**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**Form10-K**

 

**AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934for the fiscal year ended December 31, 2001**

 

**Commission File Number 0–15313**

 

**BIO-TECHNOLOGYGENERAL CORP.**

(Exact name of Registrantas specified in its charter)

 

| **Delaware**                                                    |   | **13–3033811**                     |
|-----------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |   | (I.R.S. Employer Identification Number) |
|                                                            |   |                                    |
| **70 Wood Avenue South, Iselin,  New Jersey**                   |   | **08830**                               |
| (Address of principal executive offices)                        |   | (Zip Code)                              |
|                                                            |   |                                    |
| Registrant’s telephone number, including area  code:       |   | **(732) 632-8800**                      |

 

Securities registered pursuant to Section 12(b) ofthe Act:

**Common Stock, $.01 par value**

(Title of class)

 

Securities registered pursuant to Section 12(g) ofthe Act:

**None**

(Title of each class)

 

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

YES  ý   NO  o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained 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

 

Aggregate marketvalue of the Registrant’s Common Stock held by non-affiliates at March 13, 2002(based on the closing sale price for such shares as reported by the NationalAssociation of Securities Dealers Automated Quotation System):  $293,245,213.  Common Stock outstanding as of March 13, 2002: 58,328,485 shares.

 

**Documentsincorporated by reference:**

 

Portions of theRegistrant’s definitive proxy statement for its 2002 annual meeting ofstockholders are incorporated by reference into Part III of this report.

 

 

**PART I**

 

**ITEM 1.****                                    ****BUSINESS**

 

GeneralOverview 1

 

Weare engaged in the research, development, manufacture and marketing ofbiopharmaceutical products.  Through acombination of internal research and development, acquisitions, collaborativerelationships and licensing arrangements, BTG has a portfolio of therapeuticproducts, including nine products that have received regulatory approval forsale and are currently being marketed. Additionally, we have four products in registration or clinical trialsand several products in pre-clinical development.  We distribute our products on a worldwide basis primarily througha direct sales force in the United States and primarily through third-partylicense and distribution relationships elsewhere.  We pursue the development of both products with broad markets aswell as products with specialized niche markets where we can seek Orphan Drugdesignation and potential marketing exclusivity.

 

Ourapproved products are:

 

•      OXANDRIN®(oxandrolone) for the treatment of involuntary weight loss due to severetrauma, chronic infection, extensive surgery or unknown pathophysiology, whichis primarily marketed in the United States and which, to date, has beenprimarily used to treat involuntary weight loss in AIDS patients;

 

•       BIO-TROPINTM(recombinant human growth hormone), which is currently being marketed in Japanand Israel, as well as in several countries in Europe, Latin America and theFar East for the treatment of growth hormone deficiency in children or Turnersyndrome;

 

•       BIOLON®(sodium hyaluronate), which is currently marketed in the United States andIsrael, as well as in several other countries in North and Latin America,Europe, Asia, Africa and the Far East for the protection of the cornealendothelium during ophthalmic surgery procedures such as cataract removal andintraocular lens implantation;

 

•       DELATESTRYL®(injectable testosterone), which is currently marketed in the United States forhypogonadism and delayed puberty;

 

•       MIRCETTE®,developed by Organon, Inc. using our patented oral contraceptive dosingregimen, which is currently being marketed in the United States;

 

•       SILKIS®,a vitamin D derivative, which is currently approved in nine European countriesfor the topical treatment of recalcitrant psoriasis and marketed in Europe andLatin America;

 

•       BIO-HEP-BTM,a third generation recombinant vaccine against hepatitis B virus, which iscurrently being marketed in Israel;

 

**•**      ARTHREASETM (sodiumhyaluronate) for osteoarthritic knee pain, which is currently being marketed inthe European Union; and

 

•     recombinanthuman INSULIN for diabetes, which is currently being marketed in Poland.

 

BTG’sproducts in registration or advanced stages of clinical testing and developmentinclude: PROSAPTIDETM, for the treatment of neuropathic pain associatedwith HIV; OXSODROLTM (recombinant human superoxide dismutase) forthe prevention of lung injury in premature babies; PURICASE® forallopurinol-resistant gout patients; and FIBRIMAGE®, a thrombusimaging agent being developed by DRAXIS Health, Inc.

 

Ourresearch and development focus includes BTG-271, a cancer therapy drug to treatleukemia; and the development of generic versions of two biologicpharmaceutical products that will be going off patent.

 

BTGwas founded in 1980 to develop, manufacture and market novel therapeuticproducts.  BTG’s overall administration,legal and patent activities, business development, human clinical studies,marketing 

 

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1              MIRCETTEis a trademark of Organon, Inc. ARTHREASE is a trademark of DePuy Orthopaedics, Inc., except in Israel,where it is owned by BTG.  PURICASE is a trademark of Mountain ViewPharmaceuticals, Inc.  Tev-Tropin is atrademark of Teva Pharmaceutical Industries, Inc.  All other trademarks are owned by BTG.

 

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activities,quality assurance and regulatory affairs are primarily coordinated at ourheadquarters in Iselin, New Jersey. Pre-clinical studies, research and development activities andmanufacturing of our biotechnology-derived products are primarily carried outthrough Bio-Technology General (Israel) Ltd. (“BTG-Israel”), our wholly ownedsubsidiary in Rehovot, Israel.

 

Productsand Applications

 

Ourcommercialized products are currently being marketed by third parties, with theexception of OXANDRIN, which we are co-marketing with a third party in theUnited States, and DELATESTRYL, which we are marketing on our own in the UnitedStates.  In addition, BTG is marketingOXANDRIN, BIO-TROPIN, BIOLON and BIO-HEP-B, and intends to market SILKIS and ARTHREASE,on its own in Israel. The following table presents information regarding BTG’sprincipal products:

 
| **Product**                                     |   | **Indication/Application**                                      |   | **Territory**                              |
|-------------------------------------------------|--------|-----------------------------------------------------------------|--------|--------------------------------------------|
| ***COMMERCIALIZED PRODUCTS:***                  |   |
| **OXANDRIN**(oxandrolone)                       |   | Involuntary  weight loss                                        |   | United  States and various other countries |
| **BIO-TROPIN**(human growth hormone)            |   | Growth  hormone deficiency in children and Turner syndrome      |   | Japan,  Europe and various other countries |
| **BIOLON**(sodium hyaluronate)                  |   | Injectable  viscous solution for ophthalmic surgical procedures |   | Worldwide                                  |
| **DELATESTRYL**(injectable testosterone)        |   | Hypogonadism                                                    |   | United  States                             |
| **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**                                   |   | Hepatitis-B  vaccine                                            |   | Israel                                     |
| **ARTHREASE**(sodium hyaluronate)               |   | Osteoarthritic  knee pain                                       |   | EuropeRegistration (United States)         |
| **INSULIN**                                     |   | Diabetes                                                        |   | Poland                                     |
|                                                 |        |                                                                 |        |                                            |  |

 
| **PRODUCTS IN REGISTRATION AND  CLINICAL TRIALS:** |   | **Status**                                         |
|----------------------------------------------------|--------|----------------------------------------------------|
| **PROSAPTIDE**                                     |   | Treatment  of neuropathic pain associated with HIV |   | Phase  II clinical trial |
| **OXSODROL**(human superoxide dismutase)           |   | Prevention  of lung injury in premature infants    |   | Phase  II clinical trial |
| **PURICASE**                                       |   | Gout                                               |   | Phase  I clinical trial |
| **FIBRIMAGE**(thrombus-imaging agent)              |   | Diagnosis  of deep vein thrombus                   |   | Phase  III clinical trial (Canada) |
|                                                    |        |                                                    |  |  |  |

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

 

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OXANDRIN (oxandrolone)

 

BTG’soxandrolone product, trademarked OXANDRIN, is an oral anabolic agent that is ananalogue of testosterone and is used to promote weight gain.  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 cost of treating the underlyingdisease.  We estimate the incidence ofinvoluntary weight loss in the United States is several million persons eachyear.

 

Thecauses of involuntary weight loss suffered by persons with a wide variety ofchronic and acute diseases are believed to be the result of a number offactors, with inadequate nutrient intake and an altered metabolic state playingcentral roles.  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.

 

In1964, the United States Food and Drug Administration (“FDA”) approved OXANDRINfor weight gain following weight loss due to severe trauma, chronic infectionor extensive surgery and for patients who, without definite pathophysiologicreasons, fail to gain or to maintain normal weight.  This approval permits the use of OXANDRIN to treatdisease-related weight loss other than starvation.  G.D. Searle & Company Limited (“Searle”), which originallydeveloped and obtained FDA approval of OXANDRIN, ceased marketing OXANDRIN inthe 1980s.  Searle contract manufacturesOXANDRIN for BTG.  With the growingawareness of the importance of combating disease-related involuntary weightloss, BTG decided to re-launch the product on its own under the OXANDRINtradename.  BTG commenced sellingOXANDRIN in December 1995 to Gentiva Health Services (“Gentiva”) (formerlyknown as Olsten Health Services),  BTG’sexclusive distributor in the United States, for all indications under the FDAapproval.  In May 2000, BTG signed anagreement with the Ross Products Division of Abbott Laboratories to co-marketOXANDRIN in the long-term care market in the United States.  In November 2001, the FDA approved a higherdosage form of OXANDRIN that BTG expects to introduce in mid 2002; the currentOXANDRIN product is a 2.5 mg tablet.

 

Sinceour launch of OXANDRIN in December 1995, a significant portion of OXANDRINsales has 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: (i) the effect of OXANDRIN as an adjunct to promote weightgain and hasten the rate of skin regrowth and healing in burn patients and asan adjunct to promote weight gain and hasten healing of decubitus ulcers inmalnourished patients; (ii) the use of OXANDRIN for the promotion ofweight gain in patients suffering from weight loss due to chronic obstructivepulmonary disease; and (iii) the effect of OXANDRIN on the incidence of fatredistribution syndrome (lipodystrophy) in HIV–positive patients treatedfor weight loss.  Manuscriptssummarizing the results of these studies have been published and others areplanned for submission in the near future. We are currently sponsoring clinical trials at leading institutions,including studies of: (i) OXANDRIN for the promotion of weight gain inmalnourished cancer patients and (ii) OXANDRIN for the promotion of weight gainin the frail elderly population.

 

InJanuary 1994, BTG obtained approval to market oxandrolone for pediatric growthdisorders in Australia.  This is thefirst regulatory approval for the marketing of oxandrolone for pediatric growthdisorders

 

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anywhere in theworld.  BTG has granted CSL Limited(“CSL”) of Australia exclusive marketing rights for oxandrolone in Australia,New Zealand and the nearby South Pacific region.  CSL commenced sales of oxandrolone in Australia in February 1994under the tradename LONAVAR®.

 

InAugust 1999, OXANDRIN was approved in Israel for the treatment ofconstitutional delay of growth and puberty. BTG began sales of OXANDRIN in Israel during 2001 under the tradenameLONAVAR®.

 

OXANDRINis currently being marketed by IPEX MEDICAL AB on a “name patient basis” inScandinavia.

 

BTGhas been granted U.S. patents directed to the use of oxandrolone in thetreatment of chronic obstructive pulmonary disease and in ameliorating muscleweakness/wasting in HIV-positive patients. BTG has allowed patent applications awaiting issue and filed patentapplications directed to other uses of OXANDRIN such as burns and skin ulcersthat are pending in the United States and other countries.

 

BIO-TROPIN (human growth hormone)

 

Humangrowth hormone (“hGH”) is naturally secreted by the pituitary gland andcontrols many physiological functions that are essential for normal developmentand maturation.  A deficiency of hGHresults in diminished growth and, in extreme cases, dwarfism.  We estimate that current annual worldwidesales of hGH for the treatment of growth hormone deficiency are approximately$1.5 billion, and that geographic distribution of worldwide sales isapproximately 40% in Japan, 30% in North America and 25% in Europe, with thebalance 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 preliminary injunction against BTG that currently precludes usfrom marketing BIO-TROPIN in the United States until July 2003, when theGenentech patent expires.  In September1999 the FDA approved BTG’s supplemental application for a new expressionsystem for biosynthesis of BIO-TROPIN that we believe does not infringeGenentech’s patent, although a patent issued to Novo Nordisk (“Novo”), whichBTG is challenging, could preclude BTG from marketing in the United States hGHproduced using this new expression system. Our human growth hormone is currently being marketed by third parties inJapan and several European and Latin American countries and by us in Israel.  See “—Sales and Distribution” and “Item 3.Legal Proceedings.”

 

InApril 1993, JCR Pharmaceuticals Co., Ltd. (“JCR”), BTG’s marketing partner inJapan, received regulatory approval for hGH for the treatment of short stature,and began marketing hGH in June 1993. In December 2000, JCR received regulatory approval for the use of BTG’shGH to treat Turner syndrome, a condition in which girls born withnon-functioning ovaries do not develop secondary sexual characteristics and areshorter than normal.  In January 1995, wegranted JCR exclusive distribution rights in The People’s Republic of China forall hGH-related pharmaceutical indications. In January 1998, JCR signed an agreement memorandum with SumitomoPharmaceuticals Co., Ltd. (“Sumitomo”), relating to a marketing alliance forthe marketing of hGH in Japan.  Underthe terms of the agreement memorandum, JCR is supplying Sumitomo with BTG’s hGHand Sumitomo commenced distribution in Japan in January 1999, followingtermination of its agreement to distribute Pharmacia Upjohn Co., Ltd.’srecombinant human growth hormone, GenotropinTM, at the end of1998.  Upon termination of PharmaciaUpjohn’s agreement with Sumitomo, Pharmacia Upjohn began to market Genotropinin Japan on its own.

 

InNovember 1992, BTG entered into an exclusive distribution agreement with theFerring Group (“Ferring”) for the marketing of our human growth hormone forenhancing growth and stature in growth hormone deficient children in Europe andthe countries comprising the former Soviet Union.  Sales began during the fourth quarter of 1994, and our hGH is nowapproved in more than 15 countries in Ferring’s territory.

 

BTGreceived approval for hGH from the Israel Ministry of Health in April 1988 andbegan direct marketing in Israel under the BIO–TROPIN trademark inOctober 1988.  In July 1992, BIO-TROPINwas approved by the Israel Ministry of Health for the treatment of a secondindication, Turner syndrome.  In July1997, BIO-TROPIN was approved by the Israel Ministry of Health for thetreatment of children suffering from renal insufficiency.

 

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InSeptember 1999, we granted Teva Pharmaceutical Industries Ltd. (“Teva”)exclusive marketing rights for hGH in the United States, effective July 2003,when Genentech’s patent that was the basis for the preliminary injunctionprecluding BTG from marketing BIO-TROPIN in the United States was scheduled toexpire.  In March 2000, we amended ouragreement with Teva to grant Teva exclusive marketing rights for hGH in theUnited States as of July 1, 2000.  Weare currently engaged in litigation with Serono Laboratories, Inc., a member ofThe Ares-Serono Group (“Serono”), to determine whether the non-competitionprovisions of a co-promotion agreement relating to Serono’s human growthhormone product, SAIZEN®, prohibit BTG from supplying hGH to Tevafor sale in the United States prior to April 30, 2002.  If Teva’s launch of hGH is enjoined beforeApril 28, 2002 as a result of Serono’s dispute with BTG, then BTG’s royalty ratewill be reduced to compensate Teva for the delay.  We expect Teva to begin marketing BIO-TROPIN in the United Statesin mid-2002.  See “—Sales andDistribution” and “Item 3.  LegalProceedings.”

 

BTG’shuman growth 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 several Latin American countries, South Africa and several PacificRim countries.

 

Ourhuman growth hormone product is currently being marketed by Ferring in Europeand JCR in Japan in conjunction with a needleless delivery device**.**Wehave licensed exclusive rights to a needleless delivery device in the UnitedStates for use with an authentic human growth hormone product.

 

BIOLON (sodium hyaluronate)

 

Sodiumhyaluronate is a high-viscosity, gel-like fluid.  BTG has developed a fermentation-derived sodium hyaluronate-basedproduct, trademarked BIOLON, for use in ophthalmic surgery procedures such ascataract removal and intraocular lens implantation.  BIOLON is a syringe filled with a 1% sodium hyaluronate solutionthat facilitates such surgery by acting as a highly viscous lubricant allowingfor surgical manipulation of the ocular tissues.

 

Salesof BIOLON commenced in early 1993, and BIOLON is currently approved for sale inthe United States and more than 30 other countries.  In June 1995, BIOLON was approved as a medical device by theEuropean Union medical device certification body (“mdc”).  As a result, a CE mark granted to theproduct and appearing on the product box allows BTG’s partners to freely marketBIOLON throughout Europe.  We licensedexclusive BIOLON distribution rights in the United States to Akorn, Inc.(“Akorn”) in March 1998.  Akorn launchedBIOLON in the United States in conjunction with Allergan, Inc. in November1998.  In November, 1999, Akorn signed adistribution agreement with Ciba Vision (“Ciba”) pursuant to which the productis being marketed under Ciba’s private label. In the first quarter of 2000 we halted shipment to the U.S. pending FDAapproval of a supplemental application relating to an upgrade in ourmanufacturing process to conform it to a higher standard of quality implementedby BTG.  We resumed shipments to theU.S. in the first quarter of 2001. Shipments to the U.S. stopped in the fourth quarter of 2001 because theFDA has been unable to inspect the new manufacturing facility of our contractsterilizer for BIOLON due to the ongoing violence in Israel.  See “—Sales and Distribution” and “—RiskFactors—We are dependent on third-party suppliers.”

 

Wehave completed 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.

 

DELATESTRYL (testosterone enanthate)

 

DELATESTRYLis BTG’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 theapproved New Drug Application (“NDA”) and trademark from Bristol-Myers SquibbCompany (“BMS”).  We began the sale anddistribution of DELATESTRYL in mid-1992. BTG pays BMS royalties based on its sales of DELATESTRYL.  BMS contract manufactured DELATESTRYL forBTG until it closed its manufacturing facility in July 2001.  We have an inventory of Delatestryl that webelieve will last two to four years, depending on demand.  We are currently in discussions with BMSregarding manufacture of DELATESTRYL at a BMS facility in Italy.  See “—Risk Factors—We are dependent onthird-party suppliers.”

 

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MIRCETTE (oral contraceptive dosing regimen)

 

BTGhas acquired a patent to an oral contraceptive dosing regimen that is intendedto reduce both the risk of pregnancy, in the event a woman forgets to take apill, and the breakthrough bleeding and spotting experienced by many women whouse conventional low-dose oral contraceptives.

 

Organon,Inc. (“Organon”), a subsidiary of AKZO Nobel N.V., has licensed BTG’s patentedoral contraceptive dosing regimen and has developed a product using thisregimen with the progestogen desogestrel. Organon filed an NDA with the FDA in April 1997 and, following receipt ofapproval in April 1998, began to commercialize 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 approve Organon’sdesogestrel product using the oral contraceptive regimen as a result ofreported higher incidence of thromboembolic disease than competinglevonorgestrel oral contraceptive regimens.

 

In2000, Duramed Pharmaceuticals, Inc. filed an Abbreviated New Drug Applicationwith the FDA 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.  BTGhas appealed this decision.

 

SILKIS (vitamin D derivative)

 

BTGhas obtained an exclusive license to patents covering the composition and useof certain 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 will 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.

 

BIO-HEP-B (hepatitis-B vaccine)

 

BTGhas genetically engineered a third generation vaccine against the hepatitis-Bvirus. Our BIO-HEP-B vaccine integrates the S, pre-S1 and pre-S2 surfaceproteins of the virus.  Clinical trialsin Israel, the Far East and Europe in adults, children and neonates have beencompleted 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 the IsraelHealth 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.

 

Wehave licensed marketing rights to SciGen Pte Ltd, a Singapore company(“SciGen”), for the commercialization of BIO-HEP-B in certain Pacific Rimterritories (excluding Japan) and certain other countries, including ThePeoples Republic of China, Australia, New Zealand and India.  BTG and SciGen have completed clinical trialsin several countries.  In December 1997,BTG granted SciGen a license to use the technical information provided by BTGto establish a manufacturing facility to produce BIO-HEP-B in India, China orAustralia.

 

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InFebruary 1998, BTG entered into development and licensing agreements withrespect to its BIO-HEP-B product with Berne Biotech AG (formerly Swiss Serumand Vaccine Institute Berne) for Western Europe, most of Latin America andvarious other countries.  Berne Biotechwill purchase vaccine from BTG for distribution, and we will receive milestonepayments from Berne Biotech, as well as royalties on sales of the vaccine.  Berne Biotech expects to file for regulatoryapproval in Europe by late 2002.

 

ARTHREASE

 

ARTHREASEis a fermentation-derived sodium hyaluronate composition developed by BTG forintra-articular injection into the knee to reduce osteoarthritic pain.  We conducted a clinical evaluation of ARTHREASEversus the market leader to examine the product’s efficacy in treating the painof osteoarthritis. We completed the clinical trial in the second half of 2000and European approval was obtained from the European Union medical devicecertification body (“mdc”) and a CE mark awarded in November 2000.

 

BTGlicensed worldwide rights to ARTHREASE, other than for Israel and Japan, toDePuy Orthopaedics Inc., a Johnson and Johnson Company (“DePuy”).  DePuy commenced commercialization of theproduct in Europe in the second half of 2001 and filed for regulatory approvalin the USA in May 2001. ARTHREASE is DePuy’s trademark, although in Israel BTGhas the right to and has registered the mark ARTHREASE.

 

Insulin

 

Insulinis a polypeptide hormone essential for the control of blood glucose levels thatis frequently 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 to produce efficientlyrecombinant 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 from commercially-availableinsulins in terms of purity or biological activity.

 

InJanuary 1999, we entered into a technology transfer and license agreement withAkzo Nobel’s wholly owned subsidiary, Diosynth b.v., for our recombinant humaninsulin.  The license grants Diosynthrights to the 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.

 

InJanuary 1998, BTG entered into a licensing agreement with IBATECH Sp. z.o.o., aPolish corporation that subsequently merged with Bioton Sp. z.o.o (“Bioton”),covering the development, production and commercialization of BTG’s recombinanthuman insulin.  Under the agreement,Bioton and BTG have collaborated on the development of the know-how for largescale manufacturing of BTG’s recombinant human insulin for the insulin marketsin Poland and several other East European countries.  BTG will receive certain milestone payments and royalties onsales of the product in the licensed territories.  Bioton began manufacturing and selling insulin in Poland in thesecond half of 2001 following receipt of Polish regulatory approval.

 

PROSAPTIDE

 

Prosaptide,a 14 amino acid peptide derived from the natural protein prosaposin, is beingdeveloped to treat neuropathic pain and peripheral neuropathy.  Both of these indications cause substantialdisability in patients.  Neuropathicpain is associated with nerve injury and is a result of metabolic trauma(diabetes), physical trauma (phantom limb pain), infectious trauma (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 ofdiabetes.  An estimated 3 millionpatients in the United States have peripheral neuropathy, includingapproximately 600,000 patients suffering moderate to severe pain associatedwith diabetic peripheral neuropathy and 300,000 patients suffering moderate tosevere pain associated with HIV neuropathy. Due to the fact that available treatment

 

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options for painassociated with peripheral neuropathy are often unsatisfactory and frequentlyaccompanied by unacceptable side effects, only approximately one-third ofpatients who are diagnosed and symptomatic are currently treated.  We believe that the annual worldwide marketpotential for PROSAPTIDE in the treatment of neuropathic pain may be in excessof $800 million.

