BioSpecifics Technologies Corp.
1999 Annual Report A

Back to 2000 Annual Report
Annual Report Archive - See the 1997 Report
Annual Report Archive - See the 1998 Report

Corporate Profile
To Our Stockholders
Management's Discussion and Analysis of Financial Condition and Results of Operations
Price Range of Common Stock

CORPORATE PROFILE

BioSpecifics Technologies Corp.is a pharmaceutical company with a focus on wound healing and tissue remodeling. It produces Collagenase ABC, an enzyme that digests collagen in order to remove non-viable tissue from skin ulcers and wounds. Collagenase Santyl¨ is the leading enzymatic debridement ointment in the United States and is sold under other trademarks abroad.

The mission of BioSpecifics is to further our role in the healing of wounds and to develop injectable drugs to provide healthcare professionals with a precise chemical "tool" that can deliver pinpoint, minimally invasive therapy for conditions that will benefit from the removal of collagen.

TO OUR STOCKHOLDERS

It was a good year. We earned $1.2 million, or $.26 per basic and diluted share, on product and royalty revenues of $7.1 million. More importantly, our research programs are proving very productive.

DUPUYTREN'S DISEASE
Dupuytren's disease is a deformity of the hand in which there is a contracture of fingers toward the palm, often resulting in functional disability. The only proven therapy for this disease is surgery, which involves the removal of the collagen cords reducing the extension of the finger joints, the cause of the contracture. We believe our injectable collagenase holds real promise as an alternative to the surgical procedure. A double-blind Phase 2 clinical trial at State University of New York at Stony Brook using our collagenase injection has been completed and the full analysis is being made for submission to the FDA. This study was conducted by Lawrence Hirst, MD., Chairman, Department of Orthopedics, and Dr. Marie Badalamente, both highly respected hand specialists. We are extremely encouraged by the progress to date and consequently are supporting expanded trials at two major university centers. We will make an announcement after the results of the Stony Brook trial have been submitted to FDA. We are hopeful that this Orphan Drug designate will receive active consideration by the FDA.

PEYRONE'S DISEASE
Peyronie's disease is a condition in which collagen plaques form on the shaft of the penis and interfere with erection and sexual intercourse. As with Dupuytren's disease, we believe our injectable collagenase holds real promise as an alternative to the surgical procedure which is the only proven therapy. An open label trial using our collagenase injection on 22 patients suffering from Peyronie's disease has produced excellent initial results. Six month data will be available and announced. This trial was conducted at Devine Tidewater Urology in Norfolk, VA, generally recognized as one of the world's busiest centers for the treatment of this disease, under the auspices of Gerald H. Jordan, MD. Like Dupuytren's, our experimental treatment for Peyronie's disease has Orphan Drug designation from the FDA.

WOUND HEALING
Our support of basic research in the area of wound healing has resulted in BioSpecifics and Tufts University receiving U.S. patent no. 5,851,522 for technology which has promise to accelerate the healing of normal and abnormal wounds. The technology-a formulation of our collagenase enzyme and a known growth factor, enhances cell migration and cell growth. The work performed in a Tufts University School of Medicine laboratory suggests that the new technology can accelerate normal wound healing by cell stimulation, as well as prove beneficial to healing chronic wounds such as bedsores and diabetes-related lesions.

Sincerely,

Edwin H. Wegman
President and Chairman
June 28, 1999

This report contains, in addition to historical information, statements with regard to expectations as to financial results and other aspects of our business that involve risks and uncertainties and may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect management's current views and are based on certain assumptions. Actual results could differ materially from those currently anticipated as a result of a number of factors, including, but not limited to, the risks and uncertainties discussed in this report, particularly those relating to government regulation, changing market conditions, the impact of competitive products and pricing, the timely development and approval by the FDA and foreign health authorities of potential products, market acceptance of BioSpecifics' potential products, and other risks detailed herein and in other filings BioSpecifics makes with the Securities and Exchange Commission, including BioSpecifics Annual Report on Form 10-KSB for the year ended January 31, 1999. Further, any forward looking statement or statements speak only as of the date on which such statements were made, and BioSpecifics undertakes no obligation to update any forward looking statement or statements to reflect events or circumstances after the date on which such statement or statements were made.

