The K-DOQI Guideline recommends the
treatment of bone disease and disorders of calcium and phosphorus
metabolism when the GFR is <60 ml/min. This recommendation may
encourage a shift in clinical practice to include patients in three of
the five stratifications. The NKF estimates that there are
approximately 7,600,000 stage three patients and 400,000 stage four
patients. Stage five consists of the 315,000 dialysis-dependent patient
population, of which approximately 55% to 65% are treated with vitamin
D hormone therapy. This potential shift in practice could positively
influence our market potential in the CKD patient population.
Congressman Fortney ("Pete") Stark (D-CA) has introduced a new
bill - H.R.4729, the Medicare Chronic Kidney Disease Act. If enacted
into law, this bill would provide full Medicare coverage and End Stage
Renal Disease (ESRD) prevention services to uninsured patients
suffering from CKD but who have not as yet progressed to ESRD. Medicare
coverage for treatment of the CKD patient population would promote
wider acceptance of treatment and enhance the shift in the practice to
earlier treatment. There can be no assurance that this bill will be
enacted or, if enacted, that it will remain in its current form.
SECONDARY HYPERPARATHYROIDISM IN ELDERLY OSTEOPOROSIS
PATIENTS. We plan to further investigate the use of Hectorol Capsules
to treat secondary hyperparathyroidism in elderly osteoporosis
patients. Of the 16 million people in the United States over the age of
75 years, we estimate that two to four million have secondary
hyperparathyroidism associated with osteoporosis. In many elderly
individuals, there is reduced responsiveness of the parathyroid glands,
the small intestine and muscles to D-hormones. Higher D-hormone levels
are needed in the blood of these individuals to control PTH secretion
and to maintain both intestinal calcium absorption and muscle strength.
Often these individuals develop secondary hyper-parathyroidism. Left
untreated, the elevated level of PTH in the blood causes bone loss
which increases the risk of debilitating fractures. In addition,
decreased muscle strength increases the risk of falling, which in turn
further increases the risk of fractures. Fractures often result in
disfigurement, decreased mobility and, in some cases, extensive
hospitalization and chronic nursing home care.
There are currently no FDA-approved D-hormone therapies to
treat patients in the United States with osteoporosis; however,
D-hormone therapies are approved in Europe, Asia, Australia and other
markets. Controlled clinical trials conducted in these markets using
oral calcitriol or oral alfacalcidol demonstrated increased or
stabilized bone mass and reduced rates of fractures. However, other
trials conducted in the United States have produced mixed results,
possibly due to the use of inconsistent doses. Higher doses of oral
calcitriol produced increases in spinal and total body bone mass,
whereas lower doses showed little effect. Lower doses were used in
several trials due to the unacceptable frequency of hypercalcemia and
hypercalciuria. These results suggest that D-hormone therapies with
improved safety profiles may enable more
7
consistent delivery of higher doses for improved therapeutic effects in
elderly osteoporosis patients with secondary hyperparathyroidism.
We completed a Phase II trial in 1992 in the United States to
evaluate Hectorol Capsules to treat postmenopausal osteoporosis. We and
our corporate collaborators concluded that the data from the trial did
not provide a sufficient basis for initiating pivotal Phase III trials
with Hectorol Capsules to treat postmenopausal osteoporosis. Based on
published reports that D-hormones have efficacy in patients with
secondary hyperparathyroidism, we plan to initiate an additional Phase
II trial of Hectorol Capsules in elderly osteoporosis patients to treat
secondary hyperparathyroidism. We plan to conduct a six month proof of
principle study beginning in 2003, and if successful, we will present
the design of a potential Phase III trial to the FDA. We would initiate
the Phase III trial in 2004 if a satisfactory design can be agreed upon
with the FDA.
HYPERPROLIFERATIVE DISEASES
In addition to having a role in parathyroid function and calcium and
phosphorus metabolism, D-hormones have an important role in regulating skin,
prostate, breast and colon cells. We are investigating the use of Hectorol
Capsules or our other improved D-hormone therapies in diseases associated with
hyperproliferative or neoplastic cell growth such as psoriasis and cancers of
the prostate, breast and colon. Data from preclinical models suggest that
vitamin D analogs inhibit the growth of cancer cells expressing the vitamin D
receptor.
PSORIASIS. We may develop LR-103 as an oral D-hormone therapy
for psoriasis, a chronic disease that most often affects the skin.
Psoriatic lesions are characterized by an abnormal thickening or growth
of the skin, usually on the scalp, elbows, knees and shins. Microscopic
examination of these lesions reveals an increased rate of skin cell
division, together with a decrease in the time required for these cells
to migrate to the skin surface, resulting in thickening or growth of
the skin.
According to the National Psoriasis Foundation, psoriasis
affects more than seven million individuals in the United States of
which approximately 1.5 million are being treated by a physician. A
similar prevalence rate is observed in Europe. Psoriasis affects people
of all ages, with most exhibiting mild or moderate lesions. No cure for
psoriasis exists. Dovonex(R) (topical calcipotriol marketed by
Bristol-Myers Squibb Company) is a synthetic D-hormone analog of
calcitriol and is approved to treat psoriasis in the United States.
Dovonex and tacalcitol, another D-hormone analog, are approved to
topically treat psoriasis in many countries outside of the United
States. Currently, no oral D-hormones are approved to treat psoriasis
in the United States.
Clinical studies have demonstrated that orally administered
D-hormones can cause significant improvement in psoriatic lesions
reducing, in particular, skin redness, scaling and thickness. In many
patients, complete clearing of psoriatic lesions is observed during the
course of D-hormone treatment.
PROSTATE, BREAST AND COLON CANCERS. We intend to develop
Hectorol Capsules or another of our vitamin D analogs to treat cancers
which have the potential to respond to vitamin D therapy, such as
prostate, breast and colon cancers. These cancer cells contain specific
D-hormone receptors, and pre-clinical models have demonstrated that
vitamin D analogs inhibition of growth of prostate, breast and colon
tumor cells in vitro and in vivo. Oncologists consider D-hormones to be
a potentially promising treatment for cancers expressing the vitamin D
receptor. The challenge with vitamin D-hormones in the treatment of
cancer is to achieve positive effects without inducing the frequently
observed side effects associated with high doses of D-hormones,
typically hypercalcemia. We believe that no D-hormone has received
marketing approval for cancer anywhere in the world.
Prostate cancer has become the most commonly diagnosed tumor
in American men. The American Cancer Society (ACS) estimates that in
the year 2002, 189,000 men will be diagnosed with, and 30,200 men will
die from, prostate cancer. Breast cancer is the second leading cause of
death among women in the United States. According to ACS estimates, in
the year 2002, 203,500 women will be diagnosed with, and 39,600 women
will die from, invasive breast cancer. Colon cancer is the third most
common cancer in American men and women. The ACS estimates that in the
year 2002, 148,300 men and women will be diagnosed with, and 56,600
people will die from, colon cancer. The major known risk factors for
prostate cancer, namely old age, race and residence at northern
latitudes, are all associated with low blood levels of vitamin D, the
natural precursor for D-hormones. Incidence rates for breast and colon
cancers also correlate with residence in northern latitudes. Mortality
rates for these three cancers increase as exposure to ultraviolet
radiation, the principal source of vitamin D in the human body,
decreases.
We have completed a Phase I, dose escalation trial of daily,
oral Hectorol in patients with hormone refractory prostate cancer. The
results of this study have been recently reported (Clinical Cancer
Research 9:2820-2827, September 2002). A total of 25 patients were
enrolled in this study. Oral doses of Hectorol ranging from 5 to 15
ug/day were administered. Patients were closely followed for side
effects in order to determine the maximally tolerated dose of daily,
oral Hectorol. Patients were monitored for response by objective
imaging techniques. Two patients had radiographically confirmed partial
responses while five other patients maintained stable disease for at
least 6 months. The most common toxicity observed during this trial
was reversible hypercalcemia. Based on the results of this study, a
maximum daily dose of 12.5 ug was recommended for further evaluation in
Phase II clinical trials in cancer patients. PSA is a commonly used
biomarker used to determine disease progression in patients with
prostate cancer. In vitro studies with vitamin D analogs demonstrate
stimulation of PSA production despite growth inhibitory effects on the
cancer cells. Not surprisingly during the Phase I trial, no concordance
between PSA response and objective response was observed. Results from
the Phase I trial were sufficiently encouraging that we continue to
evaluate Hectorol in Phase II clinical trials in Hormone Refractory
Prostate Cancer. The results of a Phase II trial are being evaluated.