 

APhase II human clinical trial in Type I and Type II diabetes mellitusdemonstrated that PROSAPTIDE effectively decreases pain associated withdiabetic peripheral neuropathy without deleterious side effects.  BTG plans to initiate a Phase II(b) clinicaltrial of PROSAPTIDE in 2002 in patients with HIV-associated peripheralneuropathy to supplement the findings of the previous clinical trial.  We decided to change the initial clinicalindication for PROSAPTIDE after consultation with leading experts in peripheralnerve disease led us to conclude that the clinical development program for theHIV population could be less complex than for the diabetes population initiallypursued.  In addition, pursuit of theHIV neuropathic pain indication provides us with the opportunity to collaboratewith the Neurologic AIDS Research Consortium, a group that views the need for asafe and effective thereapy for HIV neuropathic pain as a key priority.

 

Inaddition, in a series of animal studies, PROSAPTIDE was shown to not onlyalleviate peripheral neuropathic pain but also to reverse the underlyingneuropathy, thereby inducing neuronal regeneration and preventing neuronaldeath. The data from these studies strongly suggest that if these findings arereplicated in human clinical trials, there may well be additional potential forPROSAPTIDE in the treatment of peripheral neuropathy, over and above itsdemonstrated ability to decrease neuropathic pain.  No approved drugs are available to prevent or reverse the neuropathyitself.  We hold various United Statespatents relating to PROSAPTIDE and patent applications are pending in manycountries.

 

BTGacquired PROSAPTIDE in March 2001 through the acquisition of MyelosCorporation, a privately-held biopharmaceutical company focused on thedevelopment of novel therapeutics to treat diseases of the nervous system.  Under the terms of the acquisitionagreement, BTG paid Myelos stockholders $35 million in a combination of cashand stock ($14 million in cash and $21 million through the issuance ofapproximately 2,344,700 shares of our common stock).  An additional future payment of $30 million is contingent uponBTG being in position to file an NDA for FDA approval of PROSAPTIDE in the treatmentof neuropathic pain.  The acquisitionagreement provides for a final payment of 15% of worldwide net sales ofPROSAPTIDE in the third year of commercialization.  These payments will be made in shares of our common stock,although we have the right to elect to make a portion of these payments incash.  See “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Acquisition of MyelosCorporation.”

 

OXSODROL (human superoxide dismutase)

 

BTGhas developed 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 IIIclinical efficacy and safety trial related to the use of SOD to preventbronchopulmonary dysplasia (“BPD”), a chronic lung disease that developsfollowing treatment with oxygen and mechanical ventilation of premature infantswho experience respiratory distress, revealed no reduction in the combinedincidence of BPD and death at 28 days in neonates treated with OXSODROL.  However, preliminary data from earlier PhaseI investigations 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.  BTG is in theprocess of finalizing plans for additional clinical trials focused onprevention of chronic respiratory morbidity, or lung injury, in prematurebabies****andis currently in the late stage of discussions with the FDA regarding thisindication. The additional Phase IIb trial is expected to begin in the secondhalf of 2002.

 

InJanuary 1995, we licensed OXSODROL to JCR for the treatment of BPD in Japanand, in August 1997, we licensed worldwide distribution rights (excluding theUnited States, 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. Although BTG has elected to discontinue pursuing the BPD indication andto focus on the chronic respiratory morbidity indication, JCR has expressed aninterest in 

 

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continuing withthe BPD indication.  In August 2000,Serono elected not to continue its participation in the development ofOXSODROL.

 

InDecember 2001, we entered into a cross-license agreement with ChironCorporation (“Chiron”) to settle two patent interference actions and patentopposition proceedings between Chiron and us. As a result of the cross-license agreement, Chiron’s patents are nolonger a barrier to the commercialization of our human copper zinc SOD productin the United States.  However, theexistence of the cross-license agreement does not necessarily assure ourability to commercialize OXSODROL.  See“Item 3. Legal Proceedings.”

 

PURICASE

 

Goutoccurs when uric acid accumulates in the joints.  The disease causes severe pain and disability and creates a riskof kidney 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.

 

InAugust 1998 BTG licensed exclusive worldwide rights from Duke UniversityMedical Center (“Duke”) of North Carolina and Mountain View Pharmaceuticals,Inc. (“MVP”) to technology relating to polyethylene glycol (“PEG”) conjugatesof uricase (urate oxidase).  Duke hasdeveloped recombinant uricases and, together with MVP, has developed PEGconjugates of uricases to make them safer and longer acting.  MVP has transferred its PEG technology toBTG, and we will produce PEG conjugates of uricase, undertake clinical trialsand commercialize the product.  InFebruary 2001 we received Orphan Drug designation for the use of this productin the treatment of gout patients for whom conventional therapy iscontraindicated or has been ineffective.

 

Wefiled an IND with the FDA in November 2001 and the Phase I clinical trialstarted in February 2002 at Duke University Medical Center.

 

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 thedislodgement 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 variouspatents covering FIBRIMAGE in the United States, in 14 European jurisdictionsderived from its European patent, and in Australia, Finland, Hong Kong,Hungary, Japan, Korea, New Zealand, Norway and Russia.  In August 1994, we licensed worldwide rightsto the polypeptide to Merck Frosst Canada Inc. (“Merck Frosst”) for thedevelopment and commercialization of a diagnostic imaging agent for thedetection of thromboembolism.  MerckFrosst filed an application for an Investigational New Drug (“IND”) with theCanadian Bureau of Biologics in April 1996. In September 1997 DRAXIS Health Inc. (“Draxis”) acquired the radio-pharmaceuticaldivision of Merck Frosst and all rights to FIBRIMAGE.  Draxis successfully completed a Phase I study of FIBRIMAGEin Canada in December 1997, and a Phase II study in 1999.  In February 2000, Draxis initiated a PhaseIII efficacy study in Canada.  Filingfor approval in Canada is expected in the second half of 2002.

 

BTG - 271

 

BTGis developing BTG-271, based on a human antibody fragment, as a first linetherapy during remission and as a second line therapy to treat relapsed andrefractory acute myeloid leukemia (“AML”) patients.  It may be linked to a chemical conjugate or a cytotoxicagent.  Currently, treatment practicefor newly diagnosed AML patients is uniform and highly effective at inductionof remission.  However, significant unmetmedical need exists for therapies that prolong remission and are effective forrefractory and relapsed patients. BTG-271 is being developed in response totheir needs.  BTG expects to commencetoxicology studies in 

 

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2003.  BTG will require patent licenses fromseveral companies in order to commercialize BTG-271.  BTG is currently in advanced discussions with one licensor, andhas begun preliminary discussions with several other companies.  We cannot assure you that we will able toobtain these licenses on reasonable terms or at all.  If we are not able to obtain these licenses, we will not be ableto commercialize BTG-271.

 

Inaddition to AML 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.  In addition to its therapeuticpotential in AML and MM, Y1 might also be used as a diagnostic agent prior topatient treatment, since 80% of AML patients are Y1 reactive.

 

BIOGENERICATM

 

Pursuantto a strategic relationship entered into with Teva Pharmaceutical IndustriesLtd., BTG is currently pursuing the development of two recombinant humantherapeutic proteins chosen by Teva that are currently marketed worldwide byother biotech companies and which are approaching the end of their patentprotection.  Teva will distribute andmarket the products.  See “—Sales andDistribution.”

 

Salesand Distribution

 

Wemarket our products primarily on a direct basis in the United States and Israeland grant exclusive marketing or distribution rights to third parties for salesin most other countries. BTG has granted Teva exclusive marketing rights to itshGH in the United States, which Teva will market as Tev-TropinTM .  Our sales and marketing team in the UnitedStates, which we established in the second half of 1995, consisted of 50 peopleat February 1, 2002. With respect to sales outside the United States, BTG’scurrent distribution arrangements include exclusive relationships with JCR forthe sale of BIO-TROPIN in Japan and The People’s Republic of China, withFerring for the sale of BIO-TROPIN in Europe and the former Soviet Union, withseveral other companies, covering approximately 35 countries, for the sale ofBIO-TROPIN, approximately 20 companies, covering more than 35 countries, forthe sale of BIOLON, Galderma for the sale of SILKIS worldwide, and DePuy forthe sale of ARTHREASE in all countries worldwide other than Israel and Japan.

 

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 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.”

 

BTGhas an agreement with Gentiva, a provider of home health care services andproducts for chronic and acute care, to serve as BTG’s exclusive wholesaledistributor of BTG’s OXANDRIN and DELATESTRYL products in the UnitedStates.  Sales of OXANDRIN in 1999, 2000and 2001 were primarily to Gentiva.  See“—Risk Factors—We are dependent on OXANDRIN sales.”  In May 2000 BTG signed an agreement with the Ross ProductsDivision of Abbott Laboratories to co-market OXANDRIN in the United States forthe long-term care market.  Ross has theright to terminate the agreement at any time upon six months notice.  If Ross elects to terminate the agreement,our OXANDRIN sales could be adversely affected until we are able to replace theRoss sales force, which we may not be able to do successfully.

 

InSeptember 1999, we entered into a Development and Distribution Agreementpursuant to which we granted Teva exclusive distribution rights in the UnitedStates for our hGH product effective July 1, 2003 (subsequently amended to July1, 2000) and exclusive worldwide distribution rights for up to three genericbiologic pharmaceutical products chosen by Teva, although to date Teva haselected to pursue only two products. Under the agreement, BTG is responsible for conducting all developmentwork on the biologic products and manufacturing the product.  Teva will distribute and market the productsonce regulatory approvals have been obtained. Upon execution of the agreement a $10 million payment became due to BTGand was received in March 2000.  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 net salesof product.

 

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In1988 and 1995, respectively, we granted exclusive distribution rights in Japanand The Peoples Republic of China to JCR for all hGH-related pharmaceuticalindications.  BTG sells bulk product toJCR at a fixed price.  BTG is obligatedto indemnify JCR for all expenses incurred and damages suffered by JCR as aresult of any infringement of third-party patents.  A substantial portion of our hGH sales has been to JCR. Ouragreement with JCR expires in April 2003. We have begun discussions with JCR to renew this agreement, although wecannot assure you that we will be able to do so on reasonable terms or atall.  If we cannot renew our agreementwith JCR, our sales of human growth hormone will be adversely affected.  See “Item 3. Legal Proceedings.”

 

InNovember 1992, we entered into an exclusive distribution agreement with Ferringfor marketing of our human growth hormone for the enhancement of growth andstature in growth hormone deficient children in Europe and the countriescomprising the former Soviet Union. BIO-TROPIN is now available in 17 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.

 

BTGhas concluded agreements for the commercialization and distribution of BIOLONwith several companies covering most countries in Europe and Latin America andseveral countries in Africa, Asia and the Far East.  These agreements provide for license fees and/or royalties and mostrequire minimum guaranteed purchases in the first years after registration andcommencement of commercialization.

 

InJune 2000 BTG granted DePuy exclusive marketing rights to ARTHREASE in allcountries worldwide except Japan and Israel. Clinical efforts, where required, and applications for regulatoryapprovals will be undertaken by DePuy in the licensed territory except inEurope, where BTG conducted a Phase III safety and efficacy study of theproduct.  BTG will receive royalties onsales of the product by DePuy.

 

InJune 1999 BTG terminated its May 1998 co-promotion agreement with SeronoLaboratories, Inc., a member of Serono, pursuant to which BTG undertook topromote in the United States through Gentiva Serono’s recombinant human growthhormone, SAIZEN® (somatropin [r-DNA origin] for injection) for thetreatment of children with growth failure due to inadequate levels of growthhormone.  Serono has disputed BTG’sright to terminate the agreement and is asserting that BTG cannot, by virtue ofa non-competition clause, sell hGH in the United States before April 30,2002.  BTG believes that to the extentthe non-competition clause is applicable, it expired in June 2000 and in anycase does not apply to sales of our hGH by Teva.  BTG has filed a declaratory judgment action in state court in NewJersey seeking to have the court confirm BTG’s positions with respect to theagreement and the non-competition clause. See “Item 3.  Legal Proceedings”.

 

Researchand Development

 

Weconduct research on potential products for which we have retained future rightsfor our own account and on behalf of our partners for which we receive certaincurrent payments and, if successful, future payments in the form of royaltiesor manufacturing rights.  At February 1,2002, our research and development organization comprised 104 scientists,associates and related personnel with expertise in molecular biology, cellbiology and protein chemistry.  Theseindividuals have received various undergraduate and advanced degrees at prestigiousuniversities throughout the world. Twenty six hold Ph.D. or M.D. degrees, andseveral have completed post–doctoral studies under the direction ofinternationally renowned scientists in the area of biotechnology.

 

BTGapplies to the Chief Scientist of the State of Israel (the “Chief Scientist”)annually for research and development funding for its various projects for thecoming year.  The projects and amountfunded each year are within the sole discretion of the Chief Scientist.  There can be no assurance that BTG will beable to continue to secure additional funds from the Chief Scientist at thesame levels or at all.  BTG is obligatedto pay royalties to the Chief Scientist for products resulting from researchand development partially funded by the Chief Scientist.  These royalties range from 3% to 5% oncommercial sales, if any, of these products if produced in Israel, up to theamount so funded, and 4% to 6% of commercial sales, if any, if these products areproduced outside Israel, up to 120% to 300% of the amount so funded.  During 1996, BTG completed payment of itsentire obligation for royalties to the Chief Scientist for funding of its humangrowth hormone development.

 

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Manufacturingand Supply Agreements

 

Wecurrently operate a Good Manufacturing Practices-certified facility in Israelfor production of our bulk human growth hormone, BIOLON, BIO-HEP-B, OXSODROL,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, which hasundergone inspection and was approved by European and U.S. regulatoryauthorities.  Based on theseinspections, European Device Approval (CE Mark) and, in the case of BIOLON, FDAapproval were granted.

 

Althougha substantial 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.

 

InApril 1999, BTG purchased an existing building located approximately 12 milessouth of its current facility in Israel. Construction of a modern production facility meeting FDA GMPrequirements for drugs, biologics and devices was completed at the end of 2001,and qualification activities have been commenced and are expected to becompleted in the second half of 2002. The new facility is designed to allow us to meet all current regulatoryrequirements and our currently foreseeable manufacturing capacity needs.  Products we intend to manufacture at thisfacility cannot be shipped into the United States until the FDA has inspectedand approved this facility.  As a resultof the current violence in Israel, the FDA has suspended inspections ofmanufacturing facilities in Israel.  Wedo not currently intend to transfer our manufacturing activities to thisfacility until it has been inspected and approved by the FDA.

 

OurOXANDRIN product is currently being manufactured for us by Searle, whichoriginally developed the product.  Ouragreement with Searle provides that Searle will produce and exclusively sellOXANDRIN to BTG.  The agreement requiresthat BTG purchase from Searle at least 50% of its OXANDRIN bulk requirementsfrom Searle.  The agreement currentlyexpires in April 2003, subject to earlier termination under certain circumstances,and is automatically renewed for successive two year periods unless terminatedby either party.  The agreement providesthat Searle will not produce OXANDRIN for any other entity prior to April 2006.

 

Inaddition to a long term exclusive supply agreement with Searle, BTG has analternative exclusive agreement with Societa Prodotti Antibiotici S.p.A.(“SPA”) covering, if necessary, the supply of oxandrolone to BTG through atleast the year 2003, contingent on SPA obtaining certain regulatory approvals.  To date SPA has been unable to gain suchapprovals.  As a result, in February1999, we entered into a supply agreement with Gedeon-Richter Ltd. (“GRL”)pursuant to which GRL will supply oxandrolone to BTG on an exclusive basisprovided certain annual minimum purchase requirements are met.  Should Searle for any reason be unable tosupply OXANDRIN to BTG prior to GRL obtaining the necessary regulatoryapprovals, BTG’s business, results of operations and financial condition couldbe materially adversely affected.  GRLhas advised us that it believes that it will obtain the necessary approvals bythe end of 2002.  See “—Risk Factors—Weare dependent on third-party suppliers” and “Item 3.  Legal Proceedings.”

 

BMScontract manufactured DELATESTRYL for BTG until it closed its manufacturingfacility in July 2001.  We have aninventory of DELATESTRYL that we believe will last two to four years, dependingon demand.  We are currently in discussionswith BMS regarding manufacture of DELATESTRYL at a BMS facility in Italy.  If we cannot establish and obtain FDAapproval of a new DELATESTRYL manufacturing relationship on a timely basis, ourability to satisfy demand for DELATESTRYL will be adversely affected. We cannotassure you that we will be able to establish and obtain FDA approval of a newDELATESTRYL manufacturing relationship on a timely basis or at all.  See “—Risk Factors—We are dependent onthird-party suppliers.”

 

InFebruary 1995, 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 EN29002.  SII is a member of aninternational organization, the International Quality Certification Network(“IQNet”) that encompasses quality certification institutes worldwide in amutual recognition agreement.  Receiptof the ISO 9002 certification was a significant

 

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milestone in theprocess of obtaining the BIOLON CE mark. In August 1997, SII awarded BTG-IsraelISO 14001 certification for its Environmental Management System.  The ISO 14000 series of standards, dealingwith the environment and its protection, are important from both a regulatoryand commercial point of view.

 

GovernmentalRegulation

 

Regulationby governmental 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.  BTG’s policy is to conduct its research anddevelopment activities in compliance with current United States NationalInstitutes of Health Guidelines for Research Involving Recombinant DNAMolecules, and with comparable guidelines in Israel and other countries wherewe may be conducting clinical trials or other developmental activities.  See “—Risk Factors—We are subject tostringent governmental regulation.”

 

Clinicaltesting, manufacturing and marketing of human pharmaceutical products requireprior approval from the FDA and comparable agencies in foreign countries. TheFDA has established mandatory procedures and safety and efficacy standards thatapply to the testing, manufacture and marketing of such products in the UnitedStates.  In the United States, theseprocedures include pre–clinical studies, the filing of an InvestigationalNew Drug Application (“IND”), human clinical trials and approval of anNDA.  European countries generallyfollow the same procedures.  TheEuropean Union has established a unified filing system administered by theCommittee for Proprietary Medicinal Products (“CPMP”) designed to reduce theadministrative burden of processing applications for new pharmaceuti­calproducts.  Following CPMP review andapproval, marketing applications are submitted to member countries for finalapproval and pricing approval, as appropriate. These processes are likely to take a number of years and often involvesubstantial expenditures.  There can beno assurance that any approval will be granted and, even if granted, suchapproval may be withdrawn if compliance with regulatory standards is notmaintained.  In addition, certainenvironmental and consumer groups are generally opposed to geneticallyengineered products, although their opposition is primarily in the agriculturalfield.  There can be no assurance thatopposition from such groups will not adversely affect the FDA approval processwith respect to our biotechnology products.

 

Inaddition to the foregoing, BTG’s present and future business may be subject toregulation under the United States Atomic Energy Act, Drug Enforcement Agency,Clean Air Act, Clean Water Act, Occupational Safety and Health Act, NationalEnvironmental Policy Act, Toxic Substances Control Act, Resource Conservationand Recovery Act, Comprehensive Environmental Response, Compensation andLiability Act and similar state and foreign statutes, as well as nationalrestrictions on technology transfer, and import, export and customs regulationsand similar laws and regulations in foreign countries.

 

Patentsand Proprietary Rights

 

Ourscientific staff and consultants are actively working in various areas ofbiotechnology 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 andimprovements, unpatented proprietary know–how and continuingtechnological innovation to develop and maintain its competitive position.  See “—Risk Factors—We depend uponproprietary technology, which may be difficult to protect.”

 

Asof February 1, 2002, BTG was maintaining worldwide approximately 523 issuedpatents either owned or exclusively licensed by BTG, including 69 patentsissued in the United States, 19 patents issued by the European Patent Office(“EPO”), which in turn resulted in the issuance of 223 national patents in Europe,and 21 patents issued in Israel. Additionally, approximately 204 patent applications owned or exclusivelylicensed by BTG are pending in various countries.  There can be no assurance that any of the patent applicationsassigned or licensed to BTG will result in issued patents, or that issuedpatents will not be circumvented or 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

 

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ourresources.  See “—Risk Factors—We dependupon proprietary technology, which may be difficult to protect” and “Item3.  Legal Proceedings.”

 

Weare aware of patent applications filed by, or patents issued to, other entitieswith respect to technology potentially useful to BTG and, in some cases,related to products and processes being developed by BTG.  We cannot presently assess the effect, ifany, that these patents may have on our operations.  The extent to which efforts by other researchers have or willresult in patents and the extent to which the issuance of patents to otherswould have a materially adverse effect on our business or would force us toobtain licenses from others is currently unknown.  See “—Risk Factors—We depend upon proprietary technology, whichmay be difficult to protect.”

 

Todate, BTG has 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.”

 

Institutionaland Governmental Relationships

 

Webelieve our relationships with research institutions in the United States,Europe and Israel and with the Government of Israel to be important in ourresearch and product development efforts. We believe that these relationships greatly enhance our research andproduct development efforts, and we intend to develop and maintainrelationships with leading universities and research institutions even as wecontinue to expand our capability to conduct research and product developmentat our own facilities.

 

TheState of Israel supports and encourages research and development in the fieldof high technology, as well as manufacturing for export through programs thatprovide for research and development funding, export financing, tax benefitsand capital investment incentives.  BTG’sresearch and development activities in Israel through BTG-Israel enable us totake advantage of these programs.  Therecan be no assurance, however, that such programs will continue.

 

Operationsin Israel

 

BTG’sprimary research and development and production activities are conducted inIsrael and 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 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 between Israel and its Arabneighbors, 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 productionactivities during periods of military mobilization, although there can be noassurance that such activities could be continued in the event of futurehostilities.  See “—Risk Factors—Ourbusiness may be adversely affected by developments in Israel.”

 

Asa result of the current violence in Israel, the FDA has suspended inspectionsof manufacturing facilities in Israel. Products we intend to manufacture at our newly constructed manufacturingfacility cannot be shipped into the United States until the FDA has inspectedand approved 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.  Continued suspension ofthese activities by the FDA will delay the commencement of manufacturing at ournew facility, which could adversely affect our business.  The suspension of FDA inspections hasdelayed inspection of the contract sterilizer utilized by BTG for its BIOLONproduct, which has required us to stop shipping BIOLON to the United Statesuntil the facility is inspected or BTG qualifies a new contractsterilizer.  BTG is now in the processof securing alternate arrangements to prevent potential interruption ofmanufacturing activities.

 

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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 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 areas in which BTG has focused itsefforts. Significant competition comes from independent, dedicatedbiotechnology companies as well as from large, established pharmaceuticalcompanies.  The primary competitivefactors in this field are the ability to attract and retain highly qualifiedscientists and technicians, to create and maintain scientifically advancedtechnology during a period of rapid technological development and to developproprietary products or processes.

 

Theprincipal parameters influencing competition are the efficacy of products andtheir production processes, the patent protection available for such products,the timing 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.

 

Manyof our current competitors have significantly greater financial andorganizational resources than us.  Sincetechnological developments are expected to continue at a rapid pace in thebiotechnology industry, the successful development of BTG’s products will bedependent upon its ability to maintain a competitive position with respect toits technology.  See “—Risk Factors—Weoperate in a highly competitive market and our competitors may developalternative technologies and products.”

 

Weare currently 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

 

Asof February 1, 2002, we had 378 employees, most of whom are engaged inresearch, development, manufacturing, quality assurance and marketing and salesactivities, including 41 who hold Ph.D. or M.D. degrees.  In addition, we have consulting arrangementswith scientists at various institutions and universities in the United Statesand Israel.

 

BTG’sability to develop marketable products and to establish and maintain itscompetitive position in light of technological developments will depend, inpart, on its ability to attract and retain qualified scientific, marketing andmanagement personnel.  Competition forsuch personnel is intense.

 

Noneof BTG’s employees is represented by a labor union and BTG has experienced nowork stoppages.  We believe ourrelations with our employees are good and we have experienced a low turnoverrate among our employees.