GENERAL

BioSpecifics is a biopharmaceutical company focusing on wound healing and tissue remodeling. It produces Collagenase ABC, an enzyme that digests collagen and removes non-viable tissue from skin ulcers and wounds. Collagenase ABC is the essential ingredient in the prescription drug Collagenase Santyl¨ Ointment sold in the United States by BioSpecifics' licensee, Knoll Pharmaceutical Company ("KPC"). Collagenase ABC is sold under other trademarks abroad.

BioSpecifics has two injectable Collagenase ABC derived product candidates in clinical trials. The first product is for Dupuytren's disease, a deformity of the hand where fingers contract toward the palm, often resulting in functional disability. The other product is for Peyronie's disease, a deformity of the penis. Currently, the only proven therapy for these diseases is surgery. Both product candidates have "Orphan Drug" designation from the FDA.

RESULTS OF OPERATIONS

REVENUES
Net sales were $4,556,033 and $3,389,315 for the fiscal years ended January 31, 1999 and 1998, respectively, an increase of $1,166,718 or 34%. Sales of the product, Collagenase ABC, to KPC increased by 26% and sales to BioSpecifics' customer in Brazil increased by 62%.

Sales to the Brazilian customer may decrease in fiscal 2000 from levels achieved in fiscal 1999 due to economic turmoil in Brazil. Sales to KPC may decrease in fiscal 2000 versus fiscal 1999, based on KPC's current backlog of orders.

Royalties earned on Collagenase Santyl¨ ointment sales by KPC were $2,505,851 and $2,435,518 for the fiscal years ended January 31, 1999 and 1998, respectively, representing an increase of $70,333 or 3% due to an increase in Santyl¨ sales during the fiscal year.

BioSpecifics did not earn license fees in the fiscal years ended January 31, 1999, and 1998. There were no agreements reached in either fiscal 1999 or 1998.

COST OF SALES
Cost of sales was $2,250,945 and $1,665,202, respectively, in fiscal 1999 and 1998, an increase of $585,743 or 35% due to (i) the 34% increase in net sales of the product, and (ii) a reserve of $120,000 for inventory that may be reprocessed and tested as a result of observations made by the FDA in its latest inspection of BioSpecifics' facilities. "Liquidity, Capital Resources and Financial Conditions."

SELLING, GENERAL AND ADMINISTRATION
Selling, general and administrative expenses ("SG&A") were $1,776,293 and $1,526,534, respectively, in fiscal 1999 and 1998, an increase of $249,759, or 16%. SG&A costs increased due to higher consulting and professional fees, and higher administrative salaries.

R ESEARCH AND DEVELOPMENT

Research and development expenses ("R&D") were $2,050,049 and $1,904,808, respectively, in fiscal 1999 and 1998, an increase of $145,241 or 8%. The increase was primarily a result of continued expenditures for clinical trials in the United States for Dupuytren's disease, which are in Phase 2, and Peyronie's disease. BioSpecifics also incurred development expenses in Europe relating to its ointment product. BioSpecifics believes fiscal 2000 R&D expense may exceed that of fiscal 1999, as these clinical trials are ongoing and may progress to expanded trials.

OTHER INCOME, NET

Other income, net was $434,911 and $505,678, respectively, in fiscal 1999 and 1998, a decrease of $70,767. The higher amount in fiscal 1998 was due primarily to a profit of $96,683 realized on the sale of non-production related real estate in Curacao.