Collaborations with the University of Wisconsin and other institutions
to further explore the use of Hectorol in prostate cancer and other
oncology settings are ongoing.
8
LR-103 AND BCI-202
We are investigating the use of LR-103, BCI-202 and other research
compounds in pre-clinical studies to evaluate them to treat psoriasis and
cancers.
Hectorol's chemical structure differs from that of calcitriol and
alfacalcidol. Results from animal studies indicate that Hectorol shows a 3-
to-15-fold lower incidence of toxic side effects compared to calcitriol and
alfacalcidol at doses having equivalent potency. Consequently, we synthesized
and evaluated a series of compounds with chemical structures related to
Hectorol. From this research, we determined that Hectorol is activated, in part,
to LR-103, whereas calcitriol and alfacalcidol cannot be so activated.
We have since synthesized LR-103 and closely related analogs and have
studied their pharmacological properties in biological models in collaboration
with the USDA. LR-103 is as potent as Hectorol, calcitriol and alfacalcidol, but
is 30 times less likely than calcitriol and alfacalcidol to cause toxic side
effects. In addition, we have observed that LR-103 inhibits growth of skin cells
as well as breast and colon cancer cells. LR-103 is readily absorbed after oral
delivery and circulates through the bloodstream to tissues which respond to
D-hormones. LR-103 currently is in the late stages of pre-clinical research, and
we plan to begin Phase I clinical studies with LR-103 in 2003.
BCI-202 is a novel pro-hormone in an early stage of pre-clinical
development. We cannot be certain that future studies will yield safe and
effective results that warrant continued development.
SALES AND MARKETING
We commercially introduced Hectorol Capsules in October 1999 and
Hectorol Injection in August 2000. Both products are currently marketed for ESRD
patients in the United States by our direct sales force. We believe that the
ESRD market in the United States is well defined and, therefore, is suitable for
a highly focused, direct sales and marketing effort. In addition, we believe
that our pricing strategy balances the physicians' focus on patient care with
dialysis clinics' desire for greater profit and third-party payors' desire to
control treatment costs.
We are directing our marketing efforts to the following key decision
makers:
- Nephrologists. The nephrologist is the physician responsible
for the care of patients diagnosed with early and end-stage
renal disease. This care includes delivering D-hormone
replacement therapy, which may be administered based on
protocols developed in conjunction with the dialysis clinics.
We estimate that in the United States there are approximately
6,300 nephrologists caring for 315,000 dialysis patients and
over 1,000,000 CKD patients.
- Dialysis Clinics. The nephrologist is generally associated
with a clinic that performs dialysis procedures. In the United
States, a limited number of large corporations control the
majority of these clinics with the largest eight corporations
controlling more than 66% of in-center dialysis facilities and
the largest three controlling over 50% of all in-center
dialysis facilities. Generally these clinics bill for services
provided to ESRD patients, including D-hormone therapy. These
clinics work with the nephrologist to maximize both the
quality of patient care and profits.
- Third-Party Payors. Dialysis clinics who administer
intravenous D-hormones seek reimbursement from third-party
payors who generally are either insurance companies or
governmental agencies, including Medicare and Medicaid. These
payors set reimbursement levels for products and services
which the clinics provide to dialysis patients. Payors,
including the United States government, have increasingly
focused on containing costs, which has impacted the
reimbursement of various products and, in turn, affected
clinical use of certain products. We are positioning both
Hectorol Capsules and Hectorol Injection as safe, effective
and attractively priced products, and our strategy is to
establish Hectorol products as preferred D-hormone therapies.
Currently, oral D-hormone products are not reimbursed for use
by hemodialysis patients.
During the last six months, we increased our headcount of direct sales
and clinical support specialists. As of September 26, 2002, the sales and
marketing department consisted of 53 people, including a Vice President - Sales,
Vice President - Marketing, 7 marketing positions, 39 direct sales people and 5
clinical support specialists. Additionally, we may seek to establish mutually
beneficial alliances or marketing agreements with partners who can access
geographic markets and therapeutic areas where we have no current or planned
sales presence.
9
Hectorol is distributed to patients and dialysis centers through both
direct and traditional wholesale and retail channels. We have contracted for
selected administrative and distribution services from a third-party company
having a proven record of providing services to wholesale and retail customers
in the continental United States, Hawaii and Puerto Rico.
COMPETITION
We operate in a field in which new discoveries occur at a rapid pace.
Competitors may succeed in developing technologies or products that are more
effective than ours or in obtaining regulatory approvals for their drugs more
rapidly than us, which could render our products obsolete or noncompetitive.
Competition is intense and is expected to continue to increase. Many
competitors, including biotechnology and pharmaceutical companies, are actively
engaged in the research and development of products in similar areas, including
the fields of hyperparathyroidism, osteoporosis, and prostate, breast and colon
cancer.
A number of pharmaceutical and biotechnology companies are developing
new products for the treatment of the same diseases we have targeted. Abbott
Laboratories, Inc., markets intravenous calcitriol (Calcijex(R)) and intravenous
paricalcitol (Zemplar(R)). These drugs are approved to manage secondary
hyperparathyroidism in ESRD patients in the United States and in European
countries. Roche Pharmaceuticals markets oral calcitriol (Rocaltrol) and TEVA
Pharmaceuticals markets generic calcitriol in the United States to manage
secondary hyperparathyroidism in CKD patients. A number of companies, including
Leo Pharmaceutical Products A/S, TEVA Pharmaceuticals and Chugai Pharmaceutical
Company Co., Ltd., market oral or intravenous alfacalcidol, a synthetic analog
of calcitriol, in Europe and Asia under various trade names for both secondary
hyperparathyroidism and osteoporosis. Other companies, including Amgen, Inc.,
and NPS Pharmaceuticals, Inc., also are developing new therapies to manage
secondary hyperparathyroidism in ESRD patients in the United States and foreign
markets. Several companies, including Leo Pharmaceutical Products A/S, ILEX
Oncology, Inc., and Chugai Pharmaceutical Co. LTD, are developing D-hormone
therapies to treat cancers. Leo Pharmaceutical Products A/S, Bristol-Myers
Squibb Company and other companies are marketing a topical D-hormone (Dovonex)
in major markets of the world to treat psoriasis. Teijin Limited is marketing
topical tacalcitol to treat psoriasis outside the United States.
INTELLECTUAL PROPERTY
Our success will depend in part on our ability to develop patentable
products and technologies and obtain patent protection for our products and
technologies both in the United States and other countries. We currently have
over 60 issued patents and over 90 pending applications worldwide. We have
several United States patents covering the use of Hectorol for the prevention
and treatment of secondary hyperparathyroidism and metabolic bone disease,
including renal osteodystrophy. Patents covering secondary hyperparathyroidism
begin to expire in 2010. Patents covering metabolic bone disease begin to expire
in 2009.
A corresponding patent for the use of Hectorol to prevent and manage
secondary hyperparathyroidism in kidney dialysis patients has been allowed by
the European patent office, issued in Australia and Canada, and is pending in
the Japanese patent office. All of these patents expire in 2016. A corresponding
patent for the use of Hectorol to prevent and treat metabolic bone disease has
been issued by the European Patent Office and expires in 2009.
We also own United States patents for the use of Hectorol for treating
prostate cancer that expire in 2013. We have filed counterpart patent
applications in Europe and other geographic markets, including Japan, that
expire in 2017. We own United States and European patents for delayed sustained
release formulations of Hectorol as a treatment for psoriasis. Foreign
counterpart applications are also pending in Japan and other major markets. The
psoriasis-related patents expire in 2013.
The issued composition-of-matter patent covering Hectorol has expired.
Our issued patents and pending patent applications relating to Hectorol are
method-of-use patents. A method-of-use patent encompasses the use of a compound
or composition to treat a specified condition but does not encompass the
compound itself, the active ingredient used in the composition or composition
itself, or the method of making the composition or the compound used in the
composition. Method-of-use patents provide less protection than
composition-of-matter patents because of the possibility of off-label or
authorized uses if other companies market or make the compound for other uses.
We have a license from the Wisconsin Alumni Research Foundation to
practice several of their process patents for the synthesis of Hectorol. Under
this license, which extends at least through July 2, 2013 and terminates upon
the expiration of the last licensed patent, the Wisconsin Alumni Research
Foundation has agreed not to license to other parties the patents to manufacture
Hectorol for use or sale anywhere in the world as long as the license agreement
is in effect and we pay royalties based on Hectorol sales.