 

RISKFACTORS

 

ThisAnnual Report on Form 10-K contains certain forward-looking statements withinthe meaning 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,” 

 

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“estimate,”“expect,” “intend,” “plan” and other similar expressions are forward-lookingstatements.  These forward-lookingstatements are based on our current expectations, assumptions, estimates andprojections about our business and the biopharmaceutical industry, and involveknown and unknown risks, uncertainties and other factors that may cause BTG’sresults, levels of activity, performance or achievements to be materiallydifferent from the results, levels of activity, performance or achievementsexpressed or implied in or contemplated by these forward-lookingstatements.  Accordingly, stockholdersmust recognize that BTG’s actual results could differ materially from thoseprojected or contemplated in the forward-looking statements as a result of avariety of factors, including the factors set forth below.  Stockholders should not place undue relianceon 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.

 

Weare dependent on OXANDRIN sales.

 

Salesof OXANDRIN in 1999, 2000 and 2001 amounted to approximately $24.9 million,$32.2 million and $47.2 million, respectively, representing 40%, 52% and 54%,respectively, of BTG’s total product sales in those periods.  Quarterly fluctuations in sales of OXANDRINcan have a significant impact on our quarterly results of operations.  Quarterly sales of OXANDRIN in 1999, 2000and 2001 are set forth in the following table:

 
|   |   | **First Quarter**  |   | **Second Quarter** |   | **Third Quarter** |   | **Fourth Quarter** |   | **Total** |   |
|--------|--------|--------------------|--------|--------------------|--------|-------------------|--------|--------------------|--------|-----------|--------|
|   |   | **(in thousands)** |   |               |   |
| 1999   |   | $                  | 6,733  |               | $      | 6,839             |   | $                  | 6,108  |      | $      | 5,255 |   | $ | 24,935 |   |
| 2000   |   | 5,009              |   | 6,403              |   | 10,889            |   | 9,886              |   | 32,187    |   |
| 2001   |   | 16,692             |   | 17,887             |   | 4,575             |   | 7,996              |   | 47,150    |   |
|        |        |                    |        |                    |        |                   |        |                    |        |           |        |  |  |  |  |  |

 

Oursales of OXANDRIN consist of sales to Gentiva Health Services, Inc.(“Gentiva”), our wholesale and retail distributor of OXANDRIN in the UnitedStates, and the Ross Products Division of Abbott Laboratories.  The decrease in OXANDRIN sales in the secondhalf of 1999 was due to the OXANDRIN inventory reduction that Gentiva began inApril 1999 as a result of a slowing in the rate of increase in OXANDRINprescriptions.  The increase in OXANDRINsales in each of the last three quarters of 2000 was due to Gentiva’scompletion, in May 2000, of this OXANDRIN inventory reduction.  The increase in OXANDRIN sales during thefirst half of 2001 was due to: (i) the commencement, in September 2000, ofsales by the Ross Products Division of Abbott Laboratories for the long-termcare market for the treatment of patients with involuntary weight loss,including stocking activity by wholesalers in connection with the launch ofthis product in the long-term care market; (ii) stocking by certain wholesalersin anticipation of a price increase; (iii) increased purchases by Gentivafollowing its completion, in May 2000, of a reduction in the amount of OXANDRINinventory it carried, which reduction began in April 1999; and (iv) increasedwholesaler sales of OXANDRIN by Gentiva.

 

Uponcompletion of its inventory reduction in May 2000, Gentiva 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, Gentiva’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, Gentiva’s inventory of OXANDRINincreased beyond the desired level. Accordingly, BTG and Gentiva amended their distribution arrangementeffective August 2001 to provide for reduced purchases of OXANDRIN untilGentiva’s inventory was reduced to desired levels and thereafter to ensure thatsales of OXANDRIN by BTG to Gentiva 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.

 

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Gentiva’sreduction in OXANDRIN inventory adversely affected the growth in BTG’s productsales and revenues and BTG’s results of operations in 1999 and 2000.  Reductions in wholesaler purchases ofOXANDRIN from Gentiva in the second, third and fourth quarters of 2001 andsignificantly reduced purchases of OXANDRIN by Gentiva in the second half of2001 adversely affected the growth in BTG’s product sales and revenues andBTG’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 their customersand stocking in advance of anticipated price increases), BTG’s sales to Gentivaand Ross will fluctuate from quarter to quarter.  There can be no assurance that Gentiva will not determine tofurther reduce its OXANDRIN inventory levels.

 

SinceBTG’s launch 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 the RossProducts Division of Abbott Laboratories of the marketing of OXANDRIN for thetreatment of involuntary weight loss in the long-term care market.  Although OXANDRIN prescriptions increased26.5% in 2001 compared to 2000, prescriptions in the second half of 2001,although 19.4% higher than in the second half of 2000, were 0.6% belowprescriptions in the first half of 2001. In addition, to date the average prescription written for the long-termcare market involves a lower dose of OXANDRIN than the average prescriptionwritten for the AIDS market.  Ross hasthe right to terminate our OXANDRIN co-marketing agreement at any time upon sixmonths notice.  It Ross elects toterminate the agreement, our OXANDRIN sales could be adversely affected untilwe are able to replace the Ross sales force, which we may not be able to do successfully.  There can be no assurance that demand forOXANDRIN will continue to increase.

 

OXANDRINis facing 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. Additionally, there are no patents covering the use of OXANDRIN andthere can be no assurance that others will not introduce an oxandroloneproduct.

 

Weare dependent on third-party suppliers.

 

BTGis dependent on third parties for the manufacture of OXANDRIN and DELATESTRYLand the filling and vialing of its BIO-TROPIN product.  Although BTG is a party to an exclusivesupply arrangement with Searle, covering the supply of OXANDRIN to BTG through 2003,and a supply agreement with GRL, there can be no assurance that Searle willcontinue, or that GRL will be able, to provide BTG with sufficient supplies ofOXANDRIN to satisfy its future needs. BMS ceased manufacturing DELATESTRYL for BTG in July 2001 when it closedthe manufacturing facility where it produced DELATESTRYL.  BTG has an inventory of DELATESTRYL which itbelieves will be adequate to satisfy demand for DELATESTRYL until BTG canestablish and obtain FDA approval of a new manufacturing relationship.  However, if we cannot establish and obtainFDA approval of a new DELATESTRYL manufacturing relationship on a timely basis,or demand for DELATESTRYL exceeds our expectations, our ability to satisfydemand for DELATESTRYL will be adversely affected.  We cannot assure you that we will be able to establish and obtainFDA approval of a new DELATESTRYL manufacturing relationship on a timely basisor at all.  In addition, BTG isdependent on Dr. Madaus GmbH (“Dr. Madaus”) to fill and vial our BIO-TROPINproduct.

 

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 manufacture ofone or more of our products, which could have an adverse impact on ourfinancial results.  The manufacturingprocess for pharmaceutical products is highly regulated, and regulators mayshut down manufacturing facilities that 

 

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they believe donot comply with regulations.  Thecurrent FDA Good Manufacturing Practices are extensive regulations governingthe manufacturing process, stability testing, record-keeping and qualitystandards.  We do not have control over,other than by contract, third-party manufacturers’ compliance with theseregulations and standards.  Because thesuppliers of key components and materials must be named in an NDA filed withthe FDA for a product, significant delays can occur if the qualification of anew supplier is required.  In the eventof any interruption in supply from Searle, GRL or Dr. Madaus due to regulatoryreasons, processing problems, capacity constraints or other causes, alternativemanufacturing arrangements may not be available on a timely basis, if atall.  Any failure of Searle, GRL or Dr.Madaus to fulfill its obligations to BTG could have a material adverse effecton our business, results of operations and financial condition.  See “—Manufacturing and Supply Agreements.”

 

Wecurrently utilize a contract sterilizer located in Israel in connection withthe manufacture of our BIOLON product. The contract sterilizer has moved its operations to a new manufacturingfacility which must be inspected by the FDA. However, as a result of the current violence in Israel, the FDA hassuspended inspections of manufacturing facilities in Israel.  The FDA’s delay in inspecting this facilityhas required us to stop shipping BIOLON to the United States until the facilityis inspected or we qualify an alternative contract sterilizer.  We cannot assure you that the facility willbe inspected in the near term, or that we can qualify an alternative contractsterilizer on reasonable terms in a timely manner or at all.

 

Weare dependent on third-party licensees.

 

BTGis dependent on third-party licensees to distribute its products outside theUnited States and Israel and to distribute certain of its products in theUnited States.  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 webelieve our licensees have an economic motivation to commercialize theirproducts, we have no effective control over the licensees’ commercializationefforts.

 

BTGmay from time to time seek to collaborate with larger pharmaceutical companieson the research, 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, largerpharmaceutical companies often explore multiple technologies and products forthe same medical conditions. Therefore, they are likely to enter intocollaborations with BTG’s competitors for products addressing the same medicalconditions addressed by BTG’s products. Depending on how other product candidates advance, a corporate partnermay slow down or abandon its work on BTG’s product candidates or terminate itscollaborative arrangement with BTG in order to focus on these other prospects.

 

Wedepend upon proprietary technology, which may be difficult to protect.

 

BTG’ssuccess will depend, in part, on its ability to obtain patent protection forits technology (including use of its products), preserve trade secrets andoperate without infringing the proprietary rights of third parties.  The patent positions of pharmaceutical andbiopharmaceutical companies are highly uncertain and involve complex legal andfactual questions.  Patent disputes arefrequent and costly, can delay or preclude the commercialization of productsand could subject BTG to significant liabilities to third parties.  Many biopharmaceutical companies have employedintellectual property litigation as a way to gain a competitive advantage.

 

BTGhas developed patentable technology and proprietary know-how and has acquiredfrom various universities and institutions certain basic technologies, as towhich either 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 

 

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patents will notbe challenged, circumvented or invalidated or that rights granted pursuant tosuch patents will provide competitive advantages to BTG.  Because patent applications are maintainedin secrecy for a period of time after filing, we cannot be certain that othershave not filed patent applications for technology covered by our pendingapplications or that we were the first to file patent applications for suchtechnology.  BTG also relies on tradesecrets, proprietary know-how and technological innovation that it seeks toprotect with confidentiality agreements with its employees, consultants andlicensees.  There can be no assurancethat 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 file applicationsfor or be issued patents in the future with respect to technology potentiallynecessary or useful to BTG.  Some ofthese technologies, applications or patents may conflict with BTG’stechnologies 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.

 

BTGhas in the past been, is currently and may in the future be involved inlitigation and administrative hearings to determine the validity and scope ofits and others’ patents and proprietary rights. Such litigation andadministrative proceedings have to date required, and may in the futurerequire, a significant commitment of our resources.  Any such commitment may divert resources from other areas ofBTG’s business.  See “Item 3.  Legal Proceedings.”

 

Thesuccessful development of pharmaceutical products is costly and highlyuncertain.

 

Asubstantial portion of our annual operating budget is spent on research,development and clinical activities.  Weare currently developing several products that may never reach clinical trials,achieve success in the clinic, be submitted for approval, be approved formanufacturing or marketing or achieve commercial success.  Further, we rely on third parties to assistin various stages of the development process. These third parties may be unable to complete their work in a timelyfashion or in a manner that is satisfactory to us.  Should they be unable to meet our needs, our product developmentprocess would be delayed and we may have to incur substantial additional costs.

 

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

 

•       theymay be found to be ineffective or to have harmful side effects in pre-clinicalor clinical testing;

•       theymay fail to receive necessary regulatory approvals;

•       theymay turn out to be uneconomical because of manufacturing costs or otherfactors; or

•       theymay be precluded from commercialization by the proprietary rights of others orby competing products for the same indication.

 

Successin pre-clinical and early clinical trials does not ensure that large-scaletrials will be successful. Data obtained from pre-clinical and clinical trialsare frequently 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.

 

BTGis currently seeking to expand its product pipeline through the acquisition ofbusinesses, products and/or technologies. The acquisitions that BTG is currently able to pursue in general involveproducts that are still in clinical trials and, therefore, face the risksdiscussed above.  To the extent BTG usesits cash resources, incurs debt and/or issues shares of its common stock inthese acquisitions but the acquired product cannot be commercialized, BTG’sbusiness and prospects could be adversely affected.

 

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Thelength of time necessary to complete clinical trials and to submit anapplication for marketing approval for a final decision by a regulatoryauthority varies significantly and is dependent upon a number of factors, manyof which are outside our control, including the rate of patientenrollment.  Patient enrollment is afunction of several factors, including the size of the patient population andthe proximity of patients to clinical sites. Delays in patient enrollment could result in increased costs and delaysin completion of the clinical trials. In addition, pre-clinical and clinical trials must meet regulatory andinstitutional requirements.

 

Theprincipal factors affecting BTG’s research and development expenses include thenumber of and outcome of clinical trials currently being conducted by it and/orits collaborators, the number of products in development and later stageresearch and future levels of revenue.

 

Wehave limited manufacturing capacity.

 

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 amaterial adverse effect on BTG’s business, results of operations and financialcondition.  Any substantial delay in obtainingregulatory approval for its manufacturing processes and facilities could alsohave a material adverse effect on BTG. As a result of the current violence in Israel, the FDA has suspendedinspections of manufacturing facilities in Israel, which could delay FDAinspection of BTG’s new manufacturing facility and, therefore, use of suchfacility to manufacture products.

 

BTGis dependent on third parties to manufacture all or a portion of certain of itsproducts.  See “—We are dependent onthird-party suppliers.”

 

Wehave 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.  With respect toterritories outside the United States, BTG does not yet have an establishedsales force and relies on third parties to market its products.  There can be no assurance that our marketingstrategy will be successful.  Turnoverin our sales and marketing employees adversely affects our product sales, as itcan take several months to find and train new sales and marketingemployees.  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.”

 

Weare seeking to expand through acquisitions, which entails risk.

 

BTGis currently 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 may requiresubstantial additional research and development and clinical trials before theycan be commercialized, all of which could adversely affect BTG’s results ofoperations 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 

 

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the time ofacquisition, we will be required to write-off immediately the fair market valueof such technology, which will adversely affect our results of operations.

 

Weexpect our quarterly results to fluctuate, which may cause volatility in ourstock price.

 

BTG’srevenues and expenses have in the past and may in the immediate future continueto display 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:

 

•       theamount and timing of product sales,

•       thetiming of the introduction of new products,

•       thetiming and realization of milestone and other payments from licensees,

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

•       theextent and timing of costs of obtaining, enforcing and defending intellectualproperty rights, and

•     anycharges related to acquisitions.

 

Becausemany of BTG’s expenses are fixed, particularly in the short-term, any decreasein revenues will adversely affect BTG’s earnings until revenues can beincreased or expenses reduced.  Forexample, in 1999, the first five months of 2000 and the second half of 2001,BTG’s revenues and earnings were adversely affected by Gentiva’s decision toreduce the amount of OXANDRIN inventory it carried.  See “—We are dependent on OXANDRIN sales.”  Because of fluctuations in revenues andexpenses, it is possible BTG’s operating results for a particular quarter orquarters will not meet the expectations of public market analysts andinvestors, causing the market price of BTG common stock to decline.  We believe that period-to-period comparisonsof our operating results are not a good indication of our future performanceand stockholders should not rely on those comparisons to predict our futureoperating or share price performance. See “Item 7.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

 

Wemay be unable to obtain any additional capital needed to operate and grow ourbusiness.

 

Thedevelopment and commercialization of products requires a substantial amount offunds. In addition, we may require cash to acquire businesses, products and/ortechnologies.  Our cash requirements arecurrently satisfied primarily through product sales.  Historically, cash requirements were satisfied primarily through(i) product sales, (ii) funding of projects through collaborative research anddevelopment arrangements, (iii) contract fees, (iv) government of Israelfunding of a portion of certain research and development projects, mainlythrough the office of its Chief Scientist, and (v) equity and debtfinancings.  There can be no assurancethat these financing alternatives will be available in the future to satisfyour cash requirements.  We believe thatour current cash resources, together with anticipated product sales and continuedfunding from the Chief Scientist at current levels, will be sufficient to fundour ongoing operations for the foreseeable future.  There can, however, be no assurance that product sales will occuras anticipated, that current agreements with third party distributors of ourproducts will not be canceled, that the Chief Scientist will continue toprovide funding at current levels, that we will not use a substantial portionof our cash resources to acquire businesses, products and/or technologies, orthat unanticipated events requiring the expenditure of funds will not occur.

 

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, 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.

 

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Weare subject to stringent governmental regulation.

 

BTGis subject to stringent regulation with respect to product safety and efficacyby numerous governmental authorities in the United States and othercountries.  Of particular significanceare the requirements covering research and development, testing, manufacturing,quality control, labeling and promotion of pharmaceutical products for humanuse.  All of BTG’s products,manufacturing processes and facilities require governmental licensing orapproval prior to commercial use.  Apharmaceutical product cannot be marketed in the United States until it hasbeen approved by the FDA, and then can only be marketed for the indications andclaims approved by the FDA.  As a resultof these 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 may encounter delays or rejectionsbased upon changes in the policies of regulatory authorities.

 

FutureUnited States or foreign legislative or administrative acts could also preventor delay regulatory approval of BTG’s or its licensees’ products.  Failure to obtain requisite governmentalapprovals, or failure to obtain approvals of the scope requested, could delayor preclude BTG or its licensees from marketing their products, could limit thecommercial use of the products and could also allow competitors time tointroduce competing products ahead of product introduction by BTG and therebyhave a material adverse effect on BTG’s results of operations, liquidity andfinancial condition.  Even afterregulatory approval is obtained, use of the products could reveal side effectsthat, if serious, could result in suspension of existing approvals and delaysin obtaining approvals in other jurisdictions.

 

Regulationby governmental 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 length of time required to obtain regulatoryapproval of genetically-engineered products has been significantly longer thanexpected, both for BTG and the biotechnology industry in general.  These delays have had and, if they continue,could have a material adverse effect on our results of operations and financialcondition.  We believe that these delayshave in the past negatively impacted our ability to attract funding and that,as a result, the terms of such financings have been less favorable to us thanthey might otherwise have been had BTG’s product revenues provided sufficientfunds to finance 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; this willresult in lower revenues than if BTG had commercialized the products on itsown.

 

Failureto comply with applicable regulatory requirements can, among other things,result in fines, suspension of regulatory approvals, product recalls, seizureof products, imposition of operating restrictions and criminalprosecutions.  Further, FDA policy orsimilar policies of regulatory agencies in other countries may change and additionalgovernmental requirements may be established that could prevent or delayregulatory approval of our products.

 

Weare subject to uncertainties regarding healthcare reimbursement and reform.

 

BTG’sability to successfully commercialize human therapeutic products depends inpart on the extent to which reimbursement for the cost of such products andrelated treatment will be available from government health administrationauthorities, 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 and third-party payors foruse of our healthcare products, the market acceptance of these products wouldbe adversely affected.  In addition, inrecent years a number of federal and state healthcare reform proposals have 

 

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been introduced tocontain healthcare costs.  There can beno assurance as to the ultimate content, timing or effect of any healthcarereform legislation, nor is it possible at this time to estimate the impact ofpotential 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 thatcountry.  There can be no assurance thatthe establishment of a price in one European country will not have thepractical effect of requiring our marketing partners to sell the product inother European countries at no higher than such price.  Because BTG generally supplies product toits marketing partners for a specified percentage of net sales, there can be noassurance that the resulting prices would be sufficient to generate an acceptablereturn on our investment in our products or even cover our manufacturing costsfor such product.

 

Weoperate in a highly competitive market and our competitors may developalternative technologies and products.

 

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 wedo.  Acquisitions of competing companiesby large pharmaceutical companies or other companies could enhance thefinancial, 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.

 

Ourproducts must compete with others to gain market acceptance and marketshare.  An important factor will be thetiming of market introduction of competitive products.  Accordingly, the relative speed with whichwe and competing companies can develop products, complete the clinical testingand approval processes, and supply commercial quantities of the products to themarket will be an important element of market success.  Significant competitive factors include:

 

•       capabilitiesof our collaborators,

•       productefficacy and safety,

•       timingand scope of regulatory approval,

•       productavailability,

•       marketingand sale capabilities,

•       reimbursementcoverage from insurance companies and others,

•       theamount of clinical benefit of our product candidates relative to their cost,

•       themethod of administering a product,

•       price,and

•       patentprotection.

 

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.

 

Wemay be unable to obtain and retain skilled personnel.

 

Weare dependent 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 willbe successful in hiring or retaining the personnel we require for continuedgrowth.  Our failure to hire and retainsuch personnel could materially adversely affect our business.

 

Ourbusiness may be adversely affected by developments in Israel.

 

BTG’sprimary research, development and production activities are at this timeconducted in Israel by its wholly-owned subsidiary BTG-Israel and can beaffected by economic, military and political conditions in that country and inthe Middle East in general.  Since theestablishment of the State of Israel in 1948, a number of armed conflicts havetaken place between Israel and its Arab neighbors and a state of hostility,which varies in degree and intensity, has caused security and economic problemsin Israel.  Any major hostilitiesinvolving Israel could adversely affect our research, development andproduction operations, which would harm our business.  We cannot assure you that ongoing or revived hostilities relatedto Israel will not have a material adverse affect on us or our business and onour share price.  Despite the progresstowards peace between Israel and its Arab neighbors, the future of these peaceefforts is uncertain.  In addition,since October 2000, there has been a significant increase in violence,primarily in the West Bank and Gaza Strip. During the course of military operations, Israel’s military reserves,which include a number of our employees and executives, may be called up, whichcould adversely affect our ability to conduct our business.

 

Asa result of the current violence in Israel, the FDA has suspended inspectionsof manufacturing facilities in Israel. Products we intend to manufacture at our newly constructed manufacturingfacility cannot be shipped into the United States until the FDA has inspectedand approved 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.  Continued suspension ofthese activities by the FDA will delay the commencement of manufacturing at ournew facility, which could adversely affect our business.  The suspension of FDA inspections hasdelayed inspection of the contract sterilizer utilized by BTG for its BIOLONproduct, which has required us to stop shipping BIOLON to the United Statesuntil the facility is inspected or BTG qualifies a new contract sterilizer.

 

BTGmanages its Israeli operations with the objective of protecting against anymaterial net financial loss in U.S. dollars from the impact of Israeliinflation and currency devaluations on its non-U.S. dollar assets andliabilities.  The cost of BTG’soperations in Israel, as expressed in dollars, is influenced by the extent towhich any increase in the rate of inflation in Israel is not offset (or isoffset on a lagging basis) by a devaluation of the Israeli Shekel in relationto the U.S. dollar.  The rate ofinflation (as measured by the consumer price index in Israel) was approximately1% in 1999, while the Shekel was devalued by less than 1%.  In 2000 there was no change in the consumerprice index and the Shekel’s value in relation to the U.S. dollar increased byapproximately 3%.  In 2001 the inflationrate was approximately 1% while the Shekel was devalued by 9%. As a result, forthose expenses linked to the Israeli Shekel, such as salaries and rent, thisresulted in corresponding increases in these costs in U.S. dollar terms in 1999and 2000.  However, in 2001, for thoseexpenses this resulted in corresponding decreases in these costs in U.S. dollarterms.  To the extent that expenses inShekels exceed BTG’s revenues in Shekels (which to date have consistedprimarily of research funding from the Chief Scientist and product sales inIsrael), the devaluations of Israeli currency have been and will continue to bea benefit to BTG’s financial condition. However, should BTG’s revenues in Shekels exceed its expenses in Shekelsin any material respect, the devaluation of the Shekel will adversely affectBTG’s financial condition.  Further, tothe extent the devaluation of the Shekel with respect to the U.S. dollar doesnot substantially offset the increase in the costs of local goods and servicesin Israel, BTG’s financial results will be adversely affected as local expensesmeasured in U.S. dollars will increase.

 

Wemay incur substantial product liability.

