**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**Form 10-K**

 

**AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the fiscal year ended December 31, 2002**

 

**Commission File Number 0-15313**

 

| **BIO-TECHNOLOGY GENERAL CORP.**                                            |
|-----------------------------------------------------------------------------|
| (Exact name of Registrant as specified in its charter)                      |
|                                                                        |   |   |
| **Delaware**                                                                |   | **13-3033811** |
| (State or  other jurisdiction of  incorporation or organization)            |   | (I.R.S. Employer  Identification Number) |
|                                                                        |   |   |
| **One Tower Center, 14th Floor, East Brunswick, New Jersey**                |   | **08816** |
| (Address of  principal executive offices)                                   |   | (Zip Code) |
|                                                                        |   |   |
| Registrant’s telephone number, including area code: **(732) 418-9300** |
|                                                                        |   |   |
| Securities registered pursuant to Section 12(b) of the Act:                 |
| **Common Stock, $.01 par value**                                            |
| (Title of class)                                                            |
|                                                                        |   |   |
| Securities registered pursuant to Section 12(g) of the Act:                 |
| **None**                                                                    |
| (Title of each class)                                                       |

 

Indicate by check mark whetherthe Registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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  o         NO  ý(1)

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whetherthe Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes ý  No o

 

Aggregate market value of theRegistrant’s Common Stock held by non-affiliates at March 17, 2003 (based onthe closing sale price for such shares as reported by the National Associationof Securities Dealers Automated Quotation System on June 28, 2002):  $352,226,543.  Common Stock outstanding as of March 17, 2003: 58,895,048 shares.

 

**Documentsincorporated by reference:**

 

Portions of the Registrant’sdefinitive proxy statement for its 2003 annual meeting of stockholders areincorporated by reference into Part III of this report.

 

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(1)  The Company’sCurrent Report of Form 8-K relating to its acquisition of Rosemont PharmaceuticalsLimited was not timely filed.

 

 

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**PART I**

**ITEM 1.  BUSINESS**

 

General Overview

 

We are engagedin the research, development, manufacture and marketing of pharmaceuticalproducts that address unmet medical needs in both niche and larger market segments.  We distribute our products on a worldwidebasis primarily through a direct sales force in the United States, the UnitedKingdom (for our oral liquid products) and Israel and primarily throughthird-party license and distribution relationships elsewhere.  Through a combination of internal researchand development, acquisitions, collaborative relationships and licensingarrangements, BTG has assembled a diverse portfolio of therapeutic products,many of which are currently being marketed, several of which are inregistration or clinical trials and several of which are in pre-clinicaldevelopment.

 

BTG wasfounded in 1980 to develop, manufacture and market novel therapeuticproducts.  In September 2002, weacquired Rosemont Pharmaceuticals Limited (“Rosemont”), a specialtypharmaceutical company located in the United Kingdom that develops,manufactures and markets primarily prescription products in oral liquid form.  BTG’s overall administration, finance, legaland patent activities, business development, human clinical studies, U.S. salesand marketing activities, quality assurance and regulatory affairs areprimarily coordinated at our headquarters in East Brunswick, New Jersey.  Pre-clinical studies, research anddevelopment activities and manufacturing of our biotechnology-derived productsare primarily carried out through Bio-Technology General (Israel) Ltd.(“BTG-Israel”), our wholly owned subsidiary in Israel. Development,manufacture, distribution and sale of our oral liquid products are carried outthrough Rosemont in the United Kingdom.

 

Products and Applications(2)

 

Our largestselling product is OXANDRIN, which we are marketing in the United Statesprimarily with our own sales force, as well as co-marketing to the long-termcare market through a third party.  Ourother significant commercialized products are DELATESTRYL, which we aredistributing on our own in the United States, our oral liquid products, whichwe are marketing on our own in the United Kingdom, and BIO-TROPIN, our humangrowth hormone product that is being marketed in Japan and Europe by thirdparties under licensing arrangements. BTG’s other commercialized products are generally being marketed bythird parties under licensing arrangements and by BTG in Israel.

 

 

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(2)  MIRCETTE is a trademark of Organon, Inc.  ARTHREASE is a trademark of DePuyOrthopaedics, Inc., except in Israel, where it is owned by BTG.  PURICASE is a trademark of Mountain View Pharmaceuticals,Inc.  Tev-Tropin is a trademark of TevaPharmaceutical Industries, Inc. FIBRIMAGE is a trademark of Draximage. SILKIS is a trademark of Galderma, except in Israel where it is owned bySolvay. All other trademarks are owned by BTG.

 

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The followingtable presents information regarding BTG’s principal products:

 
| **Product**                                           |   | **Indication/Application**                                     |   | **Territory**                                                      |   |
|-------------------------------------------------------|--------|----------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|
| ***COMMERCIALIZED  PRODUCTS****:*                     |
|                                                  |   |                                                           |   |                                                               |   |
| **OXANDRIN**®(oxandrolone)                       |   | Involuntary weight loss                                        |   | United States and to a lesser extent various other countries       |   |
|                                                  |   |                                                           |   |                                                               |   |
| **ORAL LIQUID PHARMACEUTICAL PRODUCTS**               |   | Oral liquid formulations of medicines                          |   | United Kingdom and to a lesser extent on an export basis           |   |
|                                                  |   |                                                           |   |                                                               |   |
| **BIO-TROPIN**TM(human growth hormone)                |   | Growth hormone deficiency in children and Turner syndrome      |   | Japan, Europe and various other countries                          |   |
|                                                  |   |                                                           |   |                                                               |   |
| **DELATESTRYL**®(injectable testosterone)        |   | Hypogonadism                                                   |   | United States                                                      |   |
|                                                  |   |                                                           |   |                                                               |   |
| **BIOLON**®(sodium hyaluronate)                  |   | Injectable viscous solution for ophthalmic surgical procedures |   | Worldwide                                                          |   |
|                                                  |   |                                                           |   |                                                               |   |
| **MIRCETTE**®(oral contraceptive dosing regimen) |   | Reduced pregnancy risk                                         |   | United States                                                      |   |
|                                                  |   |                                                           |   |                                                               |   |
| **SILKIS**®(vitamin D derivative)                |   | Anti-psoriasis/contact dermatitis agent/other skin disorders   |   | Europe and Latin America                                           |   |
|                                                  |   |                                                           |   |                                                               |   |
| **BIO-HEP-B**TM                                       |   | Hepatitis-B vaccine                                            |   | Israel and the Far East                                            |   |
|                                                  |   |                                                           |   |                                                               |   |
| **ARTHREASE**TM(sodium hyaluronate)                   |   | Osteoarthritic knee pain                                       |   | Europe and Israel Registration (United States) and other countries |   |
|                                                  |   |                                                           |   |                                                               |   |
| **INSULIN**                                           |   | Diabetes                                                       |   | Eastern Europe                                                     |   |

 
| ***PRODUCTS IN  REGISTRATION AND CLINICAL TRIALS****:* |   | Status                                |   |
|--------------------------------------------------------|--------|---------------------------------------|--------|
|                                                   |   |                                  |   |   |   |
| **PROSAPTIDE**TM                                       |   | Treatment of neuropathic pain         |   | Phase II |   |
|                                                   |   |                                  |   |   |   |
| **PURICASE**®                                     |   | Severe gout                           |   | Phase I |   |
|                                                   |   |                                  |   |   |   |
| **FIBRIMAGE**®(thrombus-imaging agent)            |   | Diagnosis of deep vein thrombus       |   | Phase III |   |
| **ORAL LIQUID PHARMACEUTICAL PRODUCTS**                |   | Oral liquid formulations of medicines |   | Bio-equivalence and stability   studies |   |

 
| ***PRODUCTS IN  LABORATORY AND PRE-CLINICAL RESEARCH:*** |   | Status                                                   |   |
|----------------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                                     |   |                                                     |   |   |   |
| **BIOGENERICA**                                          |   | Generic versions of two biologic pharmaceutical products |   | Pre-clinical development |   |
|                                                     |   |                                                     |   |   |   |
| **BTG – 271**                                       |   | Leukemia                                                 |   | Preclinical |   |

 

Commercialized Products

 

OXANDRIN (oxandrolone)

 

BTG’s OXANDRINis an oral anabolic agent that is an analogue of testosterone and is used topromote weight gain following involuntary weight loss.  There is growing recognition in the medicalcommunity that interventional management of disease-related weight loss(cachexia) is an extremely important facet of patient care.  Involuntary weight loss is associated with arelatively wide range of clinical conditions that, unless monitored andcarefully managed, can lead to a delay in recovery and a rapid escalation inthe incidence of infection, morbidity and ultimately death.  Published studies indicate that the loss ofonly 10% (the clinical definition of cachexia) of an individual’s lean bodymass (*i.e.*,muscle) is associated with a 20% increase in mortality.  At 35% loss of lean body mass, the deathrate approaches 100%.  Additionally,weight loss may lead to increased intensive care and longer recovery andrehabilitation periods, thereby increasing the

 

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cost of treating the underlyingdisease.  We estimate the incidence ofinvoluntary weight loss in the United States is several million persons eachyear.

 

The causes ofinvoluntary weight loss suffered by persons with a wide variety of chronic andacute diseases are believed to be the result of a number of factors, withinadequate nutrient intake and an altered metabolic state playing centralroles.  Malnutrition, thepathophysiology of which is frequently unknown, is the one feature common toall weight loss disorders, regardless of etiology.  It is generally accepted that anabolic agents promote proteinsynthesis, which enhances the building of lean body mass and ultimately weightgain.  However, because naturalandrogens, such as testosterone, also possess androgenic or virilizingproperties that have undesirable side-effects when used for treating weightloss, particularly in women, potent anabolic and weak androgenic effects arepreferable drug properties for the treatment of this condition.  Clinical trials have shown that OXANDRIN isan effective adjunctive therapy to promote weight gain in a variety ofpathophysiologic conditions and that it has low androgenic activity.  Unlike many other anabolic agents, OXANDRINappears to undergo less overall metabolic transformation in the liver, whichBTG believes offers a safety advantage over other androgenic/anabolicalternatives that are fully metabolized in the liver and have the potential tocause liver toxicity.  Unlike appetiteenhancers currently used for treating weight loss, studies indicate thatOXANDRIN promotes weight gain primarily through the building of lean body massrather than fat and water.  BTG alsobelieves that OXANDRIN is preferable to human growth hormone for treatment ofweight loss because of the ease of administration of OXANDRIN (oral versusinjectable) and its lower cost.

 

In 1964, theUnited States Food and Drug Administration (“FDA”) approved OXANDRIN for weightgain following weight loss due to severe trauma, chronic infection or extensivesurgery and for patients who, without definite pathophysiologic reasons, failto gain or to maintain normal weight. This approval permits the use of OXANDRIN to treat disease-relatedweight loss other than starvation.  G.D.Searle & Company Limited (“Searle”), now a subsidiary of Pharmacia, whichoriginally developed and obtained FDA approval of OXANDRIN, ceased marketingOXANDRIN in the 1980s.  BTG acquired therights to OXANDRIN from Searle in 1990, and Searle contract manufactures theactive pharmaceutical ingredient of OXANDRIN for BTG.  See“—Manufacturing and Supply Arrangements,” “—Risk Factors—We  are dependent on OXANDRIN sales for asignificant portion of our revenue, and any decrease in OXANDRIN sales couldadversely affect our results of operations and our ability to conduct ourbusiness” and “—We are dependent on third party suppliers, and any failure bythem to fulfill their obligations to us could adversely affect our ability tomeet demand for our products”.

 

With the growingawareness of the importance of combating disease-related involuntary weightloss, BTG decided to re-launch the product on its own under the OXANDRIN tradename.  BTG started selling OXANDRIN inthe United States for indications under the FDA approval in December 1995.  In October 2002, BTG introduced a 10mgOXANDRIN tablet to complement its existing 2.5mg tablet.  The new tablet strength, which allowspatients taking 20mg a day, the most common dosage, to convert from eight 2.5mg tablets to the convenience of one 10mg tablet twice daily, is expected toimprove patient adherence to therapy as well as treatment outcomes.  Until the fourth quarter of 2002, BTG soldits OXANDRIN to Accredo Health, Incorporated and its predecessors (“Accredo”),which then sold the product to wholesalers. With the introduction of the 10mg tablet, BTG began to sell OXANDRINdirectly to wholesalers, although Accredo will continue to distribute the 2.5mgOXANDRIN tablets in its inventory until they complete the liquidation of theirinventory position, which we anticipate will occur by the end of March2003.  In May 2000, BTG signed anagreement with the Ross Products Division of Abbott Laboratories (“Ross”) toco-market OXANDRIN in the long-term care market in the United States.

 

Since ourlaunch of OXANDRIN in December 1995, a significant portion of OXANDRIN saleshas been for treatment of patients suffering from AIDS-related weightloss.  In order to increase marketawareness and acceptance of OXANDRIN for the treatment of other disease-relatedweight loss conditions, BTG has been conducting controlled clinical trials andpost-approval clinical studies to provide further clinical support for the useof OXANDRIN for such conditions.  Todate BTG-sponsored clinical studies at leading institutions have been completedrelating to:

 

•              the effect of OXANDRIN as anadjunct to promote weight gain and hasten the rate of skin regrowth and healingin burn patients and as an adjunct to promote weight gain and hasten healing ofdecubitus ulcers in malnourished patients;

 

•              the use of OXANDRIN for thepromotion of weight gain in patients suffering from weight loss due to chronicobstructive pulmonary disease;

 

•              the effect of OXANDRIN on theincidence of fat redistribution syndrome (lipodystrophy) in HIV-positivepatients treated for weight loss;

 

•              OXANDRIN for the promotion ofweight gain in malnourished cancer patients; and

 

•              OXANDRIN for the promotion ofweight gain in the frail elderly population.

 

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Manuscripts summarizing the results of these studies have beenpublished and others are planned for submission in the near future.

 

There arelimited sales of OXANDRIN for pediatric growth disorders in Australia andIsrael.  In addition, OXANDRIN iscurrently being marketed on a “name patient basis” in Scandinavia.

 

BTG has beengranted U.S. patents directed to the use of oxandrolone in the treatment ofchronic obstructive pulmonary disease and in ameliorating muscleweakness/wasting in HIV-positive patients. BTG has patent applications that have been allowed and are awaitingissue and has filed patent applications directed to other uses of OXANDRIN suchas burns and skin ulcers that are pending in the United States and othercountries.

 

We havereceived notice that Solchem, formerly an affiliate of Societa ProdottiAntibiotici S.p.A. (“SPA”), filed its drug master file relating to a genericoxandrolone product with the FDA in 2002. SPA was our initial alternate source supplier of oxandrolone through atleast 2003.  We believe that Solchemintends to supply oxandrolone to Mutual Pharmaceutical, a generic drugmanufacturer.  A settlement oflitigation with Solchem precludes Solchem from supplying oxandrolone to Mutualfor commercial purposes until October 2003. We expect a generic version of OXANDRIN could be introduced as early as2004.

 

Oral Liquid Pharmaceutical Products

 

Rosemontdevelops and markets oral liquid formulations of off-patent drugs to treatpatients who, because of age, medical conditions or personal preference, takemedication in oral liquid form.  Theprimary patient population for oral liquid formulations is the elderly,although these formulations are administered to the pediatric population aswell.  Rosemont has developed over 80oral liquid formulations of pharmaceutical medications and has successfullypositioned itself in the United Kingdom as “The Specialist in Oral LiquidMedicines.”

 

Under U.K.regulations, Rosemont is permitted to sell two categories of products.  For those products for which Rosemontcompletes bioequivalence and stability studies, it receives a product licensefrom the U.K. Medicines Control Agency and is permitted to promote suchproducts to physicians, nurses and pharmacists.  For compounds that are not licensed in an oral liquidformulation, Rosemont holds a license to accept custom orders for suchproducts, known as “Specials,” but is not permitted to promote Specials.

 

Rosemontcurrently sells over 80 products.  Forthe years ended December 31, 2000, 2001 and 2002, licensed products accountedfor approximately 59%, 62% and 65%, respectively, of Rosemont’s sales. Productsin three therapeutic areas — central nervous system, diuretics andcardiovascular – accounted for approximately 56%, 64% and 66% of Rosemont’ssales in 2000, 2001 and 2002, respectively. Of the licensed products, 74% are branded by Rosemont (sold under aRosemont trademark) and 52% are unique in oral liquid form.  Rosemont currently produces 37 Specials, andis planning to introduce four to six additional Specials during 2003.  Eleven licensed products and the Specialsaccounted for approximately 66% of total Rosemont sales in 2002.  Rosemont has to date focused on the U.K.domestic market and its export sales to date have been minimal.

 

Rosemontmaintains an extensive list of available Specials.  Typically, when an order comes in for a Special it can be filledwithin 48 hours.  For a product where noSpecial formulation already exists, the process of creating it takes six tonine months.  Rosemont’s strategy is tofirst produce products as Specials, then conduct bioequivalence and stabilitystudies to obtain licensure for those products.  This process generally requires two to three years.  Rosemont maintains an in-house developmentcapability to develop new products.

 

Rosemont hasworked to date with compounds that are not patent protected and has found amarket niche in which it faces limited competition.  Rosemont’s products do not follow the typical life cycle ofoff-patent drugs, as they may continue to grow for many years withoutsignificant price erosion.  We expectRosemont’s growth in the near term will primarily result from new chroniccentral nervous system or cardiovascular products coming off patent, targetinga mainly elderly patient population.  Inthe U.K., the oral liquids segment of the market is forecast to grow atapproximately 15% per annum over the next several years, more than double therate of growth of the U.K. pharmaceutical market as a whole.  We anticipate market growth will be drivenprimarily by the aging population and an increased awareness of the use ofoptimal formulations. We believe U.K. Government policy helps to drive theconsumption of oral liquid formulations. The U.K. Government guidelines of “best practice” and providing optimalcare for the elderly (published March 2001) states that “when administeringmedicines, in the best interests of the patient you must consider the method ofadministration in the context of the condition of the patient.”

 

Above acertain level of annual sales of licensed products to the National HealthService, pharmaceutical companies in the U.K. generally must renegotiatepricing with the government annually. Given the composition of Rosemont’s business and the projected growthrates of its licensed products, we do not

 

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expect to face this annualprice negotiation for a number of years. For Specials, Rosemont is generally free to set its own introductoryprices.  Although most of Rosemont’sformulations are not patented, it faces limited competition in the U.K. market,due to the limited size of the oral liquids segment.  Rosemont’s competitors are U.K. pharmaceutical companies activein the marketing of drugs for geriatric and pediatric use.

 

Rosemont hasalso used its formulation know-how to develop an oral liquid formulation oftamoxifen (trademarked Soltamox). Tamoxifen is an off-patent drug for the treatment of both advanced andearly stage breast cancers.  BTG nowholds global rights to Soltamox.  Theformulation is patented in the U.S. and the European Union.

 

BIO-TROPIN (human growth hormone)

 

Human growthhormone (“hGH”) is naturally secreted by the pituitary gland and controls manyphysiological functions that are essential for normal development andmaturation.  A deficiency of hGH resultsin diminished growth and, in extreme cases, dwarfism.  We estimate that current annual worldwide sales of hGH for thetreatment of growth hormone deficiency are approximately $1.6 billion, and thatgeographic distribution of worldwide sales is approximately 42% in Japan, 27%in the United States and 27% in Europe, with the balance in other countries.

 

BTG’sscientists first produced hGH by recombinant DNA methods in the early1980s.  Although the FDA approvedBIO-TROPIN for marketing in the United States in May 1995, to date we have beenunable to market BIO-TROPIN in the United States as a result of a seven-yearOrphan Drug exclusivity period granted to a competitor, followed by extensiveand continuing patent litigation with Genentech, Inc. (“Genentech”), whichresulted in a settlement whereby we agreed not to market BIO-TROPIN producedwith our original expression system in the United States until July 2003, whenthe Genentech patent expires.  InSeptember 1999, the FDA approved BTG’s supplemental application for a newexpression system for biosynthesis of BIO-TROPIN that we believe does notinfringe Genentech’s patent, although a patent issued to Novo Nordisk (“Novo”),which BTG is challenging, could preclude BTG from marketing in the UnitedStates hGH produced using this new expression system.  See “Item 3. Legal Proceedings.”

 

In April 1993,JCR Pharmaceuticals Co., Ltd. (“JCR”), BTG’s marketing partner in Japan, receivedregulatory approval for hGH for the treatment of short stature, and beganmarketing hGH in June 1993.  In December2000, JCR received regulatory approval for the use of BTG’s hGH to treat Turnersyndrome, a condition in which girls born with non-functioning ovaries do notdevelop secondary sexual characteristics and are shorter than normal.  In January 1995, we granted JCR exclusivedistribution rights in The People’s Republic of China for all hGH-relatedpharmaceutical indications.  In January1998, JCR signed an agreement memorandum with Sumitomo Pharmaceuticals Co.,Ltd. (“Sumitomo”), relating to a marketing alliance for the marketing of hGH inJapan.  Under the terms of the agreementmemorandum, JCR is supplying Sumitomo with BTG’s hGH and Sumitomo commenceddistribution in Japan in January 1999, following termination of its agreementto distribute GenotropinTM, the recombinant human growth hormoneproduct of Pharmacia Upjohn Co., Ltd., now a subsidiary of Pfizer, at the endof 1998.  Upon termination ofPharmacia’s agreement with Sumitomo, Pharmacia began to market Genotropin inJapan on its own.

 

BTG sells bulkproduct to JCR at a fixed price.  BTG isobligated to indemnify JCR for all expenses incurred and damages suffered byJCR as a result of any infringement of third-party patents.  A substantial portion of our hGH sales hasbeen to JCR. Our agreement with JCR expires in April 2003.  JCR and BTG have reached an agreement inprinciple to renew this agreement for an additional ten years, with the bulkprice fluctuating based on changes in the yen/dollar relationship andgovernment price controls, as the Japanese Health Ministry has in recent yearsput significant pressure on price on an industry-wide basis.  We cannot assure you that we will be able torenew the JCR relationship on these terms or at all.  If we cannot renew our agreement with JCR, our sales of humangrowth hormone will be adversely affected. See “Item 3. Legal Proceedings.”

 

In November1992, BTG entered into an exclusive distribution agreement with the FerringGroup (“Ferring”) for the marketing of our human growth hormone for enhancinggrowth and stature in growth hormone deficient children in Europe and thecountries comprising the former Soviet Union. Sales began during the fourth quarter of 1994, and our hGH is nowapproved in more than 20 countries in Ferring’s territory.  BTG sells finished product to Ferring andreceives a percentage of Ferring’s net sales. Ferring has the right to purchase bulk product from BTG and formulate,vial and package the product.  BTG isobligated to indemnify Ferring for all expenses incurred and damages sufferedby Ferring as a result of any infringement of third-party patents.

 

BTG receivedapproval for hGH from the Israel Ministry of Health in April 1988 and begandirect marketing in Israel under the BIO-TROPIN trademark in October1988.  In July 1992, BIO-TROPIN wasapproved by the Israel Ministry of Health for the treatment of a secondindication, Turner syndrome.  In July

 

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1997, BIO-TROPIN was approvedby the Israel Ministry of Health for the treatment of children suffering fromrenal insufficiency.

 

In September1999, we granted Teva Pharmaceutical Industries Ltd. (“Teva”) exclusive marketingrights for hGH in the United States, effective July 1, 2003 (subsequentlyamended to July 1, 2000).  Under theterms of the agreement we will sell finished product to Teva and receive apercentage of Teva’s net sales.  We areunable to predict when or if Teva will begin marketing our human growth hormoneproduct in the United States, which it will do under the name Tev-TropinTM.  Upon execution of the agreement a $10million payment became due to BTG and was received in March 2000.  The introduction of Tev-TropinTM in the U.S.is currently the subject of litigation. See “Item 3.  Legal Proceedings.”

 

BTG’s humangrowth hormone is also being sold by third-party distributors in severalcountries in South America and the Far East. In addition, regulatory approval to market BTG’s human growth hormone ispending in South Africa and several Pacific Rim countries.

 

DELATESTRYL (testosterone enanthate)

 

DELATESTRYL isBTG’s injectable testosterone product currently used to treat men withhypogonadism (testosterone deficiency), a condition associated with reducedlibido, insufficient muscle development and bone loss.  BTG acquired the approved New DrugApplication (“NDA”) and trademark from Bristol-Myers Squibb Company (“BMS”).  We began the sale and distribution ofDELATESTRYL in mid-1992.  BTG pays BMSroyalties based on its sales of DELATESTRYL. BMS contract manufactured DELATESTRYL for BTG until it closed itsmanufacturing facility in July 2001.  Wecurrently expect that our inventory of DELATESTRYL sourced from BMS will runout during 2003, with the exact timing depending on demand and our allocationof available inventory.  Although weobtained a new contract manufacturer for DELATESTRYL in March 2003, we cannotsell DELATESTRYL manufactured by this new supplier until FDA approval is obtainedand, as a result, we expect our remaining DELATESTRYL inventory to be exhaustedbefore our new manufacturer will be in a position to supply DELATESTRYL to us.Once our DELATESTRYL inventory runs out, we will not be able to meet customerdemand for DELATESTRYL until we can obtain FDA approval of our new source ofDELATESTRYL and our current DELATESTRYL customers may have to use a competingproduct.  We cannot assure you that wewill be able to obtain FDA approval of our new source of  DELATESTRYL on a timely basis or at all and,even if we are able to do so, that our customers will return to using ourproduct.  See “—Risk Factors—We aredependent on third-party suppliers, and any failure by them to fulfill theirobligations to us could adversely affect our ability to meet demand for ourproducts.”

 

Demand forDELATESTRYL increased significantly beginning in late 1998 when the FDA stoppedthe production of a competing generic injectable testosterone product used totreat men with hypogonadism. We expect a generic product may return, althoughwe cannot predict when, and we expect the return of generic competition willadversely affect our sales of DELATESTRYL. In addition, testosterone gels and patches are becoming morepopular.  While this increases the demandfor testosterone, we believe that our injectable product cannot compete withthese gels and patches, and any growth in DELATESTRYL market share will comefrom switching patients from Pharmacia’s injectable testosterone productcurrently on the market.

 

BIOLON (sodium hyaluronate)

 

Sodiumhyaluronate is a high-viscosity, gel-like fluid.  BTG has developed a fermentation-derivedsodium hyaluronate-based product, trademarked BIOLON, for use in ophthalmicsurgery procedures such as cataract removal and intraocular lensimplantation.  BIOLON is a syringefilled with a 1% sodium hyaluronate solution that facilitates such surgery byacting as a highly viscous lubricant allowing for surgical manipulation of theocular tissues.

 

Sales ofBIOLON commenced in early 1993, and BIOLON is currently being sold in theUnited States and more than 30 other countries, including most countries inEurope and Latin America and several countries in Africa, Asia and the FarEast.  BIOLON is distributed throughthird-party distributors, generally leading ophthalmic companies in eachterritory.  The distribution agreementsgenerally provide for license fees and/or royalties and most require minimumguaranteed purchases in the first years after registration and commencement ofcommercialization.  Sales of BIOLON inItaly, Spain and Portugal accounted for almost 50% of our 2002 BIOLON sales.

 

In June 1995,BIOLON was approved as a medical device by the European Union medical devicecertification body (mdc).  As a result,a CE mark granted to the product and appearing on the product box allows BTG’spartners to freely market BIOLON throughout Europe.

 

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We havecompleted the development of a second-generation product, BIOLON PRIMETM,that has a higher viscosity than BIOLON and gives increased support inside thechamber of the eye during the surgical procedure.  This product was granted a CE mark in June 1997, and approval wasreceived in Israel in February 1998. The product was approved in Canada and Brazil in July 1999 and September1999, respectively, and sales commenced in 2000.

 

MIRCETTE (oral contraceptive dosing regimen)

 

BTG hasacquired a patent to an oral contraceptive dosing regimen that is intended toreduce both the risk of pregnancy, in the event a woman forgets to take a pill,and the breakthrough bleeding and spotting experienced by many women who useconventional low-dose oral contraceptives.

 

Organon, Inc.(“Organon”), a subsidiary of AKZO Nobel N.V., has licensed BTG’s patented oralcontraceptive dosing regimen and has developed a product using this regimenwith the progestogen desogestrel. Organon filed an NDA with the FDA in April 1997 and, following receiptof approval in April 1998, started to sell the product under the trademarkMIRCETTE in the third quarter of 1998. Our license agreement with Organon provides for milestone payments androyalties on sales.  Regulatoryauthorities in Germany and the United Kingdom have declined to approveOrganon’s desogestrel product using the oral contraceptive regimen as a resultof reported higher incidence of thromboembolic disease than competinglevonorgestrel oral contraceptive regimens.

 

In 2000,Duramed Pharmaceuticals, Inc. filed an Abbreviated New Drug Application with theFDA seeking approval of a generic version of MIRCETTE.  Pursuant to its license agreement withOrganon, BTG filed a patent infringement suit against Duramed, which wassubsequently acquired by Barr Laboratories. In December 2001 the court granted Barr’s motion for summary judgment ofnon-infringement of BTG’s patent. We appealed the court’s decision and areawaiting the appellate decision. Organon’s sales of Mircette, and our royalties, have been adversely affectedby Barr’s launch of its generic version of Mircette in 2002.

 

SILKIS (vitamin D derivative)

 

BTG hasobtained an exclusive license to patents covering the composition and use ofcertain vitamin D derivatives for topical treatment of psoriasis, dermatitisand other skin disorders. Patents have issued in the United States, Israel andin major countries in Europe, including Great Britain.  The British patent has also been extended toSingapore and Hong Kong.  In March 1996,we sublicensed exclusive rights under the patents in the United States toGalderma S.A. (“Galderma”).  Galdermahas agreed to pay license fees upon the attainment of certain milestones and aroyalty on sales in the United States. The licensee of BTG’s rights under the patents for the remainder of theworld sublicensed those rights to Galderma in 1996.  We receive a royalty on all commercial sales of productscontaining these vitamin D derivatives in countries outside the United Statesin which the vitamin D derivative patents have issued.  Although the product was approved in TheNetherlands and Switzerland in 1995, Galderma elected to change the formulationprior to marketing. Galderma launched SILKIS in Brazil, Germany, Switzerlandand The Netherlands in 2000, and it is currently being marketed throughoutEurope and Latin America.  Galdermabegan a Phase II/III clinical trial in the United States in early 2002 and hasadvised us that it expects to introduce SILKIS in the U.S. in 2007.

 

BIO-HEP-B (hepatitis-B vaccine)

 

BTG hasgenetically engineered a third generation vaccine against the hepatitis-Bvirus. Our BIO-HEP-B vaccine integrates the S, pre-S1 and pre-S2surface proteins of the virus.  Clinicaltrials in Israel, the Far East and Europe in adults, children and neonates havebeen completed and showed the vaccine to be safe and highly immunogenic.  We believe the high immunogenicity andinitial faster rate of response of our BIO-HEP-B vaccine will provide us with acompetitive advantage, particularly in the less developed countries wherehepatitis-B is prevalent.  The firstgeneration plasma-derived hepatitis-B vaccine is generally used in lessdeveloped countries.  We believe,however, that these countries desire an alternative to the plasma-derivedvaccine because of fears of viral transmission.  In addition, many of these countries are pursuing hepatitis-Bimmunization programs for all newborns in an effort to decrease substantiallythe incidence of hepatitis-B.

 

BTG’sapplication for approval of its BIO-HEP-B vaccine, which was filed with theIsrael Health Ministry in November 1996, was approved in February 2000.  This approval, together with a Certificateof Free Sale, has allowed BTG and its licensees to initiate the registrationprocess in many countries worldwide. We currently market BIO-HEP-B in Israelfor adults, as price constraints prevent us from entering the neonatal market.

 

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We havelicensed marketing rights to SciGen Pte Ltd, a Singapore company (“SciGen”),for the commercialization of BIO-HEP-B in certain Pacific Rim territories(excluding Japan) and certain other countries, including The Peoples Republicof China, Australia, New Zealand and India. BTG and SciGen have completed clinical trials in several countries.  SciGen launched BIO-HEP-B in Vietnam in December2002, registered BIO-HEP-B for sale in the Philippines during 2002 and ispreparing registrations in several other countries.  Pursuant to our agreement with SciGen, during 2003 we expect totransfer our manufacturing technology to an Indian company that will use it tomanufacture BIO-HEP-B for sale in Sci-Gen’s territory.

 

In February1998, BTG entered into development and licensing agreements with respect to itsBIO-HEP-B product with Berne Biotech AG (formerly Swiss Serum and VaccineInstitute Berne) for Western Europe and various other countries.  Berne Biotech will purchase vaccine from BTGfor distribution, and we will receive milestone payments from Berne Biotech, aswell as royalties on sales of the vaccine. Berne Biotech expects to file for regulatory approval in Europe in late2003. Although we granted Berne Biotech the right to manufacture BIO-HEP-B, weexpect they will elect to have us supply them with BIO-HEP-B.  Berne Biotech has advised us that theyintend to market our BIO-HEP-B product primarily to non-responders, as theyplan to market their own hepatitis-B vaccine to the general population.

 

ARTHREASE

 

ARTHREASE is afermentation-derived sodium hyaluronate composition developed by BTG forintra-articular injection into the knee to reduce osteoarthritic pain.  We conducted a clinical evaluation ofARTHREASE versus the market leader to examine the product’s efficacy intreating the pain of osteoarthritis. We completed the clinical trial in the secondhalf of 2000 and European approval was obtained from the European Union medicaldevice certification body (mdc) and a CE mark awarded in November 2000.

 

BTG licensedworldwide rights to ARTHREASE, other than for Israel and Japan, to DePuyOrthopaedics Inc., a Johnson and Johnson Company (“DePuy”), in June 2000.  Clinical efforts, where required, andapplications for regulatory approvals will be undertaken by DePuy in thelicensed territory except in Europe, where BTG conducted a Phase III safety andefficacy study of the product.  DePuystarted to sell the product in Europe in the second half of 2001.  DePuy filed for regulatory approval in theU.S. in May 2001, which could be approved in 2003. We manufacture ARTHREASE forDePuy and receive a royalty on net sales. ARTHREASE is DePuy’s trademark, although in Israel BTG has the right toand has registered the mark ARTHREASE.

 

Insulin

 

Insulin is apolypeptide hormone essential for the control of blood glucose levels that isfrequently administered to patients suffering from diabetes mellitus, ametabolic disorder characterized by hyperglycemia resulting from relative orabsolute insulin deficiency. Biosynthetic recombinant human insulin is currently manufactured by twoprocesses: in *E. coli* (Eli Lilly and Company and Hoechst AG) or in yeast(Novo-Nordisk A/S).  BTG has developed aproprietary expression system and a purification process for the efficientproduction of recombinant human insulin in *E. coli*. Patent applications relating to this process have been filed in manycountries.  BTG’s insulin is identicalto naturally occurring human insulin and does not differ fromcommercially-available insulins in terms of purity or biological activity.

 

In January1999, we entered into a technology transfer and license agreement with AkzoNobel’s wholly-owned subsidiary, Diosynth b.v., granting Diosynth rights to ourrecombinant human insulin product in most countries of the world.  Under the terms of the agreement, BTGtransferred its recombinant human insulin technology to Diosynth and Diosynthwill manufacture the product in bulk form for the licensed territory.  Another Akzo Nobel subsidiary, Organon, mayin certain instances finish the bulk and market it in finished form.  BTG will receive license fees linked to theachievement of certain milestones and royalties on all commercial sales of theproduct.  We understand that Diosynth isworking towards the launch of the product in Europe  by the end of 2004.

 

In January1998, BTG entered into a licensing agreement with IBATECH Sp. z.o.o., a Polishcorporation that subsequently merged with Bioton Sp. z.o.o (“Bioton”), coveringthe development, production and commercialization of BTG’s recombinant humaninsulin.  Under the agreement, Biotonand BTG have collaborated on the development of the know-how for large scalemanufacturing of BTG’s recombinant human insulin for the insulin markets inPoland and several other East European countries.  BTG will receive certain milestone payments and royalties onsales of the product in the licensed territory.  Bioton began manufacturing and selling insulin in Poland in thesecond half of 2001 following receipt of Polish regulatory approval.

 

We have alsolicensed distribution and manufacturing rights for insulin to SciGen in thePacific Rim, China and India. We will receive royalties on sales of insulin inthe licensed territories.

 

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Products in Registration and Clinical Trials

 

PROSAPTIDE

 

PROSAPTIDE, a14 amino acid peptide derived from the natural protein prosaposin, is beingdeveloped to treat neuropathic pain and peripheral neuropathy, both of whichcause substantial disability in patients. Neuropathic pain is associated with nerve injury and is a result ofmetabolic trauma (diabetes), physical trauma (phantom limb pain), infectioustrauma (HIV, post-polio syndrome) or chemical trauma (chemotherapy).  Peripheral neuropathy is a commonneurological disorder caused by damage to the peripheral nerves located in thearms, hands, legs and feet, and is the most prevalent complication of diabetes.An estimated 3 million patients in the United States have peripheralneuropathy, including approximately 600,000 patients suffering moderate tosevere pain associated with diabetic peripheral neuropathy and 300,000 patientssuffering moderate to severe pain associated with HIV neuropathy.  Due to the fact that available treatmentoptions for pain associated with peripheral neuropathy are often unsatisfactoryand frequently accompanied by unacceptable side effects, only approximatelyone-third of patients who are diagnosed and symptomatic are currentlytreated.  We believe that the annualworldwide market potential for PROSAPTIDE in the treatment of neuropathic painmay be in excess of $800 million.

 

A Phase II(a)human clinical trial in Type I and Type II diabetes mellitus demonstrated thatPROSAPTIDE effectively decreases pain associated with diabetic peripheralneuropathy without deleterious side effects. Following the acquisition of Meylos, we decided to change the initialclinical indication for PROSAPTIDE after consultation with leading experts inperipheral nerve disease led us to conclude that the clinical developmentprogram for the HIV population could be less complex than for the diabetespopulation initially pursued.  Inaddition, pursuit of the HIV neuropathic pain indication provides us with theopportunity to collaborate with the Neurologic AIDS Research Consortium(“NARC”), a group that views the need for a safe and effective therapy for HIVneuropathic pain as a key priority. Although a Phase II(b) clinical trial of PROSAPTIDE in patients withHIV-associated peripheral neuropathy to supplement the findings of the previousclinical trial was originally scheduled to begin in 2002, we put the trial onhold pending discussions with NARC to refine the protocol.  This clinical trial is currently targeted tostart in the second quarter of 2003.

 

In addition,PROSAPTIDE was shown in a series of animal studies to not only alleviateperipheral neuropathic pain but also to reverse the underlying neuropathy,thereby inducing neuronal regeneration and preventing neuronal death.  The data from these studies suggest that ifthese findings are replicated in human clinical trials, there may well beadditional potential for PROSAPTIDE in the treatment of peripheral neuropathy,over and above its ability to decrease neuropathic pain.  No approved drugs are available to preventor reverse the neuropathy itself.  Wehold various United States patents relating to PROSAPTIDE and patent applicationsare pending in several other countries.

 

BTG acquiredPROSAPTIDE in March 2001 through the acquisition of Myelos Corporation, aprivately-held biopharmaceutical company focused on the development of noveltherapeutics to treat diseases of the nervous system.  Under the terms of the acquisition agreement, BTG paid Myelosstockholders $35 million in a combination of cash and stock ($14 million incash and $21 million through the issuance of approximately 2,344,700 shares ofour common stock).  An additional futurepayment of $30 million is contingent upon BTG being in position to file an NDAfor FDA approval of PROSAPTIDE in the treatment of neuropathic pain.  The acquisition agreement provides for afinal payment of 15% of worldwide net sales of PROSAPTIDE in the third year ofcommercialization.  These payments willbe made in shares of our common stock, although we have the right to elect tomake a portion of these payments in cash. See “Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations–Acquisition of Myelos Corporation.”

 

PURICASE

 

Gout occurswhen uric acid accumulates in the joints. The disease causes severe pain and disability and creates a risk ofkidney failure, which may lead to life-threatening complications. Currenttreatments for gout and related conditions are sometimes ineffective because ofside effects or lack of efficacy of approved medications.  PEG-uricase is a chemically modified enzymeof mammalian origin that converts uric acid to a more soluble and readilyexcreted product.  The PEG-modifiedenzyme has a much longer circulating lifetime and is less likely to induceimmune reactions than the unmodified enzyme. Therefore, the PEG-uricase enzyme should effectively and efficientlyeliminate excess uric acid from the body of individuals who cannot otherwiseexcrete excess uric acid.

 

In August 1998BTG licensed exclusive worldwide rights from Duke University Medical Center(“Duke”) of North Carolina and Mountain View Pharmaceuticals, Inc. (“MVP”) totechnology relating to

 

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polyethylene glycol (“PEG”)conjugates of uricase (urate oxidase). Duke had developed recombinant uricases and, together with MVP, haddeveloped PEG conjugates of uricases to make them safer and longer acting. MVPhas transferred its PEG technology to BTG, and we will produce uricase and PEGconjugates of uricase, undertake clinical trials and commercialize the product.

 

We filed anIND with the FDA in November 2001 and the Phase I clinical trial, utilizingdelivery by subcutaneous injection, started in February 2002 at Duke UniversityMedical Center.  While a dose-dependentreduction in serum uric acid levels was noted in the trial, topicalhypersensitivity reactions in some individuals participating in the study werealso observed.  We initiated a new PhaseI clinical trial in the first quarter of 2003 utilizing an intravenous route ofadministration to determine whether these reactions could thereby be avoided.