We have granted Draxis Health Inc. a license to use and sell Hectorol
in Canada for secondary hyperparathyroidism, osteoporosis and other metabolic
bone diseases. We also have granted Draxis a license in Canada to all know-how
developed by
10
or on behalf of us relating to the use of Hectorol for those indications. Draxis
entered into the license agreement in 1990 and paid Bone Care $100,000 for the
rights to treat secondary hyperparathyroidism and metabolic bone disease with
Hectorol in Canada. The agreement does not include royalty payments and expires
upon the expiration date of the last to expire of the Canadian patents. Draxis
received marketing approval for Hectorol Capsules in Canada in May 2001 and
plans to launch the product in the near future.
We own issued patents and have pending patent applications in the
United States and other countries relating to other D-hormones. Our patents and
pending applications include claims to compounds, compositions, methods of
synthesizing the compounds and compositions, methods of use and methods of
delivery of active D-hormone and D-hormone analogs.
We and the USDA jointly own rights to LR-103 under issued patents and
pending patent applications. The USDA has granted to us an exclusive worldwide
license to make, use and sell products covered under their rights. This
agreement, as amended in March 2002, calls for us to commercialize LR-103 by
December 31, 2006, or the USDA may modify or terminate the license. In any
circumstance, however, we would retain marketing rights under these patents. The
USDA license terminates upon the expiration of the last licensed patent.
In addition to patent protection, we also rely on proprietary
information and trade secrets. We require our employees, consultants and
advisors to execute confidentiality agreements upon commencement of an
employment or a consulting relationship with us.
MANUFACTURING
We currently have no internal manufacturing capabilities. We rely on
third party contractors to produce our active pharmaceutical ingredient and for
the subsequent manufacturing and packaging of finished drug products.
The sole manufacturer of Hectorol Injection received a warning letter
from the FDA in September 2000 identifying general deviations from the FDA's
current Good Manufacturing Practices (c-GMP) regarding manufacturing procedures,
records and training. Our supplier received another letter from the FDA in
December 2001 identifying additional deviations from c-GMP pursuant to a
follow-up inspection of their facility. In response to this second FDA letter,
our supplier agreed to halt production of Hectorol Injection until such time as
these deviations could be remediated. Our supplier is scheduled to produce
validation lots during late October and early November that could ultimately be
used as commercial product. If our manufacturer completes the validation lots by
early November and passes the FDA site inspection and the FDA accelerates their
review of our submission, we do not anticipate a reduction in revenue as a
result of a reduced supply of product. If our manufacturer does not meet this
timetable, we could experience a reduction in revenue. There can be no assurance
that the FDA will find that our manufacturer's responses and corrective actions
are adequate or that the FDA will not take further action. If the FDA is not
satisfied with our manufacturer's responses and corrective actions, the FDA
could take regulatory actions against our manufacturer, including seizure of
products, injunction against further manufacture, recall or other actions that
could interrupt production of Hectorol Injection. Any such action would have a
material adverse effect on us. We are managing the inventory levels of the
supplier channels to attempt to ensure that the end-users of our product,
clinics and patients, do not experience any shortage of product. In addition, we
have been working on contingency plans, including an additional source of
supply. We anticipate that an additional source would be available during the
second quarter of calendar year 2003.
We purchase our active pharmaceutical ingredient from a sole supplier,
although we are currently in the process of obtaining regulatory approval for an
additional supplier. In addition, Bone Care relies on one supplier to formulate
capsules and another supplier to package both Hectorol Capsules and Hectorol
Injection. Although other suppliers, formulators and vendors are available and
could provide these goods and services to Bone Care on comparable terms, any
change in suppliers could cause a delay in manufacturing and a possible loss of
sales, which would affect operating results adversely.
All of our suppliers have FDA-inspected facilities that are required to
operate under current Good Manufacturing Practices regulations established by
the FDA. These regulations govern all stages of the drug manufacturing process
and are intended to assure that drugs produced will have the identity, strength,
quality and purity represented in their labeling for all intended uses. If we
were to establish our own manufacturing facility, we would need additional funds
and would have to hire and train additional personnel and comply with the
extensive regulations applicable to the facility. We believe our relationships
with our suppliers are good.
GOVERNMENT REGULATION
Pharmaceutical products are subject to extensive regulation under the
Federal Food, Drug and Cosmetic Act by the FDA in the United States and similar
health authorities in foreign countries. This rigorous regulation governs, among
other things, testing for safety and effectiveness, manufacturing, labeling,
storage, recordkeeping, import, export, advertising, marketing and distribution
of pharmaceutical products. Any new drug candidate must undergo lengthy,
rigorous and costly pre-clinical testing,
11
clinical trials and other procedures mandated by the FDA and foreign regulatory
authorities prior to approval for sale. Before testing agents with potential
therapeutic value in healthy human test subjects, stringent government
requirements for pre-clinical data must be satisfied. The data, obtained from
studies in several animal species, as well as from laboratory studies, are
submitted in an investigational New Drug Application to the FDA or its
equivalent in countries outside the United States where clinical studies are to
be conducted. Pre-clinical data must provide an adequate basis for evaluating
both the safety and the scientific rationale for the initiation of clinical
trials.
Clinical trials are typically conducted in three sequential phases,
although these phases may overlap. Phase I frequently begins with initial
introduction of the compound into healthy human subjects. Prior to patient
introduction, the product is tested for safety, adverse affects, dosage,
tolerance, absorption, metabolism, excretion and clinical pharmacology. Phase II
typically involves studies in a small sample of the intended patient population
to assess the efficacy of the compound for a specific indication to determine
dose tolerance and the optimal dose range as well as to gather additional
information relating to safety and potential adverse effects. Phase III trials
are undertaken to further evaluate clinical safety and efficacy in an expanded
patient population which suffers from the targeted illness at geographically
dispersed study sites to determine the overall risk-benefit ratio of the
compound and to provide an adequate basis for product labeling. Each trial is
conducted in accordance with certain standards under 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 investigational New Drug Application.
Data from pre-clinical and clinical trials are submitted to the FDA as
a New Drug Application for marketing approval and to other health authorities as
a marketing authorization application. The process of completing clinical trials
for a new drug is likely to take a number of years and requires the expenditure
of substantial resources. Preparing a New Drug Application or marketing
authorization application involves considerable data collection, verification,
analysis and expense. There can be no assurance that the FDA, or any other
health authority, will grant approval on a timely basis, if at all. The approval
process is affected by a number of factors, primarily the risks and benefits
demonstrated in clinical trials as well as the severity of the disease and the
availability of alternative treatments. The FDA or other health authorities may
deny a New Drug Application or marketing authorization application if the
authority's regulatory criteria are not satisfied or may require additional
testing or information.
Even after initial FDA or other health authority approval has been
obtained, further studies, including Phase IV post-marketing studies, may be
required to provide additional data on safety. Additional studies will be
required to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested and may
be required for Hectorol Injection and Hectorol Capsules. Also, the FDA or other
regulatory authorities require post-marketing reporting to monitor the side
effects of the drug. Results of post-marketing programs may limit or expand
marketing of the products. Further, if there are any modifications to the drug,
including changes in indication, manufacturing process or labeling or a change
in manufacturing facility, an application seeking approval of such changes will
be required to be submitted to the FDA or other regulatory authority.
The manufacture and marketing of Hectorol is subject to ongoing
regulation, including compliance with the FDA's current Good Manufacturing
Practices, adverse event reporting requirements and the FDA's general
prohibitions against promoting products for "off-label" uses, or uses not listed
on the FDA-approved labeling. We also are subject to inspection and market
surveillance by the FDA for compliance with these and other requirements. Any
enforcement action resulting from failure to comply with these requirements
could affect the manufacture and marketing of Hectorol. In addition, the FDA
could withdraw a previously approved product from the market upon receipt of new
information.
Before our products can be marketed outside of the United States, they
are subject to regulatory approval similar to FDA requirements in the United
States, although the requirements governing the conduct of clinical trials and
other premarket approval requirements vary widely from country to country, and
the time spent in gaining approval varies from that required for FDA approval.
FDA approval does not assure approval by other regulatory authorities, and we
cannot predict whether foreign regulatory approvals will be granted. In some
countries, the sales price of a drug product must also be approved. The pricing
review period often begins after market approval is granted. Even if a foreign
regulatory authority approves any of our products, we cannot predict whether
satisfactory prices for our products will be approved.