PROVISION FOR INCOME TAXES
BioSpecifics' provision for income taxes was $139,300 and $363,820, respectively in fiscal 1999 and 1998. The principal reason for the difference between the United States Federal statutory tax rate of 34% and BioSpecifics' effective tax rate is due to a 2% tax rate applicable to pre-tax earnings from operations of BioSpecifics' subsidiary in Curacao, and recognition of Orphan Drug and other tax credits available to BioSpecifics as a result of its expenditures for clinical trials for Peyronie's and Dupuytren's diseases. The higher tax provision in fiscal 1998 was due to the higher level of investment and other income generated in Curacao which is taxed at rates approximating 30%, and lower tax credits available.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

BioSpecifics' primary source of working capital is from operations, which includes sales of product, royalties, and periodic license fees. At January 31, 1999, BioSpecifics had working capital of approximately $9.0 million which includes cash and cash equivalents, and marketable securities of approximately $7.2 million. The principal source of cash in fiscal 1999 was approximately $1.9 million from operating activities. This was offset by approximately $1.1 million used to purchase treasury stock during fiscal 1999.

In January and March of 1999, BioSpecifics was issued a List of Inspectional Observations ("483s") from FDA inspectors, citing numerous inspectional observations relating to deficiencies in BioSpecifics' "good manufacturing practice" at its Lynbrook, New York and Curacao, Netherlands Antilles facilities, respectively. In addition, on May 10, 1999, BioSpecifics received a letter from the FDA (the "FDA Letter") citing certain inspectional observations relating to deficiencies at its Lynbrook, New York facility, Curacao, Netherlands Antilles facility, and contract manufacturing facility. The FDA Letter advised BioSpecifics that the FDA will institute formal proceedings to revoke BioSpecifics' license to manufacture Collagenase Santyl¨ Ointment unless BioSpecifics provides satisfactory assurances to the FDA, including submitting to the FDA a detailed, comprehensive plan of corrective action within 30 days, and undertakes significant remedial action to address the observations listed in the 483s and the FDA Letter, and otherwise demonstrates compliance with applicable regulatory requirements. BioSpecifics has hired outside consultants, has employed and will continue to employ additional staff for the Quality Control and Quality Assurance departments to assist in developing and executing a corrective action plan, and is taking steps to reorganize the Quality Control and Quality Assurance departments.

BioSpecifics plans to invest between $1.5 million and $2.0 million in new equipment at its Lynbrook, New York, and Curacao, Netherlands Antilles facilities. This investment is intended to address pertinent observations in the 483s and the FDA Letter and position BioSpecifics to insure the efficiency of its production process. BioSpecifics estimates it could spend an additional $500,000 for professional fees and other expenses in connection with the remediation of the FDA observations. With approximately $9 million of working capital, including approximately $7.2 million in cash and marketable securities at January 31, 1999, BioSpecifics believes it has adequate financial resources for these expenditures. In view of BioSpecifics' working capital position and anticipated future profitable operations, although there can be no assurance, management believes that BioSpecifics has sufficient liquidity and capital resources to meet its immediate operating needs. BioSpecifics believes that cash on hand and cash provided by operations will be sufficient to meet its cash needs on an ongoing basis. However, if BioSpecifics is unable to address and remedy the observations listed in the 483s and the FDA Letter, it will be required to suspend or terminate operations. Due to the uncertainty of the outcome of the FDA issue, BioSpecifics' independent auditors KPMG LLP have noted in their report the FDA Letter raises substantial doubt about BioSpecifics' ability to continue as a going concern.

YEAR 2000
BioSpecifics is preparing its computer systems and hardware to contend with the issues related to the year 2000 ("Year 2000"). The Year 2000 issue results from computer programs being written using two digits rather than four to define the applicable year and to assume that the first two digits of a year were 19. As the year 2000 approaches, systems using such programs may recognize a date ending in "00" as the year 1900 rather than the year 2000, and so may not accurately process certain date-based information. To the extent that BioSpecifics' software applications contain source code that is unable to interpret appropriately the upcoming calendar year 2000 and beyond, some level of modification or replacement of such applications will be necessary to avoid system failures and the temporary inability to process transactions or engage in other normal business activities.

There can be no assurance that BioSpecifics will fully achieve Year 2000 compliance in a timely manner, that BioSpecifics will not have to increase significantly its expenditures relating to any such non-compliance, or that its business will not be materially adversely affected by any such non-compliance.