 

FIBRIMAGE (thrombus-imaging agent)

 

FIBRIMAGE(formerly called Imagex) is a novel agent for the detection of thrombi andblood clots in patients suffering from deep vein thrombosis or pulmonaryembolism.  Deep vein thrombosis, whichresults from the development of thrombi, causes a reduction in the venous bloodflow.  Pulmonary embolism is thedislodgment of a piece of thrombus and its relocation via the circulatorysystem to the lungs.  FIBRIMAGE consistsof a genetically-engineered portion of the fibrin binding domain of fibronectinattached to a radiopharmaceutical tag. Once injected in the patient, it targets and binds to fibrin, asubstance that is essentially present only in blood clots.  BTG holds various patents covering FIBRIMAGEin the United States and in several other countries.  In August 1994, we licensed worldwide rights to the polypeptideto Merck Frosst Canada Inc. (“Merck Frosst”) for the development andcommercialization of a diagnostic imaging agent for the detection ofthromboembolism.  Merck Frosst filed anapplication for an Investigational New Drug (“IND”) with the Canadian Bureau ofBiologics in April 1996.  In September1997 DRAXIS Health Inc. (“Draxis”) acquired the radio-pharmaceutical divisionof Merck Frosst and all rights to FIBRIMAGE. Draxis successfully completed a Phase I study of FIBRIMAGE inCanada in December 1997, and a Phase II study in 1999.  Although Draxis planned to initiate a PhaseIII efficacy study in Canada in February 2002, the study was placed on holdpending resolution of formulation issues. Draxis currently expects to initiate the Phase III study in both Canadaand the U.S. during 2003.

 

Oral Liquid Pharmaceutical Products

 

Rosemont’sstrategy is to launch products as Specials, then conduct bioequivalence andstability studies to gain licensure for those products that generate sufficientsales to warrant the expense.  Thisprocess generally requires two to three years. Rosemont maintains an in-house development capability to develop newproducts.  For further informationregarding Rosemont’s oral liquid pharmaceutical products, see “—CommercializedProducts—Oral Liquid Pharmaceutical Products.”

 

Products in Laboratory and Pre-ClinicalResearch

 

BTG - 271

 

BTG isdeveloping BTG-271, based on a human antibody fragment, termed Y1, whichtargets a cell surface antigen with specific preference  to malignant myeloid cells.  BTG believes the antibody, coupled to acytotoxic agent, may be useful as a first line therapy during remission and asa second line therapy to treat relapsed and refractory acute myeloid leukemia(“AML”) patients.  Currently, treatmentpractice for newly diagnosed AML patients is uniform and highly effective atinduction of remission.  However,significant unmet medical need exists for therapies that prolong remission andare effective for refractory and relapsed patients. BTG-271 is being developedin response to their needs.  BTG willrequire patent licenses from a number of companies in order to commercialize BTG-271.  BTG is currently in advanced discussionswith one licensor.  We cannot assure youthat we will able to obtain these licenses on reasonable terms or at all.  If we are not able to obtain these licenses,we will not be able to commercialize BTG-271.

 

In addition toAML cells, BTG-271 binding was demonstrated in B cell related malignancies,including multiple myeloma (“MM”), indicating its potential clinical utility inother indications such as other sub-types of leukemia and metastatictumors.  Y1 possibly may be useful as adiagnostic agent prior to patient treatment, since 80% of AML patients are Y1reactive.

 

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BIOGENERICATM

 

Pursuant to anagreement entered into with Teva Pharmaceutical Industries Ltd. in 1999, BTG iscurrently pursuing the development of two recombinant human therapeuticproteins chosen by Teva that are currently marketed worldwide by othercompanies and which are approaching the end of their patent protection in anumber of countries.  Under theagreement, BTG is responsible for conducting all development work on thebiologic products and manufacturing. Teva will distribute and market theproducts once regulatory approvals have been obtained.  It is likely that clinical trials will berequired in order to obtain approval of these products, and BTG is obligated topay one-half the cost of the trials, which costs may be significant. BTGreceived a milestone payment of $2,500,000 in 2000 and will receive up to anadditional $5,000,000 in milestone payments and a royalty based on Teva’s netsales of products.

 

OXSODROL (human superoxide dismutase)

 

During 2002,we terminated our development efforts with respect to our OXSODROL, a productwe were developing for the prevention of chronic respiratory morbidity, or lunginjury, in premature babies.

 

BTG haddeveloped a process for manufacturing a fully active analog of humancopper/zinc superoxide dismutase (“SOD”), which neutralizes oxygenfree-radicals.  Many premature babiesare deficient in naturally occurring SOD, and the high concentrations of oxygenthat premature babies require are believed to be involved in generating excessoxygen free-radicals in the lungs, causing permanent lung injury at thecellular level.  BTG’s Phase III clinicalefficacy and safety trial related to the use of SOD to prevent bronchopulmonarydysplasia (“BPD”), a chronic lung disease that develops following treatmentwith oxygen and mechanical ventilation of premature infants who experiencerespiratory distress, revealed no reduction in the combined incidence of BPDand death at 28 days in neonates treated with OXSODROL, although   preliminary data from earlier Phase Iinvestigations suggested a delayed protective effect in neonates treated withOXSODROL.  As a result, BTG, inconsultation with the FDA, continued the trial as a Phase II study withpreservation of blinded treatment assignments. The incidence of pulmonary and neurologic complications in the placeboand OXSODROL-treated groups was assessed at one year corrected postnatalage.  This follow-up study revealed areduction in the incidence of reactive airways (*i.e.*, asthma) in theOXSODROL-treated babies.

 

In January1995, we licensed OXSODROL to JCR for the treatment of BPD in Japan and, inAugust 1997, we licensed worldwide distribution rights (excluding the UnitedStates, Canada, Israel and Japan) for OXSODROL for the treatment ofbronchopulmonary dysplasia and other respiratory indications to Ares TradingS.A., a member of The Ares-Serono Group.  JCR has expressed an interest in continuing with the BPDindication.  In August 2000, Seronoelected not to continue its participation in the development of OXSODROL.

 

BTG may seekto determine whether there is any third party interest in the acquisition ofOXSODROL rights outside Japan.

 

Sales and Distribution

 

We marketOXANDRIN and DELATESTRYL primarily on a direct basis in the United States,our  oral liquid pharmaceutical productson a direct basis in the United Kingdom and our products on a direct basis inIsrael.  We grant exclusive marketing ordistribution rights to third parties for sales of our other products in theUnited States and for sales of all our products in most other countries.

 

Our sales andmarketing team in the United States, which we established in the second half of1995, consisted of 47 people on February 1, 2003.  Rosemont’s sales and marketing team consisted of 29 people onFebruary 1, 2003.  With respect to salesoutside the United States, BTG’s current distribution arrangements includeexclusive relationships with JCR for the sale of BIO-TROPIN in Japan and ThePeople’s Republic of China, with Ferring for the sale of BIO-TROPIN in Europeand the former Soviet Union, with several other companies, coveringapproximately 35 countries, for the sale of BIO-TROPIN, approximately 20companies, covering more than 35 countries, for the sale of BIOLON, Galdermafor the sale of SILKIS worldwide, and DePuy for the sale of ARTHREASE in allcountries worldwide other than Israel and Japan.  BTG has granted Teva exclusive marketing rights to its hGH in theUnited States, which Teva will market as Tev-TropinTM, and havegranted Akorn Inc. exclusive marketing rights for BIOLON in the United States.

 

Insubstantially all of BTG’s product distribution agreements, BTG grantsexclusive marketing and distribution rights in one or more countries inexchange for upfront license payments and exclusive supply arrangements.  Pursuant to these agreements, BTG generallysupplies product at a price equal to a percentage of the distributor’s netsales price, subject to a minimum price. Regulatory approvals are obtained either by

 

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BTG or by its distributors,depending on the product, the territory and the terms of the commercialagreement. BTG is generally obligated to indemnify the distributor for productliability claims resulting from the failure of supplied product to meet agreedupon specifications and infringement of third-party patents.  See “—Risk Factors—We are dependent onthird-party licensees to commercialize many of our products, and their failureto perform adequately could adversely affect our results of operations.”

 

In connectionwith the introduction of OXANDRIN, BTG entered into an agreement with GentivaHealth Services, Inc., which was subsequently acquired by Accredo Health,Incorporated (“Accredo”), whereby Accredo served as BTG’s exclusive wholesaledistributor of BTG’s OXANDRIN and DELATESTRYL products in the UnitedStates.  Sales of OXANDRIN in 2000, 2001and 2002 were primarily to Accredo.  See“—Risk Factors—We are dependent on OXANDRIN sales for a significant portion ofour revenue, and any decrease in OXANDRIN sales could adversely affect ourresults of operations and our ability to conduct our business.”  In the fourth quarter of 2002 BTGrenegotiated its agreement with Accredo, and BTG now sells OXANDRIN andDELATESTRYL directly to wholesalers and Accredo distributes them for BTG on afee-for-service basis.  Accredo earnsmanagement fees from BTG for certain services it provides, such as warehousingand shipping of product.  Inanticipation of the change in its distribution agreement with Accredo, BTGestablished direct relationships with key wholesalers.  BTG began selling the 10mg tablet directlyto wholesalers in September 2002. Accredo will continue to distribute the 2.5 mg OXANDRIN tablets in itsinventory until they complete the liquidation of their inventory position ,which we anticipate will occur by the end of March 2003.  BTG’s sales of OXANDRIN in the first quarterof 2003 will be determined in part by the effect of the working down ofAccredo’s available supply of the 2.5mg tablets.  In May 2000 BTG signed an agreement with Ross to co-marketOXANDRIN in the United States for the long-term care market, which representedapproximately 15% of OXANDRIN retail sales, based upon scripts, in both 2001and 2002.  Ross has the right toterminate the agreement at any time upon six months notice.  If Ross elects to do so , our OXANDRIN salescould be adversely affected until we are able to replace the Ross sales force,which we may not be able to do successfully. BTG has the right to terminate the agreement at the end of 2003 if Rossdoes not meet specified sales levels.

 

Research and Development

 

We conductresearch on potential products for which we have retained future rights for ourown account and on behalf of our partners for which we receive certain currentpayments and, if successful, future payments in the form of royalties ormanufacturing rights.  At February 1,2003, our research and development organization comprised 113 scientists,associates and related personnel with expertise in molecular biology, cellbiology, protein chemistry and clinical trials.

 

Our principalproducts in research and development are as follows:

 

 
| **Product**                                              |   | **Indication/Application**                                      |   | **Status**                                   |   |
|----------------------------------------------------------|--------|-----------------------------------------------------------------|--------|----------------------------------------------|--------|
| ***PRODUCTS IN  REGISTRATION AND CLINICAL TRIALS:***     |   |                                                            |   |
|                                                     |   |                                                            |   |
| **PROSAPTIDE**TM                                         |   | Treatment of neuropathic pain                                   |   | Phase II                                     |   |
|                                                     |   |                                                            |   |                                         |   |
| **PURICASE**®                                       |   | Severe gout                                                     |   | Phase I                                      |   |
|                                                     |   |                                                            |   |                                         |   |
| **FIBRIMAGE**®(thrombus-imaging agent)              |   | Diagnosis of deep vein thrombus                                 |   | Phase III being conducted by Draxis          |   |
|                                                     |   |                                                            |   |                                         |   |
| **ORAL LIQUID PHARMACEUTICAL PRODUCTS**                  |   | Oral liquid formulations of medicines                           |   | Bio-equivalence and stability   studies |   |
|                                                     |   |                                                            |   |                                         |   |
| ***PRODUCTS IN  LABORATORY AND PRE-CLINICAL RESEARCH:*** |   |                                                            |   |
|                                                     |   |                                                            |   |
| **BIOGENERICA**                                          |   | Generic versions of two biologic   Pharmaceutical products |   | Pre-clinical development                     |   |
|                                                     |   |                                                            |   |                                         |   |
| **BTG – 271**                                       |   | Leukemia                                                        |   | Research                                     |   |

 

For further information about these products, see “—Products inRegistration and Clinical Trials” and “—Products in Laboratory and Pre-ClinicalResearch.”

 

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In light ofthe long research and development timelines associated with pharmaceuticalresearch, as well as the high risks and costs involved, we have determined to moveaway from funding internal discovery research. Instead, we intend to focus onrecruiting promising later-stage research projects by in-licensing therapeuticsand technologies from external sources and pursuing multiple early stagecollaborations that have the potential to provide new products in oncology,neurobiology or other niche indications. We will focus our internal research expertise and resources on theadvancement or refinement of existing compounds or in-licensed productcandidates.

 

Rosemont doesnot engage in any basic research activities. However, Rosemont possesses a high degree of skill in converting drugsfrom tablet formulation to oral liquid formulations.  The process generally requires six months, with another threemonths required for stability.  Whensales of these newly developed products reach a desired level, Rosemont willcommence bioequivalency and stability studies to obtain licensure of theseproducts.  This process generallyrequires two to three years.

 

Manufacturing and Supply Arrangements

 

We currentlyoperate a production facility in Israel designed to meet current GoodManufacturing Practices (“cGMP”) for production of our bulk human growthhormone, BIOLON, BIO-HEP-B, ARTHREASE and insulin products, as well as thegenetically-engineered portion of the FIBRIMAGE product.  We also operate a modern filling suite forour BIOLON and ARTHREASE syringes, which has undergone inspection and wasapproved by European and U.S. regulatory authorities.  Based on these inspections, European Device Approval (CE Mark)and, in the case of BIOLON, FDA approval were granted.

 

In April 1999,BTG purchased an existing building located approximately 12 miles south of itscurrent facility in Israel. Construction of a modern production facility in this building that isdesigned to meet FDA cGMP requirements for drugs, biologics and devices wascompleted at the end of 2001, and qualification activities have been commencedand are expected to be completed in the second half of 2003.  The new facility is designed to allow us tomeet current regulatory requirements and our currently foreseeablemanufacturing capacity needs. In general, we cannot manufacture our productsfor commercial sale in this facility until the facility has been approved formanufacture of the specific product by the applicable regulatory agency, whichwe anticipate will occur during the period from the end of 2003 through the endof 2004, depending on product and territory. As a result of the violence in Israel in recent years, the FDA has fromtime to time suspended inspections of manufacturing facilities in Israel; anyfuture suspension of inspection activities could have an adverse effect on ourability to begin manufacturing our products at this new facility.  In addition, the FDA cancelled its scheduledApril 2003 visit to Israel in light of the current situation with Iraq.  Before moving production of a product to thenew facility, we will compile inventory for the period we anticipate will berequired to move the equipment, qualify it in the new facility and obtain therequired regulatory inspections.  Ifthis period takes longer than anticipated, or sales are higher thananticipated, we may not be able to meet demand for the product on a timelybasis, which could adversely affect our business.

 

Although asubstantial portion of the hGH supplied by BTG to its distributors is in bulkform, BTG also provides distributors with fully packaged product.  For these distributors, BTG’s bulk humangrowth hormone is formulated, filled and packed in vials in Germany by Dr.Madaus GmbH, our subcontractor for manufacturing the packaged product.  In addition, sterilization of the BIOLONsyringe is performed by Mediplast Israel Ltd., our subcontractor for thesepurposes.  We believe that we operateour facilities under, and are in compliance in all material respects with,current FDA good laboratory and manufacturing practices.

 

Our OXANDRINproduct is currently being manufactured for us by Searle, which originallydeveloped the product.  Our agreementwith Searle provides that Searle will produce and exclusively sell OXANDRIN toBTG.  In March 2003 BTG and Searleextended the agreement to April 2005. If our agreement with Searle is not renewed thereafter  and our alternative oxandrolone suppliershave not received the required regulatory approvals, our business, results ofoperations and financial condition could be materially adversely affected.  See “—Risk Factors—We  are dependent on OXANDRIN sales for asignificant portion of our revenue, and any decrease in OXANDRIN sales couldadversely affect our results of operations and our ability to conduct ourbusiness” and “—We are dependent on third party suppliers, and any failure bythem to fulfill their obligations to us could adversely affect our ability tomeet demand for our product”. The agreement provides that Searle will notproduce OXANDRIN for any other entity prior to April 2006.

 

Because ourprior alternate supplier of oxandrolone was unable to obtain the necessaryregulatory approvals, in February 1999 we entered into a supply agreement withGideon-Richter Ltd. (“GRL”) pursuant to which GRL will supply oxandrolone toBTG on an exclusive basis provided certain annual minimum purchase requirementsare met.  Should Searle for any reason beunable to supply OXANDRIN to BTG prior to GRL obtaining the necessaryregulatory approvals, BTG’s business, results of operations and financialcondition could be materially adversely affected.  GRL has advised us that it intends to file for regulatory approvalin the

 

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second quarter of 2003 andbelieves that it will obtain the necessary approvals by the end of 2003.  See “—Risk Factors—We are dependent onthird-party suppliers, and any failure by them to fulfill their obligations tous could adversely affect our ability to meet demand for our product” and “Item3.  Legal Proceedings.”

 

BMS contractmanufactured DELATESTRYL for BTG until it closed its manufacturing facility inJuly 2001.  We currently expect that ourinventory of DELATESTRYL sourced from BMS will run out during 2003, with theexact timing depending on demand and our allocation of availableinventory.  Although Sabex 2002 Inc. ofCanada (“Sabex”) agreed in March 2003 to contract manufacture DELATESTRYL forus, we cannot sell DELATESTRYL manufactured by Sabex until FDA approval isobtained and, as a result, we expect our remaining DELATESTRYL inventory to beexhausted before our new manufacturer will be in a position to supply DELATESTRYLto us. Once our DELATESTRYL inventory runs out, we will be unable to meetcustomer demand and our current DELATESTRYL customers may have to use acompeting product. We cannot assure you that we will be able to obtain FDAapproval of DELATESTRYL manufactured by Sabex on a timely basis or at all and,even if we are able to do so, that our customers will return to using ourproduct.  See “—Risk Factors—We aredependent on third-party suppliers, and any failure by them to fulfill theirobligations to us could adversely affect our ability to meet demand for ourproducts.”

 

Rosemontmanufactures all of its products at a U.K. Medicines Control Agency (“MCA”)registered manufacturing facility that is designed for the production ofaqueous oral liquids in a range of presentations from simple syrups tosuspensions.  Rosemont holds aManufacturer’s Specials License, allowing for the manufacture of unlicensedoral liquid drugs, and a Wholesale Dealer’s License, allowing for thedistribution of those drugs.  Rosemont lastpassed an MCA inspection of its facility in April 2002.  Rosemont dedicates almost all of itsmanufacturing capacity to the production of its own products, and conductslimited contract manufacturing for third parties.  During the fourth quarter of 2002, Rosemont obtained a “homeoffice” license from the U.K. regulatory authorities in order to allow itsfacility to handle and process U.K. Schedule 4, Part 2 substances, which coversanabolics such as oxandrolone.

 

In February1995, BTG-Israel was awarded ISO 9002 certification by the StandardsInstitution of Israel (“SII”).  Thecertification was issued with respect to the manufacture, packaging anddispatch of BTG’s pharmaceutical products for human use.  ISO 9002 is one of a series of QualityManagement System Standards established by the International Organization forStandardization (“ISO”) based in Geneva, Switzerland.  It is equivalent to the European Community Standard EN 29002.  SII is a member of an internationalorganization, the International Quality Certification Network (“IQNet”) thatencompasses quality certification institutes worldwide in a mutual recognitionagreement.  Receipt of the ISO 9002certification was a significant milestone in the process of obtaining theBIOLON CE mark.  In August 1997, SIIawarded BTG-Israel ISO 14001 certification for its Environmental ManagementSystem.  The ISO 14000 series ofstandards, dealing with the environment and its protection, are important fromboth a regulatory and commercial point of view.

 

Governmental Regulation

 

Regulation bygovernmental authorities in the United States and other countries is asignificant factor affecting the timing of the commercialization of ourproducts and our ongoing research and development activities.  All of our products require regulatoryapproval by governmental agencies prior to commercialization.  Various laws and regulations govern orinfluence the research and development, manufacturing, safety, labeling,storage, record keeping and marketing of our products.  The lengthy process of seeking theseapprovals, and the subsequent compliance with applicable laws and regulations,require the expenditure of substantial resources.  Any failure by us to obtain or maintain, or any delay inobtaining or maintaining, regulatory approvals could materially adverselyaffect our business.  BTG’s policy is toconduct its research and development activities in compliance with currentUnited States National Institutes of Health Guidelines for Research InvolvingRecombinant DNA Molecules, and with comparable guidelines in Israel and othercountries where we may be conducting clinical trials or other developmentalactivities.  See “—Risk Factors—We aresubject to stringent governmental regulation, and our failure to comply withapplicable regulations could adversely affect our ability to conduct ourbusiness.”

 

Clinicaltesting, manufacturing and marketing of human pharmaceutical products requireprior approval from the FDA and comparable agencies in foreign countries.  The FDA has established mandatory proceduresand safety and efficacy standards that apply to the testing, manufacture andmarketing of such products in the United States.  In the United States, these procedures include pre-clinicalstudies, the filing of an Investigational New Drug Application (“IND”) orequivalent, human clinical trials and approval of an NDA.  The results of pre-clinical testing, whichinclude laboratory evaluation of product chemistry and animal studies to assessthe potential safety and efficacy of the product and its formulations, must besubmitted to the

 

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FDA as part of an IND that mustbe reviewed before clinical testing can begin. Clinical trials generally involve a three-phase process:

 

•              Phase I trials are conducted involunteers or patients to determine the early side effect profile and, perhaps,the pattern of drug distribution and metabolism;

 

•              Phase II trials are conducted ingroups of patients with a specific disease in order to determine appropriatedosages, expand evidence of the safety profile and, perhaps, determinepreliminary efficacy; and

 

•              Phase III large scale, comparativetrials are conducted on patients with a target disease in order to generateenough data to provide the statistical proof of efficacy and safety required bynational regulatory agencies.

 

The results of the preclinical and clinical testing are then submittedto the FDA in the form of a New Drug Application (“NDA”) for approval tocommence commercial sales.  The FDA may,in responding to an NDA, grant marketing approval, request additionalinformation or deny the approval if it determines that the NDA does not providean adequate basis for approval.  Amongthe conditions for an NDA approval is the requirement that the prospectivemanufacturer’s qualify control and manufacturing procedures conform on anongoing basis with current Good Manufacturing Practices (“GMP”).  In complying with GMP, we must continue toexpend time, money and effort in the areas of production and quality control toensure full compliance.  Followingapproval of the NDA, we are subject to periodic inspections by the FDA.  Any determination by the FDA of manufacturingdeficiencies could materially adversely affect our business.

 

Europeancountries generally follow the same procedures.  The European Union has established a unified filing systemadministered by the Committee for Proprietary Medicinal Products (“CPMP”)designed to reduce the administrative burden of processing applications for newpharmaceutical products.  Following CPMPreview and approval, marketing applications are submitted to member countriesfor final approval and pricing approval, as appropriate.  In addition to obtaining regulatory approvalof products, it is generally necessary to obtain regulatory approval of thefacility in which the product will be manufactured.

 

The receipt ofregulatory approvals often takes a number of years, involves the expenditure ofsubstantial resources and depends on a number of factors, including theseverity of the disease in question, the availability of alternative treatmentsand the risks and benefits demonstrated in clinical trials.  On occasion, regulatory authorities mayrequire larger or additional studies, leading to unanticipated delay orexpense. There can be no assurance that any approval will be granted and, evenif granted, such approval may be withdrawn if compliance with regulatorystandards is not maintained.  Inaddition, the regulatory approval processes for products in the U.S., Europeancountries and other countries around the world are undergoing or may undergochanges, and we cannot predict what effect any changes in the regulatoryapproval process may have on our business.

 

Under U.K.regulations, Rosemont is permitted to sell two categories of products.  For those products for which Rosemontcompletes bioequivalence and stability studies, it receives a product licensefrom the U.K. Medicines Control Agency and is permitted to promote suchproducts to physicians, nurses and pharmacists.  For compounds that are not licensed in an oral liquidformulation, Rosemont holds a license to accept custom orders for suchproducts, known as “Specials,” but is not permitted to promote Specials.

 

In addition tothe foregoing, BTG’s present and future business may be subject to various lawsand regulations relating to safe working conditions, clinical, laboratory andmanufacturing practices, the experimental use of animals and the use anddisposal of hazardous or potentially hazardous substances, includingradioactive compounds and infectious disease agents, used in connection withour research, as well as national restrictions on technology transfer, andimport, export and customs regulations and similar laws and regulations inforeign countries.

 

Patents and Proprietary Rights

 

Our scientificstaff and consultants are actively working in various areas of pharmaceuticaldevelopment to develop techniques, microorganisms, processes and products toachieve BTG’s commercial aims.  BTGprotects its intellectual property rights in this work by a variety of means,including filing patent and trademark applications in the United States, Europeand other major industrialized countries. BTG also relies upon design registrations, trade secrets and improvements,unpatented proprietary know-how and continuing technological innovationto develop and maintain its competitive position.  See “—Risk Factors—We depend upon proprietary technology, whichmay be difficult to protect.”

 

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As of February1, 2003, BTG was maintaining worldwide approximately 490 issued patents eitherowned or exclusively licensed by BTG, including 71 patents issued in the UnitedStates, 17 patents issued by the European Patent Office (“EPO”), which in turnresulted in the issuance of 194 national patents in Europe, and 21 patentsissued in Israel.  Additionally,approximately 220 patent applications owned or exclusively licensed by BTG arepending in various countries.  There canbe no assurance that any of the patent applications assigned or licensed to BTGwill result in issued patents, or that issued patents will not be circumventedor invalidated. We believe that important legal issues remain to be resolved asto the extent and scope of patent protection, and we expect that in certaincases litigation may be necessary to determine the validity and scope of ourand others’ proprietary rights.  Suchlitigation may consume substantial amounts of our resources.  See “—Risk Factors—If our intellectualproperty positions are challenged, invalidated or circumvented, or if we failto prevail in present and future intellectual property litigation, our businesscould be adversely affected” and “Item 3. Legal Proceedings.”

 

We are awareof patent applications filed by, or patents issued to, other entities withrespect to technology potentially useful to BTG and, in some cases, related toproducts and processes being developed by BTG. We cannot presently assess the effect, if any, that these patents mayhave on our operations.  The extent towhich efforts by other researchers have or will result in patents and theextent to which the issuance of patents to others would have a materiallyadverse effect on our business or would force us to obtain licenses from othersis currently unknown.  See “—RiskFactors—If our intellectual property positions are challenged, invalidated orcircumvented, or if we fail to prevail in present and future intellectualproperty litigation, our business could be adversely affected.”

 

Rosemont’sformulation know-how is not patented, although Rosemont has obtained a patenton one resulting oral liquid products.

 

To date, BTGhas been, or currently is, party to several legal and administrativeproceedings relating to its technologies, products and patents and the patentsof others.  See “Item 3.  Legal Proceedings.”

 

Operations in Israel

 

BTG hassignificant research and development and biologics production activities inIsrael that are affected by economic, military and political conditions thereand in the Middle East in general. Since the establishment of the State of Israel in 1948, a number ofarmed conflicts have taken place between Israel and its Arab neighbors and astate of hostility, which varies in degree and intensity, has caused securityand economic problems in Israel.  Anymajor hostilities involving Israel could adversely affect our research,development and biologics production operations, which would harm our business.  We cannot assure you that ongoing or revivedhostilities related to Israel will not have a material adverse affect on us orour business and on our share price. Despite the progress towards peace betweenIsrael and its Arab neighbors, the future of these peace efforts is uncertain.  In addition, since October 2000, there hasbeen a significant increase in violence, primarily in the West Bank and GazaStrip.  During the course of militaryoperations, Israel’s military reserves, which include a number of our employeesand executives, may be called up.  Todate, we have been able to continue our research and development and biologicsproduction activities during periods of military mobilization, although therecan be no assurance that such activities could be continued in the event offuture hostilities.  See “—RiskFactors—Our business may be adversely affected by developments in Israel.”

 

As a result ofthe violence in Israel in recent years, the FDA has from time to time suspendedinspections of manufacturing facilities in Israel.  In addition, the FDA cancelled its scheduled April 2003 visit toIsrael in light of the current situation with Iraq.  To date European regulatory agencies have not suspendedinspections of manufacturing facilities in Israel.  Products we intend to manufacture at our newly constructedmanufacturing (currently BIOLON, ARTHREASE, BIO-TROPIN and BIO-HEP-B) facilitycannot be shipped into the United States until the FDA has inspected andapproved this facility.  We do notcurrently intend to transfer our manufacturing activities to our newlyconstructed manufacturing facility until the FDA has inspected and approved thenew facility.  A suspension ofinspection activities by the FDA will delay the commencement of manufacturingat our new facility, which could adversely affect our business. The suspensionof FDA inspections delayed inspection of the contract sterilizer utilized byBTG for its BIOLON product, which required us to stop shipping BIOLON to theU.S. from the fourth quarter of 2001 until September 2002, when the facilitywas approved following an inspection by the FDA.  BTG has not secured alternate arrangements to prevent potentialinterruption of manufacturing activities, and we cannot assure that we will beable to secure alternative manufacturing arrangements on a timely basis onreasonable terms, or at all, if needed.

 

BecauseBTG-Israel is involved in a technological industry and is an exporter ofIsraeli goods, BTG has enjoyed the benefits of certain programs promulgated bythe Government of Israel in order to encourage

 

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the development of technologyand export of Israeli products. However, there can be no guarantee that these programs will continue.

 

Competition

 

Therapeuticdrug development is conducted by numerous companies throughout the world.  Competition is intense in the product areasin which BTG has focused its efforts. Significant competition comes from independent, dedicated biotechnologycompanies as well as from large, established pharmaceutical and specialtypharmaceutical companies.  The primarycompetitive factors in this field are the ability to attract and retain highlyqualified scientists and technicians, to create and maintain scientificallyadvanced technology during a period of rapid technological development and todevelop proprietary products or processes.

 

The principalparameters influencing competition are the efficacy of products and theirproduction processes, the patent protection available for such products, thetiming of commercialization vis-a-vis competitors’ products and price.  BTG’s competitive position in the industryvaries on a product-by-product and country-by-countrybasis depending upon the efficacy of BTG’s products as compared to competingproducts, the scope of patent protection in each country for BTG’s products ascompared to competing products, whether BTG’s product is the first such productto be commercialized and, where there are a number of similar products, theprice of BTG’s product as compared to its competitors’ products, and therelative strength of BTG’s partner in the territory.

 

Many of ourcurrent competitors have significantly greater financial and organizationalresources than us.  Since technologicaldevelopments are expected to continue at a rapid pace in the biotechnologyindustry, the successful development of BTG’s products will be dependent uponits ability to maintain a competitive position with respect to itstechnology.  See “—Risk Factors—Weoperate in a highly competitive market and our competitors may developalternative technologies and products before or more successfully than we do.”

 

We arecurrently seeking to expand our operations and product pipeline through theacquisition of businesses, products and/or technologies.  We face significant competition foracquisitions, which could adversely affect our ability to expand our operationsand product pipeline.  See “—RiskFactors—We are seeking to expand through acquisition, which entails risks.”

 

Employees

 

As of February1, 2003, we had approximately 490 employees, most of whom are engaged inmanufacturing, quality assurance, marketing and sales, and research anddevelopment activities.  In addition, wehave consulting arrangements with scientists at various institutions anduniversities in the United States, Europe and Israel.

 

BTG’s abilityto develop marketable products and to establish and maintain its competitiveposition in light of technological developments will depend, in part, on itsability to attract and retain qualified scientific, marketing and managementpersonnel.  Competition for suchpersonnel is intense.

 

None of BTG’semployees is represented by a labor union and BTG has experienced no workstoppages.  We believe our relationswith our employees are good and we have experienced a low turnover rate amongour employees.

 

Available Information

 

Our investorrelations website is accessible through www.btgc.com.  We make available free of charge on this website, under thecaption "Investor Relations—SEC Filings", our annual reports on Form10-K, quarterly reports on Form 10-Q, current reports on Form 8-K andamendments to those reports as soon as reasonably practicable after weelectronically file or submit such materials to the Securities and ExchangeCommission.

 

RISK FACTORS

 

This AnnualReport on Form 10-K contains certain forward-looking statements within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934.  Allstatements regarding BTG’s expected future financial position, results ofoperations, cash flows, financing plans, business strategy, competitiveposition, plans and objectives and words such as “anticipate,” “believe,”“estimate,” “expect,” “intend,” “plan” and other similar expressions areforward-looking statements.  Theseforward-looking statements are based on our current expectations, assumptions,estimates and projections about our business and the biopharmaceutical andspecialty pharmaceutical industries, and involve known and unknown risks,uncertainties and other factors that may cause BTG’s results, levels ofactivity, performance or achievements to be materially different from theresults, levels of activity, performance or achievements

 

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expressed or implied in orcontemplated by these forward-looking statements.  Accordingly, stockholders must recognize that BTG’s actualresults could differ materially from those projected or contemplated in theforward-looking statements as a result of a variety of factors, including thefactors set forth below.  Stockholdersshould not place undue reliance on these forward-looking statements.

 

Theforward-looking statements speak only as of the date on which they are made,and BTG undertakes no obligation to update any forward-looking statement toreflect events or circumstances after the date on which the statement is madeor to reflect the occurrence of unanticipated events.  In addition, we cannot assess the effect of each factor on ourbusiness or the extent to which any factor, or combination of factors, maycause actual results to differ materially from those contained in anyforward-looking statements.

 

We aredependent on OXANDRIN sales for a significant portion of our revenue, and anydecrease in OXANDRIN sales could adversely affect our results of operations andour ability to conduct our business.

 

Sales ofOXANDRIN in 2000, 2001 and 2002 amounted to approximately $32.2 million, $47.2million and $45.9 million, respectively, representing 52%, 54% and 48%,respectively, of BTG’s total product sales in those periods.  We believe that sales of OXANDRIN willcontinue to constitute a significant portion of our total revenues for the nextseveral years.  Accordingly, any factoradversely affecting sales of OXANDRIN could have a material adverse effect onour results of operations and profitability and our ability to conduct ourbusiness.

 

OXANDRIN isfacing increasing competition from other products, including human growthhormone, and there can be no assurance that sales of OXANDRIN will continue toincrease.  A substantial number of usersof OXANDRIN are patients with AIDS and as more successful treatments for thisdisease, such as protease inhibitors, are developed, the need to use OXANDRINby these patients may be reduced. Although BTG is working to expand the use of OXANDRIN to treat otherconditions covered by the product’s current FDA approval, such as the treatmentof involuntary weight loss associated with burns, non-healing wounds, chronicobstructive pulmonary disease and cancer, there can be no assurance that BTGwill be successful in its efforts.

 

OXANDRIN is nolonger patented as an active pharmaceutical ingredient, although BTG does holdcertain patents on specific uses, and there can be no assurance that otherswill not introduce an oxandrolone product. We have received notice that Solchem, formerly an affiliate of SocietaProdotti Antibiotici S.p.A. (“SPA”), filed its drug master file relating to ageneric oxandrolone product with the FDA in 2002.  SPA was our initial alternate source supplier of oxandrolonethrough at least 2003.  We believe thatSolchem intends to supply oxandrolone to Mutual Pharmaceutical, a generic drugmanufacturer.  A settlement oflitigation with Solchem precludes Solchem from supplying oxandrolone to Mutualfor commercial purposes until October 2003. We expect a generic version of OXANDRIN could be introduced as early as2004.

 

Since BTG’slaunch of OXANDRIN in December 1995 through December 2000, a significant portionof OXANDRIN sales has been for treatment of patients suffering fromAIDS-related weight loss.  However, therate of growth in the AIDS-related weight loss market has slowed substantially,and there can be no assurance that it will continue to grow in the future.  Our inability to continue to increase oursales in the AIDS-related weight loss market or to expand into other marketscould have a material adverse effect on our business.  OXANDRIN sales experienced rapid growth in December 2000 and thefirst half of 2001 in large part as a result of the commencement by Ross ofmarketing OXANDRIN for the treatment of involuntary weight loss in thelong-term care market, which represented approximately 15% of OXANDRINwholesaler to end-user sales in both 2001 and 2002.  Although OXANDRIN prescriptions increased 22% in 2002 compared to2001 and 26.5% in 2001 compared to 2000, to date the average prescriptionwritten for the long-term care market involves a lower dose of OXANDRIN thanthe average prescription written for the AIDS market and, therefore, the rateof growth in OXANDRIN sales will be less than the rate of growth inprescriptions.  Ross has the right toterminate our OXANDRIN co-marketing agreement at any time upon six monthsnotice.  If Ross elects to do so, ourOXANDRIN sales could be adversely affected until we are able to replace theRoss sales force, which we may not be able to do successfully.  There can be no assurance that demand forOXANDRIN will continue to increase.

 

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Quarterlyfluctuations in sales of OXANDRIN can have a significant impact on ourquarterly results of operations. Quarterly sales of OXANDRIN in 2000, 2001 and 2002 are set forth in thefollowing table:

 
|   |   | **First  Quarter**  |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   | **Total** |   |
|--------|--------|---------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|-----------|--------|
|   |   | **(in  thousands)** |   |
| 2000   |   | $                   | 5,009  |                | $      | 6,403              |   | $                   | 10,889 |      | $      | 9,886 |   | $ | 32,187 |   |
| 2001   |   | 16,692              |   | 17,887              |   | 4,575              |   | 7,996               |   | 47,150    |   |
| 2002   |   | 9,555               |   | 12,329              |   | 13,661             |   | 10,316              |   | 45,861    |   |
|        |        |                     |        |                     |        |                    |        |                     |        |           |        |  |  |  |  |  |

 

Prior toSeptember 2002, our sales of OXANDRIN consisted solely of sales to Accredo,which served as our wholesale and retail distributor of OXANDRIN in the UnitedStates, and, beginning in the third quarter of 2000, Ross, which isco-marketing OXANDRIN in the long-term care market in the United States. Theincrease in OXANDRIN sales in each of the last three quarters of 2000 was dueto Accredo’s completion, in May 2000, of the OXANDRIN inventory reduction thatAccredo began in April 1999 as a result of a slowing in the rate of increase inOXANDRIN prescriptions.  The increase inOXANDRIN sales during the first half of 2001 was due to: (i) the commencement,in September 2000, of sales by Ross for the long-term care market for thetreatment of patients with involuntary weight loss, including stocking activityby wholesalers in connection with the launch of this product in the long-termcare market; (ii) stocking by certain wholesalers in anticipation of a priceincrease; (iii) increased purchases by Accredo following its completion, in May2000, of a reduction in the amount of OXANDRIN inventory it carried, whichreduction began in April 1999; and (iv) increased wholesaler sales of OXANDRINby Accredo.

 

Uponcompletion of its inventory reduction in May 2000, Accredo began to purchase, ona monthly basis, an amount of OXANDRIN equal to the average end-user (*i.e.*,wholesaler) sales during the preceding three months.  However, because of the significant increase in OXANDRINpurchases by wholesalers in the first quarter of 2001 in anticipation of aprice increase and in connection with the launch of OXANDRIN into the long-termcare market, Accredo’s purchases of OXANDRIN in the second quarter were higherthan the levels of its sales of OXANDRIN to wholesalers in that period.  As a result, Accredo’s inventory of OXANDRINincreased beyond the desired level. Accordingly, BTG and Accredo amended their distribution arrangementeffective August 2001 to provide for reduced purchases of OXANDRIN untilAccredo’s inventory was reduced to desired levels and thereafter to ensure thatsales of OXANDRIN by BTG to Accredo more accurately reflected end-userdemand.  As a result, sales of OXANDRINin the second half of 2001 were $22.0 million lower than in the first half of2001 and $8.2 million lower than in the second half of 2000.

 

In the fourthquarter of 2002 BTG renegotiated its agreement with Accredo, and BTG now sellsOXANDRIN directly to wholesalers and Accredo distributes OXANDRIN andDELATESTRYL for BTG on a fee-for-service basis.  Accredo will earn management fees from BTG for certain servicesit will continue to provide, such as warehousing and shipping of product.  The transition to the new arrangement, whichwe anticipate will  be completed by theend of March 2003, when Accredo ceases to act as distributor of the 2.5mgOXANDRIN tablets, resulted in sales of OXANDRIN decreasing by $3.3 million inthe fourth quarter of 2002 compared to the third quarter of 2002, as Accredobegan to reduce its inventory of the 2.5mg OXANDRIN tablet.  BTG’s sales of OXANDRIN in the first quarterof 2003 will be adversely affected by Accredo’s working down of its inventoryof the 2.5mg tablets.

 

Reductions inwholesaler purchases of OXANDRIN from Accredo in the second, third and fourthquarters of 2001 and significantly reduced purchases of OXANDRIN by Accredo inthe second half of 2001 adversely affected the growth in BTG’s product salesand revenues and BTG’s results of operations in the second half of 2001.  Because purchases by wholesalers fluctuatefrom month to month and quarter to quarter based on their own operatingstrategies (including desired levels of inventories, purchases by theircustomers and stocking in advance of anticipated price increases), BTG’s saleswill fluctuate from quarter to quarter.

 

We are dependent on third-party suppliers, and any failure by them tofulfill their obligations to us could adversely affect our ability to meetdemand for our products.

 

BTG isdependent on third parties for the manufacture of OXANDRIN and DELATESTRYL, thefilling and vialing of its BIO-TROPIN product and the sterilization of itsBIOLON product.  Our dependence uponthird parties for the manufacture of these products may adversely impact ourprofit margins or result in unforeseen delays or other problems beyond ourcontrol.  If for any reason we areunable to retain these third-party manufacturers, or obtain alternatethird-party manufacturers, on commercially acceptable terms, we may not be ableto distribute our products as planned. If we encounter delays or difficulties with contract manufacturers inproducing, filling, vialing or sterilizing these products, the sale of theseproducts would be adversely affected.