We must also comply with numerous federal, state and local laws,
regulations and recommendations relating to safe working conditions, current
Good Laboratory Practices, current Good Manufacturing Practices and the
experimental use of animals. We cannot predict the extent of governmental
regulation or the impact of new governmental regulations which might have an
adverse effect on the discovery, development, production and marketing of our
products and require us to incur significant costs to comply with the
regulations.
Our research and development processes involve the controlled use of
hazardous materials, chemicals and radioactive materials and produce waste
products. We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of such materials
and waste products. Although we believe that our safety procedures for handling
and disposing of such materials comply with the standards prescribed by such
laws and regulations, the risk of
12
accidental contamination or injury from these materials cannot be eliminated
completely. In the event of such an accident, we could be held liable for any
damages that result, and any such liability could exceed our financial
resources. We believe we comply in all material respects with applicable
environmental laws and regulations.
Completing the multitude of steps necessary before marketing a new drug
or obtaining a new indication for Hectorol requires the expenditure of
considerable resources and a lengthy period of time. Delay or failure in
obtaining the required approvals, clearances or permits by us, our corporate
partners or our licensees would have a material adverse effect on our ability to
generate sales or royalty revenue. The impact of new or changed laws or
regulations cannot be predicted with any accuracy.
EMPLOYEES
As of September 26, 2002, we had 102 full-time employees, including 15
in research and development, 19 in compliance, quality and regulatory affairs,
53 in sales and marketing and 15 in administration. Five of our employees have
Ph.D. degrees. None of our employees are represented by a union, and we consider
our employee relations to be good.
RISK FACTORS
Investors and prospective investors in Bone Care should consider
carefully the risks described below, in addition to other information in this
filing. Each of these risk factors could adversely affect Bone Care's business,
financial condition and results of operations as well as adversely affect the
value of an investment in our common stock.
RISKS RELATED TO OUR BUSINESS
OUR BUSINESS IS AT AN EARLY STAGE OF DEVELOPMENT AND WE DO NOT HAVE A
SIGNIFICANT HISTORY FOR YOU TO EVALUATE US ON.
Our business is at an early stage of development, and we currently do
not have significant revenues or positive cash flow. We face many obstacles
before we can generate enough revenue to achieve positive cash flow and finance
our operations. In June 1999, we received FDA approval to market Hectorol
Capsules in the United States to manage secondary hyperpara-thyroidism in kidney
dialysis patients and began selling Hectorol Capsules in October 1999. In April
2000, we received FDA approval to market Hectorol Injection to manage secondary
hyperparathyroidism in dialysis patients and began selling Hectorol Injection in
the United States in August 2000. We do not have FDA approval to market Hectorol
for other indications or to market any other products. All of our other product
candidates require extensive research and development and clinical testing
before we can submit a New Drug Application to the FDA.
WE HAVE A HISTORY OF LOSSES AND EXPECT OUR LOSSES TO CONTINUE.
We have incurred losses since we began operating. As of June 30, 2002,
our accumulated deficit was approximately $41.5 million. To date, we have spent
our funds primarily on product development and more recently on sales and
marketing expenses incurred to launch Hectorol Injection and Hectorol Capsules.
In fiscal year 2003 and subsequent fiscal years, we plan to make large
expenditures to expand clinical indications for Hectorol Capsules and to develop
other new products, which may result in losses in future periods. These
expenditures include costs associated with performing clinical trials for new
products, continuing our research and development and seeking foreign regulatory
approvals for Hectorol. The amount of these expenditures is difficult to
forecast accurately and cost overruns may occur. We expect our operating losses
to continue and increase. It is possible, depending on the rate at which our
revenues increase and our marketing and research and development activities
expand, that our losses will continue at least through 2003. Our ability to
generate revenues in the near future will depend primarily on our success in
marketing and selling Hectorol Injection and Hectorol Capsules. We do not know
whether we will achieve profitability or, if we do, whether we will be able to
sustain profitability. We believe that we have sufficient cash and investments
to allow us to continue operating our business for at least the next two years.
WE MAY FAIL TO SATISFY THE FDA'S CONDITIONS FOR MARKETING APPROVAL FOR
HECTOROL INJECTION, AND FOR HECTOROL CAPSULES, SLOWING THE PROGRESS OF OUR
BUSINESS.
The FDA allowed us to market Hectorol Injection to ESRD patients, but
requires us to complete a post-approval Phase IV trial in pediatric patients
with ESRD by August 2004. We plan to commence these trials by March 2003,
although the actual start date is contingent on receiving additional supply of
Hectorol Injection from either the current supplier or an additional supplier.
Any further delay in receiving product for this clinical trial could cause us to
miss the deadline for completion. If we fail to timely satisfy this requirement,
the FDA could withdraw its existing approval.
13
The FDA also allowed us to market Hectorol Capsules to ESRD patients,
but required us to complete post-approval Phase IV research and development
pertaining to the analysis of this product and its active ingredients by July
2000. We have already completed and submitted the results of our Phase IV
commitments for Hectorol Capsules to the FDA, but we do not yet know if the FDA
will be fully satisfied or will require additional Phase IV commitments.
Even after initial FDA or other health authority approval has been
obtained, further studies, including Phase IV post-marketing studies, may be
required to provide additional data on safety. Additional studies will be
required to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested and may
be required for Hectorol Injection and Hectorol Capsules. Also, the FDA or other
regulatory authorities may require post-marketing reporting to monitor the side
effects of the drug. Results of post-marketing programs may limit or expand
marketing of the products. Further, if there are any modifications to the drug,
including changes in indication, manufacturing process or labeling or a change
in manufacturing facility, the FDA or other regulatory authorities may require
an application seeking approval of such changes.
If we experience delays or are unable to receive approval of our Phase
IV commitments for Hectorol Injection and Hectorol Capsules from the FDA, our
operating results and business will be substantially impaired.
WE MAY NOT BE ABLE TO COMMERCIALIZE HECTOROL IN FOREIGN MARKETS OR FOR
OTHER INDICATIONS IF WE DO NOT ENTER INTO STRATEGIC ALLIANCES OR OTHER MARKETING
ARRANGEMENTS.
If we do not find corporate partners for Hectorol in foreign markets or
for other indications, we may have to reduce our rate of product development or
increase our capital expenditures. Our strategy for the development, testing,
manufacturing and commercialization of our products is to enter into various
collaborations with partners, licensors, licensees and others. We have been in
discussions with several potential collaborators in foreign markets but have not
entered into any agreements. We may not be able to negotiate collaborative
arrangements on acceptable terms, if at all. If we are not able to establish
collaborative arrangements, we will have to either delay further development of
some of our programs or increase our capital expenditures and undertake the
development activities at our own expense. We may encounter significant delays
in commercializing our products or find that the development, manufacture or
sale of our products is hindered by the absence of collaborative agreements.
WE DO NOT HAVE EXPERIENCE COMMERCIALIZING PRODUCTS AND MAY NOT BE ABLE
TO SUCCESSFULLY DO SO.
We began selling Hectorol Capsules in the United States in October
1999, and we began selling Hectorol Injection in the United States in August
2000. As of September 26, 2002, we have hired 44 of the 55 full-time direct
sales people and clinical support specialists we intend to hire. We will need to
invest a significant amount of money to complete the development of our sales
and marketing resources.
We cannot assure you that we will be able to sell and market Hectorol
successfully. We have a sales and marketing force that is limited in number,
experience and training, which we are seeking to expand. We may not be able to
establish and maintain an internal sales and marketing force with technical
expertise and supporting distribution capabilities. If we are unable to
successfully commercialize our Hectorol products, our growth prospects will be
diminished.
ADDITIONAL CLINICAL TRIALS MAY NOT PROVE THAT HECTOROL IS SAFER OR MORE
EFFICACIOUS THAN COMPETING D-HORMONE THERAPIES WHICH MAY LIMIT ITS MARKET
ACCEPTANCE OR LIMIT OUR EFFORTS TO COMMERCIALIZE HECTOROL.