 

Thetesting and marketing of BTG’s products entail an inherent risk of productliability and 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 other of BTG’s products or that such companies will, ifobligated to do so, have adequate resources to fulfill their indemnityagreements. Further, to the extent BTG elects to test or market productsindependently, it will bear the risk of product liability directly.  BTG presently has $15,000,000 of productliability insurance coverage in place. There can be no assurance that we willbe able to maintain existing insurance or obtain additional insurance onacceptable terms, or at all.  It ispossible that a single product liability claim could exceed our insurancecoverage limits, and multiple claims are possible.  Any successful product liability claim 

 

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made against BTGcould substantially reduce or eliminate any stockholders’ equity BTG may haveand could have a significant adverse impact on BTG’s business.

 

Ourstock price may be volatile.

 

Themarket prices for securities of biopharmaceutical companies, including BTG,have been volatile, and it is likely that the price of our common stock willfluctuate in the future.  Factors suchas announcements of technological innovations or new commercial products by BTGor its 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 stock market has also experienced significant price andvolume fluctuations that are often unrelated to the operating performance ofparticular companies.  In the past,following periods of volatility in the market price of the securities ofbiopharmaceutical companies, securities class action litigation has often beeninstituted against these companies.  Ifwe face such litigation in the future, it would result in substantial costs anda diversion of management’s attention and resources, which could adversely affectour business.

 

Inaddition, the market price of our common stock could be adversely affected byfuture exercises of outstanding options and the issuance of common stock inacquisitions of businesses, products and/or technologies.  At December 31, 2001 options to purchase anaggregate of approximately 7,917,000 shares of common stock wereoutstanding.  A substantial portion ofthese options have exercise prices below the current market price of the commonstock.  Additionally, all of the sharesof common stock issuable upon exercise of these outstanding options have beenregistered under the Securities Act of 1933, as amended, and, accordingly, whenissued will be freely tradable without restriction.  The sale of a significant amount of these shares at one timecould adversely affect the market price of our common stock.  In addition, BTG may issue additional stock,warrants and/or options to raise capital or complete acquisitions in thefuture.  BTG may also issue additionalsecurities in connection with its employee benefit plans.  During the terms of such options andwarrants, the holders thereof are given the opportunity to profit from a risein the market price of the common stock. The exercise of such options and warrants may have an adverse effect onthe market value of the common stock.  The existence of such options and warrants may adversely affectthe terms on which BTG can obtain additional equity financing.  To the extent the exercise prices of suchoptions and warrants are less than the net tangible book value of the commonstock at the time such options and warrants are exercised, BTG’s stockholderswill experience an immediate dilution in the net tangible book value of theirinvestment.  Further, the future sale ofa substantial number of shares of common stock by existing stockholders andoption holders may have an adverse impact on the market price of the commonstock.  See “Item 5. Market forRegistrant’s Common Equity and Related Stockholder Matters.”

 

Effectinga change of control of BTG could be difficult, which may discourage offers forshares of our common stock.

 

Ourcertificate of incorporation and the Delaware General Corporation Law containprovisions that may delay or prevent an attempt by a third party to acquirecontrol of us.  These provisions includethe requirements 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:

 

•       ourBoard of Directors approves of the transaction before the third party acquires15% of our stock,

•       thethird party acquires at least 85% of our stock at the time its ownership goespast the 15% level, or

•       ourBoard of Directors and two-thirds of the shares of our common stock not held bythe third party vote in favor of the transaction.

 

Wehave also adopted a stockholder rights plan intended to deter hostile orcoercive attempts to acquire us.  Underthe plan, if any person or group acquires more than 20% of our common stockwithout approval of the Board of Directors under specified circumstances, ourother stockholders have the right to purchase shares 

 

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of our commonstock, or shares of the acquiring company, at a substantial discount to thepublic market price.  The plan thusmakes an acquisition 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 toacquire control 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.

 

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**EXECUTIVE OFFICERS OF THE COMPANY**

 

Ourcurrent executive officers and key personnel are as follows:

 
| **Name**                    |   | **Age** |   | **Positions**                                                                         |
|-----------------------------|--------|---------|--------|---------------------------------------------------------------------------------------|
| Sim  Fass                   |   | 60      |   | Chairman  of the Board and Chief Executive Officer; President of BTG-Israel; Director |
|                        |   |    |   |                                                                                  |
| Norman  Barton, M.D., Ph.D. |   | 54      |   | Senior  Vice President-Chief Medical Officer                                          |
|                        |   |    |   |                                                                                  |
| Zvi  Ben-Hetz               |   | 57      |   | Vice  President-Operations and Logistics, BTG-Israel                                  |
|                        |   |    |   |                                                                                  |
| Leah  Berkovits             |   | 53      |   | Vice  President-Administration and Corporate Communications                           |
|                        |   |    |   |                                                                                  |
| John  Bond                  |   | 52      |   | Senior  Vice President-Finance and Treasurer                                          |
|                        |   |    |   |                                                                                  |
| Lawrence  Brown             |   | 43      |   | Vice  President-Business Development                                                  |
|                        |   |    |   |                                                                                  |
| Thomas  Ekhardt Dr.sc.nat.  |   | 57      |   | Vice  President-Regulatory Affairs                                                    |
|                        |   |    |   |                                                                                  |
| Meir  Fischer, Ph.D.        |   | 61      |   | Vice  President-Process Development, BTG-Israel                                       |
|                        |   |    |   |                                                                                  |
| Donald  Fishbein            |   | 47      |   | Vice  President-Marketing                                                             |
|                        |   |    |   |                                                                                  |
| Thomas  Fogarty             |   | 39      |   | Vice  President-National Sales                                                        |
|                        |   |    |   |                                                                                  |
| Dov  Kanner, Ph.D.          |   | 48      |   | Senior  Vice President; General Manager, BTG-Israel                                   |
|                        |   |    |   |                                                                                  |
| Ernest  Kelly, Ph.D.        |   | 52      |   | Senior  Vice President-Quality Assurance, Quality Control and Regulatory Affairs      |
|                        |   |    |   |                                                                                  |
| Mark  Kessler, Ph.D.        |   | 44      |   | Vice  President-Quality Assurance and Quality Control, BTG-Israel                     |
|                        |   |    |   |                                                                                  |
| Avigdor  Levanon, Ph.D.     |   | 55      |   | Vice  President-Research, BTG-Israel                                                  |
|                        |   |    |   |                                                                                  |
| Rachel  Perlman             |   | 51      |   | Vice  President-Human Resources, BTG-Israel                                           |
|                        |   |    |   |                                                                                  |
| Robert  Shaw                |   | 48      |   | Senior  Vice President-General Counsel and Secretary                                  |
|                        |   |    |   |                                                                                  |
| Ronald  Simko               |   | 51      |   | Vice  President-Manufacturing                                                         |
|                        |   |    |   |                                                                                  |
| Yehuda  Sternlicht          |   | 47      |   | Vice  President-Finance, Chief Financial Officer                                      |
|                        |   |    |   |                                                                                  |
| Bernard  Tyrrell            |   | 47      |   | Senior  Vice President-Worldwide Marketing and Sales                                  |
|                        |   |    |   |                                                                                  |
| Rivka  Zaibel               |   | 48      |   | Vice  President-Regulatory Affairs, BTG-Israel                                        |
|                        |   |    |   |                                                                                  |
| Yehuda  Zelig               |   | 49      |   | Vice  President-Manufacturing, BTG-Israel                                             |

 

SimFass has served as Chief Executive Officer of BTG and President of BTG-Israelsince May 1984 and 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.

 

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NormanBarton, M.D., Ph.D. joined BTG in April 1996 in the newly created position ofVice President—Medical Affairs and was appointed Senior Vice President—ChiefMedical Officer in March 1998. From 1985 until he joined BTG in 1996 Dr. Bartonserved as Chief of the Clinical Investigations and Therapeutics Section of theNational Institute of Neurological Disorders and Stroke in Bethesda, Maryland.During that time, he was instrumental in the development and clinicalinvestigation of macrophage-targeted glucocerebrosidase (CEREDASEä), the first enzyme replacement product for Gaucher disease, a geneticdisorder of lipid metabolism.  Between1978 and 1985, Dr. Barton held positions as a staff neurologist at The New YorkHospital and the National Institute of Neurological Disorders and Stroke.  Dr. Barton is a board-certified neurologistand holds a Ph.D. in Biological Chemistry.

 

ZviBen-Hetz joined BTG-Israel in December 1980 as facility manager.  His work included the organization andconstruction of the manufacturing facility and logistics system of BTG inIsrael.  Between 1986 and 1988, heheaded the unit involved in the construction of the present facility inIsrael.  In 1988, he was appointedOperations and Logistics Manager of BTG-Israel and in 1992 was appointed VicePresident—Operations and Logistics of BTG-Israel.  From 1976 until he joined BTG-Israel, Mr. Ben-Hetz worked at theVolcani Institute, the National Institute for Agriculture Research in Israel,as a Junior Agricultural Engineer.

 

LeahBerkovits joined BTG in March 1985. Since then, she has held a variety of positions including Manager,Administration, and Director, Corporate Communications.  In September 1999, she was promoted to VicePresident—Administration and Corporate Communications.  From 1978 until she joined BTG in 1985, Ms.Berkovits was assistant to three successive Ambassadors who served in thecapacity of Permanent Representative of Israel to the United Nations.

 

JohnBond joined BTG in June 2001 as Senior Vice President—Finance andTreasurer.  From August 2000 until April2001, Mr. Bond served as the Chief Financial Officer of Solution.com.  From 1999 until July 2000, Mr. Bond servedas the Chief Financial Officer of Centeon/Aventis Behring LLC.  Prior to that Mr. Bond served in severalsenior finance positions at Rhone-Poulenc Rorer Inc., including CorporateTreasurer from 1996 to 1998, Vice President Finance, European Operations from1993 to 1996 and Vice President Finance, Research and Development from 1992 to1993.

 

LawrenceBrown joined BTG in October 1998 in the newly created position of VicePresident—Business Development.  Priorto joining BTG, Mr. Brown was employed by Centocor, Inc. from April 1987 to October1998 in several capacities, most recently as Director, Business Development.

 

ThomasEkhardt, Dr.sc.nat joined BTG in May 2000 as Vice President—RegulatoryAffairs.  Prior to joining BTG he waswith Wyeth-Vaccines for 14 years in various research and development positions,most recently as Senior Director, Global Regulatory Affairs.  He obtained his doctorate degree inmicrobial genetics at the Swiss Institute for Advanced Technology in Zurich,Switzerland in 1974.  He spent twelveyears in molecular genetics research in academia and industry.

 

MeirFischer, Ph.D. was appointed to the newly-created position of VicePresident—Process Development of BTG-Israel in January 1998.  Dr. Fischer joined BTG-Israel in 1981 asgroup leader, served as Assistant Director of the Molecular Biology Departmentfrom 1984 to 1988, and as Department Head from 1988 to 1994 in the ResearchDivision, and Department Head of Process Development from 1994 to 1997 in theDivision of Manufacturing and Process Development.  Dr. Fischer obtained his Ph.D. in Biochemical Genetics andMicrobiology from Indiana University in 1974 and subsequently did post-doctoralresearch in the Department of Biochemistry of Duke University and at BurroughsWellcome Company.

 

DonaldFishbein joined BTG as Director of Marketing in June 1995 and was appointedVice President—Marketing in July 1998. Prior to joining BTG, Mr. Fishbein spent four years as Director ofMarketing Planning for Wyeth-Ayerst Laboratories.  Prior to Wyeth-Ayerst Laboratories, Mr. Fishbein spent four yearswith Genentech, three years with the McNeil Pharmaceuticals division of Johnson& Johnson and four years with SmithKline Beecham Clinical Laboratories invarious marketing, strategic planning and market research positions.

 

ThomasFogarty joined BTG in May 1996 as an Area Manager.  He became a Regional Manager in November 1997, Field SalesDirector in May 2000 and National Sales Director in November 2001.  In January 2002, Mr. Fogarty was appointedas Vice President— National Sales. Prior to joining BTG, he worked as a Medical Center Sales Representativespecializing in critical care medicine with both Ohmeda and WinthropPharmaceuticals.

 

DovKanner, Ph.D. was appointed Senior Vice President of BTG and General Manager ofBTG-Israel in January 2000.  Priorthereto, he served as Vice President—Quality Assurance and Regulatory Affairsof BTG-Israel from September 1994.  Dr.Kanner joined BTG-Israel in 1981 as a staff scientist, served as Head of 

 

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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.

 

ErnestKelly, Ph.D. joined BTG in February 1996 in the newly created position ofSenior Vice President—Quality Assurance, Quality Control and RegulatoryAffairs. Prior to joining BTG, he was Vice President, Worldwide QualityAssurance for Rhone-Poulenc Rorer Inc. (“RPR”).  From 1979 to 1996, Dr. Kelly served in various positions at RPRin both research and development and industrial operation qualityassurance.  Prior to joining RPR, heserved Merck Sharp and Dohme from 1974 to 1979 and McNeil Labs from 1972 to1974 in quality assurance and analytical research positions.  Dr. Kelly received his Ph.D. in PhysicalChemistry from Villanova University, served on several United StatesPharmacopeia Advisory Panels and also served as Adjunct Professor ofPharmaceutics at Temple University.

 

MarkKessler, Ph.D. joined BTG-Israel in 1992 as a Senior Research Scientist. In1995 Dr. Kessler became a Senior Quality Assurance Scientist and in 1996 waspromoted to Department Head of Quality Control. In May 2000, he was promoted toSenior Director, Quality and in June 2001, he became Vice President, Quality.Dr. Kessler obtained his Ph.D. in Genetics from the Weizmann Institute ofScience in 1987 and was a Post-Doctoral Research Fellow at Cold Spring HaborLaboratories from 1987 to 1992.

 

AvigdorLevanon, Ph.D. joined BTG-Israel in 1980 as group leader, served as Head of theMolecular Biology Department from 1983 to 1995 and as assistant to the ChiefScientist from 1995 to 1998.  In October1998 Dr. Levanon was appointed to the newly created position of VicePresident—Research of BTG-Israel.  Dr.Levanon obtained his Ph.D. in Medical Virology and Microbiology from TheTel-Aviv University Medical School in 1977 and subsequently did post-doctoralresearch at the Institute of Molecular Biology of Zurich University.

 

RachelPerlman joined BTG-Israel in September 1982 as assistant to theController.  In 1994, she was appointedSenior Director of Human Resources for BTG-Israel, and in September 1999, waspromoted to Vice President, Human Resources of BTG-Israel. Prior to joining BTG–Israel,Mrs. Perlman served as Patent Administrator in the Weizmann Institute from 1974through 1982.

 

RobertShaw joined BTG in April 1998 as Vice President—General Counsel and wasappointed Senior Vice President—General Counsel in June 1999 and Secretary inMarch 2000.  Prior to joining BTG, Mr.Shaw was Vice President, 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.

 

RonaldSimko joined BTG in August 1994 as Vice President—Manufacturing.  From 1977 to 1989, Mr. Simko worked innumerous manufacturing capacities at Schering–Plough Corporation managingthe process validation organization as well as the sterile products and tabletproduction operations.  From 1989 to1994, he was at Enzon, Inc., where he served as Senior Director, Manufacturingand Materials Management.

 

YehudaSternlicht joined BTG-Israel in July 1992 as financial manager and in January1993 was appointed Chief Financial Officer of BTG.  In June 1995, he was appointed Vice President—Finance and ChiefFinancial Officer of BTG.  From 1988until he joined BTG-Israel, he was financial manager of Bordeaux Textile Ltd.,an Israeli company.  From 1985 to 1988,he served as controller of Laser Industries Ltd., an Israeli company listed onthe American Stock Exchange.  Prior tothat, he held various positions at Haft & Haft, one of the largest CPAfirms in Israel.  From 1983 to 1985, he workedat Haft & Haft’s affiliate’s New York office. Mr. Sternlicht is qualifiedas a Certified Public Accountant in the State of Israel.

 

BernardTyrrell joined BTG in March 2001 as Senior Vice President—Worldwide Marketingand Sales.  From June 1999 until hejoined BTG, Mr. Tyrrell was Sector Head for Pharmaceuticals for The Hay Group, aconsulting firm.  Mr. Tyrrell served asDirector of Global Strategic Marketing for metabolic diseases at Johnson &Johnson from May 1998 to June 1999 and Vice President, Marketing and Sales atOncor Inc. from September 1997 to May 1998. Prior to joining Oncor, Mr. Tyrrell held various positions at EliLilly from 1977 to 1997, most recently as Director, Sales and Marketing,Oncology.  Mr. Tyrrell is a registeredpharmacist and has an MBA from Bryant College.

 

RivkaZaibel joined BTG-Israel in April 1988 as Administrative Assistant to the Headof the Manufacturing Division.  She wasappointed Coordinator of Regulatory Affairs in 1994 and Manager of RegulatoryAffairs in 1995.  Mrs. Zaibel waspromoted to Director, Regulatory Affairs, BTG-Israel, in January of 1999, toSenior Director in May 2000 and to Vice President—Regulatory Affairs,BTG-Israel, in June 2001. Prior to joining BTG-Israel, Mrs. Zaibel held variousadministrative positions at The Middle East Steel Co. 

 

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from January 1979to April 1988.  Prior to that Mrs.Zaibel served as Administrative Assistant to Deputy General Manager of theIsraeli Ministry of Defense from July 1973 to December 1978.

 

YehudaZelig joined BTG-Israel in March 1983 as a research assistant.  In 1988 he was appointed Manager—ProteinPurification of BTG-Israel, and from 1989 to 1994 he served as Manager ofBTG-Israel’s Protein Purification Department. In 1994 Mr. Zelig was appointed Head of the Manufacturing Department ofBTG-Israel and in September 1995 he was appointed Director of Manufacturing ofBTG-Israel.  In January 1998, Mr. Zeligwas appointed Vice President—Manufacturing of BTG-Israel.

 

**ITEM 2.****                                    ****PROPERTY**

 

BTG’sadministrative offices are located in Iselin, New Jersey, where BTG has leasedapproximately 23,000 square feet of office space.  The lease has a base average annual rental expense ofapproximately $415,000 and expires in October 2003.  We are currently in the process of negotiating a lease for a newheadquarters’ facility.  In addition,BTG leases approximately 2,000 square feet in New York City for its businessactivities, including its investor and public relations activities.  This lease expires in September 2003.  We also lease approximately 10,000 square feetof space in San Diego, California, where our recently acquired PROSAPTIDEresearch is being conducted.  This leaseexpires in October 2004.

 

BTG’sresearch, development and manufacturing facility is located in Rehovot, Israel,where BTG leases approximately 95,000 square feet at an annual rental ofapproximately $1,112,000.  This leaseexpires in December 2002.  Although webelieve our space is suitable and adequate for our current activities, wedetermined that we will require a new, larger manufacturing facility in Israelwithin the next several years to meet anticipated increased demand for ourproducts and increased regulatory requirements.**** Accordingly, in April 1999 BTG purchased a building in Israellocated approximately 12 miles south of its current facility for approximately$6.25 million.** **Construction of amodern production facility meeting FDA GMP requirements for drugs, biologicsand devices was completed at the end of 2001, and qualification activities havebeen commenced and are expected to be completed in the second half of2002.  BTG will initially locate itsproduction activities for FIBRIMAGE at this new facility, and will thereaftermove the remainder of its production activities to this facility.  In addition, BTG has agreed to purchaseadditional property adjacent to the new manufacturing facility forapproximately $1,200,000, of which approximately $400,000 has been paid todate.  This property will allow us tolocate our principal research and development activities adjacent to our newmanufacturing facility as well as management and administrative activities.

 

**ITEM 3.****                                    ****LEGALPROCEEDINGS**

 

OnDecember 1, 1994, Genentech filed a lawsuit against BTG in the United StatesDistrict Court for the District of Delaware alleging that BTG’s importation ofhGH produced according to its original expression system infringed twoGenentech process patents.  In January1995, BTG commenced an action against Genentech in the United States DistrictCourt for the Southern District of New York (the “U.S. District Court”)seeking, among other things, declaratory judgments as to the non-infringement,invalidity and unenforceability of certain Genentech patents.  The Delaware action was consolidated withthe New York action, and in August 1995 the U.S. District Court granted apreliminary injunction prohibiting the commercial introduction in the UnitedStates of BTG’s hGH pending 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*.

 

Twoof the Genentech patents originally at issue have expired, and only a thirdpatent of Genentech, expiring in July 2003, remains in issue.  The action in the U.S. District Court wastried in January 2000 and the U.S. District Court found that the remainingGenentech patent was invalid and vacated the preliminary injunction.  Following Genentech’s appeal, which washeard in December 2000, the CAFC reversed the District Court’s decision inSeptember 2001, reinstated the preliminary injuction and remanded the issue ofinfringement to the District Court for further proceedings.  BTG petitioned the CAFC for a rehearing enbanc, which was denied in December 2001. BTG and Genentech have settled this dispute, and a modified injunctionhas been issued which precludes BTG from importing or selling in the UnitedStates its hGH product produced according to its original expression systemduring the remaining life of this Genentech patent; however, this should notpreclude BTG from marketing hGH manufactured using a new expression system forwhich BTG obtained FDA approval in September 1999, subject to the outcome ofthe patent dispute with Novo Nordisk 

 

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discussedbelow.  We cannot assure you thatGenentech will not claim that our new expression system violates its patentthat expires in 2003 and seek an injunction to prevent our using the new expressionsystem to produce hGH for Teva.  See“Item 1.  Business—Products andApplications—BIO-TROPIN (human growth hormone).”

 

Threepatent applications of Genentech in Israel, which cover general methodsrelating to genetically engineered products and to human growth hormone, havebeen allowed — two in 1983 and one in 1985. BTG opposed the grant of all these patents.  Two of these patent applications expired during 1998 without everbeing granted.  The third, which expiredin June 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.  A decision is pending.  There can be no assurance that BTG will besuccessful in its opposition to the grant of this now expired patentapplication. If BTG is unsuccessful in its opposition in Israel the patent maybe deemed effective and Genentech may sue for infringement.

 

InSeptember 1993, JCR received a letter from attorneys representing Genentech andits licensee, 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 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 1999, 2000 and 2001 were approximately $10.5million, $13.0 million and $16.3 million, respectively, representing 17%, 21%and 19%, respectively, of BTG’s total product sales in those periods and 58%,63% and 68%, respectively, of BTG’s total hGH product sales in those periods.

 

In1997 Novo was issued a US patent for a biosynthetic ripe human growth hormonefree of contaminants 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 for biosynthetic ripe human growth hormone on the basis thatBTG scientists, not Novo scientists, were the first to invent.  The Patent Office has ruled in favor ofNovo, and BTG intends to commence an action in federal court seeking adetermination that BTG scientists were the first to invent.  Should BTG not be awarded priority, BTGcould be precluded from marketing in the United States hGH produced using thisnew expression system.

 

During1991, BTG received notification from the Patent Office of the declaration of aninterference between an issued patent assigned to BTG covering a method forproducing enzymatically active human copper/zinc SOD in bacteria and a pendingapplication of Chiron Corporation (“Chiron”), which claims an earlier filingdate.  Subsequent to the interferencebeing declared, Chiron was issued a U.S. patent for the bacterially producedform of recombinant human copper/zinc SOD. At BTG’s request, the Patent Office in 1998 declared a secondinterference to determine whether BTG rather than Chiron should hold the patentfor the bacterially produced form of recombinant human copper/zinc SOD on thebasis that BTG scientists, not Chiron scientists, invented the method forproducing recombinant human copper/zinc SOD in bacteria.  The Patent Office determined in the firstinterference that Chiron’s claims were unpatentable but that Chiron had anearlier invention date and that BTG is not entitled to the claims of itsexisting US patent.  In the secondinterference the Patent Office found that Chiron has the earlier invention dateand is entitled to keep its US patent and that BTG is not entitled to apatent.  In December 2001, BTG andChiron entered into a cross-license agreement to resolve the interferenceactions in the Patent Office, as well as a patent opposition in Israel.  BTG believes that as a result of thecross-license agreement Chiron’s patents are no longer a barrier to thecommercialization of BTG’s human copper zinc SOD product in the UnitedStates.  However, the existence of thiscross-license does not necessarily assure BTG’s ability to commercialize itsOXSODROL product.  See “Item 1.  Business—Products and Applications—OXSODROL(human superoxide dismutase).”