 

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Although BTGis a party to an exclusive supply arrangement with Searle, covering the supplyof OXANDRIN to BTG through April 2005, and a supply agreement with GRL, therecan be no assurance that Searle will continue, or that GRL will be able, toprovide BTG with sufficient supplies of OXANDRIN to satisfy its future needs oncommercially reasonable terms or at all. BMS ceased manufacturing DELATESTRYL for BTG in July 2001 when it closedthe manufacturing facility where it produced DELATESTRYL.  We currently expect that our inventory ofDELATESTRYL sourced from BMS will run out during 2003, with the exact timingdepending on demand and our allocation of available inventory.  Although Sabex agreed in March 2003 tocontract manufacture DELATESTRYL for us, we cannot sell DELATESTRYLmanufactured by Sabex until FDA approval is obtained and, as a result, weexpect our remaining DELATESTRYL inventory to be exhausted  before our new manufacturer will be in a position to supply DELATESTRYL to us.Once our DELATESTRYL inventory runs out, we will be unable to meet customerdemand and our current DELATESTRYL customers may have to use a competingproduct. We cannot assure you that we will be able to obtain FDA approval ofDELATESTRYL manufactured by Sabex on a timely basis or at all and, even if weare able to do so, that our customers will return to using our product.  In addition, BTG is dependent on Dr. MadausGmbH (“Dr. Madaus”) to fill and vial our BIO-TROPIN product.  We were forced to stop shipping BIOLON tothe U.S. from the fourth quarter of 2001 until September 2002 because the FDAwas unable to inspect the new manufacturing facility of our contract sterilizerfor BIOLON due to the violence in Israel in recent years.

 

Third–partysuppliers may encounter difficulties in achieving quality control and qualityassurance, and also may experience shortages in qualified personnel, andtherefore may not be able to meet our production schedules.  Switching suppliers may be difficult becausethe number of potential manufacturers is limited.  A shutdown in any of the manufacturing facilities utilized byBTG’s suppliers due to technical, regulatory or other problems, resulting in aninterruption in supply of products, could significantly delay the manufactureof one or more of our products, which could have an adverse impact on ourfinancial results, and we may have to seek alternative sources of supply orabandon or sell product lines on unsatisfactory terms.  We might not be able to enter intoalternative supply arrangements at commercially acceptable rates, if at all.  The manufacturing process for pharmaceuticalproducts is highly regulated, and regulators may shut down manufacturingfacilities that they believe do not comply with regulations.  The FDA current Good Manufacturing Practicesare extensive regulations governing the manufacturing process, stabilitytesting, record-keeping and quality standards. We do not have control over, other than by contract, third-partymanufacturers’ compliance with these regulations and standards.  Because the suppliers of key components andmaterials must be named in an NDA filed with the FDA for a product, significantdelays can occur if the qualification of a new supplier is required.  In the event of any interruption in supplyfrom Searle, GRL, Sabex (once an approved supplier) or Dr. Madaus due toregulatory reasons, processing problems, capacity constraints or other causes,alternative manufacturing arrangements may not be available on a timely basis,if at all.  Any failure of Searle, GRL,Sabex or Dr. Madaus to fulfill its obligations to BTG could have a materialadverse effect on our business, results of operations and financialcondition.  See “—Manufacturing andSupply Arrangements.”

 

We are dependent on third-party licensees to commercialize many of ourproducts, and their failure to perform adequately could adversely affect ourresults of operations.

 

Except for thesale of OXANDRIN and DELATESTRYL in the United States, its oral liquidpharmaceutical products in the United Kingdom and its products in Israel, whichBTG markets on its own, BTG is dependent on third-party licensees to distributeits products.  These arrangementstypically provide our licensees with certain rights to manufacture and marketspecified products developed using our proprietary technology, subject to anobligation to pay royalties to us based on any future product sales or topurchase product from us, and require the licensee to conduct required clinicaltrials and obtain any necessary regulatory approvals.  The success of these arrangements depends on each licensee’s ownfinancial, competitive, marketing and strategic considerations, which includethe relative advantages, including patent and proprietary positions, ofalternate products being marketed or developed by others.  Furthermore, the amounts of any payments tobe received by BTG under its license agreements from sales of product bylicensees will be dependent on the extent to which its licensees devoteresources to the development and commercialization of the products.  Although we believe our licensees have aneconomic motivation to commercialize their products, we have no effectivecontrol over the licensees’ commercialization efforts.

 

BTG may fromtime to time seek to collaborate with larger pharmaceutical companies on theresearch, development and commercialization of certain products.  In trying to attract corporate partners tocollaborate in the research, development and commercialization process, BTGfaces serious competition from other biopharmaceutical companies and thein-house research and development staffs of the larger pharmaceuticalcompanies.  If BTG is unable to enterinto arrangements with corporate partners, its ability to proceed with theresearch, development and commercialization of its products may be severelylimited.  Furthermore, larger

 

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pharmaceutical companies oftenexplore multiple technologies and products for the same medical conditions.Therefore, they are likely to enter into collaborations with BTG’s competitorsfor products addressing the same medical conditions addressed by BTG’sproducts.  Depending on how otherproduct candidates advance, a corporate partner may slow down or abandon itswork on BTG’s product candidates or terminate its collaborative arrangementwith BTG in order to focus on these other prospects.

 

If our intellectual property positions are challenged, invalidated orcircumvented, or if we fail to prevail in present and future intellectualproperty litigation, our business could be adversely affected.

 

BTG’s successwill depend, in part, on its ability to obtain patent protection for itstechnology (including use of its products), preserve trade secrets and operatewithout infringing the proprietary rights of third parties.  The patent positions of pharmaceutical andbiopharmaceutical companies are highly uncertain and involve complexscientific, legal and factual questions. Patent disputes are frequent and costly, can delay or preclude thecommercialization of products and could subject BTG to significant liabilitiesto third parties. Many biopharmaceutical companies have employed intellectualproperty litigation as a way to gain a competitive advantage.

 

BTG hasdeveloped patentable technology and proprietary know-how and has acquired fromvarious universities and institutions certain basic technologies, as to whicheither patents have been issued or patent applications are pending.  There can be no assurance that patentapplications will result in issued patents, that the claims allowed in suchissued patents will be sufficiently broad to protect our proprietary rights orthat patents will not be challenged, circumvented or invalidated or that rightsgranted pursuant to such patents will provide competitive advantages to BTG.  In addition, our patents may not protect usagainst competitors with similar products or technologies because competingproducts or technologies may not infringe our patents. Because patentapplications are maintained in secrecy for a period of time after filing, we cannotbe certain that others have not filed patent applications for technologycovered by our pending applications or that we were the first to file patentapplications for such technology.  BTGalso relies on trade secrets, proprietary know-how and technological innovationthat it seeks to protect with confidentiality agreements with its employees,consultants and licensees.  There can beno assurance that these agreements will not be breached, that BTG will have adequateremedies for any breach or that BTG’s trade secrets and proprietary know-howwill not otherwise become known or be independently discovered by competitors.

 

BTG’scommercial success will also depend in part on our not infringing patents orproprietary rights of third parties.  Anumber of companies and research and academic institutions have developedtechnologies, filed patent applications or received patents on varioustechnologies that relate to our business, and such entities may fileapplications for or be issued patents in the future with respect to technologypotentially necessary or useful to BTG. Some of these technologies, applications or patents may conflict withBTG’s technologies and existing or future patents, if any, or patent applications.  Such conflict could limit the scope ofpatents that BTG has obtained or may obtain in the future or result in patentapplications failing to issue as patents. In addition, if third parties obtain patents which cover our activities,there can be no assurance that BTG would be able to license such patents onreasonable terms, or at all, or be able to license or develop alternativetechnology on a timely basis, or at all. As more patents are issued to third parties, the risk that BTG’sproducts and activities may give rise to claims that they infringe the patentsof others increases.  In addition, thepresence of patents or other proprietary rights belonging to other parties maylead to the termination of research and development of a particular product.

 

BTG has in thepast been, is currently and may in the future be involved in litigation andadministrative hearings to determine the validity and scope of its and others’patents and proprietary rights. Such litigation and administrative proceedingshave to date required, and may in the future require, a significant commitmentof our resources.  Any such commitmentmay divert resources from other areas of BTG’s business.  See “Item 3.  Legal Proceedings.”

 

The successful development of pharmaceutical products is costly andhighly uncertain.

 

A substantialportion of our annual operating budget is spent on research, development andclinical activities.  We are currentlydeveloping several products that may never reach clinical trials, achievesuccess in the clinic, be submitted for approval, be approved for manufacturingor marketing or achieve commercial success. Further, we rely on third parties to assist in various stages of thedevelopment process.  These third partiesmay be unable to complete their work in a timely fashion or in a manner that issatisfactory to us. Should they be unable to meet our needs, our productdevelopment process would be delayed and we may have to incur substantialadditional costs.

 

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Successfulpharmaceutical product development is highly uncertain and is dependent onnumerous factors, many of which are beyond BTG’s control, and very few researchand development projects produce a commercial product.  Products that appear promising in the earlyphases of development may fail to reach the market for numerous reasons,including, but not limited to:

 

•  they may be found to be ineffective or tohave harmful side effects in pre-clinical or clinical testing;

•  they may fail to receive necessaryregulatory approvals;

•  they may turn out to be uneconomical becauseof manufacturing costs or other factors; or

•  they may be precluded from commercializationby the proprietary rights of others or by competing products for the sameindication.

 

Success inpre-clinical and early clinical trials does not ensure that large-scale trialswill be successful. Data obtained from pre-clinical and clinical trials arefrequently susceptible to varying interpretations that may delay, limit orprevent regulatory approvals.  Manybiopharmaceutical companies, including BTG, have suffered significant setbacksin advanced clinical trials, even after experiencing promising results inpre-clinical and early human testing.

 

BTG iscurrently seeking to expand its product pipeline through the acquisition ofbusinesses, products and/or technologies. To the extent BTG acquires products that are still in pre-clinical orclinical trials and, therefore, face the risks discussed above.  To the extent BTG uses its cash resources,incurs debt and/or issues shares of its common stock in these acquisitions butthe acquired product cannot be commercialized, BTG’s business and prospectscould be adversely affected.

 

The length oftime necessary to complete clinical trials and to submit an application formarketing approval for a final decision by a regulatory authority variessignificantly and is dependent upon a number of factors, many of which areoutside our control, including the rate of patient enrollment.  Patient enrollment is a function of severalfactors, including the size of the patient population and the proximity ofpatients to clinical sites.  Delays inpatient enrollment could result in increased costs and delays in completion ofthe clinical trials.  In addition,pre-clinical and clinical trials must meet regulatory and institutionalrequirements.

 

The principalfactors affecting BTG’s research and development expenses include the number ofand outcome of clinical trials currently being conducted by it and/or itscollaborators, the number of products in development and later stage researchand future levels of revenue.  Shouldour revenues decline, we may limit our spending on research and development.

 

We have limited manufacturing capacity.

 

We currentlyoperate a production facility meeting current Good Manufacturing Practices inIsrael for production of our bulk human growth hormone, BIOLON, BIO-HEP-B,ARTHREASE and insulin products, as well as the genetically-engineered portionof the FIBRIMAGE product.  We alsooperate a modern filling suite for our BIOLON and ARTHREASE syringes.  We completed construction of a new biologicsproduction facility at the end of 2001, and qualification activities have beencommenced and are expected to be completed in the second half of 2003.  Rosemont manufactures all of its products ata U.K. Medicines Control Agency (“MCA”) registered manufacturing facility thatis designed for the production of aqueous oral liquids in a range ofpresentations from simple syrups to suspensions.

 

Themanufacture of BTG’s products involves a number of technical steps and requiresmeeting stringent quality control specifications imposed by governmentalregulatory bodies and by BTG itself. Further, such products can only be manufactured in facilities approvedby the applicable regulatory authorities. As a result, BTG may not be able to quickly and efficiently replace itsmanufacturing capacity in the event that it is unable to manufacture itsproducts at its facilities.  In theevent of a natural disaster, equipment failure, strike, war or otherdifficulty, BTG may be unable to manufacture its products in a manner necessaryto fulfill demand.  BTG’s inability tofulfill demand may permit its licensees and distributors to terminate theiragreements, seek alternate suppliers or manufacture the productsthemselves.  Additionally, if BTG doesnot receive regulatory approval for its new facility, it would likely be unableto meet the anticipated increased demand for its products, which would have a materialadverse effect on BTG’s business, results of operations and financialcondition.  Any substantial delay inobtaining regulatory approval for its manufacturing processes and facilitiescould also have a material adverse effect on BTG.  As a result of the violence in Israel in recent years, the FDAhas from time to time suspended inspections of manufacturing facilities inIsrael, which could delay FDA inspection of BTG’s new manufacturing facilityand, therefore, use of such facility to manufacture products.  In addition, the FDA cancelled its scheduledApril 2003 visit to Israel in light of the current situation with Iraq.

 

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BTG isdependent on third parties to manufacture all or a portion of certain of itsproducts.  See “— We are dependent onthird-party suppliers, and any failure by them to fulfill their obligations tous could adversely affect our ability to supply our products.”

 

During 2003 weexpect to begin to transfer our Israeli manufacturing operations to our newmanufacturing facility in Israel.  Themanufacture of each product at the new manufacturing facility must be approvedby applicable regulatory authorities, including the FDA for products shipped tothe U.S., prior to the resumption of manufacturing of that product at the newfacility.  Prior to transferring themanufacturing for the product to the new facility, BTG will build inventory ofeach product that it believes will be adequate to meet demand over the periodrequired to transfer the manufacturing operations and have them inspected andapproved.  To the extent it takes longerthan expected to complete the transfer or obtain regulatory approval or demandfor our product exceeds our expectations, our ability to meet our customers’requirements for their products will be adversely affected, which couldadversely affect our business.

 

We have limited marketing capability and experience.

 

BTGestablished a sales and marketing force in the United States during the secondhalf of 1995 to promote distribution of OXANDRIN and other BTG products in theUnited States, and its Rosemont subsidiary has a sales force that marketsRosemont’s products in the United Kingdom. With respect to territories outside the United States, the United Kingdomfor Rosemont products,  and Israel, BTGdoes not yet have an established sales force and relies on third parties tomarket its products.  There can be noassurance that our marketing strategy will be successful.  Turnover in our sales and marketingemployees adversely affects our product sales, as it can take several months tofind and train new sales and marketing employees. Competition for experiencedsales and marketing employees is intense, and we compete with companies withgreater resources and larger product lines. BTG’s ability to market its products successfully in the future will bedependent on a number of factors, many of which are not within itscontrol.  See “—We are dependent onthird-party licensees to commercialize many of our products, and their failureto perform adequately could adversely affect our results of operations.”

 

We are seeking to expand through acquisitions, which entails risk.

 

BTG iscurrently seeking to expand its operations and product pipeline through theacquisition of businesses, products and/or technologies.  Expansion through acquisition involvesseveral risks.  In order to consummatean acquisition, BTG may issue additional equity, which would dilute currentstockholders’ percentage ownership and could dilute earnings per share, incursubstantial debt and/or assume contingent liabilities.  BTG may not be able to successfullyintegrate any acquired business, product and/or technology without asignificant expenditure of operating, financial and management resources, if atall.  In addition, acquired businessesmay not at the time of acquisition be profitable, and acquired products mayrequire substantial additional research and development and clinical trialsbefore they can be commercialized, all of which could adversely affect BTG’sresults of operations and financial position. Potential products acquired at an early stage of development may fail toreach the market for numerous reasons, including those set forth above under“—The successful development of pharmaceutical products is costly and highlyuncertain.”  To the extent we acquiretechnology that is not fully commercially developed and has no alternativefuture use at the time of acquisition, we will be required to write-offimmediately the fair market value of such technology, which will adverselyaffect our results of operations.  Ourability to expand through acquisitions is currently limited by our low stockprice and the fact that we used a substantial portion of our cash to acquireRosemont.

 

Othercompanies, many of which have substantially greater financial resources than wedo, compete with us for the acquisition of businesses, products andtechnologies.  We may not be able toacquire additional businesses or rights to products or technologies on acceptableterms, or at all, or be able to obtain financing for such acquisitions onacceptable terms, if at all.  Ourinability to acquire additional businesses, products and/or technologies couldlimit the overall growth of our business. Furthermore, even if we obtain rights to a product or technology oracquire a business, we may not be able to generate sales sufficient to create areturn on our investment.

 

We expect our quarterly results to fluctuate, which may causevolatility in our stock price.

 

BTG’s revenuesand expenses have in the past and may in the immediate future continue todisplay significant variations, which variations have in the past caused andwould in the future cause our operating results to vary significantly fromquarter to quarter and year to year. These variations are due to a variety of factors, including:

 

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•  the amount and timing of product sales,which can be affected by demand for our products, our inability to provideadequate supply for our products and changes in wholesaler buying patterns,

•  changes in the government’s or privatepayors’ reimbursement policies for our products,

•  increased competition from new or existingproducts,

•  the timing of the introduction of newproducts,

•  the timing and realization of milestone andother payments from licensees,

•the timing and amount of expenses relating to research and development, productdevelopment and manufacturing activities,

•  the extent and timing of costs of obtaining,enforcing and defending intellectual property rights, and

•  any charges related to acquisitions.

 

Because manyof BTG’s expenses are fixed, particularly in the short-term, any decrease inrevenues will adversely affect BTG’s earnings until revenues can be increasedor expenses reduced.  For example, in1999, the first five months of 2000 and the second half of 2001, BTG’s revenuesand earnings were adversely affected by Accredo’s decision to reduce the amountof OXANDRIN inventory it carried.  See“—We are dependent on OXANDRIN sales for a significant portion of our revenue,and any decrease in OXANDRIN sales could adversely affect our results ofoperations and our ability to conduct our business.”  Because of fluctuations in revenues and expenses, it is possibleBTG’s operating results for a particular quarter or quarters will not meet theexpectations of public market analysts and investors, causing the market priceof BTG common stock to decline.  Webelieve that period-to-period comparisons of our operating results are not agood indication of our future performance and stockholders should not rely onthose comparisons to predict our future operating or share priceperformance.  See “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.”

 

We may be unable to obtain any additional capital needed to operate andgrow our business.

 

Thedevelopment and commercialization of products requires substantial  funds. In addition, we may require cash toacquire businesses, products and/or technologies.  Our cash requirements are satisfied primarily through productsales.  Historically, we have alsoobtained capital through (i) funding of projects through collaborative researchand development arrangements, (ii) contract fees, (iii) government of Israelfunding of a portion of certain research and development projects, mainlythrough the office of its Chief Scientist, and (iv) equity and debtfinancings.  There can be no assurancethat these financing alternatives will be available in the future to satisfyour cash requirements.  We are currentlyin discussions with the Chief Scientist about whether it will continue to fundsome of our research and development activities, and we cannot assure you thatthe Chief Scientist will continue to provide funding to us.  We believe that our current cash resources,together with anticipated product sales, will be sufficient to fund our ongoingoperations for the foreseeable future. There can, however, be no assurance that product sales will occur asanticipated, that current agreements with third party distributors of ourproducts will not be canceled, that the Chief Scientist will continue toprovide funding, or that unanticipated events requiring the expenditure offunds will not occur.  In September2002, we used a substantial portion of our cash resources to acquire Rosemont.

 

Thesatisfaction of our future cash requirements will depend in large part on thestatus of commercialization of our products, our ability to enter intoadditional research and development and licensing arrangements, and our abilityto obtain additional equity investments or bank loans if necessary.  There can be no assurance that BTG will beable to obtain additional funds or, if such funds are available, that suchfunding will be on favorable terms.  Ifadditional funds are raised by issuing equity securities of BTG, dilution toexisting stockholders may result.  Ifadditional funds are raised through the issuance of debt securities orborrowings, BTG may incur substantial interest expense and could become subjectto financial and other covenants that could restrict our ability to operate ourbusiness.  If adequate funds are notavailable, BTG may be required to significantly curtail one or more of itscommercialization efforts or research and development programs or obtain fundsthrough arrangements with collaborative partners or others on less favorableterms than might otherwise be available.

 

We are subject to stringent governmental regulation, and our failure tocomply with applicable regulations could adversely affect our ability toconduct our business.

 

Virtually allaspects of our business are subject to extensive regulation by numerous federaland state governmental authorities in the U.S., such as the FDA, as well as byforeign countries where we manufacture or distribute our products.  Of particular significance are therequirements covering research and development, testing, manufacturing, qualitycontrol, labeling and promotion of pharmaceutical products for human use. Allof BTG’s products, manufacturing processes and facilities require governmentallicensing or approval prior to

 

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commercial use.  A pharmaceutical product cannot be marketedin the United States until it has been approved by the FDA, and then can onlybe marketed for the indications and claims approved by the FDA. As a result ofthese requirements, the length of time, the level of expenditures and thelaboratory and clinical information required for approval of an NDA aresubstantial.  The approval processapplicable to products of the type being developed by BTG usually takes five toseven years from the commencement of human clinical trials and typicallyrequires substantial expenditures.  BTGand its licensees may encounter significant delays or excessive costs in theirrespective efforts to secure necessary approvals or licenses.  Before obtaining regulatory approval for thecommercial sale of its products, BTG is required to conduct pre-clinical andclinical trials to demonstrate that the product is safe and efficacious for thetreatment of the target disease.  Thetiming of completion of clinical trials is dependent upon a number of factors,many of which are outside our control. In addition, BTG and its partners mayencounter delays or rejections based upon changes in the policies of regulatoryauthorities.  The FDA and foreignregulatory authorities have substantial discretion to terminate clinicaltrials, require additional testing, delay or withhold registration andmarketing approval, and mandate product withdrawals.

 

Failure toobtain requisite governmental approvals, or failure to obtain approvals of thescope requested, could delay or preclude BTG or its licensees from marketingtheir products, could limit the commercial use of the products and could alsoallow competitors time to introduce competing products ahead of productintroduction by BTG and thereby have a material adverse effect on BTG’s resultsof operations, liquidity and financial condition.  Even after regulatory approval is obtained, use of the productscould reveal side effects that, if serious, could result in suspension ofexisting approvals and delays in obtaining approvals in other jurisdictions.

 

Regulation bygovernmental authorities in the United States and other countries is asignificant factor affecting the timing of the commercialization of BTG’sproducts and its ongoing research and development activities.  The timing of regulatory approvals is notwithin our control.  To date, the lengthof time required to obtain regulatory approval of genetically-engineeredproducts has been significantly longer than expected, both for BTG and thebiotechnology industry in general. These delays have had and, if they continue, could have a material adverseeffect on our results of operations and financial condition.  We believe that these delays have in thepast negatively impacted our ability to attract funding and that, as a result,the terms of such financings have been less favorable to us than they mightotherwise have been had BTG’s product revenues provided sufficient funds tofinance the large costs of taking a product from discovery throughcommercialization.  As a result, BTG hashad to license the commercialization of many of its products to third partiesin exchange for research funding and royalties on product sales,  resulting in lower revenues than if BTG hadcommercialized the products on its own.

 

Failure tocomply with applicable regulatory requirements can, among other things, resultin significant fines or other sanctions, termination of clinical trials,suspension of regulatory approvals, product recalls, seizure of products,imposition of operating restrictions and criminal prosecutions.  While we have developed and instituted a corporatecompliance program based on current best practices, we cannot assure you thatwe or our employees have been or will be in compliance with all potentiallyapplicable federal and state regulations.

 

Further, FDApolicy or similar policies of regulatory agencies in other countries may changeand additional governmental requirements may be established that could preventor delay regulatory approval of our products. We cannot predict what effect changes in regulations, enforcementpositions, statutes or legal interpretation, when and if promulgated, adoptedor enacted, may have on our business in the future.  Changes could, among other things, require changes tomanufacturing methods or facilities, expanded or different  labeling, new approvals, the recall,replacement or discontinuance of certain products, additional record keepingand expanded scientific substantiation. These changes, or new legislation, could adversely affect our business.

 

Our sales depend on payment and reimbursement from third-party payors,and a reduction in the payment or reimbursement rate could result in decreaseduse or sales of our products.

 

BTG’s abilityto successfully commercialize human therapeutic products depends in part on theextent to which reimbursement for the cost of such products and relatedtreatment will be available from government health administration authorities,private health coverage insurers and other organizations.  Significant uncertainty exists as to thereimbursement status of newly approved healthcare products, and there can be noassurance that adequate third-party coverage will be available for BTG tomaintain price levels sufficient for the realization of an appropriate returnon its investment in product development. Government and other third party payors are increasingly attempting tocontain healthcare costs by limiting both coverage and the level ofreimbursement for new therapeutic products approved for marketing by the FDAand by refusing, in some cases, to provide any coverage for use of approvedproducts for disease indications for which the FDA has not granted marketingapproval.  If adequate coverage andreimbursement levels are not provided by government

 

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and third-party payors for useof our healthcare products, the market acceptance of these products would beadversely affected.  In addition, inrecent years a number of federal and state healthcare reform proposals havebeen introduced to contain healthcare costs. There can be no assurance as to the ultimate content, timing or effectof any healthcare reform legislation, nor is it possible at this time toestimate the impact of potential legislation on our business.

 

Regulatoryapproval of prices is also required in most countries outside the UnitedStates.  In particular, certain Europeancountries will condition their approval of a product on the agreement of theseller not to sell the product for more than a certain price in that country.  There can be no assurance that the establishmentof a price in one European country will not have the practical effect ofrequiring our marketing partners to sell the product in other Europeancountries at no higher than such price. Because BTG generally supplies product to its marketing partners for aspecified percentage of net sales, there can be no assurance that the resultingprices would be sufficient to generate an acceptable return on our investmentin our products or even cover our manufacturing costs for such product.  In addition, in the U.K. pharmaceuticalcompanies generally must renegotiate pricing with the government annually whensales to the National Health Service exceed a specified level.

 

We operate in a highly competitive market and our competitors maydevelop alternative technologies and products before or more successfully thanwe do.

 

Thepharmaceutical and biotechnology industries are intensely competitive, and thetechnological areas in which we work continue to evolve at a rapid pace.  Our future success depends upon maintainingour ability to compete in the research, development and commercialization ofproducts and technologies in our areas of focus.  Competition from pharmaceutical, chemical and biotechnologycompanies, universities and research institutions is intense and expected toincrease.  Many of these competitorshave substantially greater research and development capabilities and experienceand manufacturing, marketing, financial and managerial resources than we do.  Acquisitions of competing companies by largepharmaceutical companies or other companies could enhance the financial,marketing and other resources available to these competitors.

 

Ourcompetitors may develop products that are superior to those we aredeveloping.  Rapid technologicaldevelopment may result in our products or processes becoming obsolete beforemarketing of these products or before we recover a significant portion of theresearch, development and commercialization expenses incurred with respect tothose products.

 

Our productsmust compete with others to gain market acceptance and market share.  An important factor will be the timing ofmarket introduction of competitive products. Accordingly, the relative speed with which we and competing companiescan develop products, complete the clinical testing and approval processes, andsupply commercial quantities of the products to the market will be an importantelement of market success.  Significantcompetitive factors include:

 

•capabilities of our collaborators,

•product efficacy and safety,

•timing and scope of regulatory approval,

•product availability,

•marketing and sales capabilities,

•reimbursement coverage from insurance companies and others,

•the amount of clinical benefit of our product candidates relative to theircost,

•the method of administering a product,

•price, and

•patent protection.

 

Ourcompetitors may develop more effective or more affordable products or achieveearlier product development completion, patent protection, regulatory approvalor product commercialization than we do. Our competitors’ achievement of any of these goals could have a materialadverse effect on our business.  Thesecompanies also compete with BTG to attract qualified personnel and to attractthird parties for acquisitions, joint ventures or other collaborations.

 

We may be unable to obtain and retain skilled personnel.

 

We aredependent upon the efforts of our officers, scientists and otheremployees.  The loss of certain of thesekey employees could materially and adversely affect our business.  Our business is dependent upon our abilityto attract and retain qualified research and managerial personnel.  There is a great deal of competition for thelimited number of scientists with expertise in the area of BTG’soperations.   We do not maintain, andhave no current intention of obtaining, “key man” life insurance on any of ouremployees.  We cannot assure

 

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you that we will be successfulin hiring or retaining the personnel we require for continued growth.  Our failure to hire and retain suchpersonnel could materially adversely affect our business.

 

Our business may be adversely affected by developments in Israel.

 

BTG conductssignificant research, development and biologics production activities in Israeland these activities can be affected by economic, military and politicalconditions in that country and in the Middle East in general.  Since the establishment of the State ofIsrael in 1948, a number of armed conflicts have taken place between Israel andits Arab neighbors and a state of hostility, which varies in degree andintensity, has caused security and economic problems in Israel.  Any major hostilities involving Israel couldadversely affect our research, development and production operations, whichwould harm our business.  We cannotassure you that ongoing or revived hostilities related to Israel will not havea material adverse affect on us or our business and on our share price.  Despite the progress towards peace betweenIsrael and its Arab neighbors, the future of these peace efforts isuncertain.  In addition, since October2000, there has been a significant increase in violence, primarily in the WestBank and Gaza Strip.  During the courseof military operations, Israel’s military reserves, which include a number ofour employees and executives, may be called up, which could adversely affectour ability to conduct our business.

 

As a result ofthe violence in Israel in recent years, the FDA has from time to time suspendedinspections of manufacturing facilities in Israel.  In addition, the FDA cancelled its scheduled April 2003 visit toIsrael in light of the current situation with Iraq.  Products we intend to manufacture at our newly constructedmanufacturing facility cannot be shipped into the United States until the FDAhas inspected and approved this facility. We do not currently intend to transfer our manufacturing activities toour newly constructed manufacturing facility until the FDA has inspected andapproved the new facility.  Suspensionof these activities by the FDA will delay the commencement of manufacturing atour new facility, which could adversely affect our business.  The suspension of FDA inspections delayedinspection of the contract sterilizer utilized by BTG for its BIOLON product,which required us to stop shipping BIOLON to the United States from fourthquarter of 2001 until September 2002, when the facility was approved followingan inspection by the FDA.

 

We may face significant risks in expanding our internationaloperations.

 

Wesignificantly expanded our international operations with the acquisition ofRosemont on September 30, 2002.  On apro forma basis giving effect to the acquisition of Rosemont as if it occurredas of January 1, 2001, our product sales outside the United States would haveaccounted for approximately 45% and 41% of our total product sales for theyears ended December 31, 2001 and 2002, respectively.  International operations involve a number of additional risks,including the following:

 

•  difficulties in staffing and managingforeign operations;

•  less familiarity with business customs andpractices;

•  the imposition of tariffs and import andexport controls;

•  the impact of possible recessionaryenvironments in economies outside the U.S.;

•  unexpected changes in regulatoryrequirements;

•  currency exchange rate fluctuations;

•  the burdens of complying with a variety offoreign laws; and

•  potentially adverse tax consequences.

 

To the extentthat our international operations expand, we expect that an increasing portionof our international product sales and other revenues will be denominated inforeign currencies. We do not currently engage in currency hedgingtransactions.  However, as we continueto expand our international operations, exposures to gains and losses oninternational currency transactions may increase.  We may choose to limit our exposure by the purchase of forwardforeign exchange contracts or similar hedging strategies.  The currency exchange strategy that we adoptmay not be successful in avoiding exchange-related losses.  In addition, the above-listed factors maycause a decline in our future international revenue and, consequently, may harmour business.  We may not be able tosustain or increase revenue that we derive from international sources.

 

We may incur substantial product liability.

 

The testingand marketing of BTG’s products entail an inherent risk of product liabilityand associated adverse publicity. Pharmaceutical product liability exposure could be extremely large andpose a material risk. Although BTG has so far been able to obtainindemnification from pharmaceutical companies commercializing its products,there can be no assurance that other such companies will agree in the future toindemnify BTG for

 

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other of BTG’s products or thatsuch companies will, if obligated to do so, have adequate resources to fulfilltheir indemnity agreements.  Further, tothe extent BTG elects to test or market products independently, it will bearthe risk of product liability directly. BTG presently has $15,000,000 of product liability insurance coverage inplace. There can be no assurance that we will be able to maintain existinginsurance or obtain additional insurance on acceptable terms, or at all.  It is possible that a single productliability claim could exceed our insurance coverage limits, and multiple claimsare possible.  Any successful productliability claim made against BTG could substantially reduce or eliminate anystockholders’ equity BTG may have and could have a significant adverse impacton BTG’s business.  Product liabilityclaims, regardless of their merits, could be costly and divert management’sattention, and adversely affect our reputation and the demand for our products.

 

Our stock price is volatile, which could adversely affect yourinvestment.

 

The marketprices for securities of biopharmaceutical companies, including BTG, have beenvolatile, and it is likely that the price of our common stock will fluctuate inthe future.  Factors such asannouncements of technological innovations or new commercial products by BTG orits competitors, announcements by BTG or its competitors of results inpre-clinical testing and clinical trials, governmental regulation, patent orproprietary rights developments, public concern as to the safety or otherimplications of biotechnology products, changes in earnings estimates andrecommendations by securities analysts, period-to-period fluctuations infinancial results and market conditions in general may have a significantimpact on the market price of our common stock.   The volatility of our common stock imposes a greater risk ofcapital losses on our stockholders than would a less volatile stock.  In addition, such volatility makes itdifficult to ascribe a stable valuation to a stockholder’s holdings of ourcommon stock.  The stock market has alsoexperienced significant price and volume fluctuations that are often unrelatedto the operating performance of particular companies. In the past, followingperiods of volatility in the market price of the securities ofbiopharmaceutical companies, securities class action litigation has often beeninstituted against these companies. Such litigation would result in substantial costs and a diversion ofmanagement’s attention and resources, which could adversely affect ourbusiness.  See “—The ultimate outcome ofpending securities litigation is uncertain.”

 

In addition,the market price of our common stock could be adversely affected by futureexercises of outstanding options and the issuance of common stock inacquisitions of businesses, products and/or technologies.  At December 31, 2002 options to purchase anaggregate of approximately 8,573,000 shares of common stock wereoutstanding.  A portion of these optionshave exercise prices below the current market price of the common stock.  All of the shares of common stock issuableupon exercise of these outstanding options have been registered under the SecuritiesAct of 1933, as amended, and, accordingly, when issued will be freely tradablewithout restriction.  The sale of asignificant amount of these shares at one time could adversely affect themarket price of our common stock.  Inaddition, BTG may issue additional stock, warrants and/or options to raisecapital or complete acquisitions in the future.  BTG may also issue additional securities in connection with itsemployee benefit plans.  During theterms of such options and warrants, the holders thereof are given theopportunity to profit from a rise in the market price of the common stock.  The exercise of such options and warrantsmay have an adverse effect on the market value of the common stock.  The existence of such options and warrantsmay adversely affect the terms on which BTG can obtain additional equityfinancing. To the extent the exercise prices of such options and warrants areless than the net tangible book value of the common stock at the time suchoptions and warrants are exercised, BTG’s stockholders will experience animmediate dilution in the net tangible book value of their investment.  Further, the future sale of a substantialnumber of shares of common stock by existing stockholders and option holdersmay have an adverse impact on the market price of the common stock.  See “Item 5. Market for Registrant’s CommonEquity and Related Stockholder Matters.”

 

Effecting a change of control of BTG could be difficult, which maydiscourage offers for shares of our common stock.

 

Our certificateof incorporation and the Delaware General Corporation Law contain provisionsthat may delay or prevent an attempt by a third party to acquire control ofus.  These provisions include therequirements of Section 203 of the Delaware General Corporation Law.  In general, Section 203 prohibits designatedtypes of business combinations, including mergers, for a period of three yearsbetween us and any third party that owns 15% or more of our common stock.  This provision does not apply if:

 

•                  our Board of Directorsapproves of the transaction before the third party acquires 15% of our stock,

•                  the third partyacquires at least 85% of our stock at the time its ownership goes past the 15%level, or

 

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•                  our Board ofDirectors and two-thirds of the shares of our common stock not held by thethird party vote in favor of the transaction.

 

We have alsoadopted a stockholder rights plan intended to deter hostile or coerciveattempts to acquire us.  Under the plan,if any person or group acquires more than 20% of our common stock withoutapproval of our Board of Directors under specified circumstances, our otherstockholders have the right to purchase shares of our common stock, or sharesof the acquiring company, at a substantial discount to the public marketprice.  The plan thus makes anacquisition much more costly to a potential acquirer.

 

Ourcertificate of incorporation also authorizes us to issue up to 4,000,000 sharesof preferred stock in one or more different series with terms fixed by theBoard of Directors.  Stockholderapproval is not necessary to issue preferred stock in this manner.  Issuance of these shares of preferred stockcould have the effect of making it more difficult for a person or group to acquirecontrol of us.  No shares of ourpreferred stock are currently outstanding. While our Board of Directors has no current intentions or plans to issueany preferred stock, issuance of these shares could also be used as ananti-takeover device.

 

The ultimate outcome of pending securities litigation is uncertain.

 

After therestatement of our financial statements for the years ended December 31, 1999,2000 and 2001 and the first two quarters of 2002, we and some of our currentand former officers were named in a series of similar purported securitiesclass action lawsuits.  The complaintsin theses actions allege violations of U.S. securities law through allegedmaterial misrepresentations and omissions and seek an unspecified award ofdamages.  In addition, our directors andArthur Andersen LLP, our prior auditor, were named in a derivative action thatclaims, among other things, that our directors breached their fiduciary dutiesby failing to implement and maintain an adequate internal accounting controlsystem.  We intend to contest theseactions vigorously.  There can be noguarantee as to the ultimate outcome of this pending litigation or whether theultimate outcome may have a material adverse effect on our financial positionor results of our operations.  BTG hasreferred these claims to its directors and officers insurance carrier, whichhas reserved its rights as to coverage with respect to these actions.  See “Item 3.  Legal Proceedings.”

 

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**EXECUTIVE OFFICERS OF BTG**

 

Our current executive officers are asfollows:

 
| **Name**                  |   | **Age** |   | **Positions**                                                                              |   |
|---------------------------|--------|---------|--------|--------------------------------------------------------------------------------------------|--------|
| Sim Fass                  |   | 61      |   | Chairman of the Board and Chief Executive Officer; President of  BTG-Israel; Director      |   |
|                      |   |    |   |                                                                                       |   |
| Christopher Clement       |   | 47      |   | President and Chief Operating Officer                                                      |   |
| Robert Shaw               |   | 49      |   | Executive Vice President—Chief Administrative Officer, General  Counsel and Secretary |   |
|                      |   |    |   |                                                                                       |   |
| Andre Groenewegen, M.D.   |   | 40      |   | Senior Vice President; Managing Director, Rosemont                                         |   |
|                      |   |    |   |                                                                                       |   |
| Zebulun D. Horowitz, M.D. |   | 51      |   | Senior Vice President, Chief Medical Officer                                               |   |
|                      |   |    |   |                                                                                       |   |
| Dov Kanner, Ph.D.         |   | 49      |   | Senior Vice President; General Manager, BTG-Israel                                         |   |
|                      |   |    |   |                                                                                       |   |
| Ernest Kelly, Ph.D.       |   | 53      |   | Senior Vice President— Quality Assurance, Quality Control and  Regulatory Affairs.    |   |
|                      |   |    |   |                                                                                       |   |
| Whitney K. Stearns, Jr.   |   | 51      |   | Senior Vice President—Chief Financial Officer and Treasurer                           |   |

 

*Sim Fass* has servedas Chief Executive Officer of BTG and President of BTG-Israel since May 1984and as Chairman of the Board of Directors since March 1997.  He has also been a Director of BTG sinceAugust 1983.  Dr. Fass served as ChiefOperating Officer of BTG-Israel from August 1983 to May 1987, as President ofBTG from May 1984 to May 1999 and Treasurer of BTG from August 1983 to June2001.  From April 1980 to August 1983,he was Vice President, General Manager of Wampole Laboratories, a division ofCarter-Wallace, Inc., a company that manufactures health care-relatedproducts.  Prior to that, he heldvarious positions at Pfizer Inc. from September 1969 until March 1980,including Director, Marketing Research and Planning, Pfizer Pharmaceuticals,and Vice President, Marketing and Sales, Pfizer Diagnostics Division of PfizerPharmaceutical and Group Marketing Manager of Pfizer Laboratories.  Dr. Fass received his Ph.D. in developmentalbiology/biochemistry from the Massachusetts Institute of Technology.

 

*Christopher Clement*joined BTG in May 2002 as President and Chief Operating Officer.  From September 2000 until joining BTG, Mr.Clement served as CEO and Chairman of Epicyte Pharmaceutical, Inc., abio-technology company.  From 1997 untilhe joined Epicyte, he held the positions of Executive Vice President and SeniorVice President, Chief Marketing Officer at Ares-Serono Group.  From 1988 to 1997, Mr. Clement held a numberof senior management positions at Searle Pharmaceuticals, including VicePresident of Marketing, Vice President of Corporate Product Planning, VicePresident, General Manager of Global Franchises, and Division President.  Mr. Clement has a B.A. in Marketing/Businessfrom Mercy College.

 

*Robert Shaw* joinedBTG in April 1998 as Vice President—General Counsel and was appointed SeniorVice President—General Counsel in June 1999, Secretary in March 2000, andExecutive Vice President—Chief Administrative Officer in January 2003.  Prior to joining BTG, Mr. Shaw was VicePresident, Intellectual Property and Assistant Secretary at BASFCorporation.  From 1984 to 1989, he wasAssociate General Counsel at Hoechst-Celanese Corporation.  Between 1979 and 1984 he held Associatepositions at the Fish & Neave and Synnestvedt & Lechner law firms.  Mr. Shaw has a J.D. from WashingtonUniversity School of Law.  He isadmitted to the Bar in New York, Pennsylvania and Missouri.