We have not conducted head-to-head clinical trials comparing Hectorol
and competitive D-hormone therapies in ESRD patients. We, and others not
affiliated with us, have compared the toxicity and efficacy of Hectorol to
competitive D-hormone therapies in several animal species. In animal studies,
Hectorol shows a 3- to 15-times lower incidence of toxic side effects when
delivered at doses with equivalent potency. We cannot be sure, however, that the
results of additional clinical trials will prove that our assumptions, based on
animal studies, are correct. Hectorol may not compare favorably to existing or
new D-hormone therapies. If Hectorol, or our follow-on products, do not prove to
be superior to competing products, we may face severe difficulties and may incur
greater expenses in marketing Hectorol. If additional clinical trials prove that
Hectorol is inferior to competitive D-hormone therapies, we may be forced to
suspend our efforts to commercialize Hectorol and to delay or suspend our
planned efforts to develop Hectorol and follow-on compounds for additional
indications.
IF THE MEDICAL COMMUNITY DOES NOT ACCEPT HECTOROL, OUR BUSINESS WILL
SUFFER.
The success of Hectorol depends on its acceptance by the medical
community. Similarly, the success of any products we develop in the future will
depend on the adoption of these products by our targeted markets. Existing and
future products, therapies and technological approaches will compete directly
with our products. Competing products may provide greater therapeutic benefits
for a specific problem or may offer comparable performance at a lower cost. If
doctors and patients do not use our products, we may not become profitable. We
cannot predict how quickly, if at all, the medical community will accept
14
Hectorol or our future products or the extent to which these products will be
used. If we encounter difficulties introducing Hectorol or future products into
our targeted markets, our operating results and business may be substantially
impaired. To facilitate Hectorol's acceptance in the United States market, we
have priced Hectorol at a modest premium to the older D-hormone, calcitriol, but
below the more recently launched D-hormone, paricalcitol.
MEDICARE REIMBURSEMENT FOR HECTOROL INJECTION COULD BE REDUCED OR
MODIFIED.
The Center for Medicare and Medicaid Services (CMS) controls Medicare
reimbursement for D-hormone therapies administered intravenously during
hemodialysis. CMS issued a nationwide reimbursement code for Hectorol Injection
in January 2002, which effectively provides for reimbursement to the dialysis
providers on a "fee-for-service" basis. CMS could decide to eliminate
"fee-for-service" coverage for intravenous D-hormone therapies and instead make
a fixed payment to dialysis providers for the total care of each patient,
otherwise known as capitation, which would include oral or intravenous D-hormone
therapy. Capitation will encourage use of lower cost oral D-hormone therapies
and may have an adverse effect on sales of intravenous D-hormones, including
Hectorol Injection. Also, some of the fiscal intermediaries which process
Medicare and Medicaid claims for reimbursement have proposed "oral first" or
"least cost alternative" pricing for injectible vitamin D therapies. Both types
of proposals are designed to reduce the current outlay for injectible therapies,
and could adversely affect the average selling price of all vitamin D injectible
therapies, including Hectorol Injection.
FAILURE TO RAISE ADDITIONAL FUNDS IN THE FUTURE MAY DELAY OR ELIMINATE
SOME OR ALL OF OUR EFFORTS TO DEVELOP, MANUFACTURE AND SELL HECTOROL AND ANY OF
OUR FUTURE PRODUCTS.
In recent years we have significantly increased our sales and marketing
expenditures and we continue to spend significant amounts on research and
development. We cannot be sure that our estimates of capital expenditures for
Hectorol and the development of our other new products will be accurate. We
could have significant cost overruns that could reduce our ability to
commercialize new products.
Based upon our current plans, we believe that we have sufficient funds
to meet our operating expenses and capital requirements for at least the next
two years. Thereafter, we may need to raise additional capital to fund our
operations. The scope and amount of our liquidity and capital requirements will
depend upon many factors, including the extent to which Hectorol Injection gains
market acceptance, the progress and success of our clinical trials, the timing
and cost involved in obtaining regulatory approvals, the timing and cost of
developing sales and marketing programs, our ability to enter into strategic
alliances, manufacturing and research and development activities and competitive
developments. Additional required financing may not be available on satisfactory
terms, if at all. If we are unable to obtain financing in the future, we may
have to seek alternative sources of capital or re-evaluate our operating plans,
or we may be required to delay, reduce or eliminate some or all of our research
and development activities or sales and marketing efforts, in which case our
operating results and business may be substantially impaired.
WE LACK SUFFICIENT LONG-TERM DATA REGARDING THE SAFETY AND EFFICACY OF
OUR PRODUCTS AND WE COULD FIND THAT OUR LONG-TERM DATA DO NOT SUPPORT OUR
CURRENT CLINICAL RESULTS.
Hectorol is supported by less than two years of patient follow-up, and
therefore, we could discover that our current clinical results cannot be
supported by actual clinical experience. If longer-term patient studies or
clinical experience indicate that treatments with our products do not provide
patients with sustained benefits, our sales could decline. If longer-term
patient studies or clinical experience indicate that our procedures cause tissue
or muscle damage, motor impairment or other negative effects, we could be
subject to significant liability. We are not certain how long it may take for
patients to show significant increases in side effects. Further, because some of
our data have been produced in studies that are not randomized and involved
small patient groups, our data may not be reproduced in wider patient
populations.
WE HAVE NO EXPERIENCE MANUFACTURING PHARMACEUTICAL PRODUCTS SO WE MUST
RELY EXCLUSIVELY ON SUPPLIERS WHO ARE OUTSIDE OF OUR CONTROL TO MANUFACTURE OUR
PRODUCTS, INCLUDING HECTOROL.
The manufacture of pharmaceutical products requires significant
expertise and capital investment. We do not have the internal capability to
manufacture pharmaceutical products, and we currently use others to manufacture
active pharmaceutical ingredients and to formulate and package Hectorol. Our
manufacturers are required to adhere to regulations enforced by the FDA. Our
dependence upon others to manufacture our products may adversely affect our
profit margins and our ability to develop and commercialize products on a timely
and competitive basis. Delays or difficulties with contract manufacturers in
producing, packaging or distributing our products would adversely affect the
sales of Hectorol or introduction of other products. If we have to seek
alternative sources of supply, we may be unable to enter into alternative supply
arrangements on commercially acceptable terms, if at all. We employ a small
number of employees and independent consultants to coordinate and manage the
actions of these parties. Any disruption of these activities could impede our
ability to sell Hectorol, which would result in reduced revenue.
15
The sole manufacturer of Hectorol Injection received a warning letter
from the FDA in September 2000 identifying general deviations from the FDA's
current Good Manufacturing Practices (c-GMP) regarding manufacturing procedures,
records and training. Our supplier received another letter from the FDA in
December 2001 identifying additional deviations from c-GMP pursuant to a
follow-up inspection of their facility. In response to this second FDA letter,
our supplier agreed to halt production of Hectorol Injection until such time as
these deviations could be remediated. Our supplier is scheduled to produce
validation lots during late October and early November that could ultimately be
used as commercial product. If our manufacturer completes the validation lots by
early November and passes the FDA site inspection and the FDA accelerates their
review of our submission, we do not anticipate a reduction in revenue as a
result of a reduced supply of product. If our manufacturer does not meet this
timetable, we could experience a reduction in revenue. There can be no assurance
that the FDA will find that our manufacturer's responses and corrective actions
are adequate or that the FDA will not take further action. If the FDA is not
satisfied with our manufacturer's responses and corrective actions, the FDA
could take regulatory actions against our manufacturer, including seizure of
products, injunction against further manufacture, recall or other actions that
could interrupt production of Hectorol Injection. Any such action would have a
material adverse effect on us. We are managing the inventory levels of the
supplier channels to attempt to ensure that the end-users of our product,
clinics and patients, do not experience any shortage of product. In addition, we
have been working on contingency plans, including an additional source of
supply. We anticipate that an additional source would be available during the
second quarter of 2003.
We purchase our active pharmaceutical ingredient from a sole supplier,
although we are currently in the process of obtaining regulatory approval for an
additional supplier. In addition, Bone Care relies on one supplier to formulate
capsules and another supplier to package both Hectorol Capsules and Hectorol
Injection. Although other suppliers, formulators and vendors are available and
could provide these goods and services to Bone Care on comparable terms, any
change in suppliers could cause a delay in manufacturing and a possible loss of
sales, which would affect operating results adversely.
While we currently do not intend to manufacture any products ourselves,
we may choose to do so in the future. If we were to manufacture products
ourselves, we would need substantial additional financing to build manufacturing
facilities. We also would be subject to additional regulatory requirements and
would be subject to risks associated with delays or difficulties encountered in
manufacturing a product. We may not be able to manufacture any products
successfully or in a cost-effective manner.
WE CANNOT ASSURE YOU THAT WE WILL OBTAIN REGULATORY APPROVALS FOR ANY
OF OUR FUTURE PRODUCTS.