 

InSeptember 1991, we received a letter from Biogen stating that it believed thatour recombinant surface antigen of the hepatitis–B virus, which is anactive ingredient of our BIO-HEP-B vaccine, or the intermediates for theprocess of making such antigen, falls within the claims of one or more ofBiogen’s patents and/or patent applications. We made inquiries of Biogen and SmithKline Beecham (the exclusivelicensee of 

 

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all of Biogen’shepatitis-B patents except those in Japan) requesting that BTG be granted alicense to the Biogen patents; however, such efforts were not successful.  We obtained a compulsory license underBiogen’s Israeli patent to manufacture our BIO-HEP-B vaccine in Israel;however, this license expired, and the related litigation was terminated,following the expiration of Biogen’s Israeli patent.  We are now able to manufacture and sell BIO-HEP-B in Israel.  See “Item 1. Business — Products andApplications— BIO-HEP-B (hepatitis-B vaccine).”

 

Wehave been advised by SciGen, our BIO-HEP-B licensee in certain countries in theFar 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 othercountries.  BTG’s failure to obtain anyneeded license, or a determination that its vaccine infringes the patent rightsof Biogen or others, would substantially limit, if not prohibit, thecommercialization of the BIO-HEP-B vaccine in those countries in which Biogenor others have a patent until such patent is revoked or expires.  Our ability to secure any necessary licensesor sublicenses to these patents or applications cannot be predicted.

 

Weare aware of patent applications filed by, or patents issued to, other entitieswith respect to technology potentially useful to us and, in some cases, relatedto products and processes being developed by us.  We cannot presently assess the effect, if any, that these patentsmay have on our operations.  The extentto which efforts by other researchers have resulted or will result in patentsand the extent to which the issuance of patents to others would have amaterially adverse effect on BTG or would force BTG to obtain licenses fromothers is currently unknown.  See “Item1.  Business—Risk Factors—We depend uponproprietary technology, which may be difficult to protect.”

 

In1999, Solchem, a former affiliate and manufacturing arm of SPA, filed adeclaratory judgment action against BTG in the United States District Court ofNew Jersey seeking a determination that it is not a party to BTG’s agreementwith SPA, which binds affiliates of SPA, and therefore not bound by thenon-compete and free to sell oxandrolone to Mutual Pharmaceutical, a genericdrug manufacturer.  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.

 

BTGis currently in a dispute with Serono Laboratories, Inc. (“Serono Labs”)relating to a 1998 co-promotion agreement pursuant to which BTG undertook topromote in the United States through Gentiva Serono Labs’ recombinant humangrowth hormone, SAIZEN, for the treatment of children with growth failure dueto inadequate levels of growth hormone. The agreement proved to be commercially infeasible and BTG terminatedthe agreement in June 1999. Serono is contesting BTG’s termination of thatagreement in 1999 and asserting that a non-compete provision, which BTGmaintains expired in mid-2000 and in any case should not apply to Teva, if itis applicable at all, should continue until April 30, 2002.  In March 2000, BTG filed a lawsuit in NewJersey to confirm BTG’s position on these issues.  Serono Labs has commenced an action against BTG in Massachusettsto enforce the agreement.  The NewJersey court denied Serono Labs’ motion to dismiss the New Jersey action andenjoined Serono Labs from pursuing its action in Massachusetts.  The New Jersey court also denied BTG’smotion for summary judgment.  If SeronoLabs prevails in the litigation, Teva could be precluded from distributingBTG’s hGH in the United States until after April 30, 2002.  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.  See “Item 7.  Management’s Discussion and Analysis of Financial Condition andResults of Operations.”

 

In2000, Duramed Pharmaceuticals, Inc. filed an Abbreviated New Drug Application(“ANDA”) with the 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 the court granted Barr’s motion for summaryjudgment of non-

 

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infringement ofBTG’s patent.  BTG has appealed thisdecision.  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., and generic competition for MIRCETTE willlikely impact sales of MIRCETTE and, therefore, royalties to BTG.

 

**ITEM 4.****                                    ****SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None

 

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**PART II**

 

**ITEM 5.****                                    ****MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

BTG’scommon stock is quoted on the National Association of Securities DealersAutomated Quotation System (“Nasdaq”) National Market under the symbolBTGC.  The following table sets forth,for the periods indicated, the high and low sale prices per share of BTG’scommon stock from January 1, 2000 through December 31, 2001 as reported by theNasdaq National Market.

 

|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
| **2000**       |   |     |   |    |   |   |
| First Quarter  |   | $        | 21.00  |    | $      | 13.00 |   |
| Second Quarter |   | 17.19    |   | 8.44    |   |
| Third Quarter  |   | 14.06    |   | 7.44    |   |
| Fourth Quarter |   | 11.38    |   | 6.38    |   |
|           |   |     |   |    |   |
| **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    |   |

 

Thenumber of stockholders of record of our common stock on March 13, 2002 wasapproximately 1,300.

 

Wehave never declared or paid a cash dividend on our common stock, and we do notexpect that cash dividends will be paid to the holders of our common stock inthe foreseeable future.

 

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**ITEM 6.****                                    ****SELECTEDCONSOLIDATED FINANCIAL DATA**

 
|                                                                      |   | **Year ended December 31,**               |   |
|---------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                      |   | **1997**                                  |   | **1998** |   | **1999** |   | **2000(1)** |   | **2001(2)** |   |
|                                                                      |   | **(in thousands except per share  data)** |   |
| **Statement of Operations Data:**                                         |   |                                      |   |   |   |   |   |   |   |   |   |
|                                                                      |   |                                      |   |   |   |   |   |   |   |   |   |
| Total revenues                                                            |   | $                                         | 65,335 |   | $ | 76,855 |   | $ | 85,320 |   | $ | 84,944 |   | $ | 101,965 |   |
| Total expenses                                                            |   | 44,152                                    |   | 52,106 |   | 66,561 |   | 64,574 |   | 126,881 |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | 14,478                                    |   | 17,739 |   | 13,862 |   | 15,895 |   | (30,287 | ) |
| Cumulative effect of change in accounting  principle                      |   | —                                    |   | — |   | — |   | (8,178 | ) | — |   |
| Net income (loss)                                                         |   | $                                         | 14,478 |   | $ | 17,739 |   | $ | 13,862 |   | $ | 7,717 |   | $ | (30,287 | ) |
| Earnings (loss) per common share:                                         |   |                                      |   |   |   |   |   |   |   |   |   |
| Basic:                                                                    |   |                                      |   |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | $                                         | 0.31   |   | $ | 0.37 |   | $ | 0.26 |   | $ | 0.29 |   | $ | (0.53 | ) |
| Cumulative effect of change in accounting  principle                      |   | —                                    |   | — |   | — |   | (0.15 | ) | — |   |
| Net income (loss)                                                         |   | $                                         | 0.31   |   | $ | 0.37 |   | $ | 0.26 |   | $ | 0.14 |   | $ | (0.53 | ) |
| Diluted:                                                                  |   |                                      |   |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | $                                         | 0.28   |   | $ | 0.36 |   | $ | 0.26 |   | $ | 0.28 |   | $ | (0.53 | ) |
| Cumulative effect of change in accounting  principle                      |   | —                                    |   | — |   | — |   | (0.14 | ) | — |   |
| Net income (loss)                                                         |   | $                                         | 0.28   |   | $ | 0.36 |   | $ | 0.26 |   | $ | 0.14 |   | $ | (0.53 | ) |
| Weighted average shares outstanding:                                      |   |                                      |   |   |   |   |   |   |   |   |   |
| Basic                                                                     |   | 46,767                                    |   | 48,184 |   | 52,348 |   | 54,320 |   | 57,230 |   |
| Diluted                                                                   |   | 51,916                                    |   | 49,848 |   | 54,191 |   | 56,885 |   | 57,230 |   |

 
|                      |   | **As of December 31,** |   |
|---------------------------|--------|------------------------|--------|
|                      |   | **1997**               |   | **1998** |   | **1999** |   | **2000(1)** |   | **2001(2)** |   |
|                      |   | **(in thousands)**     |   |
| **Balance Sheet Data:**   |   |                   |   |   |   |   |   |   |   |   |   |
| Working capital           |   | $                      | 68,271 |   | $ | 110,359 |   | $ | 119,456 |   | $ | 153,344 |   | $ | 138,778 |   |
| Total assets              |   | 95,413                 |   | 142,595 |   | 164,645 |   | 213,225 |   | 236,670 |   |
| Long-term liabilities     |   | 3,975                  |   | 3,818 |   | 4,333 |   | 24,593 |   | 24,125 |   |
| Stockholders’ equity |   | 82,858                 |   | 122,977 |   | 141,884 |   | 159,353 |   | 162,863 |   |
|                           |        |                        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)           Effective January 1, 2000, BTGadopted Staff Accounting Bulletin 101 (“SAB 101”) issued by the Securities andExchange Commission in December 1999. As a result of adopting SAB 101, BTG changed the way it recognizesrevenue from contract fees for the license of marketing and distribution rightswhere the consideration is a one-time nonrefundable payment.  Prior to the issuance of SAB 101, BTGrecorded revenue from the license of marketing and distribution rights when therights 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 incometaxes of $4,380,000, of which $853,000 was recognized as contract fee revenuein 2000 and $1,156,000 was recognized as contract fee revenue in 2001.  The related revenues are now beingrecognized over the term of the related agreements.

 

(2)           In connection with our acquisition ofMyelos and based on an independent valuation, BTG allocated $45,600,000 toin-process research and development projects of Myelos, representing theestimated fair value based on risk-adjusted cash flows of the acquiredtechnology.  At the date of theacquisition the technology acquired in the acquisition was not fullycommercially developed and had no alternative future uses.  Accordingly, the value was expensed as ofthe acquisition date.  BTG recordednegative goodwill of $18,030,000 on its balance sheet, primarily because theamount written off as in-process research and development acquired exceeded thepurchase price for accounting purposes. This negative goodwill was being amortized over its expected useful lifeof five years, and had the effect of reducing reported expenses by $2,823,000during 2001.  In accordance with SFASNo. 142, amortization of the negative goodwill ceased beginning January 1,2002, and the balance remaining will be maintained as a deferred credit untilit is either netted against the contingent payments or reflected in net incomeas an extraordinary item should the contingent payments not become due becausethe technology did not meet the milestones which trigger payment.

 

Thefollowing table sets forth BTG’s *pro forma* results of operations as if SAB101 had been in effect since January 1, 1997. Because BTG adopted SAB 101 as of January 1, 2000, there is nodifference between BTG’s actual and *pro forma* results of operations for theyears ended December 31, 2000 and 2001.

 
|                                 |   | **Year ended December 31,**               |   |
|--------------------------------------|--------|-------------------------------------------|--------|
|                                 |   | **1997**                                  |   | **1998** |   | **1999** |   |
|                                 |   | **(in thousands except per share  data)** |   |
| Total revenues                       |   | $                                         | 64,355 |   | $ | 76,210 |   | $ | 75,742 |   |
| Total expenses                       |   | 44,152                                    |   | 52,106 |   | 66,561 |   |
| Net income                           |   | 13,860                                    |   | 17,018 |   | 7,828 |   |
| Earnings per common share:           |   |                                      |   |   |   |   |   |
| Basic                                |   | $                                         | 0.30   |   | $ | 0.35 |   | $ | 0.15 |   |
| Diluted                              |   | $                                         | 0.27   |   | $ | 0.34 |   | $ | 0.14 |   |
| Weighted average shares outstanding: |   |                                      |   |   |   |   |   |
| Basic                                |   | 46,767                                    |   | 48,184 |   | 52,348 |   |
| Diluted                              |   | 51,916                                    |   | 49,848 |   | 54,191 |   |

 

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**ITEM 7.****                                    ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*Statements in this AnnualReport on Form 10-K concerning BTG’s business outlook or future economicperformance; anticipated profitability, revenues, expenses or other financialitems; introductions and advancements in development of products, and plans andobjectives related thereto; and statements concerning assumptions made orexpectations as to any future events, conditions, performance or other matters,are “forward-looking statements” as that term is defined under the FederalSecurities Laws.  Forward-lookingstatements are subject to risks, uncertainties and other factors that couldcause actual results to differ materially from those stated in suchstatements.  Such risks, uncertaintiesand factors include, but are not limited to, changes and delays in productdevelopment plans and schedules, changes and delays in product approval andintroduction, customer acceptance of new products, changes in pricing or otheractions by competitors, patents owned by BTG and its competitors, changes inhealthcare reimbursement, risk of operations in Israel, risk of productliability, governmental regulation, dependence on third parties to manufactureproducts and commercialize products and general economic conditions, as well asother risks detailed in our filings with the Securities and Exchange Commission,including this Annual Report on Form 10-K. See “Item 1.  Business—RiskFactors.”*

 

Overview

 

Weare engaged in the research, development, manufacture and marketing ofbiopharmaceutical products.  Through acombination of internal research and development, acquisitions, collaborativerelationships and licensing arrangements, BTG has developed a portfolio oftherapeutic products, including nine products that have received regulatoryapproval for sale and are currently being marketed, four products that are inregistration or clinical trials and several products that are in pre-clinicaldevelopment.  We pursue the developmentof both products with broad markets as well as products with specialized nichemarkets where we can seek Orphan Drug designation and potential marketingexclusivity.

 

BTGwas founded in 1980 to develop, manufacture and market novel therapeuticproducts.  BTG’s overall administration,licensing, human clinical studies, marketing activities, quality assurance andregulatory affairs are primarily coordinated at our headquarters in Iselin, NewJersey.  Pre-clinical studies, researchand development activities and manufacturing of BTG’s genetically engineeredproducts are primarily carried out through its wholly-owned subsidiary in Rehovot,Israel.

 

EffectiveJanuary 1, 2000, BTG adopted Staff Accounting Bulletin 101 (“SAB 101”) issuedby the Securities and Exchange Commission in December 1999.  As a result of adopting SAB 101, BTG changedthe way it recognizes revenue from contract fees for the license of marketingand distribution 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 incometaxes of $4,380,000, of which $853,000 was recognized as contract fee revenuein 2000 and $1,156,000 was recognized as contract fee revenue in 2001.  The related revenues are now beingrecognized over the term of the related agreements.

 

Acquisitionof Myelos Corporation

 

OnMarch 19, 2001, BTG acquired Myelos Corporation, a privately-heldbiopharmaceutical company focused on the development of novel therapeutics totreat diseases of the nervous system. Under the terms of the acquisition agreement, BTG paid Myelos shareholders$35 million in a combination of cash and stock ($14 million in cash and $21million through the issuance of approximately 2,344,700 shares of BTG commonstock (based on a value of $8.9564, representing the average closing price ofBTG’s common stock for the 20 trading day period ending one day prior to theFebruary 21, 2001 date the acquisition agreement was executed)).

 

Inthe event that (i) BTG publicly announces that it will file a New DrugApplication (“NDA”) related to the use of PROSAPTIDE to treat neuropathic painor neuropathy, (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 

 

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to the Myelosshareholders an additional $30 million, at least approximately $14 million ofwhich must be paid in shares of BTG common stock, valued at the average of theclosing prices of BTG common stock during the 20 trading days ending on thePayment Trigger Date, and the remainder can be paid in cash, shares of BTGcommon stock, or a combination thereof, as determined by BTG in its solediscretion.

 

Inaddition, in the event that the FDA approves the sale of PROSAPTIDE for thetreatment of neuropathic pain or neuropathy, BTG will pay the Myelosshareholders 15% of the net sales of PROSAPTIDE for the treatment ofneuropathic pain or neuropathy during the 12 month period beginning on theearlier of (i) the 25th full month after commercial introduction of PROSAPTIDEin the United States for the treatment of neuropathic pain or neuropathy and(ii) April 1, 2010.  At least 50% ofthis payment must be paid in shares of BTG common stock, valued at the averageof the closing prices of BTG common stock during the 20 days ending one dayprior to the payment, and the remainder can be paid in cash, shares of BTGcommon stock, or a combination thereof, as determined by BTG in its solediscretion.

 

Inno event will BTG be obligated to issue in aggregate to the Myelos shareholdersmore than 10,962,000 shares of BTG common stock.  Any amount of the contingent payments that cannot be paid inshares of BTG common stock shall instead be paid in shares of BTG’s preferredstock.  The preferred stock will benon-voting, non-convertible, non-transferable, non-dividend paying (except tothe extent a cash dividend is paid on the BTG common stock), with no mandatoryredemption for a period of 20 years and one day from the March 19, 2001 closingdate of the acquisition, and a right to share in proceeds in liquidation, up tothe 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 BTG common stockissued in the acquisition of $8.1172, representing the average closing price ofBTG’s common stock for the four day period preceding the date the terms of theacquisition were agreed to (February 21, 2001).  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 $18,030,000 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,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 which trigger payment.

 

BTGallocated 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 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.

 

Investmentin Omrix Biopharmaceuticals, Inc.

 

InJanuary 2001, 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,

 

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which isconvertible into approximately 4.5% of Omrix common stock (on a fully-dilutedbasis).  Omrix is a privately-heldcompany that develops and markets a unique surgical sealant and a number ofimmunology products based on blood plasma processing technology.  Omrix currently sells its products inEurope, South America and the Middle East. During the fourth quarter of 2001, BTG determined that the decline inthe value of its investment in Omrix was other than temporary and, accordingly,wrote-down the value of this investment by $3,000,000 based on management’sevaluation of current market conditions and Omrix’s operations and forecasts.

 

2002Outlook

 

Wecurrently anticipate total 2002 revenues, excluding interest income, of atleast $100 million.  Although we alsoanticipate growth in total product sales, we expect the growth in sales ofOXANDRIN to be partially offset by a lower level of human growth hormone salesin 2002 as compared to 2001.  Due inpart to industry-wide pricing pressures in Japan by the Japanese HealthMinistry and JCR’s management of inventory levels, the level of sales of ourhuman growth hormone to JCR for the Japanese market will be adversely affected,despite an increasing market share.  Basedon wholesaler orders through February 2002, revenues from DELATESTRYL sales arecurrently anticipated to exceed those of 2001. Royalty revenues may fall below their 2001 level due to potentialgeneric competition for MIRCETTE.

 

Inorder to optimize the maturation of our proprietary pipeline products, we arecommitting significant additional resources to them in 2002.  Research and development expense isconsequently expected to increase by approximately 40% compared to 2001.  Additionally, to fully maximize OXANDRIN’spotential and provide stimulus to its growth, marketing and sales expenses areexpected to grow this year by approximately 20%.

 

Giventhis significant investment in our future growth, the increase in expenses isanticipated to outpace revenue growth and therefore we are expecting full yearEPS to be below that of 2001 pro forma EPS and possibly below 2000 pro formaEPS.  Our 2002 EPS will depend insignificant measure on the growth in OXANDRIN prescriptions and the salesachieved by both Ross and BTG.  Inaddition, acquisition activities could affect our 2002 EPS.  We expect our quarterly EPS in 2002 to varybased on the timing of product sales to customers and research and developmentand marketing expenses.

 

Critical Accounting Policies and the Use of Estimates

Thepreparation of our financial statements in conformity with accountingprinciples generally accepted in the U.S. requires management to make estimatesand assumptions that affect the amounts reported in our financial statementsand accompanying notes.  Actual results coulddiffer materially from those estimates. The items in our financial statements requiring significant estimatesand judgments are as follows:

•      *Investments.*  We from time to time 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.

•      *Write-off ofin-process research and development acquired*.  In connection with our acquisition of MyelosCorporation, we 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.  We expensed this value as of the acquisition date because thetechnology was not fully commercially developed and had no alternative futureuses.

•      *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 31,2001, 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.

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•      *Bad debts*.  We maintain allowances for doubtful accountsfor estimated losses resulting from the inability of our customers to makerequired payments.  If the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances may be required.

•      *Litigation*.  We are currently involved in certain legalproceedings referred to in the “Commitments and Contingencies” note in theNotes to Consolidated Financial Statements. We do not believe these legal proceedings will have a material adverseeffect on our consolidated financial position, results of operations or cashflows. However, were an unfavorable ruling to occur in any quarterly period,there exists the possibility of a material impact on the operating results.

                Theabove listing is not intended to be a comprehensive list of all of ouraccounting policies.  In many cases, theaccounting treatment of a particular transaction is specifically dictated bygenerally accepted accounting principles, with no need for management’sjudgment in their application.  Thereare also areas in which management’s judgment in selecting any available alternativewould not produce a materially different result.  See our audited consolidated financial statements and notesthereto which begin on page 51 of this Annual Report on Form 10-K which containaccounting policies and other disclosures required by generally acceptedaccounting principles.