 

*Andre Groenewegen*,M.D. joined BTG as Managing Director of Rosemont in September 2002 inconnection with BTG’s acquisition of Rosemont from Akzo Nobel.  In January 2003 Mr. Groenewegen wasappointed a Senior Vice President of BTG. From 1996 through September 2002, he held a number of positions withinAkzo Nobel and its various business units, including Vice President ofRosemont, Director, Sales & Marketing, Organon Belgium and Luxembourg, andin the strategy and business development department of Organon International.  From 1991 to 1996 he held various researchand development positions with Sandoz. Dr. Groenewegen holds a medical degree from the State University ofUltrecht, The Netherlands.

 

*Zebulun Horowitz,*M.D.,joined BTG in March 2003 as Senior Vice President—Chief Medical Officer.  Pior to joining BTG, Dr. Horowitz wasExecutive Director and Global Head, Clinical Research and

 

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Development of NovartisPharmaceuticals.  Prior to joiningNovartis in 1996, he was Principal Scientist and Medical Director, New DrugDevelopment at Procter & Gamble Pharmaceuticals from 1992 to 1996;Associate Professor of Clinical Medicine (Voluntary) at University ofCincinnati  College of Medicine(Endocrinology) from 1989 to 1996; Section Chief and Consultant inEndocrinology, Diabetes, Metabolilsm (Voluntary) at Veterans AdministrationMedical Center, Cincinnati, Ohio, from 1989 to 1996; Assistant Professor ofMedicine and Assistant Attending Physician, New York University School ofMedicine — Bellevue Hospital Medical Center from 1983 to 1989, and AttendingPhysician in Endocrinology, Diabetes, Metabolism at New Gouverneur Hospital inNew York City from 1982 to 1984.  Hereceived his M.D. in June 1978 from New York University School of Medicine andis a Diplomate, ABIM: Endocrinology, Diabetes, and Metabolism (1985),Diplomate, ABIM: Internal Medicine (1981) and Diplomate, National Board ofMedical Examiners (1979).

 

*Dov Kanner*, Ph.D.was appointed Senior Vice President of BTG and General Manager of BTG-Israel inJanuary 2000.  Prior thereto, he servedas Vice President—Quality Assurance and Regulatory Affairs of BTG-Israel fromSeptember 1994.  Dr. Kanner joinedBTG-Israel in 1981 as a staff scientist, served as Head of Fermentation from1984 to 1989 and as Deputy Director, Manufacturing and Process Development,from 1989 to 1994.  He obtained hisPh.D. in microbiology from Rutgers University in 1980.

 

*Ernest Kelly*, Ph.D.joined BTG in February 1996 in the newly created position of Senior VicePresident—Quality Assurance, Quality Control and Regulatory Affairs. Prior tojoining BTG, he was Vice President, Worldwide Quality Assurance forRhone-Poulenc Rorer Inc. (“RPR”).  From1979 to 1996, Dr. Kelly served in various positions at RPR in both research anddevelopment and industrial operation quality assurance.  Prior to joining RPR, he served Merck Sharpand Dohme from 1974 to 1979 and McNeil Labs from 1972 to 1974 in qualityassurance and analytical research positions. Dr. Kelly received his Ph.D. in Physical Chemistry from VillanovaUniversity, served on several United States Pharmacopeia Advisory Panels andalso served as Adjunct Professor of Pharmaceutics at Temple University.

 

*Whitney K. Stearns, Jr.*joined BTG in December 2002 as Senior Vice President—Chief Financial Officerand Treasurer.  Prior to joining BTG,Mr. Stearns was Vice President and Chief Financial Officer of PhytoCeutica,Inc., an early stage biopharmaceutical company, between May 2001 and November2002.  Between 1989 and 2001 he was employedat Schein Pharmaceutical, Inc., a publicly-traded specialty pharmaceuticalcompany, in various increasing capacities, mostly recently as Senior VicePresident and Chief Financial Officer. Mr. Stearns has a BS from Lehigh University and is a qualified CertifiedPublic Accountant.

 

Chief Accounting Officer

 

*Yehuda Sternlicht,*48, is Vice President—Chief Accounting Officer.  He joined BTG Israel in July 1992 as financial manager and inJanuary 1993 was appointed Chief Financial Officer of BTG.  In June 1995 he was appointed VicePresident-Finance and Chief Financial Officer of BTG, and in December 2002 hewas appointed Vice President- Chief Accounting Officer of BTG.  From 1988 until he joined BTG Israel, he wasfinancial manager of Bordeaux Textile Ltd., an Israeli company.  From 1985 to 1988 he served as controller ofLaser Industries Ltd., an Israeli company listed on the American StockExchange.  Prior to that, he held variouspositions at Haft & Haft, one of the largest CPA firms in Israel.  From 1983 to 1985 he worked at Haft &Haft affiliates’ New York office.  Mr.Sternlicht is qualified as a Certified Public Accountant in the State ofIsrael.

 

**ITEM 2.  PROPERTY**

 

BTG’scorporate headquarters are located in East Brunswick, New Jersey, where BTG hasleased approximately 53,000 square feet of office space.  The lease has a base average annual rentalexpense of approximately $1,728,000 and expires in March 2013.  There are two five-year renewal options.****Inaddition, BTG leases approximately 2,000 square feet in New York City for itsbusiness activities, including its investor and public relationsactivities.  This lease expires inSeptember 2003.  We also leaseapproximately 10,000 square feet of space in San Diego, California, where ourPROSAPTIDE research is being conducted. This lease expires in October 2004.

 

BTG has aresearch, development and biologics manufacturing facility located in Rehovot,Israel, where BTG-Israel leases approximately 95,000 square feet at an annualrental of approximately $995,000. This lease expires in December 2005.  In April 1999 BTG purchased a building inBe’er Tuvia, Israel located approximately 12 miles south of its currentfacility for approximately $6.25 million.** **Constructionof a modern biologics production facility designed to meet FDA GMP requirementsfor drugs, biologics and devices was completed at the end of 2001, andqualification activities have been commenced and are expected to be completedin the second half of 2003.  BTG willmove its production activities for each product to the new facility followingFDA and other applicable regulatory approval of the facility for manufacture ofthat product, which we anticipate will occur during the period from the end of2003 through the end of 2004, depending on product and territory.

 

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In addition, BTG had agreed topurchase additional property adjacent to the new manufacturing facility forapproximately $1,200,000, of which approximately $400,000 has been paid to date.  BTG had intended to locate its principalbiopharmaceutical research and development activities, as well as managementand administrative activities, adjacent to the new manufacturing facility.  BTG has terminated discussions regarding thepurchase of this property and is seeking the return of its $400,000.

 

Rosemont’sdevelopment and manufacturing facility is located in Leeds, U.K., where itleases approximately 41,000 square feet at an annual rental of approximately$270,000.  The lease for 6,000 squarefeet expires in December 2003; the lease for 4,000 square feet expires in April2004 and the remainder of 31,000 square feet expires in December 2004.

 

**ITEM 3.  LEGAL PROCEEDINGS**

 

Patent Related Litigation

 

On December 1,1994, Genentech filed a lawsuit against BTG in the United States District Courtfor the District of Delaware alleging that BTG’s importation of hGH producedaccording to its original expression system infringed two Genentech processpatents.  In January 1995, BTG commencedan action against Genentech in the United States District Court for theSouthern District of New York (the “U.S. District Court”) seeking, among otherthings, declaratory judgments as to the non-infringement, invalidity andunenforceability of certain Genentech patents. The Delaware action was consolidated with the New York action, and inAugust 1995 the U.S. District Court granted a preliminary injunctionprohibiting the commercial introduction in the United States of BTG’s hGHpending the outcome of the patent infringement action.  The U.S. Court of Appeals for the FederalCircuit (“CAFC”) rejected BTG’s appeal of the grant of the preliminaryinjunction, and the United States Supreme Court denied BTG’s petition for awrit of *certiorari*.

 

Two of theGenentech patents originally at issue have expired, and only a third patent ofGenentech, expiring in July 2003, remains in issue.  The action in the U.S. District Court was tried in January 2000and the U.S. District Court found that the remaining Genentech patent was invalidand vacated the preliminary injunction. Following Genentech’s appeal, which was heard in December 2000, the CAFCreversed the District Court’s decision in September 2001, reinstated thepreliminary injunction and remanded the issue of infringement to the DistrictCourt for further proceedings.  BTGpetitioned the CAFC for a rehearing en banc, which was denied in December2001.  BTG and Genentech have settledthis dispute, and a modified injunction has been issued which precludes BTGfrom importing or selling in the United States its hGH product producedaccording to its original expression system during the remaining life of thisGenentech patent; however, this should not preclude BTG from marketing hGHmanufactured using a new expression system for which BTG obtained FDA approvalin September 1999, subject to the outcome of the patent dispute with NovoNordisk discussed below.  We cannotassure you that Genentech will not claim that our new expression system violatesits patent that expires in 2003 and seek an injunction to prevent our using thenew expression system to produce hGH for Teva. See “Item 1.  Business—Productsand Applications—Commercialized Products—BIO-TROPIN (human growth hormone).”

 

Three patentapplications of Genentech in Israel, which cover general methods relating togenetically engineered products and to human growth hormone, have been allowed— two in 1983 and one in 1985.  BTGopposed the grant of all these patents. Two of these patent applications expired during 1998 without ever beinggranted.  The third, which expired inJune 2000, corresponds to the U.S. patent that was invalidated by the U.S.District Court in January 2000. Procedurally, hearings before the Israel Registrar of Patents took placeduring 1999 regarding the third patent application and summations and replieswere subsequently filed. BTG filed a motion in December 2001 requesting thatthe Registrar strike****out Genentech’s patent application due toits expiration and rule that the matter should no longer be heard.  The Registrar denied the motion and BTG hasapplied for leave to appeal, which was granted in March 2003.    The Registrar left office in October 2002without rendering a decision and to date a new Registrar has not beenappointed.  The filing of a leave toappeal does not bar the new Registrar from rendering a decision on the meritsof the patent application.  There can beno assurance that BTG will be successful in its opposition to the grant of thisnow expired patent application. If BTG is unsuccessful in its opposition inIsrael the patent may be deemed effective and Genentech may sue forinfringement.

 

In September1993, JCR received a letter from attorneys representing Genentech and itslicensee, Kabi Pharmacia, claiming that JCR’s sale of BTG’s hGH infringedcertain Genentech patents and patent applications and demanding that JCR ceasethe sale of BTG’s hGH in Japan. JCR and BTG have filed oppositions to fiveGenentech patent applications in Japan; oppositions with respect to four ofthese patent applications were denied but the fifth was successful, whichresulted in that patent application being revoked during 1999.  We do not believe that we are infringing orhave ever infringed any valid Genentech patent or

 

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patent application, but therecan be no assurance that our hGH will not be found to infringe certainGenentech patents in Japan, the latest of which expired in July 2000, or anypatents issued pursuant to pending patent applications, the latest of whichexpired in April 2001.  If BTG’s hGH isfound to infringe certain Genentech patents in Japan, JCR and/or BTG may beobligated to pay damages with respect to sales made while the patents were ineffect.  Sales of hGH to JCR in 2000,2001 and 2002 were approximately $13.0 million, $16.3 million and $12.3million, respectively, representing 21%, 19% and 13%, respectively, of BTG’stotal product sales in those periods and 63%, 68% and 60%, respectively, ofBTG’s total hGH product sales in those periods.

 

In 1997 Novowas issued a U.S. patent for a biosynthetic ripe human growth hormone free ofcontaminants from pituitary derived****human growth hormone.  At BTG’s request, the United States PatentOffice Board of Patent Appeals and Interferences (the “Patent Office”) in 2000declared an interference to determine whether BTG, rather than Novo, shouldhold the patent to biosynthetic ripe human growth hormone on the basis that BTGscientists, not Novo scientists, were the first to invent.  The Patent Office has ruled in favor ofNovo, and BTG commenced an action in federal court seeking a determination thatBTG scientists were the first to invent. Should BTG not be awarded priority, BTG could be precluded from marketingin the United States hGH produced using this new expression system.  In April 2002 Novo commenced an action infederal court against BTG and Teva Pharmaceuticals USA, Inc., BTG’s exclusivedistributor of human growth hormone in the U.S., claiming that BTG’smanufacture of human growth hormone using its new expression system and thesale or offer for sale of Tev-TropinTM human growth hormone by Teva in the U.S.infringes Novo’s patent.  Novo sought aninjunction that, if issued, would preclude Teva from marketing Tev-TropinTM inthe U.S. and unspecified monetary damages. On June 7, 2002, the United States District Court for the District ofDelaware granted Novo’s motion for a preliminary injunction prohibiting thesale of Tev-TropinTM recombinant human growth hormone in the U.S.  In November 2002 , the United States Court of Appeals for the Federal Circuitdetermined that Novo did not meet the requirement for a preliminary injunctionof establishing a reasonable likelihood of success on the merits, and vacatedthe injunction.  This action is currentlyscheduled for trial beginning July 2003.

 

In September1991, we received a letter from Biogen stating that it believed that ourrecombinant surface antigen of the hepatitis-B virus, which is an activeingredient of our BIO-HEP-B vaccine, or the intermediates for the process ofmaking such antigen, falls within the claims of one or more of Biogen’s patentsand/or patent applications.  We madeinquiries of Biogen and SmithKline Beecham (the exclusive licensee of all ofBiogen’s hepatitis-B patents except those in Japan) requesting that BTGbe granted a license to the Biogen patents; however, such efforts were notsuccessful.  We obtained a compulsorylicense under Biogen’s Israeli patent to manufacture our BIO-HEP-B vaccine inIsrael; however, this license expired, and the related litigation wasterminated, following the expiration of Biogen’s Israeli patent.  We are now able to manufacture and sellBIO-HEP-B in Israel.  See “Item 1.Business—Products and Applications—Commercialized Products—BIO-HEP-B (hepatitis-Bvaccine).”

 

We have beenadvised by SciGen, our BIO-HEP-B licensee in certain countries in the Far East,that in April 1993 Biogen initiated suit against SciGen in Singapore assertingthat SciGen’s conduct of clinical trials in Singapore with respect to ourhepatitis-B vaccine constitutes infringement of Biogen’s patent rights inSingapore and claiming rights in the data obtained by SciGen through itsclinical trials in Singapore and that an interlocutory hearing was held inSeptember 1993. SciGen notified BTG that the application for the injunction wasdismissed by the High Court in September 1994, but Biogen has not withdrawn itscase against SciGen in Singapore. Biogen’s Singapore patent rights are based on the registration of itscorresponding U.K. patents, and the validity of patents in Singapore depends onthe validity of the corresponding U.K. patents. Biogen’s broad U.K. patent wasinvalidated by the U.K. Court of Appeals in October 1994.  The House of Lords upheld this decision inOctober 1996, although Biogen had claims of a more limited scope allowed to thesame patent.  Additionally, three claimsof a narrower U.K. patent were upheld. We believe that none of these claims will affect commercialization ofour vaccine, although there can be no assurance of this.  We are aware of certain other patents thathave been granted or are pending and which, if granted, may prevent us fromselling our vaccine in the United States, Europe and certain other countries.  BTG’s failure to obtain any needed license,or a determination that its vaccine infringes the patent rights of Biogen orothers, would substantially limit, if not prohibit, the commercialization ofthe BIO-HEP-B vaccine in those countries in which Biogen or others have apatent until such patent is revoked or expires.  Our ability to secure any necessary licenses or sublicenses tothese patents or applications cannot be predicted.

 

We are awareof patent applications filed by, or patents issued to, other entities withrespect to technology potentially useful to us and, in some cases, related toproducts and processes being developed by us. We cannot presently assess the effect, if any, that these patents mayhave on our operations.  The extent towhich efforts by other researchers have resulted or will result in patents andthe extent to which the issuance of patents to others would have a materiallyadverse effect on BTG or would force BTG to obtain licenses from others iscurrently unknown.  See “Item 1.  Business—Risk Factors—If our intellectualproperty positions are

 

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challenged, invalidated orcircumvented, or if we fail to prevail in present and future intellectualproperty litigation, our business could be adversely affected.”

 

Non-Patent Related Litigation

 

In 1999,Solchem, a former affiliate and manufacturing arm of SPA, filed a declaratoryjudgment action against BTG in the United States District Court of New Jerseyseeking a determination that it is not a party to BTG’s agreement with SPA,which binds affiliates of SPA, and therefore not bound by the non-compete andfree to sell oxandrolone to Mutual Pharmaceutical, a generic drugmanufacturer.  BTG counterclaimedagainst Solchem and Mutual, although the claims against Mutual weredismissed.  The litigation with Solchemand Mutual was settled in early 2002, with Solchem essentially agreeing tocomply with the non-compete in SPA’s agreement with BTG, which expires October29, 2003.  Under the terms of thesettlement, the amount of oxandrolone that Solchem could supply to Mutual priorto the expiration of the non-compete was limited, and BTG denied a request bySolchem to increase this amount.  In2002 we received notice that Solchem filed its drug master file relating to ageneric oxandrolone product with the FDA.

 

In 2002, BTGsettled a dispute with Serono Laboratories, Inc. (“Serono Labs”) relating to a1998 co-promotion agreement pursuant to which BTG undertook to promote in theUnited States through Gentiva Health Services, Inc., our wholesale distributorof OXANDRIN at the time, Serono Labs’ recombinant human growth hormone, SAIZEN,for the treatment of children with growth failure due to inadequate levels ofgrowth hormone.  The agreement proved tobe commercially infeasible and BTG terminated the agreement in June 1999.  Serono Labs contested BTG’s termination ofthat agreement in 1999 and asserted that a non-compete provision, which BTGmaintained expired in mid-2000 and in any case did not apply to Teva, the U.S.licensee for BTG’s recombinant human growth hormone,  if it is applicable at all, should continue until April 30, 2002.In March 2000, BTG filed a lawsuit in New Jersey to confirm BTG’s position onthese issues.  Serono Labs commenced anaction against BTG in Massachusetts to enforce the agreement.  The New Jersey court denied Serono Labs’motion to dismiss the New Jersey action and enjoined Serono Labs from pursuingits action in Massachusetts.  The NewJersey court also denied BTG’s motion for summary judgment.  While the co-promotion agreement with SeronoLabs precluded recovery for consequential damages, Serono Labs asserted a claimfor unspecified monetary damages based on a Massachusetts law regarding “unfairtrade practices”.  Under this law, thecourt was entitled, in its discretion, to enhance the damage award by up tothree times (but not less than twice) the actual damages if there was a“willful or knowing” violation with the “malicious intent to injure” the otherparty.  The court could also award attorneys’fees and costs.  In connection with thesettlement of this dispute, BTG made a payment to Serono Labs.  In 1999 BTG accrued approximately $1,485,000of commissions received by it from Gentiva in respect of SAIZEN, which BTGsubsequently returned because Gentiva, which was unable to sell most of theproduct before it expired, returned the product to Serono Labs.

 

In 2000,Duramed Pharmaceuticals, Inc. filed an Abbreviated New Drug Application withthe FDA seeking approval of a generic version of MIRCETTE.  Pursuant to its license agreement withOrganon, BTG has commenced a patent infringement suit against Duramed, whichwas subsequently acquired by Barr Laboratories.  In December 2001,  thecourt granted Barr’s motion for summary judgment of non-infringement of BTG’spatent.  BTG appealed and a decision ispending.  If the patent is held not tobe infringed, Organon may assert that it is no longer required to pay BTGroyalties on the sale of MIRCETTE.  Barrintroduced its generic product in 2002, which has adversely affected sales ofMIRCETTE and, therefore, royalties to BTG.

 

On December20, 2002, a purported shareholder class action was filed against BTG and threeof its officers.  The action is pendingunder the caption A.F.I.K. Holding SPRL v. Fass, No. 02-6048(HAA) in the U.S. District Court for the District of New Jersey and allegesviolations of Sections 10(b) and 20(a) of the Securities Exchange Act of1934.  Plaintiff purports to represent aclass of shareholders who purchased BTG shares between April 19, 1999 andAugust 2, 2002.  The complaint assertsthat BTG’s financial statements were materially false and misleading becauseBTG restated its earnings and financial statements for the years ended 1999,2000 and 2001, as reflected in its Form 8-K and accompanying press releaseissued August 2, 2002.  Five virtuallyidentical actions were filed in January and February 2003. Plaintiffs havemoved to consolidate the actions and to appoint a lead plaintiff and leadcounsel in accordance with the Private Securities Litigation Reform Act.

 

On January 23,2003, a purported shareholder derivative action was filed on behalf of BTGagainst nine of its officers and directors, its former auditors, ArthurAndersen LLP, and BTG as a nominal defendant. The allegations in the derivative action are substantially similar tothe allegations in the purported shareholder class actions.  The derivative action is pending under thecaption Nelson v. Conrad, No. 7-794-03, in the Superior Court ofNew Jersey, Middlesex County.  A secondpurported shareholder derivative action, Millet v. Conrad, No.L-1275-03, was filed on February 14, 2003 and is pending in the same court.

 

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BTG intends tovigorously defend against all allegations of wrongdoing.  BTG has referred these claims to itsdirectors and officers insurance carrier, which has reserved its rights as tocoverage with respect to these actions.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None.

 

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**PART II**

# ** **

 

**ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY ANDRELATED STOCKHOLDER MATTERS**

 

BTG’s commonstock is quoted on the National Association of Securities Dealers AutomatedQuotation System (“Nasdaq”) National Market under the symbol BTGC.  The following table sets forth, for theperiods indicated, the high and low sale prices per share of BTG’s common stockfrom January 1, 2001 through December 31, 2002 as reported by the NasdaqNational Market.

 
|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
| **2001**       |   |     |   |    |   |
| First Quarter  |   | $        | 9.66   |    | $      | 5.96 |   |
| Second Quarter |   | 13.39    |   | 5.05    |   |
| Third Quarter  |   | 12.86    |   | 5.50    |   |
| Fourth Quarter |   | 8.68     |   | 6.89    |   |
|           |   |     |   |    |   |
| **2002**       |   |     |   |    |   |
| First Quarter  |   | $        | 9.00   |    | $      | 4.65 |   |
| Second Quarter |   | 6.26     |   | 4.10    |   |
| Third Quarter  |   | 6.05     |   | 2.50    |   |
| Fourth Quarter |   | 4.88     |   | 1.95    |   |

 

The number ofstockholders of record of our common stock on March 17, 2003 was approximately1,250.

 

We have neverdeclared or paid a cash dividend on our common stock, and we do not expect thatcash dividends will be paid to the holders of our common stock in theforeseeable future.

 

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**ITEM 6.**  **SELECTED CONSOLIDATED FINANCIAL DATA**

 
|                                                                      |   | **Year ended  December 31,**              |   |
|---------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                      |   | **1998(1)**                               |   | **1999(1)** |   | **2000(1)(2)** |   | **2001(1)(3)** |   | **2002** |   |
|                                                                      |   | **(in  thousands except per share data)** |   |
|                                                                      |   |                                      |   |
| **Statement of Operations Data:**                                         |   |                                      |   |   |   |   |   |   |   |   |   |
|                                                                      |   |                                      |   |   |   |   |   |   |   |   |   |
| Product sales, net                                                        |   | $                                         | 68,246 |   | $ | 60,332 |   | $ | 62,149 |   | $ | 87,106 |   | $ | 96,107 |   |
| Total revenues                                                            |   | 73,890                                    |   | 78,687 |   | 72,761 |   | 94,774 |   | 102,966 |   |
| Write-off of in-process research and  development acquired                |   | —                                    |   | — |   | — |   | $ | 45,600 |   | — |   |
| Total expenses                                                            |   | 51,623                                    |   | 64,903 |   | 67,396 |   | 115,038 |   | 89,828 |   |
| Operating income (loss)                                                   |   | 22,267                                    |   | 13,784 |   | 5,365 |   | (20,264 | ) | 13,138 |   |
| Other income (expense), net                                               |   | 2,798                                     |   | 4,445 |   | 7,376 |   | (4,929 | ) | 1,642 |   |
| Income tax expense                                                        |   | 7,124                                     |   | 4,821 |   | 3,798 |   | 4,733 |   | 5,063 |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | 17,941                                    |   | 13,408 |   | 8,943 |   | (29,926 | ) | 9,717 |   |
| Cumulative effect of change in accounting  principle                      |   | —                                    |   | — |   | (8,178 | ) | — |   | — |   |
| Net income (loss)                                                         |   | $                                         | 17,941 |   | $ | 13,408 |   | $ | 765 |   | $ | (29,926 | ) | $ | 9,717 |   |
| Earnings (loss) per common share:                                         |   |                                      |   |   |   |   |   |   |   |   |   |
| Basic:                                                                    |   |                                      |   |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | $                                         | 0.37   |   | $ | 0.26 |   | $ | 0.16 |   | $ | (0.52 | ) | $ | 0.17 |   |
| Cumulative effect of change in accounting  principle                      |   | —                                    |   | — |   | (0.15 | ) | — |   | — |   |
| Net income (loss)                                                         |   | $                                         | 0.37   |   | $ | 0.26 |   | $ | 0.01 |   | $ | (0.52 | ) | $ | 0.17 |   |
| Diluted:                                                                  |   |                                      |   |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | $                                         | 0.36   |   | $ | 0.25 |   | $ | 0.15 |   | $ | (0.52 | ) | $ | 0.17 |   |
| Cumulative effect of change in accounting  principle                      |   | —                                    |   | — |   | (0.14 | ) | — |   | — |   |
| Net income (loss)                                                         |   | $                                         | 0.36   |   | $ | 0.25 |   | $ | 0.01 |   | $ | (0.52 | ) | $ | 0.17 |   |
| Weighted average shares outstanding:                                      |   |                                      |   |   |   |   |   |   |   |   |   |
| Basic                                                                     |   | 48,184                                    |   | 52,348 |   | 54,320 |   | 57,230 |   | 58,480 |   |
| Diluted                                                                   |   | 49,848                                    |   | 54,191 |   | 56,885 |   | 57,230 |   | 58,659 |   |

 
|                      |   | **As of  December 31,** |    |
|---------------------------|--------|-------------------------|---------|
|                      |   | **1998**                |    | **1999** |   | **2000(2)** |   | **2001(3)** |   | **2002** |   |
|                      |   | **(in  thousands)**     |    |
|                      |   |                    |    |
| **Balance Sheet Data:**   |   |                    |    |   |   |   |   |   |   |   |   |
|                      |   |                    |    |   |   |   |   |   |   |   |   |
| Working capital           |   | $                       | 110,359 |   | $ | 120,587 |   | $ | 154,089 |   | $ | 139,472 |   | $ | 29,059 |   |
| Total assets              |   | 142,797                 |    | 162,538 |   | 209,960 |   | 235,086 |   | 285,431 |   |
| Long-term liabilities     |   | 3,818                   |    | 4,333 |   | 24,593 |   | 24,125 |   | 17,895 |   |
| Stockholders’ equity |   | 123,179                 |    | 140,534 |   | 152,645 |   | 157,540 |   | 169,075 |   |
|                           |        |                         |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)           Certain revenue andexpense items have been reclassified to conform to current year presentation.

 

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(2)           Effective January 1,2000, BTG adopted Staff Accounting Bulletin 101, *“Revenue Recognition in FinancialStatements”* (“SAB 101”) issued by the Securities and ExchangeCommission in December 1999.  As aresult of adopting SAB 101, BTG changed the way it recognizes revenue fromcontract fees for the license of marketing and distribution rights where theconsideration is a one-time nonrefundable payment.  Prior to the issuance of SAB 101, BTG recorded revenue from thelicense of marketing and distribution rights when the rights were licensed and/orwhen these payments were received. Effective January 1, 2000, BTG recorded acumulative effect of a change in accounting principle related to contractrevenues recognized in prior years in the amount of $12,558,000, net of incometaxes of $4,380,000, of which $853,000, $1,156,000 and $1,146,000 wasrecognized as contract fee revenue in 2000, 2001 and 2002, respectively.  Contract revenues are now being recognizedover the term of the related agreements.

 

(3)           In connection withour acquisition of Myelos and based on an independent valuation, BTG allocated$45,600,000 to in-process research and development projects of Myelos,representing the estimated fair value based on risk-adjusted cash flows of theacquired technology.  At the date of theacquisition the technology acquired in the acquisition was not fullycommercially developed and had no alternative future uses. Accordingly, thevalue was expensed as of the acquisition date. BTG recorded negative goodwill of $18,914,000 on its balance sheet,primarily because the amount written off as in-process research and developmentacquired exceeded the purchase price for accounting purposes.  This negative goodwill was being amortizedover its expected useful life of five years, and had the effect of reducing reportedexpenses by $2,961,000 during 2001.  Inaccordance with SFAS No. 142, *“Goodwill and Other Intangible Assets,”* amortization of the negativegoodwill ceased beginning January 1, 2002, and the balance remaining will bemaintained as a deferred credit until it is either netted against the contingentpayments or reflected in net income as an extraordinary item should thecontingent payments not become due because the technology did not meet themilestones which trigger payment.

 

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**ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Statements in this Annual Report on Form 10-Kconcerning BTG’s business outlook or future economic performance; anticipatedprofitability, revenues, expenses or other financial items; introductions andadvancements in development of products, and plans and objectives relatedthereto; and statements concerning assumptions made or expectations as to anyfuture events, conditions, performance or other matters, are “forward-lookingstatements” as that term is defined under the Federal Securities Laws.Forward-looking statements are subject to risks, uncertainties and otherfactors that could cause actual results to differ materially from those statedin such statements.  Such risks,uncertainties and factors include, but are not limited to, changes and delaysin product development plans and schedules, changes and delays in productapproval and introduction, customer acceptance of new products, development,introduction or consumer acceptance of competing products, changes in pricingor other actions by competitors, patents owned by BTG and its competitors,changes in healthcare reimbursement, risk of operations in Israel, risk ofproduct liability, governmental regulation, dependence on third parties tomanufacture products and commercialize products and general economicconditions, as well as other risks detailed in our filings with the Securitiesand Exchange Commission, including this Annual Report on Form 10-K.*

 

Overview

 

We are engagedin the research, development, manufacture and marketing of pharmaceuticalproducts that address unmet medical needs in both niche and larger marketsegments.  We distribute our products ona worldwide basis primarily through a direct sales force in the United States,the United Kingdom (for our oral liquid products) and Israel and primarilythrough third-party license and distribution relationships elsewhere.  Through a combination of internal researchand development, acquisitions, collaborative relationships and licensingarrangements, BTG has assembled a diverse portfolio of therapeutic products,many of which are currently being marketed, several of which are inregistration or clinical trials and several of which are in pre-clinicaldevelopment.

 

BTG wasfounded in 1980 to develop, manufacture and market novel therapeuticproducts.  In September 2002, weacquired Rosemont Pharmaceuticals Limited (“Rosemont”), a specialtypharmaceutical company located in the United Kingdom that develops, manufacturesand markets pharmaceutical products in oral liquid form.  BTG’s overall administration, finance, legaland patent activities, business development, human clinical studies, U.S. salesand marketing activities, quality assurance and regulatory affairs areprimarily coordinated at our headquarters in East Brunswick, New Jersey.  Pre-clinical studies, research anddevelopment activities and manufacturing of our biotechnology-derived productsare primarily carried out through Bio-Technology General (Israel) Ltd.(“BTG-Israel”), our wholly owned subsidiary in Israel.  Development, manufacture, distribution andsale of our oral liquid products are carried out through Rosemont in the UnitedKingdom.

 

Acquisition of Rosemont Pharmaceuticals Limited

 

On September30, 2002, BTG, through its wholly-owned subsidiary Acacia Biopharma Limited,completed the acquisition of all of the stock of Rosemont PharmaceuticalsLimited, a subsidiary of Akzo Nobel N.V. Rosemont is a leader in the United Kingdom market for oral liquidformulations of branded non-proprietary drugs. The purchase price (including acquisition costs of approximately$5,421,000) for Rosemont, which was funded from our cash on hand, wasapproximately $104,544,000, excluding Rosemont’s cash balances.

 

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Theacquisition has been accounted for under the purchase method ofaccounting.  The aggregate purchaseprice of $104,544,000 is being allocated based on the estimates of the fairvalue of the tangible and intangible assets acquired and liabilities assumed,as follows (in thousands):

 

| Assets Acquired:                                    |   |    |    |
|-----------------------------------------------------|--------|---------|---------|
| Current assets (including cash acquired of  $5,268) |   | $       | 10,924  |   |
| Fixed assets                                        |   | 1,708   |    |
| Intangibles                                         |   | 80,800  |    |
| Goodwill                                            |   | 40,080  |    |
|                                                |   |    |    |
| Liabilities Assumed:                                |   |    |    |
| Current liabilities                                 |   | (4,728  | )       |
| Deferred tax liabilities                            |   | (24,240 | )       |
|                                                |   |    |    |
| Total Purchase Price                                |   | $       | 104,544 |   |

 

The estimation of the fair value of assets acquired and liabilitiesassumed was determined by BTG’s management based on a preliminary independentappraisal and information currently available. BTG is in the process ofcompleting the evaluation of certain acquired assets, as well as certainintangibles.  Accordingly, theallocation of the purchase price is subject to revision.  Intangible assets consist primarily ofdeveloped products and will be amortized, using the straight-line method, overthe estimated useful life of approximately 20 years.  The estimation of the useful life of the intangible assets wasdetermined by BTG’s management based on a preliminary independent appraisal andinformation currently available.  BTG isin the process of completing the useful life assessment and, accordingly, it issubject to revision.

 

Intangibleassets consist of developed products, trademarks, and several patents and arebeing amortized, using the straight-line method, over the estimated useful lifeof approximately 20 years.  Theestimation of the useful life of the intangible assets was determined by BTG’smanagement based on an independent appraisal and information currentlyavailable.

 

In connectionwith the acquisition, we entered into a forward contract for the delivery ofthe £64,000,000 purchase price on September 30, 2002 at a cost of $99,123,200(representing an exchange rate of $1.5488 per £1).  The exchange rate at the acquisition closing date was $1.5614 per£1.  In accordance with SFAS 133 “*Accountingfor Derivative Instruments and Hedging Activities”*, which prohibitshedge accounting for a hedge of an anticipated business combination, werecorded a gain of approximately $800,000 on the forward contract.

 

Acquisition of Myelos Corporation

 

On March 19,2001, BTG acquired Myelos Corporation, a privately-held biopharmaceuticalcompany focused on the development of novel therapeutics to treat diseases ofthe nervous system.  Under the terms ofthe acquisition agreement, BTG paid Myelos shareholders $35 million in acombination of cash and stock ($14 million in cash and $21 million through theissuance of approximately 2,344,700 shares of BTG common stock (based on a pershare value of $8.9564, representing the average closing price of BTG’s commonstock for the 20 trading day period ending one day prior to the February 21,2001 date the acquisition agreement was executed)).

 

In the eventthat (i) BTG publicly announces that it will file a New Drug Application(“NDA”) related to the use of PROSAPTIDE to treat neuropathic pain orneuropathy, (ii) BTG receives United States Food and Drug Administration(“FDA”) minutes stating that the clinical data possessed by BTG is sufficientfor an NDA filing for the use of PROSAPTIDE to treat neuropathic pain orneuropathy without requiring any further testing or (iii) BTG initiatespreparation of an NDA for PROSAPTIDE for the treatment of neuropathic pain orneuropathy (the date the earliest of the foregoing occurs being the “PaymentTrigger Date”), then BTG will pay to the Myelos shareholders an additional $30million, at least approximately $14 million of which must be  paid in shares of BTG common stock, valuedat the average of the closing prices of BTG common stock during the 20 tradingdays ending on the Payment Trigger Date, and the remainder can be paid in cash,shares of BTG common stock, or a combination thereof, as determined by BTG inits sole discretion.

 

In addition,in the event that the FDA approves the sale of PROSAPTIDE for the treatment ofneuropathic pain or neuropathy, BTG will pay the Myelos shareholders 15% of thenet sales of PROSAPTIDE for the treatment of neuropathic pain or neuropathyduring the 12 month period beginning on the earlier of (i) the 25th full monthafter commercial introduction of PROSAPTIDE in the United States for thetreatment of neuropathic pain or neuropathy and (ii) April 1, 2010.  At least 50% of this payment must be paid inshares of BTG common stock, valued at the average of the closing prices of BTGcommon stock during the 20 days

 

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ending one day prior to thepayment, and the remainder can be paid in cash, shares of BTG common stock, ora combination thereof, as determined by BTG in its sole discretion.

 

In no eventwill BTG be obligated to issue in aggregate to the Myelos shareholders morethan 10,962,000 shares of BTG common stock. Any amount of the contingent payments that cannot be paid in shares ofBTG common stock shall instead be paid in shares of BTG’s preferred stock.  The preferred stock will be non-voting,non-convertible, non-transferable, non-dividend paying (except to the extent acash dividend is paid on the BTG common stock), with no mandatory redemptionfor a period of 20 years and one day from the March 19, 2001 closing date ofthe acquisition, and a right to share in proceeds in liquidation, up to theliquidation amount.

 

Thetransaction was treated as a “purchase” for accounting purposes.  The purchase price for accounting purposeswas approximately $34,387,000 (including acquisition costs of $1,387,000),based on a value per share for the approximately 2,344,700 shares of BTG commonstock issued in the acquisition of $8.1172, representing the average closingprice of BTG’s common stock for the four day period preceding  February 21, 2001, the date the terms of theacquisition were agreed. In connection with the merger and based on an independentvaluation, BTG allocated $45,600,000 to in-process research and developmentprojects of Myelos, representing the estimated fair value based onrisk-adjusted cash flows of the acquired technology.  At the date of the merger the technology acquired in theacquisition was not fully commercially developed and had no alternative futureuses.  Accordingly, the value wasexpensed as of the acquisition date. BTG recorded negative goodwill of $18,914,000 on its balance sheet,primarily because the amount written off as in-process research and developmentacquired exceeded the purchase price for accounting purposes.  During 2001 this negative goodwill was beingamortized over its expected useful life of five years.  In accordance with SFAS No. 142, amortizationof the negative goodwill ceased beginning January 1, 2002, and the balanceremaining will be maintained as a deferred credit until it is either nettedagainst the contingent payments or reflected in net income as an extraordinaryitem should the contingent payments not become due because the technology didnot meet the milestones that trigger payment.

 

BTG allocatedvalues to the in-process research and development based on an independentvaluation of the research and development project.  The value assigned to these assets was determined by estimatingthe costs to develop the acquired technology into a commercially viableproduct, estimating the resulting net cash flows from the product, anddiscounting the net cash flows to their present value.  The revenue projection used to value thein-process research and development was based on estimates of relevant marketsize and growth factors, expected trends in technology, and the nature andexpected timing of new product introductions by BTG and its competitors.  The resulting net cash flows from suchproduct are based on management’s estimates of cost of sales, operatingexpenses and income taxes from such product. BTG believes that the assumptions used in the forecasts were reasonableat the time of the merger.  No assurancecan be given, however, that the underlying assumptions used to estimate sales,development costs or profitability, or the events associated with such product,will transpire as estimated.  For thesereasons, actual results may vary from projected results. The most significantand uncertain assumptions relating to the in-process research and developmentrelate to the ability to successfully develop a product and the projectedtiming of completion of, and revenues attributable to, that product.

 

Investment in Omrix Biopharmaceuticals, Inc.

 

In January2001, in order to obtain a period of exclusivity to negotiate a possiblestrategic relationship with Omrix Biopharmaceuticals, Inc. (“Omrix”), BTGloaned $2,500,000 to Omrix and agreed to convert the loan into, and to purchasean additional $2,500,000 of, shares of Omrix preferred stock if it did notpursue a relationship.  BTG determinednot to pursue a strategic relationship with Omrix, and on March 31, 2001converted the existing loan into, and purchased an additional $2,500,000 of,shares of Omrix preferred stock, which is convertible into approximately 4.5%of Omrix common stock (on a fully-diluted basis).  Omrix is a privately-held company that develops and markets aunique surgical sealant and a number of immunology products based on bloodplasma processing technology.  Omrixcurrently sells its products in Europe, South America and the Middle East.  During the fourth quarter of 2001, BTGdetermined that the decline in the value of its investment in Omrix was otherthan temporary and, accordingly, wrote-down the value of this investment by$3,000,000 based on management’s evaluation of current market conditions andOmrix’s operations and forecasts.  Thewrite-down is included as a component of other income (expense), net. Based onthe current information available regarding Omrix, management believes thecurrent carrying value of its investment in Omrix is appropriate.

 

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2003 Outlook

 

Early in 2002,we announced our intention to invest more heavily in research and developmentand marketing and sales activities and provided guidance that, as aconsequence, 2002 earnings would not match those of 2001, although growth inearnings would resume in 2003.  BTGanticipates growth in revenues and earnings per share in 2003.  In particular, with the transition ofOXANDRIN to a direct to wholesaler business model (vs. selling to Accredo),availability, as of October 2002, of the OXANDRIN 10mg tablet strength inaddition to the 2.5mg tablet, as well as the broader focus of the BTG salesforce in new areas of potential demand for an effective involuntary weight lossproduct, and a strong upward trend suggested by recent prescription data,OXANDRIN sales are expected to grow. Human growth hormone sales are expected to be less than those of 2002due to ongoing pricing pressures in Japan and DELATESTRYL sales are expected tobe less than those of 2002 due to anticipated supply constraints followingheavier than expected demand in 2002. Sales of oral liquid pharmaceutical products by Rosemont are anticipatedto continue to grow at their historical rates and are expected to make asignificant contribution to BTG’s 2003 revenues.  Contract fees and royalty revenues are expected to approximatetheir 2002 levels.