Obtaining required regulatory approvals may take several years to
complete and consume substantial capital resources. There is no assurance that
the FDA or any other regulatory authority will act quickly or favorably on any
of our future requests for product approval, or that the FDA or any other
regulatory authority will not require us to provide additional data that we do
not currently anticipate to obtain product approvals. We cannot apply for FDA
approval to market our future products until each product successfully completes
its pre-clinical and clinical trials. We have filed a supplemental New Drug
Application with the FDA in December 2001, requesting approval to market
Hectorol Capsules for secondary hyperparathyroidism in CKD patients. Several
factors could prevent successful completion or cause significant delays of these
trials, including an inability to enroll the required number of patients or
failure to demonstrate adequately that the product is safe and effective for use
in humans. If safety problems develop, the FDA could stop our trials before
completion. If we are not able to obtain regulatory approvals for use of our
future products, or if the patient populations for which they are approved are
not sufficiently broad, the commercial success of these products could be
limited.
OUR FAILURE TO OBTAIN REGULATORY APPROVALS IN FOREIGN JURISDICTIONS
WOULD PREVENT US FROM MARKETING HECTOROL ABROAD.
We also intend to market our products in international markets,
including the European Union and Japan. We must obtain separate regulatory
approvals in order to market our products in the European Union, Japan and many
other foreign jurisdictions. The regulatory approval processes differ among
these jurisdictions. Approval in any one jurisdiction does not ensure approval
in a different jurisdiction. We intend to collaborate with others to pursue
foreign regulatory approvals and to sell our products in these markets. Hectorol
Injection and Hectorol Capsules have not been approved for marketing by any
governmental entity outside of the United States. We will require substantial
additional funds to develop the product, conduct clinical trials and gain the
necessary regulatory approvals for Hectorol Injection or Hectorol Capsules in
foreign countries. As a result, revenues from sales of Hectorol outside the
United States will require us to invest additional resources or enter into
arrangements with partners.
OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL, THE LOSS OF WHOM COULD IMPAIR
OUR BUSINESS.
Our success depends upon our ability to attract and retain qualified
scientific, technical and managerial personnel. Pharmaceutical companies,
academic and government organizations, research institutions and other entities
compete for the services of qualified scientists, technicians and managerial
personnel. We may not be able to attract and retain such personnel.
16
Furthermore, our anticipated growth and expansion into areas and activities
requiring additional expertise will require additional personnel.
OUR FAILURE TO EXPAND OUR MANAGEMENT SYSTEMS AND CONTROLS TO SUPPORT
ANTICIPATED GROWTH COULD HARM OUR BUSINESS.
Our operations continue to grow and we expect this expansion to
continue as we execute our business strategy. Sustaining our growth has placed
significant demands on management and our administrative, operational,
information technology, financial and personnel resources. Accordingly, our
future operating results will depend on the ability of our officers and other
key employees to continue to implement and improve our operational, quality
compliance, regulatory support and financial control systems, and effectively
expand, train and manage our employee base. We may not be able to manage our
growth successfully, which could seriously harm our operating results and
business.
RISKS RELATED TO OUR INDUSTRY
WE HAVE MANY COMPETITORS, SEVERAL OF WHICH HAVE SIGNIFICANTLY GREATER
FINANCIAL AND OTHER RESOURCES.
We face competition from several companies that are focused on
developing D-hormone therapies, particularly to treat secondary
hyperparathyroidism and hyperproliferative diseases. We also compete with other
companies that produce D-hormones and D-hormone analogs for international
marketplaces where these treatments have already been approved for secondary
hyperparathyroidism and hyperproliferative diseases. We expect competition to
increase further as additional companies begin to enter our markets and/or
modify their existing products to compete directly with ours. Companies also
compete indirectly with us utilizing different therapeutic approaches. Many of
our competitors have substantially greater financial, research and development
and marketing resources than we do and are better equipped to develop,
manufacture and market products, for example:
- Abbott Laboratories, Inc., markets intravenous
calcitriol (Calcijex), and intravenous paricalcitol
(Zemplar), both of which compete with Hectorol
Injection.
- Roche Pharmaceuticals markets oral calcitriol
(Rocaltrol) and TEVA Pharmaceuticals markets a
generic form of oral calcitriol. These products are
approved to manage secondary hyperparathyroidism in
kidney dialysis and CKD patients in the United States
and in European countries. Oral calcitriol is also
approved in Japan.
- A number of companies market oral and intravenous
alfacalcidol, a synthetic analog of calcitriol, in
Europe and Japan under various trade names.
- Other companies, including Amgen, Inc., Chugai
Pharmaceutical Co., Ltd., and NPS Pharmaceuticals,
Inc., also are developing new therapies to manage
secondary hyperparathyroidism in kidney dialysis
patients in the United States, European or Asian
markets.
- Leo Pharmaceuticals Products A/S and TEVA
Pharmaceuticals are marketing alfacalcidol in Europe
to manage secondary hyperparathyroidism in kidney
dialysis patients or to treat osteoporosis in elderly
patients associated with secondary
hyperparathyroidism.
- Leo Pharmaceuticals Products A/S and ILEX Oncology,
Inc., are developing D-hormone therapies to treat
certain cancers.
- Leo Pharmaceuticals Products A/S and Bristol-Myers
Squibb Company are marketing topical Dovonex in the
United States and Europe to treat psoriasis. Teijin
Ltd. is marketing topical tacalcitol to treat
psoriasis outside the United States.
Our competitors may have broad product lines which allow them to
negotiate exclusive, long-term supply contracts and offer comprehensive pricing
for their products. Broader product lines may also provide our competitors with
a significant advantage in marketing competing products to group purchasing
organizations and other managed care organizations that are increasingly seeking
to reduce costs through centralized purchasing. Greater financial resources and
product development capabilities may allow our competitors to respond more
quickly to new or emerging technologies and changes in customer requirements
that may render our products obsolete. These technological developments which
result in Hectorol becoming obsolete or non-competitive may occur before we are
able to achieve profitability. We also face competition for marketing,
distribution and collaborative development agreements, for establishing
relationships with academic and research institutions and for licenses to
intellectual property. Our competitors compete with us in attracting and
retaining qualified scientific and management personnel as well as in acquiring
technologies complementary to our programs.
17
OUR PRODUCTS AND DEVELOPMENT ACTIVITIES ARE SUBJECT TO EXTENSIVE
GOVERNMENT REGULATION WHICH COULD MAKE IT MORE EXPENSIVE AND TIME-CONSUMING FOR
US TO CONDUCT OUR BUSINESS.
Any new drug product must undergo lengthy and rigorous clinical testing
and other extensive, costly and time-consuming procedures mandated by the FDA
and foreign regulatory authorities. We may elect to delay or cancel our
anticipated regulatory submissions for new indications for Hectorol or proposed
new products for a number of reasons, including:
- unanticipated clinical testing results;
- lack of sufficient resources;
- changes in, or adoption of, new FDA regulations;
- unanticipated enforcement of existing regulations or
guidelines;
- unexpected technological developments; and
- developments by our competitors.
The FDA continues to review products even after they receive FDA
approval. The manufacture and marketing of Hectorol is subject to ongoing
regulation, including compliance with the FDA's current Good Manufacturing
Practices, adverse event reporting requirements and the FDA's general
prohibitions against promoting products for "off-label" uses, or uses not listed
on the FDA-approved labeling. We also are subject to inspection and market
surveillance by the FDA for compliance with these and other requirements. Any
enforcement action resulting from failure to comply with these requirements
could adversely affect the manufacturing and marketing of Hectorol. In addition,
the FDA could withdraw a previously approved product from the market upon
receipt of new information.
We must also comply with numerous federal, state and local laws,
regulations and recommendations relating to safe working conditions, current
Good Laboratory Practices, current Good Manufacturing Practices and the
experimental use of animals. We cannot predict the extent of government
regulation or the impact of new governmental regulations which might have an
adverse effect on the discovery, development, production and marketing of our
products, and require us to incur significant costs to comply with the
regulations.
RISKS RELATED TO OUR STOCK
CONCENTRATION OF OWNERSHIP IN OUR COMPANY BY CERTAIN SHAREHOLDERS MAY
MAKE IT MORE DIFFICULT TO REPLACE OR REMOVE OUR CURRENT MANAGEMENT.