 

Resultsof Operations

 

The following table sets forth for thefiscal periods indicated the percentage of our revenues represented by certainitems reflected on our consolidated statements of operations.

 
|                                                                      |   | **Year Ended December 31,** |   |
|---------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                      |   | **1999**                    |   | **2000** |   | **2001** |   |
| Revenues:                                                                 |   |                        |   |   |   |   |   |
| Product sales                                                             |   | 73.1                        | %      | 73.2 | % | 85.4 | % |
| Contract fees                                                             |   | 17.4                        |   | 12.0 |   | 1.1 |   |
| Royalties                                                                 |   | 2.1                         |   | 3.7 |   | 3.7 |   |
| Other revenues                                                            |   | 2.0                         |   | 2.3 |   | 2.2 |   |
| Interest                                                                  |   | 5.4                         |   | 8.8 |   | 7.6 |   |
| Total revenues                                                            |   | 100.0                       | %      | 100.0 | % | 100.0 | % |
| Expenses:                                                                 |   |                        |   |   |   |   |   |
| Research and development                                                  |   | 24.8                        | %      | 26.3 | % | 25.1 | % |
| Cost of product sales                                                     |   | 13.2                        |   | 11.6 |   | 13.7 |   |
| General and administrative                                                |   | 16.4                        |   | 14.9 |   | 10.2 |   |
| Marketing and sales                                                       |   | 19.4                        |   | 20.8 |   | 16.6 |   |
| Commissions and royalties                                                 |   | 3.8                         |   | 2.2 |   | 1.9 |   |
| Realized and unrealized loss on investment  and other financing expense   |   | 0.4                         |   | 0.2 |   | 12.2 |   |
| Write-off of in-process research and  development acquired                |   | —                      |   | — |   | 44.7 |   |
| Total expenses                                                            |   | 78.0                        |   | 76.0 |   | 124.4 |   |
|                                                                      |   |                        |   |   |   |   |   |
| Income (loss) before income taxes                                         |   | 22.0                        |   | 24.0 |   | (24.4 | ) |
| Income tax expense                                                        |   | 5.7                         |   | 5.3 |   | 5.3 |   |
| Income (loss) before cumulative effect of  change in accounting principle |   | 16.3                        |   | 18.7 |   | (29.7 | ) |
| Cumulative effect of change in accounting  principle                      |   | —                      |   | 9.6 |   | — |   |
| Net income (loss)                                                         |   | 16.3                        | %      | 9.1 | % | (29.7 | %) |

 

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The following table sets forth for thefiscal periods indicated our statement of operations on a *pro forma* basis (i) as if SAB 101 had beenin effect since January 1, 1999 and (ii) excluding in 2001 the effect of (a)the write-off of in-process research and development acquired resulting fromthe Myelos acquisition, (b) the benefit derived from the amortization ofnegative goodwill resulting from the Myelos acquisition, (c) the recognition ofa capital loss of approximately $9 million on our short-term investments, whichgenerated interest income considerably in excess of the capital loss, (d) thepartial write-off of $3 million of the $5 million we invested in Omrix in 2001as a permanent impairment, given current market conditions and the difficultyin assessing the value of a private company, and (e) the tax effect of therecognition of the capital loss and the partial write-off.  The table also sets forth for the fiscalperiods indicated the pro forma percentage of revenues represented by theseitems.

 
|                                                                    |   | **Year ended December 31,** |         |
|-------------------------------------------------------------------------|--------|-----------------------------|--------------|
|                                                                    |   | **1999**                    |         | **2001** |   |
|                                                                    |   | **(dollars in thousands)**  |         |
| Revenues:                                                               |   |                        |         |   |   |   |   |   |   |
| Product sales                                                           |   | $                           |  62,332 |   | 82.3 | % | $ |  87,106 |   | 85.4 | % |
| Contract fees                                                           |   | 5,270                       |         | 7.0 |   | 1,156 |   | 1.1 |   |
| Royalties                                                               |   | 1,761                       |         | 2.3 |   | 3,817 |   | 3.7 |   |
| Other revenues                                                          |   | 1,746                       |         | 2.3 |   | 2,195 |   | 2.2 |   |
| Interest income                                                         |   | 4,633                       |         | 6.1 |   | 7,691 |   | 7.6 |   |
|                                                                    |   | 75,742                      |         | 100.0 |   | 101,965 |   | 100.0 |   |
| Expenses:                                                               |   |                        |         |   |   |   |   |   |   |
| Research and development                                                |   | 21,120                      |         | 27.9 |   | 25,576 |   | 25.1 |   |
| Cost of product sales                                                   |   | 11,224                      |         | 14.8 |   | 14,003 |   | 13.7 |   |
| General and administrative                                              |   | 14,035                      |         | 18.5 |   | 13,252 |   | 13.0 |   |
| Marketing and sales                                                     |   | 16,583                      |         | 21.9 |   | 16,897 |   | 16.6 |   |
| Commissions and royalties                                               |   | 3,221                       |         | 4.3 |   | 1,975 |   | 1.9 |   |
| Realized and unrealized loss on investment  and other financing expense |   | 378                         |         | 0.5 |   | 170 |   | 0.2 |   |
|                                                                    |   | 66,561                      |         | 87.9 |   | 71,873 |   | 70.5 |   |
|                                                                    |   |                        |         |   |   |   |   |   |   |
| Income before income taxes                                              |   | 9,181                       |         | 12.1 |   | 30,092 |   | 29.5 |   |
| Income taxes                                                            |   | 1,353                       |         | 1.8 |   | 9,885 |   | 9.7 |   |
| Net income                                                              |   | $                           | 7,828        |   | 10.3 | % | $ | 20,207 |   | 19.8 | % |

 

BTG has historically derived its revenuesfrom product sales as well as from collaborative arrangements with thirdparties, under which BTG may earn up–front contract fees, may receivefunding for additional research (including funding from the Chief Scientist ofthe State of Israel (“Chief Scientist”)), is reimbursed for producing certainexperimental materials, may be entitled to certain milestone payments, may sellproduct at specified prices and may receive royalties on sales of product.  We anticipate that product sales will constitutethe majority of our revenues in the future. Revenues have in the past displayed and will in the immediate futurecontinue to display significant variations due to changes in demand for ourproducts, new product introductions by BTG and its competitors, the obtainingof new research and development contracts and licensing arrangements, thecompletion or termination of such contracts and arrangements, the timing andamounts of milestone payments, and the timing of regulatory approvals ofproducts.

 

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The following table summarizes BTG’s salesof its commercialized products as a percentage of total product sales for theperiods indicated:

 
|        |   | **Year ended December 31,** |   |
|-------------|--------|-----------------------------|--------|
|        |   | **1999**                    |   | **2000** |   | **2001** |   |
| OXANDRIN    |   | 40                          | %      | 52 | % | 54 | % |
| BIO-TROPIN  |   | 29                          |   | 33 |   | 27 |   |
| BIOLON      |   | 14                          |   | 10 |   | 10 |   |
| DELATESTRYL |   | 16                          |   | 4 |   | 8 |   |
| Other       |   | 1                           |   | 1 |   | 1 |   |
| Total       |   | 100                         | %      | 100 | % | 100 | % |

 

We believe that our product mix will varyfrom period to period based on the purchasing patterns of our customers and ourfocus on: (i) increasing market penetration of its existing products; (ii)expanding into new markets; and (iii) commercializing additional products.

 

Quarterly fluctuations in sales of OXANDRINhave had a significant impact on our quarterly results of operations.  Quarterly sales of OXANDRIN in 1999, 2000and 2001 are set forth in the following table:

 
|   |   | **First Quarter**  |   | **Second Quarter** |   | **Third Quarter** |   | **Fourth Quarter** |   | **Total** |   |
|--------|--------|--------------------|--------|--------------------|--------|-------------------|--------|--------------------|--------|-----------|--------|
|   |   | **(in thousands)** |   |
| 1999   |   | $                  | 6,733  |               | $      | 6,839             |   | $                  | 6,108  |      | $      | 5,255 |   | $ | 24,935 |   |
| 2000   |   | 5,009              |   | 6,403              |   | 10,889            |   | 9,886              |   | 32,187    |   |
| 2001   |   | 16,692             |   | 17,887             |   | 4,575             |   | 7,996              |   | 47,150    |   |
|        |        |                    |        |                    |        |                   |        |                    |        |           |        |  |  |  |  |  |

 

Our sales of OXANDRIN consist of sales toGentiva Health Services, Inc. (“Gentiva”), our wholesale and retail distributorof OXANDRIN in the United States, and the Ross Products Division of AbbottLaboratories.  The decrease in OXANDRINsales in the second half of 1999 was due to the OXANDRIN inventory reductionthat Gentiva began in April 1999 as a result of a slowing in the rate of increasein OXANDRIN prescriptions.  The increasein OXANDRIN sales in each of the last three quarters of 2000 was due toGentiva’s completion, in May 2000, of this OXANDRIN inventory reduction.  The increase in OXANDRIN sales during thefirst half of 2001 was due to: (i) the commencement, in September 2000, ofsales by the Ross Products Division of Abbott Laboratories for the long-termcare market for the treatment of patients with involuntary weight loss,including stocking activity by wholesalers in connection with the launch ofthis product in the long-term care market; (ii) stocking by certain wholesalersin anticipation of a price increase; (iii) increased purchases by Gentivafollowing its completion, in May 2000, of a reduction in the amount of OXANDRINinventory it carries, which reduction began in April 1999; and (iv) increasedwholesaler sales of OXANDRIN by Gentiva.

 

Upon completion of its inventory reductionin May 2000, Gentiva began to purchase, on a monthly basis, an amount ofOXANDRIN equal to the average end-user (i.e., wholesaler) sales during thepreceding three months.  However,because of the significant increase in OXANDRIN purchases by wholesalers in thefirst quarter of 2001 in anticipation of a price increase and in connectionwith the launch of OXANDRIN into the long-term care market, Gentiva’s purchasesof OXANDRIN in the second quarter of 2001 were higher than the levels of itssales of OXANDRIN to wholesalers in that period. As a result, Gentiva’sinventory of OXANDRIN increased beyond the desired level.  Accordingly, BTG and Gentiva amended theirdistribution arrangement effective August 2001 to provide for reduced purchasesof OXANDRIN until Gentiva’s inventory was reduced to desired levels andthereafter to ensure that sales of OXANDRIN by BTG to Gentiva more accurately reflectedend-user demand.  As a result, sales ofOXANDRIN in the second half of 2001 were $22,008,000 lower than in the firsthalf of 2001 and $8,204,000 lower than in the second half of 2000.

 

Gentiva’s reduction in OXANDRIN inventoryadversely affected the growth in BTG’s product sales and revenues and BTG’sresults of operations in 1999 and 2000. Reductions in wholesaler purchases of OXANDRIN from Gentiva in thesecond, third and fourth quarters of 2001 and significantly reduced 

 

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purchases ofOXANDRIN by Gentiva in the second half of 2001 adversely affected the growth inBTG’s product sales and revenues and BTG’s results of operations in the secondhalf of 2001.  Because purchases bywholesalers fluctuate from month to month and quarter to quarter based on theirown operating strategies (including desired levels of inventories, purchases bytheir customers and stocking in advance of anticipated price increases), BTG’ssales to Gentiva and Ross will fluctuate from quarter to quarter.  There can be no assurance that Gentiva willnot determine to further reduce its OXANDRIN inventory levels.

 

The launch of OXANDRIN in late 2000 by Rossinto the long-term sector for the treatment of patients with involuntary weightloss led to a 26.5% increase in prescriptions in 2001 compared to 2000.  However, prescriptions in the second half of2001, although 19.4% higher than in the second half of 2000, were 0.6% belowprescriptions in the first half of 2001, due, at least in part, to sales forcechanges in the long-term care sector. The Ross long-term care field force contingent detailing physicians,nursing homes, assisted living facilities and geriatric hospitals wasstreamlined in the spring of 2001 in an effort to achieve greater efficiency.BTG believes this may have resulted in a reduction in the number of OXANDRINcalls and details being made.  BTGunderstands that corrective measures have been taken to increase the number ofcalls and details being made.  To date theaverage prescription written for the long-term care market involves asignificantly lower dose of OXANDRIN than the average prescription written forthe AIDS market.

 

The following table summarizes BTG’s UnitedStates and international product sales as a percentage of total product salesfor the periods indicated:

 

|     |   | **Year ended December 31,** |   |
|----------|--------|-----------------------------|--------|
|     |   | **1999**                    |   | **2000** |   | **2001** |   |
| Domestic |   | 56                          | %      | 56 | % | 64 | % |
| Foreign  |   | 44                          |   | 44 |   | 36 | % |
| Total    |   | 100                         | %      | 100 | % | 100 | % |

 

Domestic sales as a percentage of totalproduct sales has fluctuated due primarily to a reduction in purchases ofOXANDRIN by BTG’s distributor in the U.S. from April 1999 through May 2000 andincreased sales of OXANDRIN to BTG’s distributor in the U.S. in the second halfof 2000 and the first half of 2001.

 

*Comparison of Years EndedDecember 31, 2001, 2000 and 1999 Revenues.*

 

Revenues in 2001 increased 20% to$101,965,000 from $84,944,000 in 2000, which represented a slight decrease from$85,320,000 in 1999. Product sales increased 40% in 2001 to $87,106,000 from$62,149,000 in 2000, which itself was a slight decrease from 1999 product salesof $62,332,000. The changes in revenues between 1999, 2000 and 2001 wereprimarily driven by changes in product sales, principally OXANDRIN, andcontract fees.

 

Sales of OXANDRIN in 2001, 2000 and 1999were approximately $47,150,000, $32,187,000, and $24,935,000, respectively,representing 54%, 52% and 40%, respectively, of BTG’s total product sales inthose periods.  Sales of OXANDRIN to Gentivain 2001, 2000 and 1999 were $36,465,000, $30,586,000 and $22,708,000, net,respectively, representing 77%, 95% and 91%, respectively, of BTG’s total salesof OXANDRIN.  In 2001 sales of OXANDRINincreased $14,963,000, or 46%, from 2000 sales.  Sales of OXANDRIN increased $23,167,000 in the first half of2001, due to: (i) the commencement, in September 2000, of sales by the RossProducts Division of Abbott Laboratories 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 Gentiva following its completion, in May2000, of a reduction in the amount of OXANDRIN inventory it carries, whichreduction began in April 1999; and (iv) increased wholesaler sales of OXANDRINby Gentiva.  Sales of OXANDRIN in thesecond half of 2001 decreased $8,204,000 from the comparable period in 2000 dueto Gentiva’s increased purchases of OXANDRIN in the second half of 2000following completion of its inventory reduction and decreased purchases in thesecond half of 2001 to reduce inventory. In 2000 sales of OXANDRIN increased $7,251,000, or 30%, as Gentivacompleted the reduction in the amount of OXANDRIN inventory it carries in May2000.  The decrease in sales to Gentivain 1999 was partially offset by $2,228,000 of sales of OXANDRIN to thirdparties for distribution overseas.

 

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Sales of hGH in 2001, 2000 and 1999 wereapproximately $23,862,000, $20,585,000 and $18,004,000, respectively,representing 27%, 33% and 29%, respectively, of BTG’s total product sales inthose periods.  Sales of human growthhormone increased in 2001 by $3,277,000, or 16%, over 2000 sales.  Sales of human growth hormone increased in2000 by $2,581,000, or 14%, over 1999 sales. The increase in sales of hGH in 2001 and 2000 was mainly due toincreased sales to JCR and Ferring. Sales of hGH to JCR in 2001, 2000 and 1999 were approximately$16,292,000, $12,975,000 and $10,507,000, respectively, representing 19%, 21%and 17%, respectively, of BTG’s total product sales in those periods and 68%,63% and 58%, respectively, of BTG’s total hGH sales in those periods.  Sales of hGH to the Ferring Group wereapproximately $5,889,000, $4,812,000 and $3,619,000 in 2001, 2000 and 1999,respectively, representing 7%, 8% and 6%, respectively, of BTG’s total productsales in those periods and 25%, 23% and 20%, respectively, of BTG’s total hGHsales in those periods. 

 

Sales of Delatestryl and BioLon increased in2001 by $2,110,000 and $4,671,000, or 34% and 181%, respectively, from 2000levels.  In 2000 sales of DELATESTRYLand BIOLON decreased $7,523,000 and $2,443,000, or 74% and 29%, respectively,from 1999 levels.  We had no sales ofDELATESTRYL in the second and third quarters of 2000.  DELATESTRYL sales increased substantially in 1999 when the FDAstopped the production of a competing injectable testosterone product used totreat men with hypogonadism (testosterone deficiency).  The decrease in sales of DELATESTRYL in 2000relates to Gentiva’s election to reduce its DELATESTRYL inventory inanticipation of the FDA’s again permitting the production of the competinginjectable testosterone product. Increased sales of DELATESTRYL in 2001 resulted from the fact that theFDA has yet to approve production of this competing product.  The decrease in sales of BIOLON in 2000 wasprimarily the result of a halt in product shipments to the U.S. beginning inthe first quarter of 2000 pending FDA approval of a supplemental applicationrelating to an upgrade in BTG’s manufacturing process to conform it to a higherstandard of quality implemented by BTG. BTG resumed shipments to the U.S. in the first quarter of 2001, althoughshipments again stopped in the fourth quarter of 2001 as the FDA has not beenable to inspect the new manufacturing facility of BTG’s contract sterilizer forBIOLON due to the violence in Israel.

 

For the year ended December 31, 2001contract fees were $1,156,000, which represent contract fees received in priorperiods but recognized in 2001 in accordance with SAB 101. For the years endedDecember 31, 2000 and 1999, contract fees, which consist of licensing andoption to license fees, amounting to $10,229,000 and $14,848,000, or 12% and17%, respectively, of total revenues, were earned from certain of BTG’scollaborative partners.  Of the contractfees earned in 2000, $5,000,000, or 49% of total contract fees, was earned inrespect of ARTHREASE, $2,500,000, or 24% of total contract fees, was earned asa milestone payment under BTG’s strategic alliance with Teva focusing on thedevelopment and global commercialization of several generic recombinant therapeuticproducts and the license of distribution rights in the United States for BTG’shGH, and $1,475,000, or 14% of total contract fees, was earned in respect ofthe BIO-HEP-B vaccine.  Under SAB 101,contract fees in 2000 include $853,000 of contract fees paid in prior periods,or 8% of total contract fees.  Of thecontract fees earned in 1999, $10,000,000, or 67% of total contract fees, wasearned in respect of BTG’s strategic alliance with Teva, and $4,197,000, or 28%of total contract fees, was earned in respect of the license of distributionrights for Insulin on a substantially worldwide basis.  Approximately $10,114,000 of the contractfees earned in 1999 have been included in the cumulative effect of change inaccounting principle.  On a *pro forma* basis as if SAB 101 had been ineffect since January 1, 1999, contract fees in 1999 would have been $5,270,000,or 7% of total revenues.

 

*Royalties* in 2001, 2000 and 1999 consist mainly of net royalties in respect ofthe MIRCETTE product in the amount of $3,817,000, $3,139,000 and $1,761,000,respectively. 

 

*Other revenues* consist primarily of funding from the Chief Scientist, whichrepresented 100%, 81% and 89% of other revenues in the years ended December 31,2001, 2000 and 1999, respectively. 

 

*Interest income* was $7,691,000, $7,496,000 and $4,633,000 for the years endedDecember 31, 2001, 2000 and 1999, respectively.  In 2001 interest income increased only slightly, as the total ofcash, cash equivalents and short-term investments decreased $646,000 from December31, 2000 to December 31, 2001. The decreased cash balances (includingshort-term investment) resulted mainly from the use of approximately$15,603,000, net to acquire Myelos, the use of approximately $22,098,000 tofund construction of the Company’s new manufacturing facility in 2001 and theuse of $5,000,000 to purchase shares of Omrix, partially offset by cash flowfrom operations, proceeds from the exercise of options and proceeds from a$20,000,000 loan borrowed to finance construction of the Company’s newmanufacturing facility in Israel. The increase in interest income in 2000 wasderived primarily from an increase in cash balances resulting from optionexercises and cash flow from operations in 2000.

 

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*Research and DevelopmentExpense*. Expenditures for research and development were $25,576,000, $22,360,000and $21,120,000 for the years ended December 31, 2001, 2000 and 1999,respectively.  The increase in researchand development expenditures in 2001 resulted mainly from the increase inresearch and development personnel and legal fees related to patent maintenanceand patent interference proceedings, as well as the addition of research anddevelopment activities for PROSAPTIDE following the acquisition of Myelos.  The increase in research and developmentexpenditures in 2000 was mainly due to the increase in research and developmentpersonnel and other expenses associated with these additional personnel,partially offset by a decreased level of grants by BTG for clinical studies.

 

*Cost of Product Sales*.  Cost of product sales was$14,003,000, $9,887,000 and $11,224,000 in the years ended December 31, 2001,2000 and 1999, respectively.  Cost ofproduct sales as a percentage of product sales was 16%, 16% and 18% in 2001,2000 and 1999, respectively.  Cost ofproduct sales in 2001 increased in absolute terms as a result of increasedproduct sales.  Cost of product sales in2000 decreased, both in absolute terms and as a percentage of revenues, primarilyas a result of increased sales of OXANDRIN and decreased sales of DELATESTRYLand BIOLON.  OXANDRIN has a relativelylow cost of manufacture as a percentage of product sales, while BIOLON has thehighest cost to manufacture as a percentage of product sales.  Cost of product sales as a percentage ofproduct sales varies from year to year and quarter to quarter depending on thequantity and mix of products sold.

 

*General and AdministrativeExpense*. General and administrative expense was $10,429,000, $12,685,000 and$14,035,000 in the years ended December 31, 2001, 2000 and 1999,respectively.  The decrease in 2001resulted from the amortization of $2,823,000 of negative goodwill resultingfrom the Myelos acquisition. On a pro forma basis to exclude the effect of theamortization of negative goodwill, general and administrative expense for 2001was $13,252,000, an increase of 5% from the comparable period in 2000. Theincrease in general and administrative expense (excluding the effect of theamortization of negative goodwill) was primarily due to increased compensationcosts, partially offset by a decrease in legal fees (litigation) as compared to2000, when legal fees increased primarily due to the reactivation in the fourthquarter of 1998 of the Company’s declaratory judgment action against Genentechin respect of the Company’s human growth hormone product in the UnitedStates.  The decrease in 2000 resultedmainly from the fact that 1999 expenses include the write off of other assetsrelating to the development of ANDROTAB-SL, a sublingual testosterone productfor the treatment of hypogonadism, as a result of our decision not to continueto pursue FDA approval of ANDROTAB-SL. 

 

*Marketing and SalesExpense*. Marketing and sales expense was $16,897,000, $17,614,000 and $16,583,000in the years ended December 31, 2001, 2000 and 1999, respectively.  These expenses primarily related to thesales and marketing force in the United States that BTG established principallyin the second half of 1995 and during 1996 to promote distribution of OXANDRINin the United States.  The decrease inmarketing and sales expense in 2001 compared to last year derived mainly fromdecreased advertising, promotional and market research activities, partiallyoffset by increased compensation costs. The increase in 2000 was primarily due to additional marketing and salesexpenses, primarily resulting from increased personnel and increasedadvertising, promotional and market research activities, arising from thegrowth of BTG’s product sales. 

 

*Commissions and Royalties*.  Commissions and royalties were$1,975,000, $1,879,000 and $3,221,000 in the years ended December 31, 2001,2000 and 1999, respectively.  Theseexpenses consist primarily of royalties to entities from which BTG licensedcertain of its products and to the Chief Scientist. Commissions and royaltiesin 1999 included $1,485,000, net of commissions received in respect of Serono’ssales of its human growth hormone to Gentiva, which commissions we subsequentlyrefunded because Gentiva was unable to sell most of Serono’s human growthhormone product before it expired. 

 

*Realized and UnrealizeLoss on Investment and Other Financing Expense*.  In 2001 we recognized realized andunrealized capital losses of $9,231,000 on short-term investments that wereliquidated in December 2001 and January 2002. Since January 1, 1996, we earned in excess of $20,000,000 on theseinvestments.  During the fourth quarter of2001, we determined that the decline in the value 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.

 

*Write-off of In-ProcessResearch and Development Acquired*.  In 2001 BTG wrote-off $45,600,000 asin-process research and development acquired relating to the acquisition ofMyelos Corporation.  In connection withthe acquisition BTG allocated $45,600,000 to in-process research anddevelopment projects of Myelos, representing the estimated fair value based onrisk-adjusted cash flows of the acquired technology based on an 

 

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independent valuation.  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.

 

*Income Taxes*.  Provision for income taxes forthe years ended December 31, 2001, 2000 and 1999 was $5,371,000, $4,475,000 and$4,897,000, respectively, representing approximately 32.8% (on a pro formabasis excluding the write-off of in-process research and development acquiredand amortization of negative goodwill, which are not taken into account in computingincome taxes), 22.0% and 26.1% of income before income taxes.  BTG’s consolidated tax rate differs from thestatutory rate because of Israeli tax benefits, research and experimental taxcredits, state and local taxes and similar items that affect the tax rate.  In 2001 BTG recorded a provision foradditional taxes as a result of a tax audit that BTG-Israel is currentlyundergoing covering the 1997 through 2000 tax years. 

 

*Earnings per Common Share*.  BTG had approximately 2.9million additional 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 wasprimarily the result of the issuance in 2001 of shares upon the exercise ofoptions and the issuance of approximately 2.3 million shares to the formershareholders of Myelos in March 2001. For 2001 diluted weighted average shares outstanding does not includedilutive securities because the effect would be anti-dilutive. 

 

On a pro-forma basis, excluding thewrite-off of in-process research and development acquired, amortization ofnegative goodwill, the realization of capital losses on short-term investmentsand the partial write-off of the Omrix investment, net income would have been$20,207,000, or $0.35 per share on both a basic and diluted share basis.  Diluted weighted average shares outstandingwould have been 58,528,000, an increase of approximately 1.3 million sharesfrom 2000, primarily as a result of the higher basic weighted average sharesoutstanding for 2001, partially offset by the fact that less outstandingoptions were considered common equivalents because their exercise price wasabove the average fair market value of the common stock for 2001, which averagefair market value was lower than in the same period last year. 

 

*Cumulative Effect ofChange in Accounting Principle*.  Effective January 1, 2000, BTG adopted SAB101.  As a result of adopting SAB 101,BTG changed the way it recognizes revenue from contract fees for the license ofmarketing and distribution rights where the consideration is a one-timenonrefundable payment.  Prior to theissuance of SAB 101, BTG recorded revenue from the license of marketing anddistribution rights when the rights were licensed and/or when these payments werereceived.  Effective January 1, 2000,BTG recorded a cumulative effect of a change in accounting principle related tocontract revenues recognized in prior years in the amount of $12,558,000, netof income taxes of $4,380,000, of which $853,000 was recognized as contract feerevenue in 2000.  The related revenuesare now being recognized over the term of the related agreements.