 

Increases inexpenses in 2003 compared to 2002 are expected due to BTG’s heavy commitment toits pipeline products and associated research and development costs.  We anticipate that research and developmentexpense will be approximately 30% of our total revenues.  Incremental investment in marketing andsales to maximize the commercial potential of BTG’s marketed products in theU.S. and the U.K. is also anticipated. Cost of goods as a percentage of sales is anticipated to grow as afunction of product mix, the Rosemont contribution to total product sales, andthe validation of BTG’s new production facility in Israel.  Additionally, amortization of intangibles expenseis expected to increase to approximately $4.0 million on an annual rate,reflecting the full year impact of the Rosemont acquisition.

 

Critical Accounting Policies and the Use of Estimates

 

Thepreparation of our consolidated financial statements in conformity withaccounting principles generally accepted in the U.S. requires management tomake estimates and assumptions that affect the amounts reported in ourconsolidated financial statements and accompanying notes.  Actual results could differ materially fromthose estimates.  The items in ourconsolidated financial statements requiring significant estimates and judgmentsare as follows:

 

•                  *Revenuerecognition.*  Product salesare recognized when the product is shipped and collectability is probable, netof discounts, sales incentives, sales allowances and freight out.  Contract fees, which consist mainly oflicense of marketing and distribution rights and research and developmentprojects, are being recognized over the estimated term of the related agreements.  Revenues related to performance milestonesare recognized based upon the achievement of the milestone, as defined in therespective agreements, and when collectability is probable.  Advance payments received in excess ofamounts earned are included in deferred revenue.  Royalties are recognized once agreement exists, the sale is madeand the royalty is earned.  Otherrevenues represent funds received by BTG for research and development projectsthat are partially funded by the Chief Scientist of the State of Israel.  BTG recognizes revenue upon performance ofsuch funded research.

 

•                  *Intangibleassets acquired.*  OnSeptember 30, 2002, we acquired Rosemont. The aggregate purchase price of $104,544,000 is being allocated based onthe estimates of the fair value of the intangible assets acquired, which wasbased on a preliminary independent appraisal and information currentlyavailable.  Intangible assets consist ofdeveloped products, trademarks and several patents and are being amortized,using the straight-line method, over the estimated useful life of approximately20 years. BTG’s management determined the estimation of the useful life of theintangible assets based on independent appraisal and information currentlyavailable.   BTG is in the process ofcompleting the evaluation of certain acquired assets, as well as certainintangibles and the useful life. Accordingly, the allocation of the purchase price and the useful lifeare subject to revisions.

 

•                  *Investments*.  From time to time we invest in nonmarketableequity securities for strategic purposes. These investments are carried at cost. We periodically monitor the liquidity progress and financing activitiesof these entities to determine if impairment write-downs are required.  In 2001, we wrote-down our investment inOmrix by $3,000,000.

 

•                  *In-processresearch and development acquired*. In connection with our acquisition of Myelos Corporation in 2001, weallocated $45,600,000 to in-process research and development projects ofMyelos, representing the estimated fair value based on risk-adjusted cash flowsof the acquired

 

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technology.  We expensed thisvalue as of the acquisition date because the technology was not fullycommercially developed and had no alternative future uses.

 

•                  *Income taxes*.  Deferred income taxes reflect the net taxeffects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and their basis for income taxpurposes and the tax effects of net operating loss and tax creditcarryforwards.  We record valuationallowances to reduce deferred tax assets to the amounts that are more likelythan not to be realized.  We haveconsidered future taxable income and ongoing prudent and feasible tax planningstrategies in assessing the need for valuation allowances, and at December 31,2002, did not record a valuation allowance against our deferred tax asset.  If we determine in the future that we willnot be able to realize all or part of our net deferred tax assets, adjustmentswill be charged to income in the period that we made such determination.

 

•                  *Allowancefor doubtful accounts*.  Wemaintain allowances for doubtful accounts receivable for estimated lossesresulting from the inability of our customers to make required payments.  If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required.

 

•                  *Litigation*.  We are currently involved in certain legalproceedings referred to in Note 8 (Commitments and Contingent Liabilities) ofthe notes to our consolidated financial statements. We do not believe theselegal proceedings will have a material adverse effect on our consolidatedfinancial position, results of operations or cash flows.  However, were an unfavorable ruling to occurin any quarterly period, there exists the possibility of a material impact onthe operating results.

 

The abovelisting is not intended to be a comprehensive list of all of our accountingpolicies.  In many cases, the accountingtreatment of a particular transaction is specifically dictated by generallyaccepted accounting principles, with no need for management’s judgment in theirapplication.  There are also areas inwhich management’s judgment in selecting any available alternative would notproduce a materially different result. See our audited consolidated financial statements and notes theretowhich begin on page 54 of this Annual Report on Form 10-K, which containaccounting policies and other disclosures required by generally acceptedaccounting principles.

 

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Results of Operations

 

The followingtable sets forth for the fiscal periods indicated the dollar amount and thepercentage of our revenues represented by the items reflected on ourconsolidated statements of operations (dollars in thousands).

 
|                                                                                              |   | **Year Ended  December 31,** |   |
|---------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                              |   | **2000**                     |   | **2001** |   | **2002** |   |
| Revenues:                                                                                         |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Product sales                                                                                     |   | $                            | 62,149 |   | 85.4 | % | $ | 87,106 |   | 91.9 | % | $ | 96,107 |   | 93.3 | % |
| Contract fees                                                                                     |   | 5,542                        |   | 7.6 |   | 1,656 |   | 1.8 |   | 1,804 |   | 1.8 |   |
| Royalties                                                                                         |   | 3,139                        |   | 4.3 |   | 3,817 |   | 4.0 |   | 3,891 |   | 3.8 |   |
| Other revenues                                                                                    |   | 1,931                        |   | 2.7 |   | 2,195 |   | 2.3 |   | 1,164 |   | 1.1 |   |
| Total revenues                                                                                    |   | 72,761                       |   | 100.0 | % | 94,774 |   | 100.0 | % | 102,966 |   | 100.0 | % |
| Expenses:                                                                                         |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Research and development                                                                          |   | 25,331                       |   | 34.8 | % | 27,778 |   | 29.3 | % | 32,783 |   | 31.8 | % |
| Marketing and sales                                                                               |   | 17,614                       |   | 24.2 |   | 17,006 |   | 17.9 |   | 22,143 |   | 21.5 |   |
| General and administrative                                                                        |   | 12,685                       |   | 17.4 |   | 13,252 |   | 14.0 |   | 17,582 |   | 17.1 |   |
| Cost of product sales                                                                             |   | 9,887                        |   | 13.6 |   | 12,388 |   | 13.1 |   | 14,148 |   | 13.7 |   |
| Amortization of intangibles and negative  goodwill associated with acquisitions                   |   | —                       |   | — |   | (2,961 | ) | (3.1 | ) | 1,013 |   | 1.0 |   |
| Commissions and royalties                                                                         |   | 1,879                        |   | 2.6 |   | 1,975 |   | 2.1 |   | 2,159 |   | 2.1 |   |
| Write-off of in-process research and  development acquired                                        |   | —                       |   | — |   | 45,600 |   | 48.1 |   | — |   | — |   |
| Total expenses                                                                                    |   | 67,396                       |   | 92.6 |   | 115,038 |   | 121.4 |   | 89,828 |   | 87.2 |   |
|                                                                                              |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Operating income (loss)                                                                           |   | 5,365                        |   | 7.4 |   | (20,264 | ) | (21.4 | ) | 13,138 |   | 12.8 |   |
| Other income (expense), net                                                                       |   | 7,376                        |   | 10.1 |   | (4,929 | ) | (5.2 | ) | 1,642 |   | 1.6 |   |
| Income (loss) before income taxes and  cumulative effect of change in accounting   principle |   | 12,741                       |   | 17.5 |   | (25,193 | ) | (26.6 | ) | 14,780 |   | 14.4 |   |
| Income tax expense                                                                                |   | 3,798                        |   | 5.2 |   | 4,733 |   | 5.0 |   | 5,063 |   | 4.9 |   |
| Income (loss) before cumulative effect of  change in accounting principle                         |   | 8,943                        |   | 12.3 |   | (29,926 | ) | (31.6 | ) | 9,717 |   | 9.5 |   |
| Cumulative effect of change in accounting  principle                                              |   | (8,178                       | )      | 11.2 |   | — |   | — |   | — |   | — |   |
| Net income (loss)                                                                                 |   | $                            | 765    |   | 1.1 | % | $ | (29,926 | ) | (31.6 | )% | $ | 9,717 |   | 9.5 | % |

 

BTG hashistorically derived its revenues from product sales as well as fromcollaborative arrangements with third parties, under which BTG may earn up-frontcontract fees, may receive funding for additional research (including fundingfrom the Chief Scientist of the State of Israel (“Chief Scientist”)), isreimbursed for producing certain experimental materials, may be entitled tocertain milestone payments, may sell product at specified prices and mayreceive royalties on sales of product. We anticipate that product sales will constitute the majority of ourrevenues in the future.  Revenues havein the past displayed and will in the immediate future continue to displaysignificant variations due to changes in demand for our products, new productintroductions by BTG and its competitors, the obtaining of new research anddevelopment contracts and licensing arrangements, the completion or terminationof such contracts and arrangements, the timing and amounts of milestonepayments, and the timing of regulatory approvals of products.

 

The followingtable summarizes, for the fiscal periods indicated, BTG’s sales of itscommercialized products and their percentage of total product sales (dollars inthousands):

 
|                                |   | **Year ended  December 31,** |   |
|-------------------------------------|--------|------------------------------|--------|
|                                |   | **2000**                     |   | **2001** |   | **2002** |   |
| OXANDRIN                            |   | $                            | 32,187 |   | 52 | % | $ | 47,150 |   | 54 | % | $ | 45,861 |   | 48 | % |
| BIO-TROPIN                          |   | 20,584                       |   | 33 |   | 23,863 |   | 27 |   | 20,564 |   | 21 |   |
| BIOLON                              |   | 6,117                        |   | 10 |   | 8,227 |   | 10 |   | 6,696 |   | 7 |   |
| DELATESTRYL                         |   | 2,582                        |   | 4 |   | 7,253 |   | 8 |   | 15,595 |   | 16 |   |
| Oral Liquid Pharmaceutical Products |   | —                       |   | — |   | — |   | — |   | 6,346 |   | 7 |   |
| Other                               |   | 679                          |   | 1 |   | 613 |   | 1 |   | 1,045 |   | 1 |   |
| Total                               |   | $                            | 62,149 |   | 100 | % | $ | 87,106 |   | 100 | % | $ | 96,107 |   | 100 | % |

 

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We believethat our product mix will vary from period to period based on the purchasingpatterns of our customers and our focus on: (i) increasing market penetrationof our existing products; (ii) expanding into new markets; and (iii)commercializing additional products.

 

We believethat sales of OXANDRIN will continue to constitute a significant portion of ourtotal revenues for the next several years. Accordingly, any factor adversely affecting sales of OXANDRIN could havea material adverse effect on our results of operations and profitability andour ability to conduct our business. Quarterly fluctuations in sales of OXANDRIN have had a significantimpact on our quarterly results of operations. Quarterly sales of OXANDRIN in 2000, 2001 and 2002 are set forth in thefollowing table:

 
|   |   | **First  Quarter**  |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   | **Total** |   |
|--------|--------|---------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|-----------|--------|
|   |   | **(in  thousands)** |   |
| 2000   |   | $                   | 5,009  |                | $      | 6,403              |   | $                   | 10,889 |      | $      | 9,886 |   | $ | 32,187 |   |
| 2001   |   | 16,692              |   | 17,887              |   | 4,575              |   | 7,996               |   | 47,150    |   |
| 2002   |   | 9,555               |   | 12,329              |   | 13,661             |   | 10,316              |   | 45,861    |   |
|        |        |                     |        |                     |        |                    |        |                     |        |           |        |  |  |  |  |  |

 

Until thefourth quarter of 2002, our sales of OXANDRIN consisted of sales to AccredoHealth Services, Inc., formerly known as Gentiva Health Services, Inc.(“Accredo”), our wholesale and retail distributor of OXANDRIN in the UnitedStates, and, beginning in the third quarter of 2002, the Ross Products Divisionof Abbott Laboratories (“Ross”), which is co-marketing OXANDRIN in thelong-term care market. In the fourth quarter of 2002 BTG renegotiated itsagreement with Accredo, and BTG now sells OXANDRIN directly to wholesalers andAccredo distributes OXANDRIN for BTG on a fee-for-service basis.  Accredo will earn management fees from BTGfor certain services it will continue to provide, such as warehousing andshipping of product.  The transition tothe new arrangement, which we anticipate will be completed by the end of March2003 when Accredo ceases to act as distributor of the 2.5mg OXANDRIN tablets,resulted in sales of OXANDRIN decreasing by $3,345,000 in the fourth quarter of2002 compared to the third quarter of 2002, as Accredo began to reduce itsinventory of the 2.5mg OXANDRIN tablet. BTG’s sales of OXANDRIN in the first quarter of 2003 will be adverselyaffected by Accredo’s working down of its inventory of the 2.5mg tablets.

 

The increasein OXANDRIN sales in each of the last three quarters of 2000 was due toAccredo’s completion, in May 2000, of the OXANDRIN inventory reduction thatAccredo began in April 1999 as a result of a slowing in the rate of increase inOXANDRIN prescriptions.  The increase inOXANDRIN sales during the first half of 2001 was due to: (i) the commencement,in September 2000, of sales by Ross for the long-term care market for thetreatment of patients with involuntary weight loss, including stocking activityby wholesalers in connection with the launch of this product in the long-termcare market; (ii) stocking by certain wholesalers in anticipation of a priceincrease; (iii) increased purchases by Accredo following its completion, in May2000, of a reduction in the amount of OXANDRIN inventory it carried, whichreduction began in April 1999; and (iv) increased wholesaler sales of OXANDRINby Accredo.

 

Uponcompletion of its inventory reduction in May 2000, Accredo began to purchase,on a monthly basis, an amount of OXANDRIN equal to the average end-user (*i.e.*,wholesaler) sales during the preceding three months.  However, because of the significant increase in OXANDRINpurchases by wholesalers in the first quarter of 2001 in anticipation of aprice increase and in connection with the launch of OXANDRIN into the long-termcare market, Accredo’s purchases of OXANDRIN in the second quarter were higherthan the levels of its sales of OXANDRIN to wholesalers in that period.  As a result, Accredo’s inventory of OXANDRINincreased beyond the desired level. Accordingly, BTG and Accredo amended their distribution arrangementeffective August 2001 to provide for reduced purchases of OXANDRIN untilAccredo’s inventory was reduced to desired levels and thereafter to ensure thatsales of OXANDRIN by BTG to Accredo more accurately reflected end-userdemand.  As a result, sales of OXANDRINin the second half of 2001 were $22,008,000 lower than in the first half of2001 and $8,204,000 lower than in the second half of 2000.

 

Since BTG’slaunch of OXANDRIN in December 1995 through December 2000, a significantportion of OXANDRIN sales has been for treatment of patients suffering fromAIDS-related weight loss.  However, therate of growth in the AIDS-related weight loss market has slowed substantially,and there can be no assurance that it will continue to grow in the future.  Our inability to continue to increase oursales in the AIDS-related weight loss market or to expand into other marketscould have a material adverse effect on our business.  OXANDRIN sales experienced rapid growth in December 2000 and thefirst half of 2001 in large part as a result of the commencement by Ross of themarketing of OXANDRIN for the treatment of involuntary weight loss in thelong-term care market, which represented approximately 15% of OXANDRINwholesaler to end-user salesin both 2001 and 2002.  AlthoughOXANDRIN prescriptions increased 22% in

 

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2002 compared to 2001 and 26.5%in 2001 compared to 2000, to date the average prescription written for thelong-term care market involves a lower dose of OXANDRIN than the averageprescription written for the AIDS market and, therefore, the rate of growth inOXANDRIN sales will be less than the rate of growth in prescriptions.  Ross has the right to terminate our OXANDRINco-marketing agreement at any time upon six months notice.  If Ross elects to do so , our OXANDRIN salescould be adversely affected until we are able to replace the Ross sales force,which we may not be able to do successfully. BTG has the right to terminate the agreement at the end of 2003 if Rossdoes not meet specified sales levels. There can be no assurance that demand forOXANDRIN will continue to increase.

 

Reductions inwholesaler purchases of OXANDRIN from Accredo in the second, third and fourthquarters of 2001 and significantly reduced purchases of OXANDRIN by Accredo inthe second half of 2001 adversely affected the growth in BTG’s product salesand revenues and BTG’s results of operations in the second half of 2001.  Because purchases by wholesalers fluctuatefrom month to month and quarter to quarter based on their own operatingstrategies (including desired levels of inventories, purchases by theircustomers and stocking in advance of anticipated price increases), BTG’s saleswill fluctuate from quarter to quarter.

 

The followingtable summarizes, for the fiscal periods indicated, BTG’s United States andinternational product sales and their percentage of total product sales(dollars in thousands):

 
|          |   | **Year ended  December 31,** |   |
|---------------|--------|------------------------------|--------|
|          |   | **2000**                     |   | **2001** |   | **2002** |   |
| United States |   | $                            | 34,635 |   | 56 | % | $ | 55,441 |   | 64 | % | $ | 63,382 |   | 66 | % |
| International |   | 27,514                       |   | 44 |   | 31,665 |   | 36 |   | 32,725 |   | 34 |   |
| Total         |   | $                            | 62,149 |   | 100 | % | $ | 87,106 |   | 100 | % | $ | 96,107 |   | 100 | % |

 

Domestic salesas a percentage of total product sales have fluctuated due primarily to areduction in purchases of OXANDRIN by BTG’s U.S. distributor from April 1999through May 2000 and increased sales of OXANDRIN to BTG’s U.S. distributor inthe second half of 2000 and the first half of 2001.

 

*Comparison of Years Ended December 31, 2000,2001 and 2002*

 

*Revenues. *Revenues in 2002 increased 9% to $102,966,000from $94,774,000 in 2001, which represented a 30% increase from $72,761,000 in2000.  Product sales, net of discounts,sales incentives, sales allowances and freight out, increased 10% in 2002 to$96,107,000 from $87,106,000 in 2001, which itself was a 40% increase from 2000product sales of $62,149,000. The changes in revenues between 2000, 2001 and2002 were primarily driven by changes in product sales, principallyOXANDRIN.  Product sales in 2002 include$6,346,000 of sales of oral liquid pharmaceutical products resulting from ouracquisition of Rosemont on September 30, 2002.

 

Sales ofOXANDRIN in 2002, 2001 and 2000 were $45,861,000, $47,150,000 and $32,187,000,respectively, representing 48%, 54% and 52% respectively, of BTG’s total product sales in those periods. Sales ofOXANDRIN to Accredo in 2002, 2001 and 2000 were $30,030,000, $38,775,000 and$30,885,000, net, respectively, representing 65%, 82% and 96% , respectively,of BTG’s total sales of OXANDRIN.  Salesof OXANDRIN in 2002 decreased by $1,289,000, or 3%, from 2001 sales as a resultof our transition to a direct to wholesaler business model rather than sellingto Accredo, which would then resell to distributors. In 2001 sales of OXANDRINincreased $14,963,000, or 46%, from 2000 sales.  Sales of OXANDRIN increased $23,167,000 in the first half of 2001due to: (i) the commencement, in September 2000, of sales by Ross for thelong-term care market for the treatment of patients with involuntary weightloss, including stocking activity by wholesalers in connection with the launchof this product in the long-term care market; (ii) stocking by certainwholesalers in anticipation of a price increase; (iii) increased purchases byAccredo following its completion, in May 2000, of a reduction in the amount ofOXANDRIN inventory it carried, which reduction began in April 1999; and (iv)increased wholesaler sales of OXANDRIN by Accredo.  Sales of OXANDRIN in the second half of 2001 decreased $8,204,000from the comparable period in 2000 due to Accredo’s increased purchases ofOXANDRIN in the second half of 2000 following completion of its inventoryreduction and decreased purchases in the second half of 2001 to reduceinventory.

 

Sales of humangrowth hormone in 2002, 2001 and 2000 were $20,564,000, $23,863,000 and$20,584,000, respectively, representing 21%, 27% and 33%, respectively, ofBTG’s total product sales in those periods. Sales of hGH in 2002 decreased by $3,299,000, or 14%, from 2001 salesdue to pricing pressures in Japan, partially offset by an initial sale toTeva.  Sales of human growth hormoneincreased in 2001 by $3,279,000, or 16%, over 2000 sales, primarily due toincreased sales to JCR and Ferring. Sales of hGH to JCR in 2002, 2001 and 2000 were $12,331,000, $16,292,000and $12,975,000, respectively, representing 13%, 19% and 21%, respectively, ofBTG’s total product sales in those periods and 60%, 68% and 63%,

 

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respectively, of BTG’s totalhGH sales in those periods.  Sales ofhGH to Ferring were $5,453,000, $5,889,000 and $4,812,000 in 2002, 2001 and2000, respectively, representing 6%, 7% and 8%, respectively, of BTG’s totalproduct sales in those periods and 27%, 25% and 23%, respectively, of BTG’stotal hGH sales in those periods.

 

Sales ofDELATESTRYL in 2002 increased by $8,342,000, or 115%, over 2001 sales, whichsales increased by $4,671,000, or 181%, over 2000 levels, when we had no salesof DELATESTRYL in the second and third quarters.  The increase in DELATESTRYL sales was due to the FDA stopping theproduction of a competing generic injectable testosterone product used to treatmen with hypogonadism (testostrone deficiency) in 1998, which product has notto date been re-introduced.

 

BIOLON salesin 2002 decreased $1,530,000, or 19%, from 2001 levels, after 2001 salesincreased $2,110,000, or 34%, over 2002 sales. In the first quarter of 2000 we halted product shipments of BIOLON tothe U.S. pending FDA approval of a supplemental application relating to anupgrade in BTG’s manufacturing process to conform it to a higher standard ofquality implemented by BTG.  BTG resumedshipments to the U.S. in the first quarter of 2001, although shipments againstopped in the fourth quarter of 2001 as the FDA was not able to inspect thenew manufacturing facility of BTG’s contract sterilizer for BIOLON due to theviolence in Israel in recent years until July 2002 and shipments resumed inSeptember 2002 following FDA approval.

 

*Contract fees* forthe year ended December 31, 2002 were $1,804,000, which includes $1,646,000 ofcontract fees received in prior periods but recognized in 2002 in accordancewith SAB 101.  For the year endedDecember 31, 2001 contract fees were $1,656,000, which represent contract feesreceived in prior periods but recognized in 2001 in accordance with SAB 101.For the year ended December 31, 2000, contract fees, which consist of licensingand option to license fees, amounting to $5,542,000, or 8%, of total revenues,were earned from certain of BTG’s collaborative partners.  Of the contract fees earned in 2000,$2,500,000, or 45% of total contract fees, was earned as a milestone payment underBTG’s strategic alliance with Teva focusing on the development and globalcommercialization of several generic recombinant therapeutic products and thelicense of distribution rights in the United States for BTG’s hGH, and$1,475,000, or 27% of total contract fees, was earned in respect of theBIO-HEP-B vaccine.  Under SAB 101,contract fees in 2000 include $853,000 of contract fees paid in prior periods,or 15% of total contract fees, as well as $313,000, or 6% of total contractfees, of the $5,000,000 received in 2000 in respect of ARTHREASE; the remaining$4,687,000 of this fee has been deferred in accordance with SAB 101.

 

*Royalties* in 2002,2001 and 2000 consist mainly of net royalties in respect of the MIRCETTEproduct in the amount of $3,891,000, $3,817,000 and $3,139,000, respectively.

 

*Other revenues*consist primarily of funding from the Chief Scientist, which represented 90%,100% and 81% of other revenues in the years ended December 31, 2002, 2001 and2000, respectively.

 

*Research and development expense*was $32,783,000, $27,778,000 and $25,331,000 for the years ended December 31,2002, 2001 and 2000, respectively.  Theincrease in research and development expenditures in 2002 compared to 2001resulted primarily from the addition of research and development activities forPROSAPTIDE following the acquisition of Myelos in March 2001, increased patentrelated expenses, increased clinical activities and Rosemont’s developmentexpenses following the acquisition.  Theincrease in research and development expenditures in 2001 compared to 2000resulted mainly from the increase in research and development personnel andlegal fees related to patent maintenance and patent interference proceedings,as well as the addition of research and development activities for PROSAPTIDEfollowing the acquisition of Myelos, partially offset by decreased expenses in2001 compared to 2000 associated with developing alternate manufacturingsources for OXANDRIN and for a new tablet formulation and decreasedcompensation charges arising from modification of the periods of vesting andexercisability of certain stock option awards to certain employees and formeremployees made in connection with the termination of their employment andpost-employment consulting arrangements.

 

*Marketing and sales expense*was $22,143,000, $17,006,000 and $17,614,000 in the years ended December 31,2002, 2001 and 2000, respectively. These expenses primarily related to the sales and marketing force in theUnited States that BTG established principally in the second half of 1995 andduring 1996 to promote distribution of OXANDRIN in the United States and,beginning with the fourth quarter of 2002, Rosemont’s sales and marketing forcein the United Kingdom.  The significantincrease in marketing and sales expense in 2002 was due to increased promotionand marketing costs, as well as increased compensation and training costs dueto BTG’s expansion of its field force, as BTG sought to maximize OXANDRIN’spotential and growth, and the inclusion of $1,339,000 of Rosemont’s expenses,partially offset by decreased incentive compensation costs.  The decrease in marketing and sales expensein 2001 compared to 2000 derived mainly from decreased advertising, promotionaland market research activities, partially offset by increased compensationcosts.

 

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*General and administrative expense*was $17,582,000, $13,252,000 and $12,685,000 in the years ended December 31,2002, 2001 and 2000, respectively.  Theincrease in general and administrative expense in 2002 compared to 2001 wasprincipally due to increased compensation costs, substantial audit feesincurred in 2002 in connection with the reaudit of BTG’s financial statementsand inclusion of Rosemont’s expenses following the acquisition, partiallyoffset by decreased merger and acquisition activities in 2002 and higherconsulting fees in 2001.  General andadministrative expenses for 2002 includes a $1,100,000 non-recurring pensionexpense incurred in connection with the acquisition of Rosemont.  The increase in 2001 compared to 2000 wasprimarily due to increased compensation costs, partially offset by a decreasein legal fees (litigation) as compared to 2000, when legal fees increasedprimarily due to the reactivation in the fourth quarter of 1998 of BTG’sdeclaratory judgment action against Genentech in respect of BTG’s human growthhormone product in the United States.

 

*Cost of product sales*was $14,148,000, $12,388,000 and $9,887,000 in the years ended December 31,2002, 2001 and 2000, respectively.  Costof product sales as a percentage of product sales was 15%, 14% and 16% in 2002,2001 and 2000, respectively.  Cost ofproduct sales in 2002 increased in absolute terms and as a percentage ofproduct sales due to increased sales, a change in the mix of products ascompared to 2001 and the addition of Rosemont’s products, which have a highercost of goods than most of the other BTG products, in the fourth quarter of2002.  Cost of product sales for 2002include $1,272,000 of costs related to the Rosemont products.  Cost of product sales in 2001 increased inabsolute terms as a result of increased product sales, but decreased as apercentage of product sales, primarily as a result of OXANDRIN accounting for asignificant portion of the increase in product sales.  OXANDRIN has a relatively low cost of manufacture as a percentageof product sales, while BIOLON has the highest cost to manufacture as apercentage of product sales.  Cost ofproduct sales as a percentage of product sales varies from year to year andquarter to quarter depending on the quantity and mix of products sold.

 

*Amortization of Intangibles and NegativeGoodwill Associated with Acquisitions*.  In connection with the acquisition ofMyelos, BTG recorded negative goodwill of $18,989,000 on its balance sheet,primarily because the amount written off as in-process research and developmentacquired exceeded the purchase price for accounting purposes. During 2001 thisnegative goodwill was being amortized over its expected useful life of fiveyears.  In accordance with SFAS No. 142,amortization of the negative goodwill ceased beginning January 1, 2002, and thebalance remaining will be maintained as a deferred credit until it is eithernetted against the contingent payments or reflected in net income as anextraordinary item should the contingent payments not become due because thetechnology did not meet the milestones that trigger payment.  In connection with the acquisition ofRosemont, we recorded intangibles of $80,800,000, consisting of trademarks,patents and developed products.  Theseintangibles are being amortized, using the straight-line method, over theestimated useful life of approximately 20 years.  We recorded $1,013,000 of amortization of these intangibles inthe fourth quarter of 2002, and expect that we will record $4,050,000 of annualamortization of these intangibles.

 

*Commissions and royalties*were $2,159,000, $1,975,000 and $1,879,000 in the years ended December 31,2002, 2001 and 2000, respectively. These expenses consist primarily of royalties to entities from which BTGlicensed certain of its products and to the Chief Scientist.

 

*Write-off of In-Process Research andDevelopment Acquired*. In 2001, BTG wrote-off $45,600,000 as in-process research anddevelopment acquired relating to the acquisition of Myelos Corporation.  In connection with the acquisition BTGallocated $45,600,000 to in-process research and development projects ofMyelos, representing the estimated fair value based on risk-adjusted cash flowsof the acquired technology based on an independent valuation.  At the date of the merger the technologyacquired in the acquisition was not fully commercially developed and had noalternative future uses.  Accordingly,the value was expensed as of the acquisition date.

 

*Other income (expense), net*,which was $1,642,000, ($4,929,000) and $7,376,000 in the years ended December31, 2002, 2001 and 2000, respectively, includes investment income, net, financeexpense and realized and unrealized losses on investments.  Investment income, net was $2,823,000,$7,302,000 and $7,376,000 in the years ended December 31, 2002, 2001 and 2000,respectively.  In 2002 investmentincome, net decreased mainly due to lower yields and lower cash and short-terminvestment balances in 2002 resulting from the acquisition of Rosemont,partially off-set by an $800,000 realized gain from the forward contract forthe delivery of £64,000,000 entered into in connection with the Rosemontacquisition.  SFAS 133 prohibits hedgeaccounting for a hedge of an anticipated business combination.  In 2001 investment income, net decreasedslightly, as the total of cash, cash equivalents and short-term investmentsdecreased due to the use of cash to acquire Myelos, to fund construction ofBTG’s new manufacturing facility and to purchase shares of Omrix, partiallyoffset by cash flow from operations, proceeds from the exercise of options andproceeds from a $20,000,000 loan borrowed to finance construction of BTG’s newmanufacturing facility in Israel.  Werecognized realized and unrealized losses on investment, net of $1,181,000 in2002.  In 2001 we recognized realizedand unrealized capital losses of $9,231,000 on short-term investments that wereliquidated during December 2001 and early 2002.  During the fourth quarter of 2001, we determined that the declinein the value

 

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of our investment in Omrix wasother than temporary and, accordingly, wrote-down the value of this $5,000,000investment by $3,000,000 based on management’s evaluation of current marketconditions and Omrix’s operations and forecasts.

 

*Income Taxes*.  Provision for income taxes for the yearsended December 31, 2002, 2001 and 2000 was $5,063,000, $4,733,000 and$3,798,000, respectively, representing approximately 34.3%, 27.1% (on a proforma basis excluding the write-off of in-process research and developmentacquired and amortization of negative goodwill, which are not taken intoaccount in computing income taxes), and 29.8% of income before incometaxes.  BTG’s consolidated tax ratediffers from the statutory rate because of Israeli tax benefits, research andexperimental tax credits, state and local taxes and similar items that affectthe tax rate.  In 2001 BTG recorded aprovision for additional taxes of $1,530,000 as a result of a tax audit thatBTG-Israel was undergoing covering the 1997 through 2000 tax years.  The tax audit was settled in the secondquarter of 2002, and an additional $519,000 of tax was accrued at that time.

 

*Earnings per Common Share*.  BTG had approximately 1.2 million additionalbasic weighted average shares outstanding for the year ended December 31, 2002as compared to the same period in 2001, and had approximately 2.9 millionadditional basic weighted average shares outstanding for the year endedDecember 31, 2001 as compared to the same period in 2000.  The increased number of basic shares in both2001 and 2002 was primarily the result of the issuance throughout 2001 ofshares upon the exercise of options, the issuance throughout 2001 and 2002 ofshares pursuant to our employee stock purchase plan and the issuance ofapproximately 2.3 million shares to the former shareholders of Myelos in March2001.  For 2001 diluted weighted averageshares outstanding does not include dilutive securities because the effectwould be anti-dilutive.

 

*Cumulative Effect of Change in AccountingPrinciple*. Effective January 1, 2000, BTG adopted SAB 101.  As a result, BTG changed the way itrecognizes revenue from contract fees for the license of marketing anddistribution rights where the consideration is a one-time nonrefundablepayment.  Prior to the issuance of SAB101, BTG recorded revenue from the license of marketing and distribution rightswhen the rights were licensed and/or when these payments were received.  Effective January 1, 2000, BTG recorded acumulative effect of a change in accounting principle related to contractrevenues recognized in prior years in the amount of $12,558,000, net of income taxesof $4,380,000, of which $1,166,000 was recognized as contract fee revenue in2000.  Contract fee revenues are nowbeing recognized over the estimated term of the related agreements.

 

**Liquidity and CapitalResources**

 

At December31, 2002, our working capital was $29,059,000 as compared to $139,472,000 atDecember 31, 2001.  The decrease inworking capital at December 31, 2002 was primarily due to the use of$95,954,000 to acquire Rosemont and an increase in accounts payable and othercurrent liabilities, partially offset by an increase in accounts receivable.

 

Our cash flowshave fluctuated significantly due to the impact of net income, capitalspending, working capital requirements, the issuance of common stock and otherfinancing activities.  BTG expects thatcash flows in the near future will be primarily determined by the levels of netincome, working capital requirements and financings, if any, undertaken byBTG.  Cash, excluding short-terminvestments, (decreased) increased by $(63,240,000), $49,098,000 and$7,650,000, in the years ended December 31, 2002, 2001 and 2000,respectively.  Cash provided byoperating activities was $9,194,000, $37,760,000 and $15,267,000 in the yearsended December 31, 2002, 2001 and 2000, respectively.  Net income (loss) was $9,717,000, $(29,926,000) and $765,000 inthe same periods, respectively.

 

In 2002 netcash provided by operating activities was less than net income primarily as aresult of increased accounts receivable, inventories, prepaid expenses andother current assets and deferred income taxes of $8,265,000, $1,202,000,$1,284,000, and $837,000, respectively, and deferred revenues of $1,553,000,partially offset by increased accounts payable in the amount of $7,541,000,depreciation and amortization, amortization of intangible assets associatedwith acquisitions and a provision for inventory reduction in connection withthe validation of a new manufacturing site in the U.S. in the amounts of$2,701,000, $1,013,000 and $976,000, respectively.

 

In 2001 we hadnet cash provided by operating activities, despite the net loss, mainly due tothe write-off of in-process research and development acquired of $45,600,000, adecrease in accounts receivable of $14,572,000, an unrealized loss oninvestments, net of $8,963,000, an increase in accounts payable of $5,178,000,depreciation and amortization of $2,937,000, a realized loss on the sale ofshort-term investments, net of $1,735,000, and compensation expense of$1,024,000 resulting from the modification of options previously granted,partially offset by an increase in inventories of $3,875,000, an increase indeferred income tax of $3,957,000, amortization of negative goodwill associatedwith acquisitions of $2,961,000 and deferred revenues of $1,656,000.

 

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In 2000 netcash provided by operating activities was greater than net income, mainly dueto the cumulative effect of the accounting change resulting from the adoptionof SAB 101 of $8,178,000 (net of income taxes), deferred revenues of$3,834,000, depreciation and amortization of $2,861,000 and compensationexpense of $1,592,000 resulting from the modification of options previouslygranted, partially offset by an increase in inventories and accounts receivableof $1,256,000 and $973,000, respectively.

 

Net cash (usedin) provided by investing activities was $(73,228,000), $3,651,000 and$(37,401,000) in the years ended December 31, 2002, 2001 and 2000,respectively.  Net cash (used in)provided by investing activities included capital expenditures of $15,546,000,$23,974,000 and $10,913,000 in these periods, respectively, consisting ofapproximately $12,138,000, $21,758,000 and $8,950,000, respectively, for thepurchase and construction of a new manufacturing facility, with the remainderin all periods primarily for laboratory and manufacturing equipment andinfrastructure.  In 2002 net cash usedin investing activities also includes the $95,954,000, net used to acquireRosemont.  In 2001, net cash used ininvesting activities also includes the $5,000,000 investment in Omrix and$15,603,000, net used in connection with the acquisition of Myelos.  The remainder of the net cash used ininvesting activities, in all periods, was primarily for purchases and sales ofshort-term investments.

 

Net cashprovided by financing activities was $517,000, $7,687,000 and $29,784,000 inthe years ended December 31, 2002, 2001 and 2000, respectively.  Cash from financing activities in 2002 and2001 consisted of net proceeds from issuances of common stock of $1,751,000 and$7,687,000, respectively.  Net proceedsfrom the sale of common stock resulted mainly from option exercises in 2001 andin both periods the issuances of stock pursuant to our employee stock purchaseplan.  In 2002, we repaid $1,234,000 oflong-term debt, principally borrowings under our credit facility that we usedto finance a portion of the construction of our new manufacturing facility inIsrael.  Cash flows from financing activitiesin 2000 were primarily affected by long-term borrowings of $20,000,000 andproceeds from the issuance of common stock of $9,784,000.

 

In April 1999,BTG purchased a manufacturing facility in Israel for approximately $6,500,000(including local taxes and legal fees). Construction of a modern biologicsproduction facility designed to meet FDA cGMP requirements for biologics anddevices was completed at the end of 2001, and validation has commenced and isexpected to be completed in the second half of 2003.  BTG will then commence the process validation for productsmanufactured in the existing facility to be transferred to the newfacility.  Production of these productscannot be relocated to the new facility until the new facility has received allnecessary regulatory approvals, which BTG anticipates will occur during theperiod from the end of 2003 through the end of 2004, depending on product andterritory.  Through December 31, 2002,BTG has spent approximately $42,000,000 to complete construction of theproduction facility (including capitalized interest but excluding the cost ofpurchasing the facility and post-completion validation), and expects to spendapproximately $7,000,000 to complete validation activities, of whichapproximately $4,000,000 has been expended through December 31, 2002.  In June 2000 BTG-Israel entered into a$20,000,000 credit facility with Bank Hapoalim B.M. to finance a portion of thecost of completing its new manufacturing facility.  Loans under the facility bear interest at the rate of LIBOR plus1%.  The credit facility is secured bythe assets of BTG-Israel and has been guaranteed by BTG.  At December 31, 2002, BTG had outstandinglong-term borrowings of $18,889,000 under the facility, of which $6,667,000 isdue in each of 2003 and 2004, with the remaining $5,555,000 due in 2005.Borrowings are repaid monthly in equal installments.

 

We believethat our cash resources as of December 31, 2002, together with anticipatedproduct sales, will be sufficient to fund our ongoing operations for theforeseeable future.  There can, however,be no assurance that product sales will occur as anticipated, that currentagreements with third party distributors of our products will not be canceled,that the Chief Scientist will continue to provide funding at current levels orat all, that we will not use a substantial portion of our cash resources toacquire businesses, products and/or technologies, or that unanticipated eventsrequiring the expenditure of funds will not occur.  The satisfaction of BTG’s future cash requirements will depend inlarge part on the status of commercialization of BTG’s products, BTG’s abilityto enter into additional research and development and licensing arrangements,and BTG’s ability to obtain additional equity and debt financing, if necessary.  There can be no assurance that BTG will beable to obtain additional funds or, if such funds are available, that suchfunding will be on favorable terms.  BTGcontinues to seek additional collaborative research and development andlicensing arrangements in order to provide revenue from sales of certainproducts and funding for a portion of the research and development expensesrelating to the products covered, although there can be no assurance that itwill be able to obtain such agreements. See “Item 1.  Business—RiskFactors —We may be unable to obtain any additional capital needed to operateand grow our business” and “—We expect our quarterly results to fluctuate,which may cause volatility in our stock price.”

 

Below is atable that presents our contractual obligations and commitments at December 31,2002. We had no capital lease obligations or unconditional purchase commitmentsas of that date (in thousands).

 

51

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**PaymentsDue by Period**

 
| **Contractual  Obligations**       |   | **Total** |   | **Less than  One Year** |   | **1-3 years** |   | **4-5 years** |   | **After 5  years** |   | **Undetermined(1)** |   |
|------------------------------------|--------|-----------|--------|-------------------------|--------|---------------|--------|---------------|--------|--------------------|--------|---------------------|--------|
| Long-term debt                     |   | $         | 18,889 |                    | $      | 6,667         |   | $             | 12,222 |               | — |                | — |   | — |   |
| Operating leases                   |   | 21,450    |   | 3,176                   |   | 5,749         |   | $             | 3,455  |               | $      | 9,070               |   | — |   |
| Other long-term obligations (1)    |   | 2,890     |   | —                  |   | —        |   | —        |   | —             |   | 2,890               |   |
| Total contractual cash obligations |   | $         | 43,229 |                    | $      | 9,843         |   | $             | 17,971 |               | $      | 3,455               |   | $ | 9,070 |   | $ | 2,890 |   |
|                                    |        |           |        |                         |        |               |        |               |        |                    |        |                     |        |  |  |  |  |  |  |

 

----

(1)  Consists of severance benefits payable underIsraeli law.  Because these benefits arepaid only upon termination of employment, it is not possible to allocate theliability across future years.