Based on the number of shares outstanding at August 1, 2002, our
executive officers and directors beneficially own approximately 24% of the
outstanding shares of our common stock and, as a result, have significant
control of us, which they could exert to make it more difficult to replace or
remove our current management.
OUR FUTURE OPERATING RESULTS AND THE TRADING PRICE OF OUR COMMON STOCK
IS LIKELY TO FLUCTUATE SUBSTANTIALLY IN THE FUTURE.
Our stock price has fluctuated substantially since we became a public
company in May 1996. Our stock price, like that of many other biotechnology and
pharmaceutical companies, is likely to remain volatile. The trading price of our
common stock may fluctuate widely as a result of a number of factors, some of
which are not in our control, including:
- market perception and customer acceptance of our
products;
- our efforts to increase sales of our Hectorol
products;
- quarter-to-quarter variations in our operating
results;
- timely implementation of new and improved products;
- our level of investment in research and development;
- increased competition;
- our establishment of strategic alliances or
acquisitions;
- changes in our relationships with suppliers;
- litigation concerning intellectual property rights in
the industry;
- announcements regarding clinical activities or new
products by us or our competitors;
- timing of regulatory actions, such as product
approvals or recalls;
- costs we incur in anticipation of future sales, such
as inventory purchases or expansion of manufacturing
facilities;
- general and economic conditions in the biotechnology
and pharmaceutical industry and the state of
healthcare cost containment efforts, including
reimbursement policies;
- limited research coverage by independent securities
analysts; and
- changes in earnings estimates by analysts.
18
In addition, the market for our stock has experienced extreme price and
volume fluctuations, which have often been unrelated to our operating
performance. We believe that period-to-period comparisons of our historical and
future results will not necessarily be meaningful and that investors and
prospective investors in Bone Care should not rely on them as an indication of
future performance. To the extent we experience the factors described above, our
future operating results may not meet the expectations of securities analysts or
investors from time to time, which may cause the market price of our common
stock to decline or be volatile.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY
DEPRESS OUR STOCK PRICE.
Most of our outstanding shares of common stock are freely tradable. The
market price of our common stock could drop due to sales of a large number of
shares or the perception that such sales could occur. These factors also could
make it more difficult to raise funds through future offerings of common stock.
RISKS RELATED TO INTELLECTUAL PROPERTY
IF WE ARE UNABLE TO PROTECT OUR PATENTS, OUR COMPETITIVENESS AND
BUSINESS PROSPECTS MAY BE MATERIALLY DAMAGED.
Our success will depend to a significant degree on our ability to
obtain and enforce patents and licenses to patent rights, both in the United
States and in other countries. The patent position, however, of pharmaceutical
companies is often uncertain and involves complex legal and factual questions,
not the least of which is that we cannot predict the breadth of patent claims in
pharmaceutical patents. In addition, a substantial backlog of pharmaceutical
patent applications exists at the United States Patent and Trademark Office. The
backlog may delay review and potential issuance of patents.
To date, we have filed a number of patent applications in the United
States and other countries. Our issued patents and pending patent applications
relating to Hectorol are method-of-use patents which cover only the use of
certain compounds to treat specified conditions, rather than composition-of-
matter patents which would cover the chemical composition of the active
ingredient. Method-of-use patents provide less protection than
composition-of-matter patents because of the possibility of off-label uses if
other companies market or make the compound for other uses. We actively continue
to file applications as appropriate for patents covering our products, uses and
processes. We cannot guarantee that we will obtain patent protection for our
products or processes.
We also cannot guarantee that competitors will not successfully
challenge our patents, if issued, on the basis of validity and/or
enforceability. Nor can we guarantee that they will not circumvent or design
around our patent position. We could face increased competition as a result of
the failure of patents to be issued on our pending applications or a finding of
invalidity and/or unenforceability of one of our patents.
In the United States, patent applications are maintained in secrecy
until a patent issues. We cannot be certain that others have not filed patent
applications for compounds, uses or processes covered by our pending
applications. We also cannot be certain that we were the first to invent or
discover the compound, use or process that is the subject of our applications.
Competitors may have filed applications for, or may have received patents and
may obtain additional patents and proprietary rights relating to, compounds,
uses or processes that block or compete with our patents and rights. We are
aware of a significant number of patent applications relating to D-hormones
filed by, and patents issued to, third parties. If any of our competitors have
filed patent applications in the United States that claim compounds, uses or
processes also claimed by us, we may have to participate in an interference
proceeding declared by the United States Patent and Trademark Office to
determine priority of invention and the corresponding right to a patent for the
compounds, uses or processes in the United States. A proceeding could result in
substantial cost to us even if the outcome is favorable.
We have not filed patent applications in every country. In certain
countries, obtaining patents for our products, processes and uses may be
difficult or impossible. Patents issued in countries and regions other than the
United States, Japan and Europe may be harder to enforce than, and may not
provide the same protection as, patents obtained in the United States, Europe
and Japan.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS AND TRADE SECRETS,
OUR COMPETITIVENESS AND BUSINESS PROSPECTS MAY BE MATERIALLY DAMAGED.
Operation of our business also relies on our ability to protect
proprietary information and trade secrets. We require our employees, consultants
and advisors to execute confidentiality agreements upon commencement of
employment or consulting relationships with us. We cannot guarantee, however,
that these agreements will provide meaningful protection or adequate remedies
for our proprietary information and trade secrets in the event of unauthorized
use or disclosure of such information nor can we guarantee that the parties to
the agreements will not breach their agreements. We also cannot guarantee that
third parties
19
will not know, discover or develop independently equivalent proprietary
information or techniques, that they will not gain access to our trade secrets
or disclose our trade secrets to the public. Therefore, we cannot guarantee that
we can maintain and protect unpatented proprietary information and trade
secrets.
WE MAY BE ACCUSED OF INFRINGING UPON THE PROPRIETARY RIGHTS OF OTHERS
AND ANY RELATED LITIGATION COULD DAMAGE OUR BUSINESS.
Our commercial success depends significantly on our ability to operate
our business without infringing upon the patents and other proprietary rights of
third parties. We cannot guarantee that our compounds, uses or processes do not
and will not infringe upon the patents and proprietary rights of third parties.
In the event of an infringement determination, we may be enjoined from research,
development or commercialization of our products. We may also be required to
enter into royalty or license arrangements with third parties claiming
infringement or otherwise to design around their patents. Any required license,
if available at all, may not be obtained on commercially reasonable terms. If we
do not obtain the licenses or are unable to design around the patent, we may be
delayed or prevented from pursuing the development of some of our product
candidates.
ITEM 2. PROPERTIES
We currently lease approximately 34,000 square feet of office and
laboratory space in Middleton, Wisconsin. This lease expires in January 2006. We
believe our facilities are adequate to meet our needs for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
We may be a defendant from time to time in actions arising out of our
ordinary business operations. There are no material legal proceedings pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of August 1, 2002, our executive officers are as follows:
NAME AGE POSITION
---- --- --------
Paul L. Berns 35 President and CEO
Robert A. Beckman 48 Vice President-Finance
Jim Caruso 43 Vice President-Sales
Charlie Basil Mundy II 56 Vice President-Marketing
R. Andrew Morgan 44 Vice President-Regulatory Affairs, Quality and Compliance
Paul L. Berns joined Bone Care in June 2002 as President and CEO and
Director. Mr. Berns was formerly Vice President and General Manager of the
Immunology and Oncology business unit of Abbott Laboratories from March 2001 to
April 2002. His prior appointments include Vice President, Marketing at BASF
Pharmaceuticals from June 2000 to March 2001 and serving at Bristol Myers Squibb
Company from 1990 to June 2000 where he held positions of Territory Manager,
Senior Product Manager, Director and finally Vice President of Neuroscience
Marketing.
Robert A. Beckman has served as Vice President- Finance since July
2001. Mr. Beckman was previously the Vice President of Finance for Lunar
Corporation from 1987 until August 2000; he also served as Vice President of
Bone Care from May 1996 to November 1996 and served as a Director of Bone Care
from 1989 to July 2002.
Jim Caruso joined Bone Care in August 2002 as our Vice President-
Sales. Mr. Caruso was Vice President of Sales of the Neuroscience Business Unit
at Novartis from June 2001 to August 2002. Mr. Caruso was Vice President of
Sales at BASF Pharmaceuticals from June 2000 to June 2001 and from 1988 to June
2000; Mr. Caruso held several positions at Bristol Myers Squibb including
Director of Sales- West Coast and Senior Director of Serzone Marketing.