 

**Liquidity and Capital Resources**

 

Our working capital at December 31, 2001,was $138,778,000 as compared to $153,344,000 at December 31, 2000.  The decrease in working capital at December31, 2001 was primarily due to a decrease in accounts receivable as BTGshortened the average terms of payment to its customers. 

 

Our cash flows have fluctuated significantlydue to the impact of net income, capital spending, working capitalrequirements, the issuance of common stock and other financing activities.  BTG expects that cash flows in the nearfuture will be primarily determined by the levels of net income, workingcapital requirements, and financings, if any, undertaken by BTG.  Net cash increased by $49,098,000,$7,650,000, and $9,272,000 in the years ended December 31, 2001, 2000 and 1999,respectively.  The large increase in2001 was primarily due to the sale of short-term investments. 

 

Net cash provided by operating activitieswas $38,818,000, $16,646,000 and $48,980,000 in the years ended December 31, 2001, 2000 and 1999,respectively.  Net (loss) income was$(30,287,000), $7,717,000 and $13,862,000 in the same periods, respectively.  In 2001 we had net cash provided byoperating activities despite the net loss, mainly due to the write-off ofin-process research and development acquired of $45,600,000, a decrease inaccounts receivable of $16,353,000, an unrealized loss on investments, net of$8,963,000, an increase in accounts payable of $5,128,000, depreciation andamortization of $2,708,000 and a realized loss on the sale of short-terminvestments, net of $1,735,000, partially offset by an increase in inventoriesof $4,260,000, an increase in deferred income tax of $3,269,000, amortizationof negative goodwill of $2,823,000 and deferred revenues of $1,153,000.  In 2000 net cash provided by operatingactivities was greater than net income, mainly due to the cumulative effect ofthe accounting change resulting from the 

 

47

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adoption of SAB 101 of $11,704,000 (net of incometaxes) due to SAB 101 and depreciation and amortization of $2,861,000,partially offset by an increase in deferred income taxes, inventories andaccounts receivable of $3,904,000, $1,256,000 and $944,000, respectively.

 

Net cash provided by (used in) investingactivities was $2,593,000, $(38,780,000) and $(46,720,000) in the years endedDecember 31, 2001, 2000 and 1999, respectively. Net cash used in, investingactivities included capital expenditures of $23,974,000, $10,913,000 and$11,432,000 in these periods, respectively, consisting of approximately$21,758,000, $8,950,000 and $9,517,000, respectively, for the purchase andreconstruction of a new manufacturing facility, with the remainder in allperiods primarily for laboratory and manufacturing equipment andinfrastructure.  In 2001, net cash usedin investing 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 cash provided by financing activitieswas $7,687,000, $29,784,000 and $7,012,000 in the years ended December 31,2001, 2000 and 1999, respectively.  Cashflows from financing activities in 2000 were primarily affected by long-termborrowings of $20,000,000 and proceeds from the issuance of common stock of$9,784,000.  Cash flows from financingactivities in 2001 and 1999 were primarily affected by net proceeds fromissuances of common stock of $7,686,000 and $7,012,000, respectively, in theseperiods.  Net proceeds from the sale ofcommon stock resulted mainly from option exercises.

 

In April 1999, BTG purchased a manufacturingfacility in Israel for approximately $6,250,000.  Construction of a modern production facility meeting FDA GMPrequirements for drugs, biologics and devices was completed at the end of 2001,and qualification activities have been commenced and are expected to becompleted in the second half of 2002. BTG will initially locate its production activities for FIBRIMAGE atthis new facility, and will thereafter move the remainder of its productionactivities to this facility.  We expectit will cost approximately $40,000,000 to complete the production facility(excluding the cost of purchasing the facility), of which approximately$33,975,000 had been expended through December 31, 2001.  At December 31, 2001, BTG had outstandingcommitments of $4,467,000 related to completion of this facility. In addition,BTG has agreed to purchase additional property adjacent to the new manufacturingfacility for approximately $1,200,000, of which approximately $400,000 has beenpaid to date.  This property will allowBTG to locate its principal research and development activities adjacent to ournew manufacturing facility. 

 

In June 2000 BTG-Israel entered into a$20,000,000 revolving credit facility with Bank Hapoalim B.M. to finance aportion of the cost of completing its new manufacturing facility.  Short-term borrowings under the facility aredue 12 months from the date of borrowing and long-term borrowings are due fiveyears from the date of borrowing.  Loansunder the facility bear interest at the rate of LIBOR plus 0.5% in the case ofshort-term borrowings and LIBOR plus 1% in the case of long-term borrowings.  Amounts repaid under the facility can bereborrowed.  The credit facility issecured by the assets of BTG-Israel and has been guaranteed by theCompany.  At December 31, 2001, BTG hadoutstanding long-term borrowings of $20,000,000 under the facility.

 

We currently maintain our funds incommercial paper, money market funds and other liquid debt instruments.  See Note 1c and 1d of Notes to ConsolidatedFinancial Statements. 

 

BTG manages its 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 BTG’s 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.  The rateof inflation (as measured by the consumer price index in Israel) wasapproximately 1% in 1999, while the Shekel was devalued by less than 1%.  In 2000 there was no change in the consumerprice index and the Shekel’s value in relation to the U.S. dollar increased byapproximately 3%.  In 2001 the inflationrate was approximately 1% while the Shekel was devalued by 9%. As a result, forthose expenses linked to the Israeli Shekel, such as salaries and rent, thisresulted in corresponding increases in these costs in U.S. dollar terms in 1999and 2000.  However, in 2001, for thoseexpenses this resulted in corresponding decreases in these costs in U.S. dollarterms.  To the extent that expenses inShekels exceed BTG’s revenues in Shekels (which to date have consistedprimarily of research funding from the Chief Scientist and product sales inIsrael), the devaluations of Israeli currency have been and will continue to bea benefit to BTG’s financial condition. However, should BTG’s revenues in Shekels exceed its expenses in Shekelsin any material respect, the devaluation of the Shekel will adversely affectBTG’s financial condition.  Further, tothe extent the devaluation of the Shekel with respect to the U.S. dollar doesnot substantially offset 

 

48

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the increase in the costs of local goods andservices in Israel, BTG’s financial results will be adversely affected as localexpenses measured in U.S. dollars will increase.

 

We believe that our cash resources as ofDecember 31, 2001, together with anticipated product sales and continuedfunding from the Chief Scientist at current levels will be sufficient to fundour ongoing operations for the foreseeable future.  There can, however, be no assurance that product sales will occuras anticipated, that current agreements with third party distributors of ourproducts will not be canceled, that the Chief Scientist will continue toprovide funding at current levels, that we will not use a substantial portionof our cash resources to acquire businesses, products and/or technologies, orthat unanticipated events requiring the expenditure of funds will not occur.  The satisfaction of BTG’s future cashrequirements will depend in large part on the status of commercialization ofBTG’s products, BTG’s ability to enter into additional research and developmentand licensing arrangements, and BTG’s ability to obtain additional equity anddebt financing, if necessary.  There canbe no assurance that BTG will be able to obtain additional funds or, if suchfunds are available, that such funding 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 theCompany will be able to obtain such agreements.  See “Item 1. Business—Risk Factors —We may be unable to obtain any additional capitalneeded to operate and grow our business” and “—We expect our quarterly resultsto fluctuate, which may cause volatility in our stock price.”  

 

Belowis a table which presents our contractual obligations and commitments atDecember 31, 2001:
| **Payments Due by Period**             |
|----------------------------------------|
| **Contractual Obligations**            |   | **Total** |   | **Less than One Year** |   | **1-3 years** |   | **4-5 years** |   | **After 5 years** |   | **Undetermined(3)** |   |
| Long-term debt                         |   | $ | 20,000,000 |   | $ | 1,111,000 |   | $ | 13,334,000 |   | $ | 5,555,000 |   | — |   |   |   |
| Capital lease obligations              |   | $ | 130,000 |   | $ | 123,000 |   | $ | 7,000 |   | — |   | — |   |   |   |
| Operating leases(1)                    |   | $ | 2,399,000 |   | $ | 1,728,000 |   | $ | 671,000 |   | — |   | — |   |   |   |
| Unconditional purchase  commitments(2) |   | $ | 4,467,000 |   | $ | 4,467,000 |   | — |   | — |   | — |   |   |   |
| Other long-term  obligations(3)        |   | $ | 2,845,000 |   | — |   | — |   | — |   | — |   | $ | 2,845,000 |   |
| Total contractual cash  obligations    |   | $ | 29,841,000 |   | $ | 7,429,000 |   | $ | 14,012,000 |   | $ | 5,555,000 |   | — |   | $ | 2,845,000 |   |

 

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(1)  BTG’s lease of its headquarters in theUnited States expires in October 2003, and BTG is currently in the process ofnegotiating a lease for a new headquarters’ facility.

(2)  Consists of commitments relating to theconstruction of BTG’s new manufacturing facility in Israel.

(3)  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.

 

**New Accounting Pronouncements**

 

In June 2001, the FASB approved SFAS Nos.141 and 142 entitled “Business Combinations” and “Goodwill and Other IntangibleAssets”, respectively.  SFAS No. 141,among other things, eliminates the pooling of interests method of accountingfor business acquisitions entered into after June 30, 2001.  SFAS No. 142 requires companies to use afair-value approach to determine whether there is an impairment of existing andfuture goodwill.  SFAS No. 141 isapplied to all business combinations initiated after June 30, 2001.  SFAS No. 142 is effective for fiscal yearsbeginning after December 15, 2001.  As aresult of the adoption of SFAS No. 142, beginning in 2002 we will no longeramortize the negative goodwill resulting from

 

49

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the Myelos acquisition, which reduced general andadministrative expense by approximately $1,000,000 per quarter for financialreporting purposes.  Under SFAS No. 142,the negative goodwill balance of $15,207,000 remaining at December 31, 2001will be maintained on the Balance Sheet as a deferred credit until it is eithernetted against the contingent payments, if any, made to the former Myelosshareholders or reflected in net income as an extraordinary item should thecontingent payments not become due.  Theadoption of SFAS No. 141 had no impact on BTG’s consolidated financialstatements.  The only impact of theadoption of SFAS No. 142 on BTG’s consolidated financial statements is that thenegative goodwill recorded in connection with the Myelos acquisition will nolonger be amortized.  The amortizationof negative goodwill during 2001 reduced our reported general andadministrative expense. 

 

In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  This statementis effective for fiscal years beginning after June 15, 2002.  We are currently assessing the impact ofthis new standard, although we do not expect it to affect our results ofoperations. 

 

In July 2001, the FASB issued SFAS No. 144,“Impairment or Disposal of Long-Lived Assets,” which is effective for fiscalyears beginning after December 15, 2001. The provisions of this statement provide a single accounting model forimpairment of long-lived assets.  We arecurrently assessing the impact of this new standard, although we do not expectit to affect our results of operations. 

 

**ITEM 7A.               QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

Market risk is the exposure to lossresulting from changes in interest rates, foreign currency exchange rates,commodity prices and equity prices.  Todate our exposure to market risk has been limited.  Other than one foreign currency exchange rate hedge, we do notcurrently hedge any market risk, although we may do so in the future.  We do not hold or issue any derivativefinancial instruments for trading or other speculative purposes.  In early 2002, BTG purchased forwardcontracts in the amount of $3,000,000 to hedge part of its commitments inIsraeli Shekels, primarily salaries, by locking in the Shekel/U.S. Dollarexchange rate, which had become more volatile in recent months.  These contracts mature during the first halfof 2002. 

Our obligations under our $20,000,000revolving credit facility bear interest at floating rates and, therefore, weare impacted by changes in prevailing interest rates.  A 100 basis point increase in market interest rates on the$20,000,000 outstanding under this facility at December 31, 2001 would resultin an increase in our annual interest expense of $200,000.  Because these borrowings relate to theconstruction of our new facility, which has not yet begun operation, interestexpense is currently being capitalized. 

 

Our material interest bearing assets consistof cash and cash equivalents and short–term investments, which currentlyconsist primarily today of investments in commercial paper and timedeposits.  Our interest income is sensitiveto changes in the general level of interest rates, primarily U.S. interestrates and other market conditions. 

 

As discussed above under “—Liquidity andCapital Resources,” we manage our Israeli operations with the objective ofprotecting against any material net financial loss in U.S. dollars from theimpact of Israeli inflation and currency devaluations on its non–U.S.dollar assets and liabilities.  All ofBTG’s revenues are in U.S. dollars except for payments from the Chief Scientistand sales of our products in Israel, which are denominated in IsraeliShekels.  

 

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ITEM 8.                FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA

 

Index toConsolidated Financial Statements

 
| Report of  Independent Public Accountants                                                                              |
|------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                   |
| Consolidated  Financial Statements:                                                                                    |
|                                                                                                                   |
| Consolidated Balance Sheets as of December  31, 2000 and 2001                                                          |
|                                                                                                                   |
| Consolidated  Statements of Operations for the ears ended December 31, 1999, 2000 and 2001                             |
|                                                                                                                   |
| Consolidated  Statements of Changes in Stockholders’ Equity for the years ended December  31, 1999, 2000 and 2001 |
|                                                                                                                   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001                            |
|                                                                                                                   |
| Notes to  Consolidated Financial Statements                                                                            |

 

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REPORT OF INDEPENDENTPUBLIC ACCOUNTANTS

 

To the Board of Directorsand Stockholders of 

Bio–TechnologyGeneral Corp.:

 

  We have audited the accompanyingconsolidated balance sheets of Bio–Technology General Corp. (a Delawarecorporation) and subsidiaries as of December 31, 2001 and 2000, and the relatedconsolidated statements of operations, changes in stockholders’ equity and cashflows for each of the three years in the period ended December 31, 2001.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits. 

 

We conducted ouraudits in accordance with auditing standards generally accepted in the UnitedStates.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion. 

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the financial position of Bio–Technology General Corp. andsubsidiaries as of December 31, 2001 and 2000, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2001, in conformity with accounting principles generally acceptedin the United States. 

 

As discussed inNote 1k, during the year ended December 31, 2000, the Company changed itsmethod of accounting for revenue recognition. 

 

ARTHUR ANDERSENLLP                

 

 

New York, New York

February 20, 2002 

 

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CONSOLIDATED BALANCE SHEETS

 
|                                                                                                              |   | **December 31,**                       |    |
|-------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|---------|
|                                                                                                              |   | **2000**                               |    | **2001** |   |
|                                                                                                              |   | **(in thousands, except share  data)** |    |
| ASSETS                                                                                                            |   |                                   |    |   |   |
| Current Assets:                                                                                                   |   |                                   |    |   |   |
| Cash and cash equivalents                                                                                         |   | $                                      | 26,353  |   | $ | 75,451 |   |
| Short-term investments                                                                                            |   | 93,217                                 |    | 43,473 |   |
| Accounts receivable                                                                                               |   | 39,188                                 |    | 24,538 |   |
| Inventories                                                                                                       |   | 9,880                                  |    | 14,140 |   |
| Deferred income taxes                                                                                             |   | 2,445                                  |    | 5,079 |   |
| Prepaid expenses and other                                                                                        |   | 989                                    |    | 1,167 |   |
| Total current assets                                                                                              |   | 172,072                                |    | 163,848 |   |
|                                                                                                              |   |                                   |    |   |   |
| Accounts receivable — trade                                                                                  |   | 1,703                                  |    | — |   |
| Severance pay funded                                                                                              |   | 2,321                                  |    | 2,385 |   |
| Deferred income taxes                                                                                             |   | 5,745                                  |    | 13,808 |   |
| Property and equipment, net                                                                                       |   | 27,819                                 |    | 50,374 |   |
| Intangibles, net of accumulated amortization  of $6,138  in 2000 and $6,675 in 2001                          |   | 800                                    |    | 266 |   |
| Other assets                                                                                                      |   | 2,765                                  |    | 5,989 |   |
| Total assets                                                                                                      |   | $                                      | 213,225 |   | $ | 236,670 |   |
|                                                                                                              |   |                                   |    |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                         |   |                                   |    |   |   |
| Current Liabilities:                                                                                              |   |                                   |    |   |   |
| Accounts payable                                                                                                  |   | $                                      | 6,420   |   | $ | 11,522 |   |
| Deferred revenues                                                                                                 |   | 1,153                                  |    | 1,146 |   |
| Current portion of long-term debt                                                                                 |   | —                                 |    | 1,234 |   |
| Other current liabilities                                                                                         |   | 11,155                                 |    | 11,168 |   |
| Total current liabilities                                                                                         |   | 18,728                                 |    | 25,070 |   |
|                                                                                                              |   |                                   |    |   |   |
| Long-term debt                                                                                                    |   | 20,000                                 |    | 18,896 |   |
| Deferred revenues                                                                                                 |   | 10,551                                 |    | 9,405 |   |
| Severance pay                                                                                                     |   | 4,593                                  |    | 5,229 |   |
| Negative goodwill                                                                                                 |   | —                                 |    | 15,207 |   |
|                                                                                                              |   |                                   |    |   |   |
| Commitments and contingent liabilities                                                                            |   |                                   |    |   |   |
|                                                                                                              |   |                                   |    |   |   |
| 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: 54,765,000 in 2000 58,260,000 in 2001 |   | 547                                    |    | 582 |   |
| Additional paid in capital                                                                                        |   | 179,586                                |    | 207,265 |   |
| Accumulated deficit                                                                                               |   | (14,817                                | )       | (45,104 | ) |
| Accumulated other comprehensive (loss)  income                                                                    |   | (5,963                                 | )       | 120 |   |
| Total stockholders’ equity                                                                                   |   | 159,353                                |    | 162,863 |   |
| Total liabilities and stockholders’ equity                                                                   |   | $                                      | 213,225 |   | $ | 236,670 |   |

 

The accompanying notes are an integral part ofthese consolidated balance sheets.

 

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CONSOLIDATED STATEMENTSOF OPERATIONS

 
|                                                                                       |   | **Year Ended December 31,**               |   |
|--------------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                                       |   | **Historical**                            |   | **Pro Forma*** |   |
|                                                                                       |   | **1999**                                  |   | **2000** |   | **2001** |   | **1999** |   |
|                                                                                       |   | **(in thousands, except per share data)** |   |
| Revenues:                                                                                  |   |                                      |   |   |   |   |   |   |   |
| Product sales                                                                              |   | $                                         | 62,332 |   | $ | 62,149 |   | $ | 87,106 |   | $ | 62,332 |   |
| Contract fees                                                                              |   | 14,848                                    |   | 10,229 |   | 1,156 |   | 5,270 |   |
| Royalties                                                                                  |   | 1,761                                     |   | 3,139 |   | 3,817 |   | 1,761 |   |
| Other revenues                                                                             |   | 1,746                                     |   | 1,931 |   | 2,195 |   | 1,746 |   |
| Interest                                                                                   |   | 4,633                                     |   | 7,496 |   | 7,691 |   | 4,633 |   |
|                                                                                       |   | 85,320                                    |   | 84,944 |   | 101,965 |   | 75,742 |   |
| Expenses:                                                                                  |   |                                      |   |   |   |   |   |   |   |
| Research and development                                                                   |   | 21,120                                    |   | 22,360 |   | 25,576 |   | 21,120 |   |
| Cost of product sales                                                                      |   | 11,224                                    |   | 9,887 |   | 14,003 |   | 11,224 |   |
| General and administrative                                                                 |   | 14,035                                    |   | 12,685 |   | 10,429 |   | 14,035 |   |
| Marketing and sales                                                                        |   | 16,583                                    |   | 17,614 |   | 16,897 |   | 16,583 |   |
| Commissions and royalties                                                                  |   | 3,221                                     |   | 1,879 |   | 1,975 |   | 3,221 |   |
| Realized and unrealized loss on  invest-ment and other financing expense                   |   | 378                                       |   | 149 |   | 12,401 |   | 378 |   |
| Write-off of in-process research and  development acquired                                 |   | —                                    |   | — |   | 45,600 |   | — |   |
|                                                                                       |   | 66,561                                    |   | 64,574 |   | 126,881 |   | 66,561 |   |
| Income (loss) before income taxes                                                          |   | 18,759                                    |   | 20,370 |   | (24,916 | ) | 9,181 |   |
| Income tax expense                                                                         |   | 4,897                                     |   | 4,475 |   | 5,371 |   | 1,353 |   |
| Income (loss) before cumulative effect of  change in accounting principle                  |   | 13,862                                    |   | 15,895 |   | (30,287 | ) | 7,828 |   |
| Cumulative effect of change in  accounting  principle, net of income  taxes of $4,380 |   | —                                    |   | (8,178 | ) | — |   | — |   |
| Net income (loss)                                                                          |   | $                                         | 13,862 |   | $ | 7,717 |   | $ | (30,287 | ) | $ | 7,828 |   |
|                                                                                       |   |                                      |   |   |   |   |   |   |   |
| Earnings (loss) per common share:                                                          |   |                                      |   |   |   |   |   |   |   |
| Basic:                                                                                     |   |                                      |   |   |   |   |   |   |   |
| Income (loss) before cumulative  effect of change in accounting principle             |   | $                                         | 0.26   |   | $ | 0.29 |   | $ | (0.53 | ) | $ | 0.15 |   |
| Cumulative effect of change in accounting  principle                                       |   | —                                    |   | (0.15 | ) | — |   | — |   |
| Net income (loss)                                                                          |   | $                                         | 0.26   |   | $ | 0.14 |   | $ | (0.53 | ) | $ | 0.15 |   |
| Diluted:                                                                                   |   |                                      |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of  change in accounting principle                  |   | $                                         | 0.26   |   | $ | 0.28 |   | $ | (0.53 | ) | $ | 0.14 |   |
| Cumulative effect of change in accounting  principle                                       |   | —                                    |   | (0.14 | ) | — |   | — |   |
| Net income (loss)                                                                          |   | $                                         | 0.26   |   | $ | 0.14 |   | $ | (0.53 | ) | $ | 0.14 |   |
| Weighted average number of common and  common equivalent shares:                           |   |                                      |   |   |   |   |   |   |   |
| Basic                                                                                      |   | 52,348                                    |   | 54,320 |   | 57,230 |   | 52,348 |   |
| Diluted                                                                                    |   | 54,191                                    |   | 56,885 |   | 57,230 |   | 54,191 |   |
|                                                                                            |        |                                           |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

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* See Note 1k

 

The accompanying notes are an integral part ofthese consolidated statements.