 

BTG applies tothe Chief Scientist of the State of Israel annually for research anddevelopment funding for its various projects for the coming year.  The projects and amount funded each year arewithin the sole discretion of the Chief Scientist.  We are currently in discussions with the Chief Scientist aboutwhether it will continue to fund some of our research and developmentactivities, and we cannot assure you that the Chief Scientist will continue toprovide funding to us at the same levels or at all.  BTG is obligated to pay royalties to the Chief Scientist forproducts resulting from research and development partially funded by the ChiefScientist.  These royalties range from3% to 5% on commercial sales, if any, of these products if produced in Israel,up to the amount so funded, and 4% to 6% of commercial sales, if any, if theseproducts are produced outside Israel, up to 120% to 300% of the amount sofunded.  BTG has received aggregatefunding from the Chief Scientist of $22,131,000 through December 31, 2002(including participation for projects that will not have future sales), and haspaid aggregate royalties to the Chief Scientist totaling $4,011,000 throughDecember 31, 2002.

 

At December31, 2002, the Company had employment agreements with seven seniorofficers.  Under these agreements, theCompany has committed to total aggregate base compensation per year ofapproximately $2,117,000 plus other normal customary fringe benefits andbonuses.  These employment agreementsgenerally have a term of three years and are automatically renewed forsuccessive one-year periods unless either party gives the other notice ofnon-renewal.

 

**New AccountingPronouncements**

 

In June 2001,the FASB issued SFAS No. 143, *“Accounting for Asset Retirement Obligations”*.SFAS No. 143 addresses accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs.  This statement is effectivefor fiscal years beginning after June 15, 2002.  We are currently assessing the impact of this new standard,although we do not expect it to affect our results of operations.

 

In July 2002,the FASB issued SFAS No. 146, *“Accounting for Costs Associated with Exit orDisposal Activities.”*  SFASNo. 146 requires companies to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of commitment to anexit or disposal plan.  SFAS No. 146will be applied to exit or disposal activities after December 31, 2002 and isnot expected to have a material effect on BTG’s financial position or resultsof operations.

 

In December2002, the FASB issued Statement 148, *“Accounting for Stock-Based Compensation—Transitionand Disclosure:  an amendment of FASBStatement 123 (SFAS 123)”*, to provide alternative transition methodsfor a voluntary change to the fair value based method of accounting forstock-based employee compensation.  Inaddition, SFAS 148 amends the disclosure requirements of SFAS 123 to requireprominent disclosures in annual financial statements about the method ofaccounting for stock-based employee compensation and the pro forma effect onreported results of applying the fair value based method for entities that usethe intrinsic value method of accounting. The pro forma effect disclosures are also required to be prominentlydisclosed in interim period financial statements.  This statement is effective for financial statements for fiscalyears ending after December 15, 2002 and is effective for financial reportscontaining condensed financial statements for interim periods beginning afterDecember 15, 2002, with earlier application permitted.  BTG does not plan a change to the fair valuebased method of accounting for stock-based employee compensation.

 

In November2002, FASB Interpretation 45, *“Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others”*(“FIN 45”), was issued.  FIN 45 requiresa guarantor entity, at the inception of a guarantee covered by the measurementprovisions of the

 

52

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interpretation, to record aliability for the fair value of the obligation undertaken in issuing theguarantee.  BTG previously did notrecord a liability when guaranteeing obligations unless it became probable thatBTG would have to perform under the guarantee. FIN 45 applies prospectively to guarantees BTG issues or modifiessubsequent to December 31, 2002, but has certain disclosure requirementseffective for interim and annual periods ending after December 15, 2002.  BTG has not yet determined the effects ofFIN 45 on its financial statements. Disclosures required by FIN 45 are included in the accompanyingfinancial statements.

 
| **ITEM 7A.** |   | **QUANTITATIVE AND  QUALITATIVE DISCLOSURES ABOUT MARKET RISK** |
|--------------|--------|-----------------------------------------------------------------|

 

Market risk isthe exposure to loss resulting from changes in interest rates, foreign currencyexchange rates, commodity prices and equity prices.  To date our exposure to market risk has been limited.  We do not currently hedge any market risk,although we may do so in the future.  Wedo not hold or issue any derivative financial instruments for trading or otherspeculative purposes.  In early 2002,BTG purchased forward contracts in the amount of $3,000,000 to hedge part ofits commitments in Israeli Shekels, primarily salaries, by locking in theShekel/U.S. Dollar exchange rate, which had become more volatile in late 2001.  All of these contracts matured by July 1,2002.

 

In connectionwith the acquisition of Rosemont, we entered into a forward contract for thedelivery of the £64,000,000 purchase price on September 30, 2002 at a cost of$99,123,200 (representing an exchange rate of $1.5488 per £1).  The exchange rate at the acquisition closingdate was $1.5614 per £1.  In accordancewith SFAS 133, which prohibits hedge accounting for a hedge of an anticipatedbusiness combination, we recorded a gain of approximately $800,000 on theforward contract.

 

Borrowingsunder our $20,000,000 credit facility bear interest at a floating rate and,therefore, we are impacted by changes in prevailing interest rates.  A 100 basis point increase in marketinterest rates on the $18,889,000 outstanding under this facility at December31, 2002 would result in an increase in our annual interest expense of$188,890.  Because these borrowingsrelate to the construction of our new facility, which is not yet ready for itsintended use, interest expense is currently being capitalized.

 

Our interestbearing assets consist of cash and cash equivalents and short-terminvestments, which currently consist primarily today of investments incommercial paper and time deposits.  Ourinterest income is sensitive to changes in the general level of interest rates,primarily U.S. interest rates and other market conditions.

 

As a result ofour operations in Israel and the United Kingdom, we are subject to currencyexchange rate fluctuations that can affect our results of operations.  We manage our Israeli operations with theobjective of protecting against any material net financial loss in U.S. dollarsfrom the impact of Israeli inflation and currency devaluations on its non-U.S.dollar assets and liabilities.  The costof our operations in Israel, as expressed in dollars, is influenced by theextent to which any increase in the rate of inflation in Israel is not offset(or is offset on a lagging basis) by a devaluation of the Israeli Shekel inrelation to the U.S. dollar.  To theextent that expenses in Shekels exceed BTG-Israel’s revenues in Shekels (whichto date have consisted primarily of research funding from the Chief Scientistand product sales in Israel), the devaluations of Israeli currency have beenand will continue to be a benefit to BTG’s financial condition.  However, should BTG-Israel’s revenues inShekels exceed its expenses in Shekels in any material respect, the devaluationof the Shekel will adversely affect BTG’s financial condition.  Further, to the extent the devaluation of theShekel with respect to the U.S. dollar does not substantially offset theincrease in the costs of local goods and services in Israel, BTG’s financialresults will be adversely affected as local expenses measured in U.S. dollarswill increase.

 

53

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**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

Index to Consolidated Financial Statements

 
| Independent Auditors’ Reports                                                                                    |
|-----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                  |
| Consolidated Financial Statements:                                                                                    |
|                                                                                                                  |
| Consolidated Balance Sheets as of December 31, 2001 and 2002                                                          |
|                                                                                                                  |
| Consolidated Statements of Operations for  the years ended December 31, 2000, 2001 and 2002                           |
|                                                                                                                  |
| Consolidated Statements of Changes in  Stockholders’ Equity for the years ended December 31, 2000, 2001 and 2002 |
|                                                                                                                  |
| Consolidated Statements of Cash Flows for  the years ended December 31, 2000, 2001 and 2002                           |
|                                                                                                                  |
| Notes to Consolidated Financial Statements                                                                            |

 

54

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**REPORTOF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS**

 

To the Board of Directors and Stockholders of

 

**Bio-TechnologyGeneral Corp.**

 

 

We have audited the accompanying consolidated balance sheet ofBio-Technology General Corp. and subsidiaries as of December 31, 2002, and therelated statements of operations, changes in stockholders’ equity, and cashflows for the year then ended.  Theseconsolidated financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on the consolidated financial statements based on our audit.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, the 2002 consolidated financial statements referred toabove present fairly, in all material respects the consolidated financialposition of Bio-Technology General Corp. and subsidiaries as of December 31,2002, and the consolidated results of their operations and their cash flows forthe year then ended, in conformity with accounting principles generallyaccepted in the United States of America.

 

As discussed in Note 1(i) to the consolidated financial statements, theCompany adopted Statement of Financial Accounting Standards No. 142, “Goodwilland Other Intangible Assets” (SFAS 142) on January 1, 2002.

 

 
| GRANT THORNTON LLP |   |
|--------------------|--------|
|               |
|               |
|               |
| New York, New York |
| February 14, 2003  |

 

55

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Independent Auditors’ Report

 

 

To the Board of Directors and Stockholders

Bio-Technology General Corp.:

 

 

We haveaudited the accompanying consolidated balance sheet of Bio-Technology GeneralCorp. and subsidiaries as of December 31, 2001, and the related consolidatedstatements of operations, changes in stockholders’ equity and cash flows foreach of the years in the two-year period ended December 31, 2001. Theseconsolidated financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

We conductedour audits in accordance with auditing standards generally accepted in theUnited States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Bio-TechnologyGeneral Corp. and subsidiaries as of December 31, 2001, and the results oftheir operations and their cash flows for each of the years in the two-yearperiod ended December 31, 2001, in conformity with accounting principlesgenerally accepted in the United States of America.

 

As discussedin Note 1j to the consolidated financial statements, the Company changed itsmethod of revenue recognition for certain up-front nonrefundable fees in 2000.

 

 

 
|                  | KPMG LLP |   |
|-----------------------|----------|--------|
|                  |     |
|                  |     |
| Princeton, New Jersey |     |
| September 20, 2002    |     |

 

56

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**BIO-TECHNOLOGYGENERAL CORP.**

**CONSOLIDATED BALANCESHEETS**

 

(in thousands, except share data)

 
|                                                                                                          |   | **December  31,** |    |
|---------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                          |   | **2001**          |    | **2002** |   |
| ASSETS                                                                                                        |   |              |    |   |   |
| Current Assets:                                                                                               |   |              |    |   |   |
| Cash and cash equivalents                                                                                     |   | $                 | 75,451  |   | $ | 12,211 |   |
| Short-term investments                                                                                        |   | 43,473            |    | 4,336 |   |
| Accounts receivable, net                                                                                      |   | 24,538            |    | 35,764 |   |
| Inventories                                                                                                   |   | 14,140            |    | 16,612 |   |
| Deferred income taxes                                                                                         |   | 5,079             |    | 4,176 |   |
| Prepaid expenses and other                                                                                    |   | 1,167             |    | 2,829 |   |
| Total current assets                                                                                          |   | 163,848           |    | 75,928 |   |
|                                                                                                          |   |              |    |   |   |
| Property and equipment, net                                                                                   |   | 51,059            |    | 66,596 |   |
| Intangible assets, net                                                                                        |   | 266               |    | 79,878 |   |
| Goodwill                                                                                                      |   | —            |    | 40,080 |   |
| Deferred income taxes                                                                                         |   | 14,687            |    | 16,380 |   |
| Severance pay funded                                                                                          |   | 2,385             |    | 2,783 |   |
| Other assets (including restricted cash of  $1,280 in 2002)                                                   |   | 2,841             |    | 3,786 |   |
| Total assets                                                                                                  |   | $                 | 235,086 |   | $ | 285,431 |   |
|                                                                                                          |   |              |    |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                     |   |              |    |   |   |
| Current Liabilities:                                                                                          |   |              |    |   |   |
| Accounts payable (including income tax  payable of $7,006,000 in 2001and $5,464,000 in 2002)                  |   | $                 | 10,328  |   | $ | 21,618 |   |
| Deferred revenues                                                                                             |   | 1,646             |    | 1,557 |   |
| Current portion of long-term debt                                                                             |   | 1,234             |    | 6,674 |   |
| Other current liabilities                                                                                     |   | 11,168            |    | 17,020 |   |
| Total current liabilities                                                                                     |   | 24,376            |    | 46,869 |   |
|                                                                                                          |   |              |    |   |   |
| Long-term debt                                                                                                |   | 18,896            |    | 12,222 |   |
| Deferred revenues                                                                                             |   | 13,092            |    | 11,628 |   |
| Severance pay                                                                                                 |   | 5,229             |    | 5,673 |   |
| Negative goodwill                                                                                             |   | 15,953            |    | 16,028 |   |
| Deferred income taxes                                                                                         |   | —            |    | 23,936 |   |
|                                                                                                          |   |              |    |   |   |
| Commitments and contingent liabilities  (Note 8)                                                              |   |              |    |   |   |
|                                                                                                          |   |              |    |   |   |
| Stockholders’ Equity:                                                                                    |   |              |    |   |   |
| Preferred stock - $.01 par value; 4,000,000  shares authorized; no shares issued                              |   | —            |    | — |   |
| Common stock - $.01 par value; 150,000,000 shares  authorized; issued: 58,260,000 in 2001, 58,733,000 in 2002 |   | 582               |    | 587 |   |
| Additional paid in capital                                                                                    |   | 212,408           |    | 214,224 |   |
| Accumulated deficit                                                                                           |   | (55,570           | )       | (45,853 | ) |
| Accumulated other comprehensive income                                                                        |   | 120               |    | 117 |   |
| Total stockholders’ equity                                                                               |   | 157,540           |    | 169,075 |   |
| Total liabilities and stockholders’ equity                                                               |   | $                 | 235,086 |   | $ | 285,431 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

57

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**BIO-TECHNOLOGYGENERAL CORP.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 

(in thousands, except per share data)

 
|                                                                                       |   | **Year Ended  December 31,** |   |
|--------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                       |   | **2000**                     |   | **2001** |   | **2002** |   |
| Revenues:                                                                                  |   |                         |   |   |   |   |   |
| Product sales, net                                                                         |   | $                            | 62,149 |   | $ | 87,106 |   | $ | 96,107 |   |
| Contract fees                                                                              |   | 5,542                        |   | 1,656 |   | 1,804 |   |
| Royalties                                                                                  |   | 3,139                        |   | 3,817 |   | 3,891 |   |
| Other revenues                                                                             |   | 1,931                        |   | 2,195 |   | 1,164 |   |
|                                                                                       |   | 72,761                       |   | 94,774 |   | 102,966 |   |
| Expenses:                                                                                  |   |                         |   |   |   |   |   |
| Research and development                                                                   |   | 25,331                       |   | 27,778 |   | 32,783 |   |
| Marketing and sales                                                                        |   | 17,614                       |   | 17,006 |   | 22,143 |   |
| General and administrative                                                                 |   | 12,685                       |   | 13,252 |   | 17,582 |   |
| Cost of product sales                                                                      |   | 9,887                        |   | 12,388 |   | 14,148 |   |
| Amortization of intangibles and  negative goodwill associated with  acquisitions      |   | —                       |   | (2,961 | ) | 1,013 |   |
| Commissions and royalties                                                                  |   | 1,879                        |   | 1,975 |   | 2,159 |   |
| Write-off of in-process research and  development acquired                                 |   | —                       |   | 45,600 |   | — |   |
|                                                                                       |   | 67,396                       |   | 115,038 |   | 89,828 |   |
|                                                                                       |   |                         |   |   |   |   |   |
| Operating income (loss)                                                                    |   | 5,365                        |   | (20,264 | ) | 13,138 |   |
| Other income (expense), net                                                                |   | 7,376                        |   | (4,929 | ) | 1,642 |   |
|                                                                                       |   |                         |   |   |   |   |   |
| Income (loss) before income taxes and  cumulative effect of change in accounting principle |   | 12,741                       |   | (25,193 | ) | 14,780 |   |
| Income tax expense                                                                         |   | 3,798                        |   | 4,733 |   | 5,063 |   |
| Income (loss) before cumulative effect of  change in accounting principle                  |   | 8,943                        |   | (29,926 | ) | 9,717 |   |
| Cumulative effect of change in accounting  principle, net of income taxes of $4,380   |   | (8,178                       | )      | — |   | — |   |
| Net income (loss)                                                                          |   | $                            | 765    |   | $ | (29,926 | ) | $ | 9,717 |   |
|                                                                                       |   |                         |   |   |   |   |   |
| Earnings (loss) per common share:                                                          |   |                         |   |   |   |   |   |
| Basic:                                                                                     |   |                         |   |   |   |   |   |
| Income (loss) before cumulative effect of  change in accounting principle                  |   | $                            | 0.16   |   | $ | (0.52 | ) | $ | 0.17 |   |
| Cumulative effect of change in accounting  principle                                       |   | (0.15                        | )      | — |   | — |   |
| Net income (loss)                                                                          |   | $                            | 0.01   |   | $ | (0.52 | ) | $ | 0.17 |   |
| Diluted:                                                                                   |   |                         |   |   |   |   |   |
| Income (loss) before cumulative effect of  change in accounting principle                  |   | $                            | 0.15   |   | $ | (0.52 | ) | $ | 0.17 |   |
| Cumulative effect of change in accounting  principle                                       |   | (0.14                        | )      | — |   | — |   |
| Net income (loss)                                                                          |   | $                            | 0.01   |   | $ | (0.52 | ) | $ | 0.17 |   |
| Weighted average number of common and  common equivalent shares:                           |   |                         |   |   |   |   |   |
| Basic                                                                                      |   | 54,320                       |   | 57,230 |   | 58,480 |   |
| Diluted                                                                                    |   | 56,885                       |   | 57,230 |   | 58,659 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

58

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**BIO-TECHNOLOGYGENERAL CORP.**

**CONSOLIDATEDSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**

 

(in thousands)

 
|                                                                |   | **Common  Stock** |   |           |   |                             |   |                     |   |                |    |
|---------------------------------------------------------------------|--------|-------------------|--------|----------------|--------|----------------------------------|--------|--------------------------|--------|---------------------|---------|
|                                                                |   | **Shares**        |   | **Par  Value** |   | **Additional  Paid In  Capital** |   | **Accumulated  Deficit** |   | **Treasury  Stock** |    | **Accumulated  other  comprehensive  income (loss)** |   | **Total  Stockholders’  Equity** |   |
| **Balance, December 31, 1999**                                      |   | 53,280            |   | $              | 533    |                             | $      | 171,270                  |   | $                   | (26,409 | ) | $ | (340 | ) | $ | (4,518 | ) | $ | 140,536 |   |
| Comprehensive income:                                               |   |              |   |           |   |                             |   |                     |   |                |    |   |   |   |   |
| Net income                                                          |   |              |   |           |   |                             |   | 765                      |   |                |    |   |   | 765 |   |
| Unrealized loss on marketable securities, net                       |   |              |   |           |   |                             |   |                     |   |                |    | (1,445 | ) | (1,445 | ) |
| Total comprehensive loss                                            |   |              |   |           |   |                             |   |                     |   |                |    |   |   | (680 | ) |
| Issuance of common stock                                            |   | 345               |   | 3              |   | 1,926                            |   |                     |   |                |    |   |   | 1,929 |   |
| Cancellation of treasury stock                                      |   | (83               | )      | (1             | )      | (339                             | )      |                     |   | 340                 |    |   |   | — |   |
| Tax benefit derived from exercise  of stock options            |   |              |   |           |   | 1,353                            |   |                     |   |                |    |   |   | 1,353 |   |
| Compensation expense in connection with options  modification       |   |              |   |           |   | 1,592                            |   |                     |   |                |    |   |   | 1,592 |   |
| Exercise of stock options                                           |   | 1,223             |   | 12             |   | 7,903                            |   |                     |   |                |    |   |   | 7,915 |   |
| **Balance, December 31, 2000**                                      |   | 54,765            |   | 547            |   | 183,705                          |   | (25,644                  | )      | —              |    | (5,963 | ) | 152,645 |   |
| Comprehensive income:                                               |   |              |   |           |   |                             |   |                     |   |                |    |   |   |   |   |
| Net loss                                                            |   |              |   |           |   |                             |   | (29,926                  | )      |                |    |   |   | (29,926 | ) |
| Unrealized loss on marketable securities, net                       |   |              |   |           |   |                             |   |                     |   |                |    | (1,110 | ) | (1,110 | ) |
| Reclassification adjustment for realized loss  included in net loss |   |              |   |           |   |                             |   |                     |   |                |    | 7,193 |   | 7,193 |   |
| Total comprehensive loss                                            |   |              |   |           |   |                             |   |                     |   |                |    |   |   | (23,843 | ) |
| Issuance of common stock in Myelos acquisition                      |   | 2,345             |   | 23             |   | 19,009                           |   |                     |   |                |    |   |   | 19,032 |   |
| Issuance of common stock                                            |   | 277               |   | 3              |   | 1,994                            |   |                     |   |                |    |   |   | 1,997 |   |
| Tax benefit derived from exercise  of stock options            |   |              |   |           |   | 925                              |   |                     |   |                |    |   |   | 925 |   |
| Compensation expense in connection with options  modification       |   |              |   |           |   | 1,024                            |   |                     |   |                |    |   |   | 1,024 |   |
| Exercise of stock options                                           |   | 873               |   | 9              |   | 5,751                            |   |                     |   |                |    |   |   | 5,760 |   |
| **Balance, December 31, 2001**                                      |   | 58,260            |   | 582            |   | 212,408                          |   | (55,570                  | )      | —              |    | 120 |   | 157,540 |   |
| Comprehensive income:                                               |   |              |   |           |   |                             |   |                     |   |                |    |   |   |   |   |
| Net income                                                          |   |              |   |           |   |                             |   | 9,717                    |   |                |    |   |   | 9,717 |   |
| Unrealized loss on marketable securities, net                       |   |              |   |           |   |                             |   |                     |   |                |    | (280 | ) | (280 | ) |
| Currency translation adjustment                                     |   |              |   |           |   |                             |   |                     |   |                |    | 277 |   | 277 |   |
| Total comprehensive income                                          |   |              |   |           |   |                             |   |                     |   |                |    |   |   | 9,714 |   |
| Issuance of common stock                                            |   | 469               |   | 5              |   | 1,792                            |   |                     |   |                |    |   |   | 1,797 |   |
| Exercise of stock options                                           |   | 4                 |   |           |   | 24_                              |   |                     |   |                |    |   |   | 24 |   |
| **Balance, December 31, 2002**                                      |   | 58,733            |   | $              | 587    |                             | $      | 214,224                  |   | $                   | (45,853 | ) | $ | — |   | $ | 117 |   | $ | 169,075 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

59

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**BIO-TECHNOLOGYGENERAL CORP.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 

(in thousands)

 
|                                                                                      |                                      | **Year Ended  December 31,** |   |
|-------------------------------------------------------------------------------------------|-------------------------------------------|------------------------------|--------|
|                                                                                      |                                      | **2000**                     |   | **2001** |   | **2002** |   |
| **Cash flows from operating activities**:                                                 |                                      |                         |   |   |   |   |   |
| Net income (loss)                                                                         |                                      | $                            | 765    |   | $ | (29,926 | ) | $ | 9,717 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |                                      |                         |   |   |   |   |   |
| Cumulative effect of accounting change, net                                               |                                      | 8,178                        |   | — |   | — |   |
| Deferred income tax                                                                       |                                      | 140                          |   | (3,957 | ) | (837 | ) |
| Depreciation and amortization                                                             |                                      | 2,861                        |   | 2,937 |   | 2,701 |   |
| Write-off of in-process research and  development acquired                                |                                      | —                       |   | 45,600 |   | — |   |
| Compensation expense in connection with  option modification                              |                                      | 1,592                        |   | 1,024 |   | — |   |
| Amortization of negative goodwill and  intangible assets associated with acquisitions     |                                      | —                       |   | (2,961 | ) | 1,013 |   |
| Unrealized loss on investments, net                                                       |                                      | —                       |   | 8,963 |   | — |   |
| Provision for inventory reduction                                                         |                                      | —                       |   | — |   | 976 |   |
| Provision for severance pay                                                               |                                      | 260                          |   | 636 |   | 444 |   |
| Deferred revenues                                                                         |                                      | 3,834                        |   | (1,656 | ) | (1,553 | ) |
| (Gain) loss on disposal of property and  equipment                                        |                                      | (29                          | )      | 10 |   | 354 |   |
| Gain from forward contract                                                                |                                      | —                       |   | — |   | (800 | ) |
| Realized loss on sales of short-term  investments, net                                    |                                      | 446                          |   | 1,735 |   | 14 |   |
| Common stock as payment for services                                                      |                                      | 60                           |   | 70 |   | 70 |   |
| Changes in:                                                                               | accounts receivable                       |                         | (973   | ) | 14,572 |   | (8,265 | ) |
|                                                                                      | inventories                               |                         | (1,256 | ) | (3,875 | ) | (1,202 | ) |
|                                                                                      | prepaid expenses and other current assets |                         | (769   | ) | (405 | ) | (1,284 | ) |
|                                                                                      | accounts payable                          |                         | 174    |   | 5,178 |   | 7,541 |   |
|                                                                                      | other current liabilities                 |                         | (16    | ) | (185 | ) | 305 |   |
| Net cash provided by operating activities                                                 |                                      | 15,267                       |   | 37,760 |   | 9,194 |   |
| **Cash flows from investing activities:**                                                 |                                      |                         |   |   |   |   |   |
| Purchases of short-term investments                                                       |                                      | (48,738                      | )      | (10,407 | ) | (4,706 | ) |
| Capital expenditures                                                                      |                                      | (10,913                      | )      | (23,974 | ) | (15,546 | ) |
| Severance pay funded                                                                      |                                      | 48                           |   | (64 | ) | (398 | ) |
| Other investments                                                                         |                                      | —                       |   | (5,000 | ) | — |   |
| Net proceeds from forward contract                                                        |                                      | —                       |   | — |   | 800 |   |
| Restricted cash                                                                           |                                      | —                       |   | — |   | (1,280 | ) |
| Other assets                                                                              |                                      | 126                          |   | 69 |   | (86 | ) |
| Change in patents                                                                         |                                      | (180                         | )      | — |   | — |   |
| Proceeds from sales of short-term  investments                                            |                                      | 22,177                       |   | 58,416 |   | 43,919 |   |
| Net cash paid in acquisition                                                              |                                      | —                       |   | (15,603 | ) | (95,954 | ) |
| Proceeds from sales of property and  equipment                                            |                                      | 79                           |   | 214 |   | 23 |   |
| Net cash (used in) provided by investing  activities                                      |                                      | (37,401                      | )      | 3,651 |   | (73,228 | ) |
| **Cash flows from financing activities:**                                                 |                                      |                         |   |   |   |   |   |
| Proceeds from issuances of common stock                                                   |                                      | 9,784                        |   | 7,687 |   | 1,751 |   |
| Proceeds from long-term loan                                                              |                                      | 20,000                       |   | — |   | — |   |
| Repayment of long-term debt                                                               |                                      | —                       |   | — |   | (1,234 | ) |
| Net cash provided by financing activities                                                 |                                      | 29,784                       |   | 7,687 |   | 517 |   |
| Effect of exchange rate changes                                                           |                                      | —                       |   | — |   | 277 |   |
| Net increase (decrease) in cash and cash  equivalents                                     |                                      | 7,650                        |   | 49,098 |   | (63,240 | ) |
| Cash and cash equivalents at beginning of  year                                           |                                      | 18,703                       |   | 26,353 |   | 75,451 |   |
| Cash and cash equivalents at end of year                                                  |                                      | $                            | 26,353 |   | $ | 75,451 |   | $ | 12,211 |   |

 

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**BIO-TECHNOLOGYGENERAL CORP.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**(continued)

(in thousands)

 
|                                                                               |   | **Year Ended  December 31,** |   |
|------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                               |   | **2000**                     |   | **2001** |   | **2002** |   |
| **Supplementary information:**                                                     |   |                         |   |   |   |   |   |
| Other information:                                                                 |   |                         |   |   |   |   |   |
| Interest paid                                                                      |   | $                            | 269    |   | $ | 1,044 |   | $ | 587 |   |
| Income taxes paid                                                                  |   | $                            | 4,567  |   | $ | 3,937 |   | $ | 6,777 |   |
| Tax benefit derived from exercise of stock  options                                |   | $                            | 1,353  |   | $ | 925 |   | — |   |
|                                                                               |   |                         |   |   |   |   |   |
| **Acquisitions:**                                                                  |   |                         |   |   |   |   |   |
| Assets acquired                                                                    |   | $                            | — |   | $ | 9,141 |   | $ | 12,632 |   |
| Liabilities assumed                                                                |   | —                       |   | (1,125 | ) | (28,968 | ) |
| Goodwill                                                                           |   | —                       |   | (18,914 | ) | 40,080 |   |
| Intangible assets                                                                  |   | —                       |   | — |   | 80,800 |   |
| Equity issued                                                                      |   | —                       |   | (19,032 | ) | — |   |
| In process research and development  acquired                                      |   | —                       |   | 45,600 |   | — |   |
| Purchase price (including acquisition costs  of $1,387 in 2001 and $5,421 in 2002) |   | —                       |   | 15,670 |   | 104,544 |   |
| Less – accrued acquisition costs                                              |   | —                       |   | — |   | (3,322 | ) |
| Less – cash acquired                                                          |   | —                       |   | (67 | ) | (5,268 | ) |
|                                                                               |   |                         |   |   |   |   |   |
| Net cash paid                                                                      |   | $                            | — |   | $ | 15,603 |   | $ | 95,954 |   |
|                                                                               |   |                         |   |   |   |   |   |
| **Non-cash activity:**                                                             |   |                         |   |   |   |   |   |
| Capital expenditures unpaid as of December  31                                     |   | $                            | — |   | $ | 899 |   | $ | 1,134 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

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# **BIO-TECHNOLOGY GENERAL CORP.**

# **NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

NOTE 1 -ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Bio-TechnologyGeneral Corp. (“BTG”) and its wholly-owned subsidiaries (collectively, the“Company”) are engaged in the research, development, manufacture and marketingof pharmaceutical products that address unmet medical needs in both niche andlarger market segments. The Company distributes its products on a worldwide basisprimarily through a direct sales force in the United States, the United Kingdom(for the Rosemont products) and Israel and primarily through third-partylicense and distribution relationships elsewhere.  Through a combination of internal research and development,acquisitions, collaborative relationships and licensing arrangements, theCompany has assembled a diverse portfolio of therapeutic products, many ofwhich are currently being marketed, several of which are in registration orclinical trials and several of which are in pre-clinical development.

 

BTG and itswholly-owned subsidiary, Bio-Technology General (Israel) Ltd. (“BTG-Israel”),were formed in 1980 to research, develop, manufacture and market productsthrough the application of genetic engineering and relatedbiotechnologies.  On March 19, 2001, BTGacquired Myelos Corporation (“Myelos”), a privately-held biopharmaceuticalcompany focused on the development of novel therapeutics to treat diseases ofthe nervous system.  On September 30,2002 BTG, through its wholly-owned subsidiary Acacia Biopharma Limited(“Acacia”), acquired Rosemont Pharmaceuticals Limited (“Rosemont”), a specialtypharmaceutical company located in the United Kingdom that develops,manufactures and markets pharmaceutical products in oral liquid form.

 

a.             Basis of consolidation:

 

Theconsolidated financial statements include the accounts of BTG, BTG-Israel,Myelos, Acacia and Rosemont.  Results ofoperations and cash flows of Myelos and Rosemont are included in the consolidatedfinancial statements since March 19, 2001 and September 30, 2002, theirrespective dates of acquisition.  Allmaterial intercompany transactions and balances have been eliminated.

 

b.             Reclassifications

 

Certainreclassifications have been made to 2000 and 2001 financial statements toconform to the 2002 presentation.

 

c.             Translation of foreign currency:

 

The functionalcurrency of BTG-Israel is the U.S. dollar. Accordingly, its transactions and balances are remeasured in dollars,and translation gains and losses (which are immaterial for all periodspresented) are included in the statements of operations. The functionalcurrency of Rosemont is the British pound sterling and its translation gainsand losses are included in accumulated other comprehensive income.

 

d.             Cash and cash equivalents:

 

At December31, 2001 and 2002, cash and cash equivalents included cash of $4,334,000 and$10,411,000, respectively, and money market funds, commercial paper and otherliquid short-term debt instruments (with maturities at date of purchaseof ninety days or less) of $71,117,000 and $1,800,000, respectively.  Cash and cash equivalents at December 31,2001 and 2002 include $69,000 and $6,295,000, respectively, denominated incurrencies other than the U.S. dollar.

 

e.             Short-term investments:

 

(i)  Short-term investments, which are carried atfair value, consist primarily of investments in mutual funds and corporatebonds that have been classified as “available-for-sale securities” pursuant toStatement of Financial Accounting Standards (“SFAS”) No. 115 ,*”Accountingfor Certain Investments in Debt and Equity Securities.”*  Unrealized holding gains and losses, whichare deemed to be temporary, on available-for-sale 

 

62

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securities are excluded fromearnings and are reported as a separate component of other comprehensiveincome.  Realized gains and losses fromthe sale of available-for-sale securities are determined on a specific identificationbasis.  A decline in the market value ofan available-for-sale security below cost that is deemed to be other thantemporary is recognized as a charge in the consolidated statement of operationsand a new cost basis for the security is established.

 

At December31, 2001 and 2002, management determined that the decline in the value ofcertain investments was other than temporary and, accordingly, cost was  adjusted to reflect market value and a losson impairment of investment of $7,193,000 and $1,168,000, respectively, wasrecognized and included in the statement of operations in other income(expense), net.

 

At December31, 2001 and 2002, the cost of the securities available for sale was$40,642,000 and $7,147,000, respectively. Total realized and unrealized losses, net, included in other income  (expense), net, for the years ended December31, 2001 and 2002 were  $9,231,000 and$1,181,000, respectively.  There were norealized losses in 2000.

 

(ii)  Cost basis investment included within otherassets at December 31, 2001 and 2002 represents an equity investment of lessthan 20% in a private entity.  Changesin the value of this investment are not recognized unless an impairment isdeemed to be other than temporary (see Note 2c).

 

f.              Inventories:

 

Inventoriesare stated at the lower of cost or market. Cost is determined by using the weighted average method.  At December 31, 2001 and 2002, inventoriesincluded raw materials of $1,706,000 and $2,214,000, work-in-process of$1,137,000 and $3,018,000, and finished goods of $11,297,000 and $11,380,000,respectively.

 

g.             Property and equipment, net ofaccumulated depreciation and amortization:

 

Property andequipment are stated at cost. Depreciation has been calculated using the straight-line methodover the estimated useful lives of the assets, ranging from 3 to 17 years.  Leasehold improvements are amortized overthe lives of the respective leases, which are shorter than the usefullife.  The cost of maintenance andrepairs is expensed as incurred.

 

Land, buildingand construction in progress represents a building under construction and isstated at cost.  This includes cost ofconstruction under the construction contracts, plant and equipment, capitalizedinterest, labor and other direct costs. Interest is capitalized under the provision of SFAS No. 34 *“Capitalizationof Interest Cost”*. Capitalized interest was $339,000, $1,039,000 and $577,000 for the yearsended December 31, 2000, 2001 and 2002, respectively, and totaled $1,378,000and $1,955,000 at December 31, 2001 and 2002, respectively.  Construction in progress is not depreciateduntil such time as the relevant assets are completed and ready for theirintended use.

 

h.             Intangible assets:

 

At December31, 2002, intangible assets consist mainly of developed products, trademarksand several patents acquired in the Rosemont acquisition and are beingamortized, using the straight-line method, over the estimated useful life ofapproximately 20 years.  The estimationof the useful life of the intangible assets was determined by BTG’s management basedon a preliminary independent appraisal and information currentlyavailable.  At December 31, 2001intangibles consist of repurchased rights to one of the Company’s productspreviously licensed to a third party, and are being amortized, using the straight-linemethod over the shorter of the life of the related revenue stream or sevenyears, commencing with the initial sale of the related product.

 

i.              Long-lived assets:

 

The Company’slong-lived assets include property and equipment, intangible assets andgoodwill.

 

As of January 1, 2002 the Company adopted SFAS No. 142, *“Goodwilland Other Intangible Assets”*, which eliminated the amortization ofpurchased goodwill.  As a result, theCompany is no longer amortizing the negative goodwill resulting from the Myelosacquisition.  Under SFAS No. 142, thenegative goodwill

 

63

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balance of $16,028,000 remaining at December 31, 2002 will bemaintained on the balance sheet as a deferred credit until it is either nettedagainst the contingent payments, if any, made to the former Myelos shareholdersor reflected in net income as an extraordinary item should the contingentpayments not become due.  Under SFAS No.142, goodwill is tested annually and more frequently if an event occurs whichindicates the goodwill may be impaired. SFAS No. 142 requires companies to use a fair value approach todetermine whether there is an impairment event.

 

The followingtable presents a reconciliation of net income and earnings per share amounts,as reported in the financial statements, to those amounts adjusted for negativegoodwill amortization, determined in accordance with SFAS No. 142.

 
|                                          |   | **Year ended  December 31,**              |   |
|-----------------------------------------------|--------|-------------------------------------------|--------|
|                                          |   | **2000**                                  |   | **2001** |   | **2002** |   |
|                                          |   | **(in  thousands except per share data)** |   |
| Reported net income (loss)                    |   | $                                         | 765    |   | $ | (29,926 | ) | $ | 9,717 |   |
| Deduct:   negative goodwill amortization |   | —                                    |   | (2,961 | ) | — |   |
| Adjusted net income (loss)                    |   | $                                         | 765    |   | $ | (32,887 | ) | $ | 9,717 |   |
| Basic earnings (loss) per common share:       |   |                                      |   |   |   |   |   |
| As reported                                   |   | $                                         | 0.01   |   | $ | (0.52 | ) | $ | 0.17 |   |
| Negative goodwill amortization                |   | —                                    |   | (0.05 | ) | — |   |
| Adjusted                                      |   | $                                         | 0.01   |   | $ | (0.57 | ) | $ | 0.17 |   |
| Diluted earnings (loss) per common share:     |   |                                      |   |   |   |   |   |
| As reported                                   |   | $                                         | 0.01   |   | $ | (0.52 | ) | $ | 0.17 |   |
| Negative goodwill amortization                |   | —                                    |   | (0.05 | ) | — |   |
| Adjusted                                      |   | $                                         | 0.01   |   | $ | (0.57 | ) | $ | 0.17 |   |

 

As of January1, 2002, the Company adopted SFAS No. 144, *“Accounting for the Impairment or Disposal ofLong-lived Assets”* which supersedes SFAS No. 121, *“Accountingfor the Impairment of Long-lived Assets to be Disposed Of”*.  Under SFAS No. 144, intangible assets otherthan goodwill are reviewed on a periodic basis for impairment whenever eventsor changes in circumstances indicate that the carrying amounts of the assetsmay not be recoverable.  Such events orchanges in circumstances include, but are not limited to:  (a) a significant decrease in the marketprice of a long-lived asset (or asset group); (b) a significant adverse changein the extent or manner in which a long-lived asset (or asset group) is beingused or in its physical condition; (c) a significant adverse change in legalfactors or in the business climate that could affect the value of a long-livedasset (or asset group), including an adverse action or assessment by aregulator; (d) an accumulation of costs significantly in excess of the amountoriginally expected for the acquisition or construction of a long-lived asset(or asset group); (e) a current-period operating or cash flow loss combinedwith a history of operating or cash flow losses or a projection or forecast thatdemonstrates continuing losses associated with the use of a long-lived asset(or asset group); and (f) a current expectation that, more likely than not, along-lived asset (or asset group) will be sold or otherwise disposed ofsignificantly before the end of its previously estimated useful life.  Recoverability of assets to be held and usedis measured by a comparison of the carrying amount of an asset to futureundiscounted net cash flows expected to be generated by the asset.  If such assets are considered to beimpaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets.  The Company’s management believes that nosuch event or change has occurred.  Theadoption of SFAS No. 144 had no effect on the Company.

 

j.              Revenue recognition:

 

Product salesare recognized when the product is shipped and collectability is probable, netof discounts, sales incentives, sales allowances and freight out.

 

Contract feesconsist mainly of license of marketing and distribution rights and research anddevelopment projects.  Effective January1, 2000, the Company adopted Staff Accounting Bulletin 101, *“RevenueRecognition in Financial Statements”* (“SAB 101”), issued by theSecurities and Exchange Commission in December 1999.  As a result, the Company changed the way it recognizes revenuefor up-front nonrefundable contract fees for the license of marketing anddistribution rights. Prior to the issuance of SAB 101, the Company recorded revenuefrom the license of marketing and distribution rights when the rights werelicensed and/or when these payments were received.  In accordance with SAB 101, contract fee revenues are 

 

64

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now being recognized over theestimated term of the related agreements, which range from five to 16years.  Effective January 1, 2000, theCompany recorded a cumulative effect of change in accounting principle relatedto contract revenues recognized in prior years in the amount of $12,558,000,net of income taxes of $4,380,000, of which $853,000, $1,156,000 and $1,146,000was recognized as contract fee revenue in 2000, 2001 and 2002, respectively.

 

Revenuerelated to performance milestones is recognized based upon the achievement ofthe milestone, as defined in the respective agreements, and when collectabilityis probable.  Advance payments receivedin excess of amounts earned are included in deferred revenue.

 

Royalties arerecognized once agreement exists, the sale is made and the royalty is earned.