20
Charlie Basil Mundy II joined Bone Care in January 2002 as our Vice
President- Marketing. Mr. Mundy held several senior marketing positions at
Celltech Pharmaceuticals from July 2000 to December 2001. His prior appointments
include Vice President, Marketing at MGI Pharma from December 1997 to March
1999, Director, INFeD Sales at Schein Pharmaceutical from January 1996 to
December 1997 and Marketing Director for the National Kidney Foundation from May
1995 to January 1996. Mr. Mundy was previously employed by Johnson and Johnson,
Ortho Biotech Inc. for 27 years.
R. Andrew Morgan, R.Ph., joined Bone Care in April 2002 as our Vice
President- Regulatory Affairs, Quality and Compliance. Mr. Morgan was Director
of Regulatory Affairs for Celltech Pharmaceuticals from November 1997 to March
2002. His prior appointments include Manager of Regulatory Affairs for Medeva,
Inc. from May 1994 to November 1997 and Senior Regulatory Affairs Associate for
Adams Laboratories from June 1991 to May 1994. Mr. Morgan also worked seven
years as a clinical Pharmacist and Manager at All Saints Hospital.
Officers are elected to serve, subject to the discretion of the Board
of Directors, until their successors are appointed.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the NASDAQ National Market of The NASDAQ
Stock Market under the symbol "BCII" and has been publicly traded since May
1996. The following table sets forth high and low sales prices as reported on
The NASDAQ Stock Market for fiscal years 2001 and 2002 as indicated.
HIGH LOW
------ ------
FISCAL YEAR ENDED JUNE 30, 2001
First Quarter ............. $23.94 $18.00
Second Quarter ............ 30.25 13.00
Third Quarter ............. 18.38 14.75
Fourth Quarter ............ 27.80 14.92
FISCAL YEAR ENDING JUNE 30, 2002
First Quarter ............. $27.50 $16.00
Second Quarter ............ 21.80 16.31
Third Quarter ............. 18.70 12.01
Fourth Quarter ............ 13.73 5.50
As of June 30, 2002, approximately 185 shareholders of record held our
common stock.
We have never declared or paid any cash dividends on our common stock,
and we do not plan on paying any in the near future. Any future determination as
to the declaration and payment of dividends will be at the discretion of our
board of directors and will depend on then existing conditions, including our
financial condition, results of operations, contractual restrictions, capital
requirements, business prospects and other factors our board of directors deem
relevant.
22
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected statements of operations data
and balance sheet data for the fiscal years ended June 30, 1998, 1999, 2000,
2001 and 2002. The financial data with respect to our statements of operations
for the fiscal years ended June 30, 2000, 2001 and 2002 and with respect to our
balance sheets as of June 30, 2001 and 2002 are derived from our audited
financial statements that appear elsewhere in this filing. The following
statements of operations data for fiscal years ended June 30, 1998 and 1999 and
balance sheet data as of June 30, 1998, 1999 and 2000 are derived from our
audited financial statements not included in this filing. You should read the
financial statement data in conjunction with the discussion in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the audited financial statements and the related notes to those audited
financial statements included elsewhere in this filing.
YEAR ENDED JUNE 30,
----------------------------------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues .................................. $-- $-- $ 385 $ 5,997 $ 14,991
Operating expenses:
Cost of sales ........................ -- -- 103 1,645 3,391
Inventory write-off .................. -- -- 400 260 166
Research and development ............. 3,932 3,455 4,048 4,556 5,739
Marketing and administrative ......... 898 2,855 6,282 9,859 13,856
-------- -------- -------- -------- --------
Total operating expenses ........ 4,830 6,310 10,833 16,320 23,152
Loss from operations ...................... (4,830) (6,310) (10,448) (10,323) (8,161)
Interest income, net ...................... 340 533 656 1,309 1,257
-------- -------- -------- -------- --------
Loss before income tax .................... (4,490) (5,777) (9,792) (9,014) (6,904)
Income tax expense ........................ -- -- (13) -- --
-------- -------- -------- -------- --------
Net loss .................................. $ (4,490) $ (5,777) $ (9,805) $ (9,014) $ (6,904)
======== ======== ======== ======== ========
Net loss per common share-basic and diluted $ (0.51) $ (0.57) $ (0.89) $ (0.70) $ (0.49)
======== ======== ======== ======== ========
Weighted average common shares outstanding 8,747 10,055 11,071 12,884 14,084
JUNE 30,
----------------------------------------------------------------------------
(IN THOUSANDS)
BALANCE SHEET DATA: 1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
Cash and cash equivalents . $ 3,484 $ 7,314 $ 4,736 $ 1,843 $ 2,024
Marketable securities ..... -- -- 4,972 15,080 18,437
Long-term securities ...... -- -- -- 14,424 3,720
Working capital ........... 3,073 7,956 9,229 20,786 24,962
Total assets .............. 5,813 10,303 12,460 40,477 34,684
Total long-term liabilities -- -- -- -- --
Accumulated deficit ....... (10,020) (15,797) (25,602) (34,616) (41,520)
Total shareholders' equity 5,122 9,717 11,083 38,098 32,024
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with "Selected Financial Data" and our financial statements and the related
notes included elsewhere in this filing.
OVERVIEW OF OUR BUSINESS
Bone Care is a pharmaceutical company engaged in discovering,
developing and commercializing improved vitamin D-hormone therapies to treat
secondary hyperparathyroidism in patients with kidney (or renal) disease,
osteoporosis and other diseases including psoriasis and cancers of the prostate,
breast and colon. We were founded in 1984 as a subsidiary of Lunar Corporation,
located in Madison, Wisconsin, and we were spun off from Lunar in 1996.
We licensed our first product, doxercalciferol or Hectorol, as it is
known commercially, in 1987 from the University of Wisconsin, a leading vitamin
D research center. Hectorol, also known as doxercalciferol, is a vitamin D
replacement therapy approved by the FDA in two formulations to treat secondary
hyperparathyroidism in patients with end-stage renal disease, or ESRD. Hectorol
is a safe and effective therapy for reducing elevated levels of parathyroid
hormone (PTH) in blood in the management of secondary hyperparathyroidism, a
disease characterized by excessive secretion of PTH. Hyperparathyroidism, if
left untreated, can eventually result in cardiovascular compromise, reduced
immunity, muscle weakness, bone loss and fractures. Virtually all ESRD patients
suffer from secondary hyperparathyroidism. We obtained FDA approval for Hectorol
Capsules in June 1999, and we began selling this orally administered product in
the United States in October 1999. We filed a supplemental New Drug Application
with the FDA in December 2001 to treat secondary hyperparathyroidism in chronic
kidney disease (CKD) patients. If approved, this would expand the approved
indications for Hectorol Capsules. We obtained FDA approval for Hectorol
Injection in April 2000, and we began selling this intravenous product in the
United States in August 2000. We are also developing doxercalciferol and other
vitamin D-hormones to treat several other diseases.
From our inception in 1984, we have generated minimal revenue from
operations, and from our inception substantially all of our resources have been
dedicated to:
- the development, patenting, pre-clinical testing, and clinical
trials of Hectorol Capsules and Hectorol Injection;
- the development of manufacturing processes for Hectorol
Capsules and Hectorol Injection;
- pursuing United States regulatory approvals of Hectorol
Capsules and Hectorol Injection;
- the sales and marketing associated with the launch of Hectorol
Capsules and Hectorol Injection; and
- research and development and pre-clinical testing of other
potential product candidates.
We have lost money since inception and, as of June 30, 2002 have an
accumulated deficit of approximately $41.5 million. Our only sources of revenue
have been:
- revenues from the launch of Hectorol Capsules and Hectorol
Injection;
- licensing fees associated with our early stage research
collaborations, which licenses have since expired; and
- fees from conducting incidental laboratory assay services.
We estimate that commercialization, regulatory compliance and sales
efforts associated with Hectorol Capsules and Hectorol Injection will exceed $14
million per year prior to achieving profitable operating levels. Further,
development of LR-103, BCI-202 and other product candidates, or expansion of
Hectorol into other therapeutic areas, will require significant, time-consuming
and costly research and development, pre-clinical testing and extensive clinical
trials prior to submission of any regulatory application for commercial use. We
plan to continue pre-clinical testing of LR-103 and BCI-202 in order to begin
Phase I clinical trials on both product candidates within three years. The
pre-clinical efforts could cost approximately $3 million. We expect to incur
substantial losses at least through June 30, 2003 until revenues from the sale
of Hectorol products are