 

Other revenuesrepresent funds received by the Company for research and development projectsthat are partially funded by collaborative partners and the Chief Scientist ofthe State of Israel, respectively.  TheCompany recognizes revenues upon performance of such funded research.  In general, these contracts are cancelableby the Company’s collaborative partners at any time.

 

k.             Stock-based compensation:

 

At December31, 2002, the Company has stock based compensation plans, which are describedmore fully in Notes 10 and 11.  Aspermitted by SFAS No. 123, *“Accounting for Stock Based Compensation”*,the Company accounts for stock-based compensation arrangements with employeesin accordance with provisions of Accounting Principles Board (“APB”) OpinionNo. 25, *“Accountingfor Stock Issued to Employees”*. Compensation expense for stock options issued to employees is based onthe difference on the date of grant, between the fair value of the Company’sstock and the exercise price of the option. No stock based employee compensation cost is reflected in net incomeupon option grant, as all options granted under those plans had an exerciseprice equal to the market value of the underlying common stock at the date ofgrant.  The Company accounts for equityinstruments issued to nonemployees in accordance with the provisions of SFASNo. 123 and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “*Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in Conjunction With Selling, Goods or Services*”.  All transactions in which goods or servicesare the consideration received for the issuance of equity instruments areaccounted for based on the fair value of the consideration received or the fairvalue of the equity instrument issued, whichever is more reliably measurable.

 

The followingtable illustrates the effect on net income and earnings per share if thecompany had applied the fair value recognition provisions of SFAS No. 123 tostock based compensation:

 
|                                                                                                                                  |   | **Year ended  December 31,**              |   |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                                                                  |   | **2000**                                  |   | **2001** |   | **2002** |   |
|                                                                                                                                  |   | **(in  thousands except per share data)** |   |
| Net income (loss)                                                                                                                     |   |                                      |   |   |   |   |   |
| As reported                                                                                                                           |   | $                                         | 765    |   | $ | (29,926 | ) | $ | 9,717 |   |
| Deduct:                                                                                                                               |   |                                      |   |   |   |   |   |
| Total stock based employee compensation  expense determined under fair value based method for all awards, net of  related tax effects |   | 10,509                                    |   | 13,731 |   | 13,853 |   |
| Pro forma                                                                                                                             |   | $                                         | (9,744 | ) | $ | (43,657 | ) | $ | (4,136 | ) |
| Basic earnings (loss) per common share                                                                                                |   |                                      |   |   |   |   |   |
| As reported                                                                                                                           |   | $                                         | 0.01   |   | $ | (0.52 | ) | $ | 0.17 |   |
| Pro forma                                                                                                                             |   | $                                         | (0.18  | ) | $ | (0.76 | ) | $ | (0.07 | ) |
| Diluted earnings (loss) per common share                                                                                              |   |                                      |   |   |   |   |   |
| As reported                                                                                                                           |   | $                                         | 0.01   |   | $ | (0.52 | ) | $ | 0.17 |   |
| Pro forma                                                                                                                             |   | $                                         | (0.18  | ) | $ | (0.76 | ) | $ | (0.07 | ) |

 

65

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l.              Research and development:

 

All researchand development costs are expensed as incurred.

 

m.            Income taxes:

 

Deferredincome taxes are recognized for the tax consequences of temporary differencesby applying the enacted statutory tax rates to differences between thefinancial statement carrying amounts and the tax bases of existing assets andliabilities and for capital and net operating losses and tax credits carryforward.  When it is not considered morelikely than not that a part or the entire deferred tax asset will be realized,a valuation allowance is recognized.

 

BTG-Israel andRosemont file separate income tax returns and provide for taxes under locallaws.

 

n.             Other comprehensive income (loss):

 

Othercomprehensive income (loss) consists of unrealized gains (losses) on marketablesecurities and currency translation gains (losses) from the translation ofRosemont’s financial statements from British pound sterling to U.S. dollars.

 

o.             Earnings per common share:

 

Net earningsper common share amounts (“basic EPS”) are computed by dividing net earnings bythe weighted average number of common shares outstanding and exclude anypotential dilution.  Net earnings percommon share amounts assuming dilution (“diluted EPS”) are computed byreflecting potential dilution from the exercise of stock options.

 

Areconciliation between the numerators and denominators of the basic and dilutedEPS computations for net earnings is as follows:

 

66

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|                                                                           |   | **Year Ended  December 31, 2000** |   | **Year Ended  December 31, 2001** |   | **Year Ended  December 31, 2002** |   |
|--------------------------------------------------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
|                                                                           |   | **Income  (Numerator)**           |   | **Shares  (Denominator)**         |   | **Per   Share  Amounts**          |   | **Income  (Numerator)** |   | **Shares  (Denominator)** |   | **Per   Share  Amounts** |   | **Income  (Numerator)** |   | **Shares  (Denominator)** |   | **Per   Share   Amounts** |   |
| **(In thousands, except per share data)**                                      |   |                              |   |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net Earnings (Loss)**                                                        |   | $                                 | 765    |                              |   |                              |   |   | $ | (29,926 | ) |   |   |   |   | $ | 9,717 |   |   |   |   |   |
|                                                                           |   |                              |   |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Basic EPS**                                                                  |   |                              |   |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss) attributable to common stock                               |   | 765                               |   | 54,320                            |   | $                                 | 0.01   |   | (29,926 | ) | 57,230 |   | $ | (0.52 | ) | 9,717 |   | 58,480 |   | $ | 0.17 |   |
|                                                                           |   |                              |   |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Effect of Dilutive Securities**                                              |   |                              |   |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options                                                                  |   |                              |   | 2,565                             |   |                              |   |   |   | — |   |   |   |   |   | 179 |   |   |   |
|                                                                           |   |                              |   |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Diluted EPS**                                                                |   |                              |   |                              |   |                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss) attributable to common stock  and assumed option exercises |   | $                                 | 765    |                              | 56,885 |                              | $      | 0.01 |   | $ | (29,926 | ) | 57,230 |   | $ | (0.52 | ) | $ | 9,717 |   | 58,659 |   | $ | 0.17 |   |

 

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Options to purchase 732,000 and 6,989,000 shares of common stock out ofthe total number of options outstanding as of December 31, 2000 and 2002,respectively, are not included in the computation of diluted EPS because oftheir anti-dilutive effect.  In 2001 alloptions outstanding as of December 31, 2001 are excluded from the computationof diluted EPS because of their anti-dilutive effect.

 

p.             Use of estimates in preparation offinancial statements:

 

Thepreparation of financial statements in conformity with generally acceptedaccounting principles in the United States of America, requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  On anongoing basis, we evaluate our estimates, including those related toinvestments, accounts receivable, inventories, property and equipment,intangible assets and income taxes.  Webase our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying value of assetsand liabilities that are not readily apparent from other sources.  Results may differ from these estimates dueto actual outcomes being different from those on which we based ourassumptions.

 

q.             Fair value of financialinstruments:

 

The carryingamounts of accounts receivable and accounts payable approximate fair value dueto the short-term maturity of these instruments.  The carrying amount of the long-term debt approximates fairvalue as the borrowing rates are variable and are currently available for debtwith similar terms and maturities.

 

r.              Concentration of credit risk:

 

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist principally of cash and cash equivalents, short-term investmentsand accounts receivable.  The Companyplaces its cash and cash equivalents and short-term investments with highquality financial institutions and limits the amount of credit exposure to anyone institution.  Concentration ofcredit risk with respect to accounts receivable is discussed in Note 13.  Generally, the Company does not requirecollateral from its customers; however, collateral or other security foraccounts receivable may be obtained in certain circumstances when considerednecessary.

 

s.             New accounting pronouncements:

 

In June 2001,the FASB issued SFAS No. 143, *“Accounting for Asset Retirement Obligations”*.SFAS No. 143 addresses accounting and reporting for obligations associated withthe retirement of tangible long-lived assets and the associated assetretirement costs.  This statement iseffective for fiscal years beginning after June 15, 2002.  The Company is currently assessing theimpact of this new standard, although it does not expect it to affect itsresults of operations.

 

In July 2002,the FASB issued SFAS No. 146, *“Accounting for Costs Associated with Exit orDisposal Activities”*.  SFASNo. 146 requires companies to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of commitment to anexit or disposal plan.  SFAS No. 146will be applied to exit or disposal activities after December 31, 2002 and isnot expected to have a material effect on the Company’s financial position orresults of operations.

 

In December2002, the FASB issued Statement 148, *“Accounting for Stock-Based Compensation—Transitionand Disclosure:  an amendment of FASBStatement 123 (SFAS 123)”*, to provide alternative transition methodsfor a voluntary change to the fair value based method of accounting forstock-based employee compensation.  Inaddition, SFAS 148 amends the disclosure requirements of SFAS 123 to requireprominent disclosures in annual financial statements about the method ofaccounting for stock-based employee compensation and the pro forma effect onreported results of applying the fair value based method for entities that usethe intrinsic value method of accounting. The pro forma effect disclosures are also required to be prominentlydisclosed in interim period financial statements.  This statement is effective for financial statements for fiscalyears ending after December 15, 2002 and is effective for financial reportscontaining 

 

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condensed financial statementsfor interim periods beginning after December 15, 2002, with earlier applicationpermitted.  BTG does not plan a changeto the fair value based method of accounting for stock-based employeecompensation and has included the disclosure requirements of SFAS 148 in theaccompanying financial statements.

 

In November2002, FASB Interpretation 45, *“Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others”*(“FIN 45”), was issued.  FIN 45 requiresa guarantor entity, at the inception of a guarantee covered by the measurementprovisions of the interpretation, to record a liability for the fair value ofthe obligation undertaken in issuing the guarantee.  BTG previously did not record a liability when guaranteeingobligations unless it became probable that BTG would have to perform under theguarantee.  FIN 45 applies prospectivelyto guarantees BTG issues or modifies subsequent to December 31, 2002, but hascertain disclosure requirements effective for interim and annual periods endingafter December 15, 2002.  BTG has notyet determined the effects of FIN 45 on its financial statements.  Disclosures required by FIN 45 are includedin the accompanying financial statements.

 

NOTE 2 –ACQUISITIONS AND INVESTMENTS

 

(a)           Acquisition of RosemontPharmaceuticals Limited

 

On September30, 2002, BTG, through its wholly-owned subsidiary Acacia Biopharma Limited,completed the acquisition of all of the stock of Rosemont, a subsidiary of AkzoNobel N.V.  Rosemont is a leader in theUnited Kingdom market for oral liquid formulations of branded non-proprietarydrugs.  The purchase price (includingacquisition costs of approximately $5,421,000) for Rosemont, which was fundedfrom BTG’s cash on hand, was approximately $104,544,000, excluding Rosemont’scash balances.

 

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Theacquisition has been accounted for under the purchase method ofaccounting.  The aggregate purchaseprice of $104,544,000 is being allocated based on the estimates of the fairvalue of the tangible and intangible assets acquired and liabilities assumed asfollows (in thousands):

 
| Assets Acquired:                                    |   |    |    |
|-----------------------------------------------------|--------|---------|---------|
| Current assets (including cash acquired of  $5,268) |   | $       | 10,924  |   |
| Fixed assets                                        |   | 1,708   |    |
| Intangibles                                         | 80,800 |    |
| Goodwill                                            |   | 40,080  |    |
|                                                |   |    |    |
| Liabilities Assumed:                                |   |    |    |
| Current liabilities                                 |   | (4,728  | )       |
| Deferred tax liabilities                            |   | (24,240 | )       |
|                                                |   |    |    |
| Total Purchase Price                                |   | $       | 104,544 |   |

 

The estimation of the fair value of assets acquired and liabilitiesassumed was determined by BTG’s management based on a preliminary independentappraisal and information currently available. BTG is in the process of completing the evaluation of certain acquiredassets, as well as certain intangibles. Accordingly, the allocation of the purchase price is subject torevisions.  Intangible assets consistprimarily of developed products and will be amortized, using the straight-linemethod, over the estimated useful life of approximately 20 years.  The estimation of the useful life of theintangible assets was determined by BTG’s management based on a preliminaryindependent appraisal and information currently available.  BTG is in the process of completing theuseful life assessment and, accordingly, it is subject to revision.

 

Intangibleassets consist of developed products, trademarks and one patent and are beingamortized, using the straight-line method, over the estimated useful life ofapproximately 20 years.  The estimationof the useful life of the intangible assets was determined by BTG’s managementbased on an independent appraisal and information currently available.

 

The accompanyingconsolidated financial statements include the assets and liabilities ofRosemont as of December 31, 2002 and its result of operation for the threemonths ended December 31, 2002 but exclude the results of Rosemont for allother periods presented.  The followingunaudited pro forma consolidated results of operations for the years endedDecember 31, 2001 and 2002 ** **wasprepared assuming the acquisition of Rosemont occurred on January 1, 2001.  The pro forma results of operations are notnecessarily indicative of the consolidated results that actually would haveoccurred if the acquisition had been consummated at January 1, 2001, nor dothey purport to represent the results of operations for future periods.

 
|                       |   | **Year Ended  December 31,**              |   |
|----------------------------|--------|-------------------------------------------|--------|
|                       |   | **(Unaudited)**                           |   |
|                       |   | **(in  thousands except per share data)** |   |
|                       |   | **2001**                                  |   | **2002** |   |
|                       |   | **As  Reported**                          |   | **Pro Forma** |   | **As  Reported** |   | **Pro Forma** |   |
| Total revenues             |   | $                                         | 94,774 |   | $ | 113,272 |   | $ | 102,966 |   | $ | 119,094 |   |
| Net income (loss)          |   | (29,926                                   | )      | (27,442 | ) | 9,717 |   | 13,059 |   |
| Earnings (loss) per common |   |                                      |   |   |   |   |   |   |   |
| share:                     |   |                                      |   |   |   |   |   |   |   |
| Basic                      |   | $                                         | (0.52  | ) | $ | (0.48 | ) | $ | 0.17 |   | $ | 0.22 |   |
| Diluted                    |   | $                                         | (0.52  | ) | $ | (0.48 | ) | $ | 0.17 |   | $ | 0.22 |   |

 

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In connectionwith the acquisition, BTG entered into a forward contract for the delivery ofthe £64,000,000 purchase price on September 30, 2002 at a cost of $99,123,200(representing an exchange rate of $1.5488 per £1).  The exchange rate at the acquisition closing date was $1.5614 per£1.  In accordance with SFAS No. 133 “*Accountingfor Derivative Instruments and Hedging Activities*”, which prohibitshedge accounting for a hedge of an anticipated business combination, BTGrecorded a gain of approximately $800,000 on the forward contract, which gainis included in other income (expense), net.

 

(b)           Acquisition of Myelos Corporation

 

On March 19,2001, the Company acquired Myelos, a privately-held biopharmaceutical companyfocused on the development of novel therapeutics to treat diseases of thenervous system.  Under the terms of theacquisition agreement, the Company paid Myelos shareholders $35,000,000 in acombination of cash and stock ($14,000,000 in cash and $21,000,000 through theissuance of approximately 2,344,700 shares of the Company’s common stock (basedon a per share value of $8.9564, representing the average closing price of  the Company’s common stock for the 20trading day period ending one day prior to February 21, 2001, the date theacquisition agreement was executed)). In addition, the Company has agreed to pay the Myelos shareholders anadditional $30,000,000 if the Company is able to file a New Drug Applicationwith respect to Prosaptide to treat neuropathic pain or neuropathy, of which atleast $14,000,000 will be paid through the issuance of shares of Company commonstock.  The remaining $16,000,000 can bepaid, at the Company’s option, in cash, shares of Company common stock or acombination thereof.  The Company hasalso agreed that if Prosaptide is approved by the United States Food and DrugAdministration for the treatment of neuropathic pain or neuropathy, the Companywill pay the Myelos shareholders 15% of net sales of Prosaptide during the 12month period beginning on the earlier of (i) the 25th full monthafter commercial introduction of Prosaptide in the United States for thetreatment of neuropathic pain or neuropathy and (ii) April 1, 2010. At least50% of this payment must be in shares of Company common stock, with theremainder payable, at the Company’s option, in cash, shares of Company commonstock or a combination thereof.  In noevent is the Company required to issue more than 10,962,000 shares of itscommon stock; any equity required to be issued in excess of that amount will beissued in shares of Company preferred stock. The preferred stock would be non-voting, non-convertible,non-transferable, non-dividend paying (except to the extent a cash dividend ispaid on the Company common stock), with no mandatory redemption for a period of20 years and one day from the closing date of the acquisition, and a right toshare in proceeds in liquidation, up to the liquidation amount.

 

Thetransaction was treated as a “purchase” for accounting purposes.  The purchase price for accounting purposeswas approximately $34,387,000 (including acquisition costs of $1,387,000),based on a value for the approximately 2,344,700 shares of Company common stockissued in the acquisition of $8.1172, representing the average closing price ofthe Company’s common stock for the four day period preceding February 21, 2001,  the date the terms of the acquisition wereagreed to.  In connection with themerger and based on an independent valuation, the Company allocated $45,600,000to in-process research and development projects of Myelos, representing theestimated fair value based on risk-adjusted cash flows of the acquiredtechnology.  At the date of the merger,the technology acquired in the acquisition was not fully commercially developedand had no alternative future uses. Accordingly, the value was expensed as of the acquisition date.  The Company recorded negative goodwill of$18,989,000 on its balance sheet, primarily because the amount written off asin-process research and development acquired exceeded the purchase price foraccounting purposes.  During 2001 thisnegative goodwill was being amortized over its expected useful life of fiveyears.  In accordance with SFAS No. 142,amortization of the negative goodwill ceased beginning January 1, 2002, and thebalance remaining will be maintained as a deferred credit until it is either nettedagainst the contingent payments or reflected in net income as an extraordinaryitem should the contingent payments not become due because the technology didnot meet the milestones that trigger payment.

 

The Companyallocated values to the in-process research and development based on anindependent valuation of the research and development project.  The value assigned to these assets wasdetermined by estimating the costs to develop the acquired technology into acommercially viable product, estimating the resulting net cash flows from theproduct, and discounting the net cash flows to their present value.  The revenue projection used to value thein-process research and development was based on estimates of relevant marketsize and growth factors, expected trends in technology, and the nature andexpected timing of new product introductions by the Company and itscompetitors.  The resulting net cashflows from such product are based on management’s estimates of cost of sales,operating expenses and income taxes from such product.  The Company believes that the assumptionsused in the forecasts were reasonable at the time of the merger.  No assurance can be given, however, that theunderlying assumptions used to estimate sales, development costs or profitability,or the events associated with such product, will transpire as estimated.  For these reasons,

 

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actual results may vary fromprojected results.  The most significantand uncertain assumptions relating to the in-process research and developmentrelate to the ability to successfully develop a product and the projectedtiming of completion of, and revenues attributable to, that product.

 

(c)           Investment in OmrixBiopharmaceuticals, Inc.

 

In January 2001,in order to obtain a period of exclusivity to negotiate a possible strategicrelationship with Omrix Biopharmaceuticals, Inc., the Company loaned $2,500,000to Omrix and agreed to convert the loan into, and to purchase an additional$2,500,000 of, shares of Omrix preferred stock if it did not pursue arelationship.  The Company determinednot to pursue a strategic relationship with Omrix, and on March 31, 2001converted the existing loan into, and purchased an additional $2,500,000 of,shares of Omrix preferred stock, which are convertible into approximately 4.5%of Omrix common stock (on a fully-diluted basis).  This investment is carried at cost and is included as a componentof other long-term assets. Omrix is a privately-held company that develops andmarkets a unique surgical sealant and a number of immunology products based onblood plasma processing technology. Omrix currently sells its products in Europe, South America and theMiddle East.

 

During thefourth quarter of 2001, the Company determined that the decline in the value ofits investment in Omrix was other than temporary and, accordingly, wrote downthe value of this investment by $3,000,000 based on management’s evaluation ofcurrent market conditions and Omrix’s operations and forecasts. The write-downis included in the year ended December 31, 2001 as a component of other income(expense), net.  Based on the currentinformation available regarding Omrix, management believes the current carryingvalue of its investment in Omrix is appropriate.

 

NOTE 3 -PROPERTY AND EQUIPMENT, NET

 
|                                             |   | **December  31,**   |   |
|--------------------------------------------------|--------|---------------------|--------|
|                                             |   | **2001**            |   | **2002** |   |
|                                             |   | **(in  thousands)** |   |
| Laboratory and manufacturing equipment(1)        |   | $                   | 28,098 |   | $ | 37,482 |   |
| Office equipment(2)                              |   | 4,842               |   | 7,108 |   |
| Air conditioning and other                       |   | 4,613               |   | 4,734 |   |
| Leasehold improvements                           |   | 8,054               |   | 10,026 |   |
|                                             |   | 45,607              |   | 59,350 |   |
| Land, building and construction in progress  (3) |   | 29,265              |   | 39,152 |   |
|                                             |   | 74,872              |   | 98,502 |   |
| Accumulated depreciation and amortization        |   | (23,813             | )      | (31,906 | ) |
| Total                                            |   | $                   | 51,059 |   | $ | 66,596 |   |

 

----

(1)                                  Includes $8,784,000and $10,984,000 of equipment not placed in use at December 31, 2001 and 2002,respectively, and therefore no depreciation and amortization has beenaccumulated.

(2)                                  Includes $2,327,000and $2,599,000 of equipment not placed in use at December 31, 2001 and 2002,respectively, and therefore no depreciation and amortization has beenaccumulated.

(3)                                  The related asset,which is a production facility in Israel intended to meet FDA GMP requirements,is not ready for its intended use and therefore no depreciation andamortization has been accumulated as of December 31, 2002.  Includes $2,815,000 and $9,837,000 ofcapitalized interest, labor and other costs as of December 31, 2001 and 2002,respectively which in 2002 includes increased validation costs.  This balance includes $6,500,000 of land andbuilding costs (including local taxes and legal fees) associated with thisfacility.

 

Themanufacture of each product at the new Israeli manufacturing facility must beapproved by applicable regulatory authorities, including the FDA for productsshipped to the U.S., prior to the resumption of manufacturing of that productat the new facility.  As a result of theviolence in Israel in recent years, the FDA has from time to time suspended itsinspections in Israel.

 

Depreciationexpense was approximately $1,982,000, $2,295,000 and $2,474,000 for the yearsended December 31, 2000, 2001 and 2002, respectively.

 

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NOTE 4 -ACQUIRED INTANGIBLE ASSETS

 

The followingsummarizes the carrying amounts of acquired intangible assets and relatedamortization.

 
|                            |   | **As of  December 31, 2002** |   |
|---------------------------------|--------|------------------------------|--------|
|                            |   | **Gross  Carrying  Amount**  |   | **Accumulated  Amortization** |   |
|                            |   | **(in  thousands)**          |   |
| Amortized intangible assets:    |   |                         |   |   |   |
| Developed products              |   | $                            | 76,700 |   | $ | 959 |   |
| Trademarks                      |   | 3,300                        |   | 41 |   |
| Patents                         |   | 891                          |   | 13 |   |
| Total                           |   | $                            | 80,891 |   | $ | 1,013 |   |
| Unamortized intangible assets:  |   |                         |   |   |   |
| Goodwill                        |   | $                            | 40,080 |   |   |   |
| Amortization expense:           |   |                         |   |   |   |
| For year ended 12/31/02         |   | $                            | 1,013  |   |   |   |
| Estimated amortization expense: |   |                         |   |   |   |
| For year ending 12/31/03        |   | $                            | 4,050  |   |   |   |
| For year ending 12/31/04        |   | $                            | 4,050  |   |   |   |
| For year ending 12/31/05        |   | $                            | 4,050  |   |   |   |
| For year ending 12/31/06        |   | $                            | 4,050  |   |   |   |
| For year ending 12/31/07        |   | $                            | 4,050  |   |   |   |

 

NOTE 5 -OTHER CURRENT LIABILITIES

 
|                            |   | **December  31,**  |   |
|---------------------------------|--------|--------------------|--------|
|                            |   | **2001**           |   | **2002** |   |
|                            |   | **(in thousands)** |   |
| Salaries and related expenses   |   | $                  | 3,836  |   | $ | 5,639 |   |
| Accrued subcontracting payable  |   | 3,516              |   | 5,235 |   |
| Governmental and state agencies |   | 875                |   | 4,133 |   |
| Legal and professional fees     |   | 978                |   | 720 |   |
| Royalties and commissions       |   | 1,512              |   | 932 |   |
| Other                           |   | 451                |   | 361 |   |
|                            |   | $                  | 11,168 |   | $ | 17,020 |   |

 

NOTE 6 -SEVERANCE PAY

 

BTG-Israelparticipates in a defined contribution pension plan and makes regular depositswith a pension fund to secure pension rights on behalf of some of itsemployees.  The custody and managementof the amounts so deposited are independent of the Company and accordingly suchamounts funded (included in expenses on an accrual basis) and relatedliabilities are not reflected in the balance sheets.  The Company’s obligation for severance pay, in addition to theamount funded, is included within long-term liabilities in the accompanyingconsolidated balance sheets.

 

In respect ofits other employees, BTG-Israel purchases individual insurance policiesintended to cover its severance obligations. The amount funded in the insurance policy and its obligation forseverance pay to

 

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those employees are reflectedin the consolidated balance sheets as severance pay funded and severance pay,respectively.

 

The liabilityof the Company for severance pay is calculated on the basis of the latestsalary paid to its employees and the length of time they have worked for theCompany.  The liability is covered bythe amounts deposited, including accumulated income thereon, as well as by theunfunded liability.

 

Expenserelated to severance and pension pay for the years ended December 31, 2000,2001 and 2002 were $1,434,000, $1,648,000 and $1,297,000, respectively.

 

NOTE 7 -LONG-TERM DEBT

 

In June 2000the Company entered into a $20,000,000 credit facility with Bank Hapoalim B.M.to finance a portion of the cost of completing its new productionfacility.  Loans under the creditfacility, which is secured by the assets of BTG-Israel and has been guaranteedby the Company,  bear interest at therate of LIBOR plus 1%.    At December31, 2001 and 2002 the Company had long-term borrowings of $20,000,000 and$18,889,000, respectively, outstanding under the credit facility, of which$1,111,000 and $6,667,000, respectively, are included in current portion oflong-term debt.  At December 31, 2002,the loans are at an average interest rate of approximately 2.5% and theprincipal is payable as follows: in 2003 - $6,667,000; in 2004 - $6,667,000;and in 2005 - $5,555,000.

 

NOTE 8-COMMITMENTS AND CONTINGENT LIABILITIES

 

a.             BTG’s administrative offices arelocated in East Brunswick, New Jersey, where it has leased approximately 53,000square feet of office space.  The leasehas a base average annual rental expense of approximately $1,728,000 andexpires in March 2013.  There are twofive year renewal options.  Inconnection with this lease arrangement, the Company was required to provide asecurity deposit by way of an irrevocable letter of credit for $1,280,000,which amount is reflected in other assets on the balance sheet at December 31,2002. In addition, BTG leases approximately 2,000 square feet in New York Cityfor its business activities, including its investor and public relationsactivities.  This lease expires in September2003.  BTG also leases approximately10,000 square feet of space in San Diego, California, where our PROSAPTIDEresearch is being conducted.  This leaseexpires in October 2004.

 

BTG has aresearch, development and manufacturing facility located in Rehovot, Israel,where BTG-Israel leases approximately 95,000 square feet at an annual rental ofapproximately $995,000.  This leaseexpires in December 2005.

 

Rosemont’sdevelopment and manufacturing facility is located in Leeds, U.K., where itleases approximately 41,000 square feet at an annual rental of approximately$270,000.  The lease for 6,000 squarefeet expires in December 2003; the lease for 4,000 square feet expires in April2004 and the remainder of 31,000 square feet expires in December 2004.

 

Rent expensewas approximately $1,787,000, $1,830,000 and $2,223,000 for the years endedDecember 31, 2000, 2001 and 2002, respectively.

 

The futureannual minimum rentals (exclusive of amounts for real estate taxes,maintenance, etc.) for each of the  following years are: 2003-$3,176,000; 2004-$3,026,000;2005-$2,723,000; 2006-$1,728,000; 2007-$1,728,000; and 2008 until2013-$9,069,000.  There is also a bankguarantee outstanding in favor of the lessor of the Israeli facility for$458,000 secured by the assets of BTG-Israel.

 

b.             The Company is obligated, forproducts resulting from research and development projects partially funded bythe Chief Scientist, to pay royalties to the Israeli government of 3%-5% oncommercial sales, if any, of these products if produced in Israel up to theamount so funded, or royalties of 4%-6% if produced outside Israel up to120%-300% of the amount so funded.  Asof December 31, 2002, the Company is obligated to repay to the Chief Scientist,out of revenue from future product sales, a minimum of $5,241,000 of researchand development funding for products that are currently being sold and aminimum of $7,644,000 of research and development funding for productscurrently under development if these products will be sold. During the yearsended December 31, 2000, 2001 and 2002, the Company recognized approximately$529,000, $304,000 and $258,000, respectively, as royalties to the ChiefScientist.

 

The Company isalso committed to pay royalties on future sales, if any, of certain of itsproducts to licensees from which the Company licensed these products.

 

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c.             At December 31, 2002, the Companyhad employment agreements with seven senior officers.  Under these agreements, the Company has committed to totalaggregate base compensation per year of approximately $2,117,000  plus other normal customary fringe benefitsand bonuses.  These employment agreementsgenerally have a term of three years and are automatically renewed for successiveone-year periods unless either party gives the other notice of non-renewal.

 

d.             The Company has receivednotification of claims filed that certain of its products may infringe certainthird-party patents in the normal course of operations.  Management believes that these claims haveno merit, and the Company intends to defend them vigorously and does not expectsignificant adverse impact on its financial position, results of operations orcash flows as a result of the outcome. However, were an unfavorable ruling to occur in any subsequent period,there exists the possibility of a material adverse impact on the operatingresults.  No accrual can be determinedat this time.

 

e.             On December 20, 2002, a purportedshareholder class action was filed against the Company and three of itsofficers.  The action is pending underthe caption A.F.I.K. Holding SPRL v. Fass, No. 02-6048 (HAA) inthe U.S. District Court for the District of New Jersey and alleges violationsof Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  Plaintiff purports to represent a class ofshareholders who purchased shares of the Company between April 19, 1999 andAugust 2, 2002.  The complaint assertsthat the Company’s financial statements were materially false and misleadingbecause the Company restated its earnings and financial statements for theyears ended 1999, 2000 and 2001, as reflected in the Company’s Form 8-K andaccompanying press release issued August 2, 2002.  Five virtually identical actions were filed in January andFebruary 2003.  Plaintiffs have moved toconsolidate the actions and to appoint a lead plaintiff and lead counsel inaccordance with the Private Securities Litigation Reform Act.

 

On January 23,2003, a purported shareholder derivative action was filed on behalf of theCompany against nine of the Company’s officers and directors, the Company’sformer auditor, Arthur Andersen, and the Company as a nominal defendant. The allegations in the derivative action are substantially similar tothe allegations in the purported shareholder class actions.  The derivative action is pending under thecaption Nelson v. Conrad, No. 7-794-03, in the Superior Court ofNew Jersey, Middlesex County.  A secondpurported shareholder derivative action, Millet v. Conrad, No.L-1275-03, was filed on February 14, 2003 and is pending in the same court.

 

The Companyintends to vigorously defend against all allegations of wrongdoing.  The Company has referred these claims to itsdirectors and officers insurance carrier, which has reserved its rights as tocoverage with respect to these actions.

 

f.              The Company is obligated undercertain circumstances to indemnify certain customers for certain or allexpenses incurred and damages suffered by them as a result of any infringement ofthird-party patents.  In addition theCompany is obligated to indemnify its officers and directors against allreasonable costs and expenses related to stockholder and other claimspertaining to actions taken in their capacity as officers and directors whichare not covered by the Company’s directors and officers’ insurance policy.  These indemnification obligations are in theregular course of business and in most cases do not include a limit on amaximum potential future payments, nor are there any recourse provisions orcollateral that may offset the cost.  Asof December 31, 2002, the Company has not recorded a liability for anyobligations arising as a result of these indemnification obligations.

 

NOTE 9 -STOCKHOLDERS’ EQUITY

 

In 1998 theCompany adopted a stockholder rights plan intended to deter hostile or coerciveattempts to acquire the Company.  Underthe plan, if any person or group acquires more than 20% of the Company’s commonstock without approval of the Board of Directors under specified circumstances,the Company’s other stockholders have the right to purchase shares of theCompany’s common stock, or shares of the acquiring company, at a substantialdiscount to the public market price. The stockholder rights plan is intended to ensure fair value to allstockholders in the event of an unsolicited takeover offer.

 

As discussedin Note 2(b), BTG may be obligated to issue additional shares of common stockto the former shareholders of Myelos.

 

75

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NOTE 10 -STOCK OPTIONS

 

In the yearsended December 31, 2000, 2001 and 2002, the Company issued 1,223,000 shares,873,000 shares and 4,000 shares, respectively, of the Company’s common stockupon the exercise of outstanding stock options and received proceeds of$7,915,000, $5,760,000 and $24,000 respectively.

 

In 1992 theCompany adopted the Bio-Technology General Corp. 1992 Stock Option Plan (the“1992 Stock Option Plan”).  The 1992Stock Option Plan permits the granting of options to purchase up to anaggregate of 12,000,000 shares of the Company’s common stock to key employees(including employees who are directors) and consultants of the Company.  Under the 1992 Stock Option Plan, theCompany may grant either incentive stock options, at an exercise price of notless than 100% of the fair market value of the underlying shares on the date ofgrant, or non-qualified stock options, at an exercise price not less than thepar value of the common stock on the date of grant.  Options generally become exercisable ratably over two orfour-year periods, with unexercised options expiring after the earlier of 10years or shortly after termination of employment.  No further options can be issued under the 1992 Plan.

 

In 2001 theCompany adopted the 2001 Stock Option Plan (the “2001 Stock Option Plan”).  The 2001 Stock Option Plan permits thegranting of options to purchase up to an aggregate of 10,000,000 shares of theCompany’s common stock to employees (including employees who are directors) andconsultants of the Company.  Under the2001 Stock Option Plan, the Company may grant either incentive stock options,at an exercise price of not less than 100% of the fair market value of theunderlying shares on the date of grant, or non-qualified stock options, at an exerciseprice not less than 85% of the fair market value of the underlying shares onthe date of grant.  Options generallybecome exercisable ratably over two or four-year periods, with unexercisedoptions expiring after the earlier of 10 years or shortly after termination ofemployment.  Terminated options areavailable for reissuance.  Under thisplan, 7,805,000 shares remain available for future grant at December 31, 2002.

 

The Companyalso established a Stock Option Plan for New Directors (the “New DirectorPlan”) that, upon an individual’s initial election or appointment to the Boardof Directors, provides for the grant of an option to purchase 20,000 shares ofcommon stock at an exercise price equal to the market value of the common stockon the date of grant.  Options becomeexercisable over a three-year period. The New Director Plan expired January 29, 2000, although previouslygranted options remain outstanding.

 

In June 1997the Company adopted the Bio-Technology General Corp. 1997 Stock Option Plan forNon-Employee Directors (the “Directors Plan”). The Directors Plan provides that each non-employee director willautomatically receive an option to purchase 7,500 shares of the Company’scommon stock on each date such person is re-elected a director of theCompany.  The exercise price of eachoption is equal to the market value of the common stock on the date ofgrant.  Options become exercisable overa three-year period.  An aggregate of500,000 shares of common stock has been reserved for issuance under theDirectors Plan.  The Board of Directorsterminated the Directors Plan in February 2002, and instead provided that eachnon-employee director would receive under the 2001 Stock Option Plan an optionto purchase 5,000 shares of the Company’s common stock on the last business dayof each quarter, commencing with the quarter ended March 31, 2002.  The exercise price of each option is equal to the market value of the commonstock on the date of grant, and options become fully exercisable on the first anniversaryof the date of grant.

 

76

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Transactionsunder the 1992 Stock Option Plan, the 2001 Stock Option Plan, the New DirectorPlan and the Directors Plan during 2000, 2001 and 2002 were as follows:

 
|                                            |   | **Year ended  December 31,** |   |
|-------------------------------------------------|--------|------------------------------|--------|
|                                            |   | **2000**                     |   | **2001** |   | **2002** |   |
|                                            |   | **Shares  (‘000s)**     |   | **Weighted  Average  Exercise  Price** |   | **Shares  (‘000s)** |   | **Weighted  Average  Exercise  Price** |   | **Shares  (‘000s)** |   | **Weighted  Average  Exercise  Price** |   |
|                                            |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Options outstanding at beginning of year        |   | 7,487                        |   | $ | 7.38 |   | 7,037 |   | $ | 8.39 |   | 7,917 |   | $ | 9.47 |   |
| Granted                                         |   | 1,506                        |   | 11.85 |   | 2,095 |   | 11.89 |   | 1,730 |   | 4.93 |   |
| Exercised                                       |   | (1,223                       | )      | 6.47 |   | (873 | ) | 6.59 |   | (4 | ) | 5.94 |   |
| Terminated                                      |   | (733                         | )      | 8.39 |   | (342 | ) | 9.42 |   | (1,070 | ) | 9.59 |   |
| Options outstanding at end of year              |   | 7,037                        |   | 8.39 |   | 7,917 |   | 9.47 |   | 8,573 |   | 8.54 |   |
|                                            |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Exercisable at end of year                      |   | 2,706                        |   |   |   | 4,319 |   |   |   | 4,941 |   |   |   |
| Weighted average fair value of options  granted |   |                         |   | 7.62 |   |   |   | 7.65 |   |   |   | 3.21 |   |
|                                                 |        |                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Under SFAS No.123, the fair value of each option is estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted averageassumptions used for grants in 2000, 2001 and 2002: (i) expected life of optionof seven years; (ii) dividend yield of 0%; (iii) expected volatility of 59%,62% and 64%; and (iv) risk-free interest rate of 5.62%, 3.50% and 3.50%,respectively.

 

Of the8,573,000 options outstanding as of December 31, 2002:

 

•  2,762,000 have exercise prices between $2.10and $6.89 with a weighted average exercise price of $4.91 and a weightedaverage remaining contractual life of 7.01 years.  Of these 2,762,000 options, 1,399,000 are exercisable; theirweighted average exercise price is $5.29.

 

•  2,811,000 options have exercise pricesbetween $7.00 and $9.87 with a weighted average exercise price of $7.83 and aweighted average remaining contractual life of 5.52 years.  Of these 2,811,000 options, 2,372,000 areexercisable; their weighted average exercise price is $7.87.

 

•  3,000,000 options have exercise pricesbetween $10.25 and $20.44 with a weighted average exercise price of $12.54 anda weighted average remaining contractual life of 7.60 years.  Of these 3,000,000 options, 1,170,000 areexercisable; their weighted average exercise price is $12.64.

 

During 2000and 2001 the Company made modifications to the period of vesting andexercisability of approximately 446,000 stock option awards and 273,000 stockoption awards, respectively, for certain employees in connection with thetermination of their employment and post-employment consultingarrangements.  As a result, the Companyrecognized stock compensation expense of $1,592,000 and $1,024,000 during 2000and 2001, respectively and were primarily included in research and developmentexpenses.

 

NOTE 11 -  EMPLOYEE BENEFITS

 

(a)           Employee Stock Purchase Plan

 

In April 1998,the Company adopted the 1998 Employee Stock Purchase Plan (the “1998 ESPP”).The 1998 ESPP is qualified as an employee stock purchase plan under Section 423of the Internal Revenue Code of 1986, as amended.  Under this plan 3,000,000 shares have been  reserved for issuance.  All full-time

 

77

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employees of the Company in theUnited States and Israel are eligible to participate in the 1998 ESPP.  From time to time, the Board of Directorsmay fix a date or a series of dates on which the Company will grant rights topurchase shares of common stock under the 1998 ESPP (“Rights”) at prices notless than 85% of the lesser of (i) the fair market value of the shares on thedate of grant of such Rights or (ii) the fair market value of the shares on thedate such Rights are exercised.  Rightsgranted under the 1998 ESPP will run for a maximum of 27 months.  No employee may be granted a Right that permitssuch employee to purchase shares under the 1998 ESPP having a fair market valuethat exceeds $25,000 (determined at the time such Right is granted) for eachcalendar year in which such Right is outstanding, and no Right granted to anyparticipating employee may cover more than 12,000 shares.  In 2000, 2001 and 2002 the Company issued339,000 shares, 268,000 shares and 451,000 shares, respectively, of commonstock under the 1998 ESPP.

 

(b)           401(k) Profit-Sharing Plan

 

BTG has a401(k) profit-sharing plan.  As ofDecember 31, 2002, the 401(k) plan permits employees who meet the age andservice requirements to contribute up to $11,000 of their total compensation ona pretax basis, which is matched 50% by BTG. BTG’s contribution to the plan amounted to approximately $348,000,$391,000 and $444,000 for the years ended December 31, 2000, 2001 and 2002,respectively.

 

(c)           Pension Plan

 

Rosemont  operates a defined contribution pension planfor the benefit of its employees.  Theassets of the plan are administered by trustees in a fund independent fromthose of the Company.  Under the pensionplan an employee contributes 3.5% of his or her pensionable annual salary(annual base salary minus the income tax exempt portion), of which Rosemontmakes a matching contribution equal to 8% of the pensionable annualsalary.  If the working relationshipterminates within two years from the date the employee joined the pension plan,he or she is then entitled to a refund of his or her contribution only.  If the working relationship terminates aftertwo year then the entire amount accumulated in the pension plan is considered adeferred benefit.  The pension costcharge for the three months ended December 31, 2002 was $1,286,000, which includesa one time contribution of $1,100,000 to the pension plan made in connectionwith the acquisition of Rosemont.

 

NOTE 12 –OTHERINCOME (EXPENSE), NET

 
|                                                |   | **Year ended  December 31,** |   |
|-----------------------------------------------------|--------|------------------------------|--------|
|                                                |   | **2000**                     |   | **2001** |   | **2002** |   |
|                                                |   | **(in thousands)**           |   |
| Gain on forward contract                            |   | $                            | — |   | $ | — |   | $ | 800 |   |
| Investment income                                   |   | 7,496                        |   | 7,472 |   | 2,654 |   |
|                                                |   | 7,496                        |   | 7,472 |   | 3,454 |   |
| Less:                                               |   |                         |   |   |   |   |   |
| Realized and unrealized losses on  investments, net |   | —                       |   | 12,231 |   | 1,181 |   |
| Interest and other expense                          |   | 120                          |   | 170 |   | 631 |   |
|                                                |   | 120                          |   | 12,401 |   | 1,812 |   |
|                                                |   | $                            | 7,376  |   | $ | (4,929 | ) | $ | 1,642 |   |

 

NOTE 13 -CONCENTRATIONS

 

In 2000, 2001and 2002, one customer for human growth hormone, located solely in Japan,represented $12,975,000, $16,292,000 and $12,331,000, or 17%, 17% and 12%,respectively of revenues, respectively. In 2000, 2001 and 2002, one customer for OXANDRIN and DELATESTRYL,located solely in the United States, represented $33,422,000, $43,718,000 and$45,625,000, or 45%, 46% and 47% of revenues, respectively.  In 2001 and 2002, one additional customerfor OXANDRIN, located solely in the United States, represented $10,383,000 and$6,595,000, or 11% and 6%, respectively, of revenues.  In 2002, the Company’s product sales consisted primarily of salesof OXANDRIN, DELATESTRYL, human growth hormone, BIOLON and oral liquid  products in the amount of approximately$45,861,000, $20,564,000, $15,595,000, $6,696,000 and $6,346,000, or 48%, 21%,16%, 7% and 7% of total product sales, respectively.  One customer accounted for 36% and 33% of total accountsreceivable as of December 31, 2001 and 2002, respectively.  Another customer accounted for 34% and 10%,respectively, of total accounts receivable as of December 31,

 

78

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2001 and 2002.  Another customer accounted for 16% of totalaccounts receivable as of December 31, 2002. From July 2001 until March 2003 BTG had no supplier for its DELATESTRYLproduct, and BTG currently expects that its current inventory of DELATESTRYLwill run out during 2003, with the exact timing depending on demand and itsallocation of inventory.  BTG cannotsell DELATESTRYL manufactured by its new supplier until FDA approval isobtained, and does not expect that the new supplier will be in a position tosupply DELATESTRYL to BTG prior to BTG running out of its current DELATESTRYLinventory.

 

NOTE 14 -INCOME TAXES

 

The componentsof current and deferred income tax expense (benefit) are as follows:

 
|                     |   | **Year ended  December 31,** |   |
|--------------------------|--------|------------------------------|--------|
|                     |   | **2000**                     |   | **2001** |   | **2002** |   |
|                     |   | **(in  thousands)**          |   |
| Current                  |   |                         |   |   |   |   |   |
| State                    |   | $                            | 647    |   | $ | 1,067 |   | $ | 984 |   |
| Federal                  |   | 6,302                        |   | 12,959 |   | 3,040 |   |
| Foreign                  |   | 1,152                        |   | 1,891 |   | 1,876 |   |
|                     |   | 8,101                        |   | 15,917 |   | 5,900 |   |
| Deferred:                |   |                         |   |   |   |   |   |
| State                    |   | (183                         | )      | (463 | ) | (100 | ) |
| Federal                  |   | (3,362                       | )      | (10,164 | ) | (1,140 | ) |
| Foreign                  |   | (758                         | )      | (557 | ) | 403 |   |
|                     |   | (4,303                       | )      | (11,184 | ) | (837 | ) |
|                     |   |                         |   |   |   |   |   |
| Total income tax expense |   | $                            | 3,798  |   | $ | 4,733 |   | $ | 5,063 |   |

 

The domesticand foreign components of income (loss) before income taxes and cumulativeeffect of change in accounting principle are as follows:

 
|     |   | **Year ended  December 31,** |   |
|----------|--------|------------------------------|--------|
|     |   | **2000**                     |   | **2001** |   | **2002** |   |
|     |   | **(in thousands)**           |   |
| Domestic |   | $                            | 9,423  |   | $ | (32,519 | ) | $ | 7,593 |   |
| Foreign  |   | 3,318                        |   | 6,606 |   | 7,181 |   |
|     |   | $                            | 12,741 |   | $ | (25,193 | ) | $ | 14,780 |   |

 

Reconciliationof income taxes between the statutory and effective tax rates on income beforeincome taxes is as follows:

 
|                                                   |   | **Year ended  December 31,** |   |
|--------------------------------------------------------|--------|------------------------------|--------|
|                                                   |   | **2000**                     |   | **2001** |   | **2002** |   |
|                                                   |   | **(in  thousands)**          |   |
| Income tax at U.S. statutory rate                      |   | $                            | 4,459  |   | $ | (8,818 | ) | $ | 5,172 |   |
| State and local income taxes (net of  federal benefit) |   | 302                          |   | 386 |   | 564 |   |
| Non-deductible expenses                                |   | 317                          |   | 428 |   | 263 |   |
| R&E credit                                         |   | (720                         | )      | (1,229 | ) | (812 | ) |
| Foreign income subject to a reduced rate of  tax       |   | (756                         | )      | (1,928 | ) | (510 | ) |
| In-process research and development  acquired          |   | —                       |   | 15,504 |   | — |   |
| Goodwill amortization                                  |   | —                       |   | (1,066 | ) | — |   |
| Foreign taxes in respect of previous years             |   | —                       |   | 1,530 |   | 519 |   |
| Foreign compensation                                   |   | 557                          |   | 358 |   | — |   |
| Foreign tax benefit                                    |   | —                       |   | (759 | ) | — |   |
| Other                                                  |   | (361                         | )      | 127 |   | (133 | ) |
| Income tax expense                                     |   | $                            | 3,798  |   | $ | 4,733 |   | $ | 5,063 |   |

 

79

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In 2002BTG-Israel concluded a tax audit for the fiscal years 1997 through 2000.  As a result, the Company has recorded in theyears ended December 31, 2001 and 2002, a provision for additional taxliabilities for those years.

 

The components of deferredincome tax assets (liabilities) are as follows:

 
|                          |   | **December  31,**   |   |
|-------------------------------|--------|---------------------|--------|
|                          |   | **2001**            |   | **2002** |   |
|                          |   | **(in  thousands)** |   |
|                          |   |                |   |   |   |
| Net operating loss carryover  |   | $                   | 6,843  |   | $ | 5,599 |   |
| Capital loss carryover        |   | 1,014               |   | 1,047 |   |
| R&E credit                |   | 2,067               |   | 2,516 |   |
| Valuation of securities       |   | 3,600               |   | 4,443 |   |
| Deferred revenues             |   | 3,778               |   | 4,119 |   |
| Accrued amounts               |   | 2,803               |   | 3,037 |   |
| Other                         |   | (226                | )      | — |   |
|                          |   | 19,879              |   | 20,761 |   |
| Depreciation and amortization |   | (113                | )      | (24,141 | ) |
|                          |   | $                   | 19,766 |   | $ | (3,380 | ) |

 

At December31, 2002, BTG had a capital loss carryover of approximately $2,800,000available to offset future capital gains, which expires at various times withrespect to various amounts through 2007, a net operating loss carryover ofapproximately $15,000,000 available to offset future taxable income in limitedamounts per year, which expires at various times with respect to variousamounts through 2021, and a research and experimental (“R&E”) creditcarryover of approximately $2,500,000 available to reduce future income taxes,which expires at various times with respect to various amounts through 2022.

 

The Companyanticipates using tax planning strategies to utilize its capital losscarryforwards.  These tax planningstrategies have been considered by the Company when determining the need for avaluation allowance. Although realization is not assured, management believesit is more likely than not that all the deferred tax assets will berealized.  Accordingly, the Companybelieves that no valuation allowance is required.

 

Provision forincome taxes has not been made for U.S. or additional foreign taxes onundistributed earnings of foreign subsidiaries.  Those earnings have been and will continue to be permanentlyreinvested. It is not practicable to determine the amount of additional taxthat might be payable on the foreign earnings. The cumulative amount ofreinvested earnings was approximately $13,000,000 at December 31, 2002.

 

80

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NOTE 15 –INTERNATIONAL OPERATIONS

 

The Company’soperations are treated as one operating segment as it only reports profit andloss information on an aggregate basis to chief operating decision makers ofthe Company.  Information about theCompany’s operations in the United States, Israel and the U.K. is presentedbelow:

 
|                                        |   | **U.S.**                           |   | **Israel** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------|--------|------------------------------------|--------|------------|--------|------------------|--------|------------------|--------|
|                                        |   | **(in thousands of U.S. dollars)** |   |
| Year ended December 31, 2000:               |   |                               |   |       |   |             |   |             |   |
| Revenues§                              |   | $                                  | 62,483 |       | $      | 10,278           |   |             |   | $ | 72,761 |   |
| Intercompany transactions                   |   | 1,272                              |   | 4,009      |   | (5,281           | )      |             |   |
| Reimbursement of subsidiary’s expenses |   |                               |   | 12,712     |   | (12,712          | )      |             |   |
| Depreciation and amortization               |   | 1,389                              |   | 1,472      |   |             |   | 2,861            |   |
| Other income, net                           |   | 7,369                              |   | 7          |   |             |   | 7,376            |   |
| Income tax expense                          |   | 3,719                              |   | 79         |   |             |   | 3,798            |   |
| Net income                                  |   | (1,815                             | )      | 2,061      |   | 519              |   | 765              |   |
| Identifiable assets+                        |   | 175,555                            |   | 45,921     |   | (11,516          | )      | 209,960          |   |
| Foreign liabilities+                        |   |                               |   | 28,034     | ‡ |             |   | 28,034           |   |
| Investment in subsidiaries (cost basis)     |   | 15,298                             |   |       |   | (15,298          | )      |             |   |
|                                        |   |                               |   |       |   |             |   |             |   |
| Year ended December 31, 2001:               |   |                               |   |       |   |             |   |             |   |
| Revenues§                              |   | $                                  | 82,182 |       | $      | 12,592           |   |             |   | $ | 94,774 |   |
| Intercompany transactions                   |   | 318                                |   | 4,863      |   | (5,181           | )      |             |   |
| Reimbursement of subsidiary’s expenses |   |                               |   | 13,498     |   | (13,498          | )      |             |   |
| Depreciation and amortization               |   | 1,376                              |   | 1,561      |   |             |   | 2,937            |   |
| Other income (expense), net                 |   | (5,080                             | )      | 151        |   |             |   | (4,929           | )      |
| Income tax expense                          |   | 3,398                              |   | 1,335      |   |             |   | 4,733            |   |
| Net income                                  |   | (35,205                            | )      | 4,612      |   | 667              |   | (29,926          | )      |
| Identifiable assets+                        |   | 189,415                            |   | 61,261     |   | (15,590          | )      | 235,086          |   |
| Foreign liabilities+                        |   |                               |   | 32,639     | ‡ |             |   | 32,639           |   |
| Investment in subsidiaries (cost basis)     |   | 15,298                             |   |       |   | (15,298          | )      |             |   |

 
|                                        |   | **U.S.** |   | **Israel** |   | **U.K.** |   | **Eliminations** |   | **Consolidated** |   |
|---------------------------------------------|--------|----------|--------|------------|--------|----------|--------|------------------|--------|------------------|--------|
| Year ended December 31, 2002:               |   |     |   |       |   |     |   |             |   |             |   |
| Revenues§                              |   | $        | 86,460 |       | $      | 10,160   |   | $                | 6,346  |             |   |   | $ | 102,966 |   |
| Intercompany transactions                   |   | 308      |   | 4,354      |   |     |   | (4,662           | )      |             |   |
| Reimbursement of subsidiary’s expenses |   |     |   | 14,808     |   |     |   | (14,808          | )      |             |   |
| Depreciation and amortization               |   | 1,119    |   | 1,419      |   | 163      |   |             |   | 2,701            |   |
| Other income (expense), net                 |   | 2,189    |   | (590       | )      | 43       |   |             |   | 1,642            |   |
| Income tax expense                          |   | 2,784    |   | 2,026      |   | 253      |   |             |   | 5,063            |   |
| Net income (loss)                           |   | 5,853    |   | 2,832      |   | 1,140    |   | (108             | )      | 9,717            |   |
| Identifiable assets+                        |   | 90,021   |   | 72,971     |   | 14,492   |   | 107,947          |   | 285,431          |   |
| Foreign liabilities+                        |   |     |   | 32,338     |   | 5,000    |   |             |   | 37,338           |   |
| Investment in subsidiaries (cost basis)     |   | 119,842  |   |       |   |     |   | (119,842         | )      |             |   |
|                                             |        |          |        |            |        |          |        |                  |        |                  |        |  |  |  |  |

 

----

§ Includes sales to countries outside the UnitedStates of  $27,514,000, $31,665,000 and$32,725,000 in 2000, 2001 and 2002, respectively, of which $12,975,000,$16,292,000 and $12,331,000, respectively, are sales to Japan.

+ At year end.

‡ Excludes liability to parent.

 

NOTE 16 –QUARTERLY DATA (UNAUDITED)

 

Following arethe quarterly results of operations for the years ended December 31, 2001 and2002.

 

81

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|                                                             |   | **March 31,**                             |    |
|------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                             |   | **2001**                                  |    | **2002** |   |
|                                                             |   | **(in  thousands except per share data)** |    |
| Revenues:                                                        |   |                                      |    |   |   |
| Product sales                                                    |   | $                                         | 29,887  |   | $ | 18,938 |   |
| Contract fees                                                    |   | 414                                       |    | 564 |   |
| Other                                                            |   | 1,064                                     |    | 1,346 |   |
|                                                             |   | 31,365                                    |    | 20,848 |   |
| Expenses:                                                        |   |                                      |    |   |   |
| Research and development                                         |   | 5,927                                     |    | 8,935 |   |
| Marketing and sales                                              |   | 4,741                                     |    | 4,449 |   |
| General and administrative                                       |   | 3,272                                     |    | 3,225 |   |
| Cost of products sales                                           |   | 3,524                                     |    | 3,171 |   |
| Other                                                            |   | 46,246                                    |    | 683 |   |
|                                                             |   | 63,710                                    |    | 20,463 |   |
| Operating income (loss)                                          |   | (32,345                                   | )       | 385 |   |
| Other income, net                                                |   | 2,260                                     |    | 928 |   |
| Income (loss) before income taxes                                |   | (30,085                                   | )       | 1,313 |   |
| Income tax expense                                               |   | 4,820                                     |    | 324 |   |
| Net income (loss)                                                |   | $                                         | (34,905 | ) | $ | 989 |   |
| Earnings (loss) per common share:                                |   |                                      |    |   |   |
| Basic                                                            |   | $                                         | (0.63   | ) | $ | 0.02 |   |
| Diluted                                                          |   | $                                         | (0.63   | ) | $ | 0.02 |   |
| Weighted average number of common and  common equivalent shares: |   |                                      |    |   |   |
| Basic                                                            |   | 55,117                                    |    | 58,305 |   |
| Diluted                                                          |   | 55,117                                    |    | 58,649 |   |

 

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|                                                             |   | **June 30,**                              |   |
|------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                             |   | **2001**                                  |   | **2002** |   |
|                                                             |   | **(in  thousands except per share data)** |   |
| Revenues:                                                        |   |                                      |   |   |   |
| Product sales                                                    |   | $                                         | 25,303 |   | $ | 23,205 |   |
| Contract fees                                                    |   | 415                                       |   | 414 |   |
| Other                                                            |   | 1,037                                     |   | 1,481 |   |
|                                                             |   | 26,755                                    |   | 25,100 |   |
| Expenses:                                                        |   |                                      |   |   |   |
| Research and development                                         |   | 8,866                                     |   | 8,208 |   |
| Marketing and sales                                              |   | 4,557                                     |   | 4,816 |   |
| General and administrative                                       |   | 3,679                                     |   | 3,566 |   |
| Cost of products sales                                           |   | 3,819                                     |   | 3,489 |   |
| Amortization of negative goodwill  associated with acquisitions  |   | (1,082                                    | )      | — |   |
| Other                                                            |   | 265                                       |   | 412 |   |
|                                                             |   | 20,104                                    |   | 20,491 |   |
| Operating income                                                 |   | 6,651                                     |   | 4,609 |   |
| Other income (expenses), net                                     |   | 1,577                                     |   | (1,012 | ) |
| Income before income taxes                                       |   | 8,228                                     |   | 3,597 |   |
| Income tax expense                                               |   | 2,279                                     |   | 1,236 |   |
| Net income                                                       |   | $                                         | 5,949  |   | $ | 2,361 |   |
|                                                             |   |                                      |   |   |   |
| Earnings per common share:                                       |   |                                      |   |   |   |
| Basic                                                            |   | $                                         | 0.10   |   | $ | 0.04 |   |
| Diluted                                                          |   | $                                         | 0.10   |   | $ | 0.04 |   |
| Weighted average number of common and  common equivalent shares: |   |                                      |   |   |   |
| Basic                                                            |   | 57,388                                    |   | 58,403 |   |
| Diluted                                                          |   | 58,899                                    |   | 58,498 |   |

 

83

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** **
|                                                                 |   | **September  30,**                        |   |
|----------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                 |   | **2001**                                  |   | **2002** |   |
|                                                                 |   | **(in  thousands except per share data)** |   |
| Revenues:                                                            |   |                                      |   |   |   |
| Product sales                                                        |   | $                                         | 15,541 |   | $ | 24,719 |   |
| Contract fees                                                        |   | 414                                       |   | 262 |   |
| Other                                                                |   | 2,395                                     |   | 1,252 |   |
|                                                                 |   | 18,350                                    |   | 26,233 |   |
| Expenses:                                                            |   |                                      |   |   |   |
| Research and development                                             |   | 5,847                                     |   | 6,778 |   |
| Marketing and sales                                                  |   | 3,046                                     |   | 5,200 |   |
| General and administrative                                           |   | 2,977                                     |   | 4,082 |   |
| Cost of products sales                                               |   | 2,710                                     |   | 3,097 |   |
| Amortization of  negative goodwill associated with acquisitions |   | (959                                      | )      | — |   |
| Other                                                                |   | 533                                       |   | 435 |   |
|                                                                 |   | 14,154                                    |   | 19,592 |   |
| Operating income                                                     |   | 4,196                                     |   | 6,641 |   |
| Other income, net                                                    |   | 1,797                                     |   | 1,478 |   |
| Income before income taxes                                           |   | 5,993                                     |   | 8,119 |   |
| Income tax expense                                                   |   | 1,443                                     |   | 2,465 |   |
| Net income                                                           |   | $                                         | 4,550  |   | 5,654 |   |
|                                                                 |   |                                      |   |   |   |
| Earnings per common share:                                           |   |                                      |   |   |   |
| Basic                                                                |   | $                                         | 0.08   |   | $ | 0.10 |   |
| Diluted                                                              |   | $                                         | 0.08   |   | $ | 0.10 |   |
| Weighted average number of common and common  equivalent shares:     |   |                                      |   |   |   |
| Basic                                                                |   | 58,078                                    |   | 58,531 |   |
| Diluted                                                              |   | 59,411                                    |   | 58,578 |   |

 

84

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|                                                                            |   | **December  31,**                         |   |
|---------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                            |   | **2001**                                  |   | **2002** |   |
|                                                                            |   | **(in  thousands except per share data)** |   |
| Revenues:                                                                       |   |                                      |   |   |   |
| Product sales                                                                   |   | $                                         | 16,375 |   | $ | 29,245 |   |
| Contract fees                                                                   |   | 413                                       |   | 564 |   |
| Other                                                                           |   | 1,517                                     |   | 976 |   |
|                                                                            |   | 18,305                                    |   | 30,785 |   |
| Expenses:                                                                       |   |                                      |   |   |   |
| Research and development                                                        |   | 7,137                                     |   | 8,862 |   |
| Marketing and sales                                                             |   | 4,662                                     |   | 7,679 |   |
| General and administrative                                                      |   | 3,324                                     |   | 6,708 |   |
| Cost of products sales                                                          |   | 2,335                                     |   | 4,391 |   |
| Amortization of intangibles and negative  goodwill associated with acquisitions |   | (919                                      | )      | 1,013 |   |
| Other                                                                           |   | 525                                       |   | 629 |   |
|                                                                            |   | 17,064                                    |   | 29,282 |   |
|                                                                            |   |                                      |   |   |   |
| Operating income                                                                |   | 1,241                                     |   | 1,503 |   |
| Other income (expense), net                                                     |   | (10,570                                   | )      | 248 |   |
| Income (loss) before income taxes                                               |   | (9,329                                    | )      | 1,751 |   |
| Income tax expense (benefit)                                                    |   | (3,810                                    | )      | 1,038 |   |
| Net income (loss)                                                               |   | $                                         | (5,519 | ) | $ | 713 |   |
|                                                                            |   |                                      |   |   |   |
| Earnings (loss) per common share:                                               |   |                                      |   |   |   |
| Basic                                                                           |   | $                                         | (0.09  | ) | $ | 0.01 |   |
| Diluted                                                                         |   | $                                         | (0.09  | ) | $ | 0.01 |   |
| Weighted average number of common and  common equivalent shares:                |   |                                      |   |   |   |
| Basic                                                                           |   | 58,294                                    |   | 58,678 |   |
| Diluted                                                                         |   | 58,294                                    |   | 58,716 |   |

 

85

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**ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

 

There were no disagreements with accountants onaccounting and financial disclosures during the last three fiscal years.  On May 8, 2002, we dismissed Arthur AndersenLLP as BTG’s independent public accountants and decided to engage KPMG LLP toserve as our independent public accountant for 2002.  BTG’s decision to change its independent accountants was approvedby the Board of Directors upon recommendation of the Audit Committee.  For more information with respect to thismatter, see our current report on Form 8-K, as amended, dated May 8, 2002.  On October 4, 2002, KPMG LLP notified usthat it resigned as our independent auditors. For more information with respect to this matter, see our current reporton Form 8-K dated October 4, 2002.  OnOctober 16, 2002, our Board, upon the recommendation of the Audit Committee,approved the engagement of Grant Thornton LLP to serve as BTG’s independentpublic accountants for the fiscal year ended December 31, 2002.  For more information with respect to thismatter, see our current report on Form 8-K dated October 16, 2002.

 

**PARTIII**

 

**ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

Directors

The sectionentitled “Proposal No. 1 - Election of Directors” in BTG’s Proxy Statement forthe Annual Meeting of Stockholders is incorporated herein by reference.

 

Executive Officers

See “Part I -Item 1. Business - Executive Officers of BTG”.

 

**ITEM 11.  EXECUTIVE COMPENSATION**

 

The sectionentitled “Executive Compensation” in BTG’s Proxy Statement for the Annual Meetingof Stockholders is incorporated herein by reference.

 

**ITEM 12. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The sectionsentitled “Beneficial Ownership of Common Stock” and "Equity CompensationPlan Information" in BTG’s Proxy Statement for the Annual Meeting ofStockholders are incorporated herein by reference.

 

**ITEM 13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

The sectionsentitled “Executive Compensation - Compensation Committee Interlocks andInsider Participation” and “Certain Transactions” in BTG’s Proxy Statement forthe Annual Meeting of Stockholders is incorporated herein by reference.

 

86

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**ITEM 14.  CONTROLS AND PROCEDURES**

 

BTG maintains“disclosure controls and procedures”, as such term is defined under SecuritiesExchange Act Rule 13a-14(c), that are designed to ensure that informationrequired to be disclosed in the our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosures.  In designing andevaluating the disclosure controls and procedures, BTG’s management recognizedthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives andBTG’s management necessarily was required to apply its judgment in evaluatingthe cost-benefit relationship of possible controls and procedures.  BTG has carried out an evaluation, withinthe 90 days prior to the date of filing of this report, under the supervisionand with the participation of BTG’s management, including BTG’s Chief ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design andoperation of BTG’s disclosure controls and procedures.  Based upon their evaluation and subject tothe foregoing, the Chief Executive Officer and Chief Financial Officerconcluded that BTG’s disclosure controls and procedures were effective inensuring that material information relating to BTG is made known to the ChiefExecutive Officer and Chief Financial Officer by others within BTG during theperiod in which this report was being prepared.

 

There havebeen no significant changes in BTG’s internal controls or in other factors thatcould significantly affect these controls subsequent to the date BTG completedits evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

87

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**PARTIV**

 

**ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, ANDREPORTS ON FORM 8-K**

 

(a)               Financial Statements

 

(1) and (2) See “Index to Consolidated Financial Statements” at Item 8of this Annual Report on Form 10-K.

 

(b)              Reports on Form 8-K

 

Current Reporton Form 8-K dated September 30, 2002, as amended, announcing the closing ofBTG’s acquisition of Rosemont Pharmaceuticals Limited.

 

Current Reporton Form 8-K dated October 4, 2002, announcing the resignation of KPMG LLP asBTG’s independent public accountants.

 

Current Reporton Form 8-K dated October 16, 2002, announcing the engagement of Grant ThorntonLLP as BTG’s independent public accountants.

 

Current Reporton Form 8-K dated January 13, 2003, announcing that several purported classaction lawsuits had been filed against BTG and certain of its officers and directors.

 

Current Reporton Form 8-K dated February 26, 2003, containing the transcript of BTG’s yearend earnings conference call.

 

(c)               Exhibits

 

Certain exhibits presented below contain information that has beengranted or is subject to a request for confidential treatment.  Such information has been omitted from theexhibit.  Exhibit Nos. 10.13, 10.14,10.15, 10.16, 10.17, 10.18, 10.19, 10.20, 10.21, 10.22, 10.24, 10.25,10.26 and 10.27 are management contracts, compensatory plans or arrangements.

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.1             |   | Agreement and Plan of Reorganization, dated as of February 21, 2001,  by and among Bio-Technology General Corp., MYLS Acquisition Corp. and Myelos  Corporation.*(1)                                                                                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 2.2             |   | Share Purchase Agreement, dated September 20, 2002, relating to  Rosemont Pharmaceuticals Limited, between NED-INT Holdings Ltd, Akzo Nobel  N.V. and Bio-Technology General Corp.*(21)                                                                                                                                                                                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.1             |   | Certificate of Incorporation of the Registrant, as amended. *(2)                                                                                                                                                                                                                                                                                                                                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2             |   | By-laws of the Registrant, as amended.*(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1             |   | Rights Agreement, dated as of October 7, 1998, by and between  Bio-Technology General Corp. and American Stock Transfer & Trust Company,  as Rights Agent, which includes the form of Certificate of Designations  setting forth the terms of the Series A Junior Participating Cumulative  Preferred Stock, par value $0.01 per share, as Exhibit A, the form of  Right Certificate as Exhibit B and the Summary of Rights to Purchase  Preferred Shares as Exhibit C.*(3) |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2             |   | Certificate of Designations of the Series A Junior Participating  Cumulative Preferred Stock.*(3)                                                                                                                                                                                                                                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1            |   | Agreement, dated January 25, 1981, between Bio-Technology  General (Israel) Ltd. and Yeda Research and Development Co., Ltd. (“Yeda”).  *(4)                                                                                                                                                                                                                                                                                                                                         |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2            |   | Letter from the Chief Scientist to Bio-Technology General  (Israel) Ltd. *(4)                                                                                                                                                                                                                                                                                                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3            |   | Letter from the Company to Yeda relating to bGH and hSOD. *(5)                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4            |   | Agreement, dated January 20, 1984, between Bio-Technology  General (Israel) Ltd., and the Chief Scientist with regard to certain projects.  *(6)                                                                                                                                                                                                                                                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5            |   | Agreement, dated July 9, 1984, between the Company and Yeda. *(6)                                                                                                                                                                                                                                                                                                                                                                                                                              |

 

88

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| 10.6   |   | Agreement, dated as of January 1, 1984, between the Company and  Yissum. *(7)                                                                                        |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                 |
| 10.7   |   | Form of Indemnity Agreement between the Company and its directors and  officers. *(8)                                                                                |
|   |   |                                                                                                                                                                 |
| 10.8   |   | Agreement, dated November 18, 1988, between the Company and Yeda.  *(9)                                                                                              |
|   |   |                                                                                                                                                                 |
| 10.9   |   | Reacquisition of Rights Agreement, effective June 12, 1991 between  the Company and The Du Pont Merck Pharmaceutical Company. *(10)                                  |
|   |   |                                                                                                                                                                 |
| 10.10  |   | Agreement, dated as of November 9, 1992, between the Company and  SmithKline Beecham Intercredit B.V. *(11)                                                          |
|   |   |                                                                                                                                                                 |
| 10.11  |   | Research and Development Services Agreement, dated as of January 1,  1996 by and between Bio-Technology General Corp. and Bio-Technology General  (Israel) Ltd.*(12) |
|   |   |                                                                                                                                                                 |
| 10.12  |   | Manufacturing Services Agreement, dated as of January 1, 1996, by and  between Bio-Technology General Corp. and Bio-Technology General (Israel)  Ltd.*(12)           |
|   |   |                                                                                                                                                                 |
| 10.13  |   | Bio-Technology General Corp. Stock Compensation Plan for  Outside Directors, as amended through March 1991. *(13)                                                    |
|   |   |                                                                                                                                                                 |
| 10.14  |   | Bio-Technology General Corp. Stock Option Plan for New  Directors, as amended through March 1991. *(13)                                                              |
|   |   |                                                                                                                                                                 |
| 10.15  |   | Bio-Technology General Corp. 1992 Stock Option Plan, as amended.*(14)                                                                                                |
|   |   |                                                                                                                                                                 |
| 10.16  |   | Bio-Technology General Corp. 1997 Stock Option Plan for Non-Employee  Directors.*(14)                                                                                |
|   |   |                                                                                                                                                                 |
| 10.17  |   | Bio-Technology General Corp. 1998 Employee Stock Purchase Plan.*(15)                                                                                                 |
|   |   |                                                                                                                                                                 |
| 10.18  |   | Bio-Technology General Corp. 2001 Stock Option Plan. *(17)                                                                                                           |
|   |   |                                                                                                                                                                 |
| 10.19  |   | Employment Agreement, dated as of December 19, 2002, by and between  Bio-Technology General Corp. and Andre Groenewegen.                                             |
|   |   |                                                                                                                                                                 |
| 10.20  |   | Employment Agreement, dated as of December 2, 2002, by and between  Bio-Technology General Corp. and Whitney K. Stearns, Jr.                                         |
|   |   |                                                                                                                                                                 |
| 10.21  |   | Employment Agreement, dated as of January 1, 2002, by and between  Bio-Technology General Corp. and Sim Fass. *(17)                                                  |
|   |   |                                                                                                                                                                 |
| 10.22  |   | Employment Agreement, dated as of January 1, 2002, by and between  Bio-Technology General Corp. and Ernest Kelly. *(17)                                              |
|   |   |                                                                                                                                                                 |
| 10.23  |   | Employment Agreement, dated as of January 1, 2002, by and between  Bio-Technology General Corp. and Robert Shaw. *(17)                                               |
|   |   |                                                                                                                                                                 |
| 10.24  |   | Amendment to Employment Agreement, dated as of January 22, 2003, by  and between Bio-Technology General Corp. and Robert Shaw.                                       |
|   |   |                                                                                                                                                                 |
| 10.25  |   | Employment Agreement, dated as of January 1, 2002, by and between  Bio-Technology General Corp. and Dov Kanner.*(18)                                                 |
|   |   |                                                                                                                                                                 |
| 10.26  |   | Employment Agreement, dated as of May 14, 2002, by and between  Bio-Technology General Corp. and Christopher Clement.*(19)                                           |
|   |   |                                                                                                                                                                 |
| 10.27  |   | Employment Agreement, dated March 23, 2003, by and between  Bio-Technology General Corp. and Zebulun D. Horowitz, M.D.                                               |
|   |   |                                                                                                                                                                 |
| 10.28  |   | Intention letter for granting credit,  dated March 22, 2000, between Bank Hapoalim B.M. and  Bio-Technology General (Israel) Ltd.*(20)                          |
|   |   |                                                                                                                                                                 |
| 10.29  |   | Unlimited guaranty of Bio-Technology   General Corp. in favor of Bank Hapoalim B.M. *(20)                                                                       |

 

89

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| 10.30  |   | Lease and Lease Agreement, dated as of June 11, 2002, between SCV  Partners and Bio-Technology General Corp., as amended. *(18)                                                                                                                                                                                                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 21     |   | Subsidiaries of Bio-Technology General Corp.                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 23.1   |   | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 23.1   |   | Consent of Grant Thornton LLP.                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 99.1   |   | Certification by the chief executive officer, chief financial officer  and chief accounting officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 in connection with  Bio-Technology General Corp.’s Annual Report on Form 10-K for the year ended  December 31, 2002. |

 

Exhibits have been included in copies of this Report filed with theSecurities and Exchange Commission. Stockholders of the Company will be provided with copies of these exhibitsupon written request to the Company.

 

----

+  Confidentialtreatment has been granted for portions of such document.

* Previously filed with theCommission as Exhibits to, and incorporated herein by reference from, thefollowing documents:

 
| (1)    |   | Company’s Current Report on Form 8-K, dated March 19, 2001.                                                                                                                                                                                                                                                     |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    |   | Company’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 1994.                                                                                                                                                                                                                                   |
| (3)    |   | Company’s Current Report on Form 8-K, dated October 7, 1998.                                                                                                                                                                                                                                                    |
| (4)    |   | Registration Statement on Form S-1 (File No. 2-84690).                                                                                                                                                                                                                                                               |
| (5)    |   | Company’s Annual Report on Form 10-K for the year ended  December 31, 1983.                                                                                                                                                                                                                                     |
| (6)    |   | Registration Statement on Form S-1 (File No. 33-2597).                                                                                                                                                                                                                                                               |
| (7)    |   | Registration Statement on Form S-2 (File No. 33-12238).                                                                                                                                                                                                                                                              |
| (8)    |   | Company’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 1987.                                                                                                                                                                                                                                   |
| (9)    |   | Company’s Annual Report on Form 10-K for the year ended  December 31, 1988.                                                                                                                                                                                                                                     |
| (10)   |   | Registration Statement on Form S-3 (File No. 33-39018).                                                                                                                                                                                                                                                              |
| (11)   |   | Company’s Annual Report on Form 10-K for the year ended  December 31, 1992.                                                                                                                                                                                                                                     |
| (12)   |   | Company’s Annual Report on Form 10-K for the year ended December 31,  1998.                                                                                                                                                                                                                                     |
| (13)   |   | Company’s Annual Report on Form 10-K for the year ended December 31,  1991.                                                                                                                                                                                                                                     |
| (14)   |   | Company’s Annual Report on Form 10-K for the year ended December 31,  1997.                                                                                                                                                                                                                                     |
| (15)   |   | Company’s Registration Statement on Form S-8 (File No. 333-64541).                                                                                                                                                                                                                                              |
| (16)   |   | Company’s Annual Report on Form 10-K for the year ended December 31,  1999.                                                                                                                                                                                                                                     |
| (17)   |   | Company’s Annual Report on Form 10-K for the year ended December 31,  2001.                                                                                                                                                                                                                                     |
| (18)   |   | Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2002.                                                                                                                                                                                                                              |
| (19)   |   | Company’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 2002.                                                                                                                                                                                                                                  |
| (20)   |   | Company’s Quarterly Report on Form 10-Q for the quarter ended  June 30, 2000.                                                                                                                                                                                                                                   |
| (21)   |   | Company’s Current Report on Form 8-K, dated September 30, 2002.                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                 |
| (d)    |   | Financial Statement Schedule                                                                                                                                                                                                                                                                                         |
|   |   | See “Index to Consolidated Financial Statements and Supplemental  Schedule” at Item 8 of this Annual Report on Form 10-K.  Schedules not included herein are omitted  because they are not applicable or the required information appears in the  Consolidated Financial Statements or notes thereto. |

 

90

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,as amended, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|   |   |   |   |   |   | Bio-Technology General Corp. |                          |
|--------|--------|--------|--------|--------|--------|------------------------------|-------------------------------|
|   |   |   |   |   |   | (Registrant)                 |                          |
|   |   |   |   |   |   |                         |                          |
|   |   |   |   |   |   |                         |                          |
|   |   |   |   |   |   | By:                          | /s/ Sim Fass                  |   |   |
|   |   |   |   |   |   |                         | Chairman of the Board and CEO |   |
|        |        |        |        |        |        |                              |                               |  |  |

 

March 31, 2003

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, this report has been signed below by the following persons on behalfof the Registrant and in the capacities and on the dates indicated.

 
| **Signature**        |   | **Title**                                                                    |           | **Date** |
|----------------------|--------|------------------------------------------------------------------------------|----------------|----------|
| /s/ Sim Fass         |   | Chairman of the Board,  CEO  and Director (Principal Executive Officer) | March 31, 2003 |
| (Sim Fass)           |   |                                                                         |           |
|                 |   |                                                                         |           |
| /s/ Herbert Conrad   |   | Director                                                                     | March 31, 2003 |
| (Herbert Conrad)     |   |                                                                         |           |
|                 |   |                                                                         |           |
| /s/ Carl Kaplan      |   | Director                                                                     | March 31, 2003 |
| (Carl Kaplan)        |   |                                                                         |           |
| /s/ Allan Rosenfield |   |                                                                         |           |
| (Allan Rosenfield)   |   | Director                                                                     | March 31, 2003 |
|                 |   |                                                                         |           |
| /s/ David Tendler    |   | Director                                                                     | March 31, 2003 |
| (David Tendler)      |   |                                                                         |           |
| /s/ Virgil Thompson  |   |                                                                         |           |
| (Virgil Thompson)    |   | Director                                                                     | March 31, 2003 |
| /s/ Dan Tolkowsky    |   |                                                                         |           |
| (Dan Tolkowsky)      |   | Director                                                                     | March 31, 2003 |
|                 |   |                                                                         |           |
| /s/ Faye Wattleton   |   | Director                                                                     | March 31, 2003 |
| (Faye Wattleton)     |   |                                                                         |           |
|                      |        |                                                                              |                |          |  |

 

91

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| **Signature**                     |   | **Title**                                                                                              |           | **Date** |
|-----------------------------------|--------|--------------------------------------------------------------------------------------------------------|----------------|----------|
| /s/ Herbert Weissbach             |   |                                                                                                   |           |
| (Herbert Weissbach)               |   | Director                                                                                               | March 31, 2003 |
|                              |   |                                                                                                   |           |
| /s/ Whitney K. Stearns, Jr.  |   | Senior Vice President-Chief Financial Officer  and Treasurer (Principal Financial  Officer)  | March 31, 2003 |
| (Whitney K. Stearns, Jr.)         |   |                                                                                                   |           |
|                              |   |                                                                                                   |           |
| /s/ Yehuda Sternlicht             |   | Vice President-Chief Accounting Officer (Principal Accounting  Officer)                                | March 31, 2003 |
| (Yehuda Sternlicht)               |   |                                                                                                   |           |
|                                   |        |                                                                                                        |                |          |  |

 

92

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CERTIFICATIONS

 

 

I, Sim Fass, certify that:

 

1.             I have reviewed this Annual Reporton Form 10-K of Bio-Technology General Corp.;

 

2.             Based on my knowledge, this annualreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.             Based on my knowledge, thefinancial statements, and other financial information included in this annualreport, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report.

 

4.             The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosure controlsand procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a) designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b) evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 days priorto the filing date of this annual report (the “Evaluation Date”); and

 

c) presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b) any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.             The registrant’s other certifyingofficers and I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 

March 31, 2003

 

 
|   |   |   |   |   | /s/ Sim Fass                  |
|--------|--------|--------|--------|--------|-------------------------------|
|   |   |   |   |   | Sim Fass                      |
|   |   |   |   |   | Chairman of the Board and CEO |

 

93

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I, Whitney K.Stearns, Jr., certify that:

 

1.             I have reviewed this Annual Reporton Form 10-K of Bio-Technology General Corp.;

 

2.             Based on my knowledge, this annualreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.             Based on my knowledge, thefinancial statements, and other financial information included in this annualreport, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report.

 

4.             The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

a) designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b) evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c) presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b) any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.             The registrant’s other certifyingofficers and I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 

March 31, 2003

 

 
|   |   |   |   |   |   | /s/ Whitney K. Stearns, Jr.                        |
|--------|--------|--------|--------|--------|--------|----------------------------------------------------|
|   |   |   |   |   |   | Whitney K. Stearns, Jr.                            |
|   |   |   |   |   |   | Senior Vice President—Chief Financial Officer |
|   |   |   |   |   |   | and Treasurer                                      |

 

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I, YehudaSternlicht, certify that:

 

1.             I have reviewed this Annual Reporton Form 10-K of Bio-Technology General Corp.;

 

2.             Based on my knowledge, this annualreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.             Based on my knowledge, thefinancial statements, and other financial information included in this annualreport, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report.

 

4.             The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

a) designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

b) evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c) presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b) any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.             The registrant’s other certifyingofficers and I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 

March 31, 2003

 

 
|   |   |   |   |   |   | /s/ Yehuda Sternlicht                         |
|--------|--------|--------|--------|--------|--------|-----------------------------------------------|
|   |   |   |   |   |   | Yehuda Sternlicht                             |
|   |   |   |   |   |   | Vice President— Chief Accounting Officer |

 

95

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