 

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CONSOLIDATED STATEMENTSOF CHANGES IN STOCKHOLDERS’ EQUITY

 
|                                                     |   | **Common Stock**   |   | **Additional   Paid In Capital** |   | **Accumulated Deficit** |   | **Treasury   Stock** |   | **Accumulated other   comprehensive income (loss)** |     | **Total   Stockholders’   Equity** |   |
|----------------------------------------------------------|--------|--------------------|--------|---------------------------------------|--------|------------------------------|--------|----------------------|--------|-----------------------------------------------------|----------|-----------------------------------------|--------|
| **Shares**                                               |   | **Par Value**      |   |
|                                                     |   | **(in thousands)** |   |
| **Balance, December 31, 1998**                           |   | 51,934             |   | $                                     | 519    |                         | $      | 161,164              |   | $                                                   | (36,396) |                                    | $      | (340) |   | $ | (1,970) |   | $ | 122,977 |   |
| Comprehensive  income:                                   |   |               |   |                                  |   |                         |   |                 |   |                                                |     |                                    |   |   |   |
| Net income                                               |   |               |   |                                  |   |                         |   | 13,862               |   |                                                |     |                                    |   | 13,862 |   |
| Unrealized loss on marketable securities,  net           |   |               |   |                                  |   |                         |   |                 |   |                                                |     | (2,548                                  | )      | (2,548 | ) |
| Total comprehensive income                               |   |               |   |                                  |   |                         |   |                 |   |                                                |     |                                    |   | 11,314 |   |
| Issuance of common stock                                 |   | 259                |   | 3                                     |   | 1,380                        |   |                 |   |                                                |     |                                    |   | 1,383 |   |
| Tax benefit derived from exercise  of stock options |   |               |   |                                  |   | 521                          |   |                 |   |                                                |     |                                    |   | 521 |   |
| Exercise of stock options                                |   | 1,087              |   | 11                                    |   | 5,678                        |   |                 |   |                                                |     |                                    |   | 5,689 |   |
| **Balance, December 31,  1999**                          |   | 53,280             |   | 533                                   |   | 168,743                      |   | (22,534              | )      | (340                                                | )        | (4,518                                  | )      | 141,884 |   |
| Comprehensive income:                                    |   |               |   |                                  |   |                         |   |                 |   |                                                |     |                                    |   |   |   |
| Net income                                               |   |               |   |                                  |   |                         |   | 7,717                |   |                                                |     |                                    |   | 7,717 |   |
| Unrealized loss on marketable securities,  net           |   |               |   |                                  |   |                         |   |                 |   |                                                |     | (1,445                                  | )      | (1,445 | ) |
| Total comprehensive income                               |   |               |   |                                  |   |                         |   |                 |   |                                                |     |                                    |   | 6,272 |   |
| 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 |   |
| Exercise of stock options                                |   | 1,223              |   | 12                                    |   | 7,903                        |   |                 |   |                                                |     |                                    |   | 7,915 |   |
| **Balance, December 31,  2000**                          |   | 54,765             |   | 547                                   |   | 179,586                      |   | (14,817              | )      | —                                              |     | (5,963                                  | )      | 159,353 |   |
| Comprehensive income:                                    |   |               |   |                                  |   |                         |   |                 |   |                                                |     |                                    |   |   |   |
| Net loss                                                 |   |               |   |                                  |   |                         |   | (30,287              | )      |                                                |     |                                    |   | (30,287 | ) |
| Unrealized loss on marketable securities,  net           |   |               |   |                                  |   |                         |   |                 |   |                                                |     | 6,083                                   |   | 6,083 |   |
| Total comprehensive loss                                 |   |               |   |                                  |   |                         |   |                 |   |                                                |     |                                    |   | (24,204 | ) |
| 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 |   |
| Exercise of stock options                                |   | 873                |   | 9                                     |   | 5,751                        |   |                 |   |                                                |     |                                    |   | 5,760 |   |
| **Balance, December 31,  2001**                          |   | 58,260             |   | $                                     | 582    |                         | $      | 207,265              |   | $                                                   | (45,104  | )                                       | — |   | $ | 120 |   | $ | 162,863 |   |
|                                                          |        |                    |        |                                       |        |                              |        |                      |        |                                                     |          |                                         |        |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part ofthese consolidated statements. 

 

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CONSOLIDATED STATEMENTS OF CASH FLOWS

 
|                                                                                         |   | **Year Ended December 31,** |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                         |   | **1999**                    |   | **2000** |   | **2001** |   |
|                                                                                         |   | **(in thousands)**          |   |
| **Cash flows from operating  activities:**                                                   |   |                        |   |   |   |   |   |
| Net income (loss)                                                                            |   | $                           | 13,862 |   | $ | 7,717 |   | $ | (30,287 | ) |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |   |                        |   |   |   |   |   |
| Cumulative effect of accounting change,  net                                                 |   | —                      |   | 8,178 |   | — |   |
| Deferred income tax                                                                          |   | 1,121                       |   | 331 |   | (3,269 | ) |
| Depreciation and amortization                                                                |   | 3,014                       |   | 2,861 |   | 2,708 |   |
| Write-off of in-process research and  development acquired                                   |   | —                      |   | — |   | 45,600 |   |
| Amortization of negative goodwill                                                            |   | —                      |   | — |   | (2,823 | ) |
| Write-off of other assets                                                                    |   | 1,894                       |   | — |   | — |   |
| Unrealized loss on investments, net                                                          |   | —                      |   | — |   | 8,963 |   |
| Provision for severance pay                                                                  |   | 515                         |   | 260 |   | 636 |   |
| Deferred revenues                                                                            |   | —                      |   | (853 | ) | (1,153 | ) |
| (Gain) loss on disposal of property and  equipment                                           |   | (4                          | )      | (29 | ) | 7 |   |
| Realized loss on sales of short-term  investments, net                                       |   | 441                         |   | 446 |   | 1,735 |   |
| Common stock as payment for services                                                         |   | 60                          |   | 60 |   | 70 |   |
| Changes in:     accounts receivable                                      |   | 28,450                      |   | (944 | ) | 16,353 |   |
| inventories                                                                                  |   | (3,646                      | )      | (1,256 | ) | (4,260 | ) |
| prepaid expenses and other current assets                                                    |   | 124                         |   | (769 | ) | (405 | ) |
| accounts payable                                                                             |   | 2,419                       |   | 660 |   | 5,128 |   |
| other current liabilities                                                                    |   | 730                         |   | (16 | ) | (185 | ) |
| Net cash provided by operating activities                                                    |   | 48,980                      |   | 16,646 |   | 38,818 |   |
| **Cash flows from investing  activities:**                                                   |   |                        |   |   |   |   |   |
| Purchases of short-term investments                                                          |   | (53,501                     | )      | (48,738 | ) | (10,407 | ) |
| Capital expenditures                                                                         |   | (11,432                     | )      | (10,913 | ) | (23,974 | ) |
| Intangibles                                                                                  |   | (150                        | )      | — |   | — |   |
| Severance pay funded                                                                         |   | (136                        | )      | 48 |   | (64 | ) |
| Other investments                                                                            |   | —                      |   | — |   | (5,000 | ) |
| Other assets                                                                                 |   | (931                        | )      | (1,253 | ) | (989 | ) |
| Change in patents                                                                            |   | (181                        | )      | (180 | ) | — |   |
| Proceeds from sales of short-term  investments                                               |   | 19,567                      |   | 22,177 |   | 58,416 |   |
| Net cash paid in acquisition                                                                 |   | —                      |   | — |   | (15,603 | ) |
| Proceeds from sales of property and equipment                                                |   | 44                          |   | 79 |   | 214 |   |
| Net cash provided by (used in) investing  activities                                         |   | (46,720                     | )      | (38,780 | ) | 2,593 |   |
| **Cash flows from financing  activities:**                                                   |   |                        |   |   |   |   |   |
| Proceeds from issuances of common stock                                                      |   | 7,012                       |   | 9,784 |   | 7,687 |   |
| Proceeds from long-term loan                                                                 |   | —                      |   | 20,000 |   | — |   |
| Net cash provided by financing activities                                                    |   | 7,012                       |   | 29,784 |   | 7,687 |   |
|                                                                                         |   |                        |   |   |   |   |   |
| Net increase in cash and cash equivalents                                                    |   | 9,272                       |   | 7,650 |   | 49,098 |   |
| Cash and cash equivalents at beginning of  year                                              |   | 9,431                       |   | 18,703 |   | 26,353 |   |
| Cash and cash equivalents at end of year                                                     |   | $                           | 18,703 |   | $ | 26,353 |   | $ | 75,451 |   |

 

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|                                                       |   | **Year Ended December 31,** |   |
|------------------------------------------------------------|--------|-----------------------------|--------|
|                                                       |   | **1999**                    |   | **2000** |   | **2001** |   |
|                                                       |   | **(in thousands)**          |   |
| **Supplementary  Information:**                            |   |                        |   |   |   |   |   |
| Other information:                                         |   |                        |   |   |   |   |   |
| Interest paid                                              |   | $                           | 11     |   | $ | 269 |   | $ | 1,044 |   |
| Income taxes paid                                          |   | $                           | 3,518  |   | $ | 4,567 |   | $ | 3,937 |   |
| Tax benefit derived from exercise of stock  options        |   | $                           | 521    |   | $ | 1,353 |   | $ | 925 |   |
|                                                       |   |                        |   |   |   |   |   |
| **Acquisition of Myelos  Corporation:**                    |   |                        |   |   |   |   |   |
| Assets acquired                                            |   | —                      |   | — |   | $ | 8,257 |   |
| Liabilities assumed                                        |   | —                      |   | — |   | (1,125 | ) |
| Negative goodwill                                          |   | —                      |   | — |   | (18,030 | ) |
| Equity issued                                              |   | —                      |   | — |   | (19,032 | ) |
| In process research and development  acquired              |   | —                      |   | — |   | 45,600 |   |
|                                                       |   | —                      |   |   |   | 15,670 |   |
| Less — cash acquired                                  |   | —                      |   | — |   | (67 | ) |
|                                                       |   |                        |   |   |   |   |   |
| Net cash paid                                              |   | $                           | — |   | $ | — |   | $ | 15,603 |   |
|                                                       |   |                        |   |   |   |   |   |
| **Non-cash activity:**                                     |   |                        |   |   |   |   |   |
| Investment in fixed assets unpaid as of  December 31, 2001 |   | $                           | — |   | $ | — |   | $ | 899 |   |

 

The accompanyingnotes are an integral part of these consolidated statements. 

 

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

NOTE 1 - ORGANIZATION AND SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

 

Bio–Technology General Corp. (“BTG”)and its wholly-owned subsidiary, Bio-Technology General (Israel) Ltd. (“BTG-Israel”),were formed in 1980 to research, develop, manufacture and market productsthrough the application of genetic engineering and related biotechnologies.

 

a.             Basisof consolidation: 

 

The consolidated financial statementsinclude the accounts of BTG, BTG-Israel and Myelos Corporation (“Myelos”),hereinafter collectively referred to as the “Company”.  All material intercompany transactions andbalances have been eliminated.  Certainprior year amounts have been reclassified to conform to current year presentation.

 

b.             Translationof foreign currency: 

 

The functional currency of BTG-Israel is theU.S. dollar.  Accordingly, its accountsare remeasured in dollars, and translation gains and losses (which areimmaterial) are included in the statements of operations.

 

c.             Cashand cash equivalents: 

 

At December 31, 2000 and 2001, cash and cashequivalents included cash of $9,504,000 and $4,334,000, respectively, and moneymarket funds, commercial paper and other liquid short–term debtinstruments (with maturities at date of purchase of ninety days or less) of$16,849,000 and $71,117,000, respectively.

 

d.             Short-terminvestments: 

 

(i) Short-term investments consist primarily of investments in mutual fundsand at December 31, 2000 consist also of U.S. Treasury and corporate bonds thathave been classified as “available-for-sale securities” pursuant to Statementof Financial Accounting Standards (“SFAS”) No. 115 “Accounting for CertainInvestments in Debt and Equity Securities.” At December 31, 2001, management determined that the decline ininvestment value is other than temporary and, accordingly, cost has beenadjusted to reflect market value and a loss on impairment of investment of$7,193,000 was recognized and included in the statement of operations.  At December 31, 2000, the cost of thesecurities was $99,180,000; an adjustment was made to reflect market value andwas recorded as comprehensive loss and deducted from stockholders’ equity.

 

 (ii)  Cost basis investmentincluded within other assets represents an equity investment of less than 20%in a private entity.  Changes in thevalue of this investment are not recognized unless an impairment is deemed tobe other than temporary.

 

e.             Inventories:

 

Inventories are stated at the lower of costor market.  Cost is determined by usingthe weighted average method.  AtDecember 31, 2000 and 2001, inventories include raw materials of $1,324,000 and$1,706,000, work-in-process of $1,499,000 and $1,137,000, and finished goods of$7,057,000 and $11,297,000, respectively.

 

f.              Long-termaccounts receivable — trade: 

 

As of December 31, 2000, long-term accountsreceivable — trade consists of amounts owed to the Company by one customer forwhich collection was expected in part by December 31, 2001 and for theremainder by December 31, 2002.  Theamount does not bear interest and as such a discount has been recorded in theconsolidated financial statements for the periods ended December 31, 2000.  The $500,000 due by December 31, 2001 wasreceived, and the amount due by December 31, 2002 is included in currentassets.

 

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g.             Propertyand equipment, net of accumulated depreciation and amortization: 

 

Property and equipment are stated atcost.  Depreciation has been calculatedusing the straight-line method over the estimated useful lives of the assets,ranging from 3 to 17 years.  Leaseholdimprovements are amortized over the lives of the respective leases, which areshorter than the useful life.  The costof maintenance and repairs is expensed as incurred.

 

Land, building and construction-in-progressrepresents building under construction and is stated at cost.  This includes cost of construction under theconstruction contracts, plant and equipment, capitalized interest, labor andother direct costs.  Capitalizedinterest is included under the provision of SFAS No. 34 and totaledapproximately $339,000 and $1,378,000 at December 31, 2000 and 2001,respectively.  Construction-in-progressis not depreciated until such time as the relevant assets are completed and putinto operational use.

 

h.             Intangibles:

 

Intangibles consist of repurchased rights toone of the Company’s products previously licensed to a third party, and areamortized, using the straight-line method over the shorter of the life of therelated revenue stream or seven years, commencing with the initial sale of therelated product.

 

i.              Patents:

 

Patent costs related to products approved byany regulatory agency worldwide or being sold have been capitalized. Amortizationhas been calculated using the straight-line method over 17 years commencing onthe date of grant with respect to each project.  

 

j.              Long-livedassets:

 

The Company’s policy is to record long-livedassets at cost, amortizing these costs over the expected useful lives ofrelated assets.  In accordance with SFASNo. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of”, these assets are reviewed on a periodic basis forimpairment whenever events or changes in circumstances indicate that thecarrying amounts of the assets may not be recoverable.  Management of the Company believes that nosuch event or change has occurred.

 

k.             Revenuerecognition: 

 

Product sales are recognized when theproduct is shipped and collectability is probable.  No rights of return exist.

 

Contract fees consist mainly of license ofmarketing and distribution rights and research and development projects.  Effective January 1, 2000, the Companyadopted Staff Accounting Bulletin 101 (“SAB 101”) issued by the Securities andExchange Commission in December 1999. As a result of adopting SAB 101, the Company changed the way itrecognizes revenue from contract fees for the license of marketing and distributionrights where the consideration is a one-time nonrefundable payment. Prior tothe issuance of SAB 101, the Company recorded revenue from the license ofmarketing and distribution rights when the rights were licensed and/or whenthese payments were received.  Inaccordance with SAB 101, the related revenues are now being recognized over theterm of the related agreements. Effective January 1, 2000, the Company recorded a cumulative effect ofchange in accounting principle related to contract revenues recognized in prioryears in the amount of $12,558,000, net of income taxes of $4,380,000, of which$853,000  and $1,156,000 was recognizedas contract fee revenue in 2000 and 2001, respectively. 

 

Revenue related to performance milestones isrecognized 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 agreementexists, the sale is made and the royalty is earned.

 

Other revenues represent funds received bythe Company for research and development projects that are partially funded bycollaborative partners and the Chief Scientist of the State of Israel,respectively.  The 

 

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Company recognizes revenue upon performance of suchfunded research.  In general, thesecontracts are cancelable by the Company’s collaborative partners at any time. 

 

The *proform*a results of operations of the Company for the year endedDecember 31, 1999 have been prepared as if the Company adopted SAB 101prior to January 1, 1999.  

 

l.              Stock-basedcompensation: 

 

The Company has adopted SFAS No. 123,“Accounting for Stock Based Compensation”. As permitted under SFAS 123, the Company has elected to followAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees”, and related interpretations in accounting for itsemployee stock options.  The Company hasprovided the necessary pro forma disclosure as if the fair value method hasbeen applied.  (See note 8.)  Under APB 25, when the exercise price ofemployee stock options equals or exceeds the market price of the underlyingstock on the date of grant, no compensation expense is recorded.

 

m.            Researchand development: 

 

All research and development costs areexpensed as incurred.  

 

n.             Incometaxes: 

 

Deferred income taxes are recognized for thetax consequences of temporary differences by applying the enacted statutory taxrates to differences between the financial statement carrying amounts and thetax bases of existing assets and liabilities. 

 

BTG-Israel files separate income tax returnsand provides for taxes under Israeli regulations.

 

o.             Othercomprehensive income (loss): 

 

Other comprehensive income (loss) consistsof unrealized gains (losses) on marketable securities.  

 

p.             Earningsper common share: 

 

Net earnings per common share amounts(“basic EPS”) are computed by dividing net earnings by the weighted averagenumber of common shares outstanding and exclude any potential dilution.  Net earnings per common share amountsassuming dilution (“diluted EPS”) are computed by reflecting potential dilutionfrom the exercise of stock options and warrants. 

 

A reconciliation between the numerators anddenominators of the basic and diluted EPS computations for net earnings is asfollows: 

 

 

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|                                                                         |   | **Year Ended December 31, 1999**          |       | **Year Ended December 31, 2000** |       | **Year Ended December 31, 2001** |       |
|------------------------------------------------------------------------------|--------|-------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
|                                                                         |   | **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)**                                                       |   | $                                         | 13,862     |                             |       |                             |       |   | $ | 7,717 |   |   |   |   |   | $ | (30,287 | ) |   |   |   |   |
|                                                                         |   |                                      |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Basic EPS**                                                                |   |                                      |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings  (loss)attributable to common stock                             |   | 13,862                                    |       | 52,348                           |       | $                                | 0.26       |   | 7,717 |   | 54,320 |   | $ | 0.14 |   | (30,287 | ) | 57,230 |   | $ | (0.53 | ) |
|                                                                         |   |                                      | ** ** |                             | ** ** |                             | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Effect of Dilutive  Securities**                                           |   |                                      |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock options                                                                |   |                                      |       | 1,843                            |       |                             |       |   |   | 2,565 |   |   |   |   |   | — |   |   |   |
|                                                                         |   |                                      |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Diluted EPS**                                                              |   |                                      |       |                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net earnings (loss)attributable to common  stock and asumed option exercises |   | $                                         | 13,862     |                             | 54,191     |                             | $          | 0.26 |   | $ | 7,717 |   | 56,885 |   | $ | 0.14 |   | $ | (30,287 | ) | 57,230 |   | $ | (0.53 | ) |
|                                                                              |        |                                           |            |                                  |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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Options topurchase 697,000 and 732,000 shares of common stock out of the total number ofoptions outstanding as of December 31, 1999 and 2000, respectively, are notincluded in the computation of diluted EPS because of their anti-dilutiveeffect.  In 2001 all options outstandingas of December 31, 2001 are excluded from the computation of diluted EPSbecause of their anti-dilutive effect.

 

q.             Useof estimates in preparation of financial statements: 

 

The preparation of financial statements inconformity with generally accepted accounting principles 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 an ongoing basis, we evaluate our estimates, including those relatedto accounts receivable, inventories, intangible assets and income taxes.  We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying value of assets and liabilities that are notreadily apparent from other sources. Results may differ from these estimates due to actual outcomes beingdifferent from those on which we based our assumptions.

 

r.              Fairvalue of financial instruments: 

 

The carrying amounts of cash and cashequivalents, short-term investments, accounts receivable and accounts payableapproximate fair value due to the short-term maturity of theseinstruments.  The carrying amount of thelong–term debt approximates fair value as the borrowing rates arecurrently available for debt with similar terms and maturities.

 

s.             Concentrationof credit risk: 

 

Financial instruments that potentiallysubject the Company to concentrations of credit risk consist principally ofcash and cash equivalents, short term investments and accounts receivable.  The Company places its short-terminvestments with high quality financial institutions and limits the amount ofcredit exposure to any one institution. Concentration of credit risk with respect to accounts receivable isdiscussed in Note 12.  Generally, theCompany does not require collateral from its customers; however, collateral orother security for accounts receivable may be obtained in certain circumstanceswhen considered necessary.

 

t.              Newaccounting pronouncements: 

 

In June 2001, the FASB approved SFAS Nos.141 and 142 entitled “Business Combinations” and “Goodwill and Other IntangibleAssets”, respectively.  SFAS No. 141, amongother things, eliminates the pooling of interests method of accounting forbusiness acquisitions entered into after June 30, 2001.  SFAS No. 142 requires companies to use afair-value approach to determine whether there is an impairment of existing andfuture goodwill.  SFAS No. 141 isapplied to all business combinations initiated after June 30, 2001.  SFAS No. 142 is effective for fiscal yearsbeginning after December 15, 2001.  As aresult of the adoption of SFAS No. 142, beginning in 2002 the Company will nolonger amortize the negative goodwill resulting from the Myelos acquisition,which reduced general and administrative expense by approximately $1,000,000per quarter for financial reporting purposes. Under SFAS No. 142, the negative goodwill balance of $15,207,000remaining at December 31, 2001 will be maintained on the Balance Sheet as adeferred credit until it is either netted against the contingent payments, ifany, made to the former Myelos shareholders or reflected in net income as an extraordinaryitem should the contingent payments not become due.  The adoption of SFAS No. 141 had no impact on the Company’sconsolidated financial statements. 

 

In June 2001, the FASB issued SFAS No. 143,“Accounting for Asset Retirement Obligations”. SFAS No. 143 addresses accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and the associatedasset retirement costs.  This statementis effective 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 2001, the FASB issued SFAS No. 144,“Impairment or Disposal of Long-Lived Assets,” which is effective for fiscalyears beginning after December 15, 2001. The provisions of this statement provide a single accounting model forimpairment of long-lived assets.  TheCompany is currently assessing the impact of this new standard, although itdoes not expect it to affect its results of operations.

 

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NOTE 2 - SEVERANCE PAY 

 

BTG-Israel participates in a definedcontribution pension plan and makes regular deposits with a pension fund tosecure pension rights on behalf of some of its employees.  The custody and management of the amounts sodeposited are independent of the Company and accordingly such amounts funded(included in expenses on an accrual basis) and related liabilities are notreflected in the balance sheets.  TheCompany’s obligation for severance pay, in addition to the amount funded, isincluded within long-term liabilities in the accompanying consolidated balancesheets. 

 

In respect of its other employees,BTG-Israel purchases individual insurance policies intended to cover itsseverance obligations.  The amountfunded in the insurance policy and its obligation for severance pay to thoseemployees is reflected in the consolidated balance sheets as severance payfunded and severance pay, respectively. 

 

The liability of the Company for severancepay is calculated on the basis of the latest salary paid to its employees andthe length of time they have worked for the Company.  The liability is covered by the amounts deposited, includingaccumulated income thereon, as well as by the unfunded liability. 

 

The expense related to severance and pensionpay for the years ended December 31, 1999, 2000 and 2001, was $1,039,000,$1,434,000 and $1,648,000, respectively. 

 

NOTE 3 - PROPERTY AND EQUIPMENT, NET             

 

 
|                                                 |   | **December 31,**   |   |
|------------------------------------------------------|--------|--------------------|--------|
|                                                 |   | **2000**           |   | **2001** |   |
|                                                 |   | **(in thousands)** |   |
| Laboratory and manufacturing equipment               |   | $                  | 19,250 |   | $ | 27,682 |   |
| Office equipment                                     |   | 3,922              |   | 4,807 |   |
| Air conditioning and other                           |   | 2,951              |   | 4,600 |   |
| Leasehold improvements                               |   | 7,631              |   | 7,634 |   |
|                                                 |   | 33,754             |   | 44,723 |   |
| Land, building and construction in  progress (1) (2) |   | 15,806             |   | 29,265 |   |
|                                                 |   | 49,560             |   | 73,988 |   |
| Accumulated depreciation and amortization            |   | (21,741            | )      | (23,614 | ) |
| Total                                                |   | $                  | 27,819 |   | $ | 50,374 |   |

 

----

(1)           Therelated asset has not been placed in service and therefore no depreciation andamortization has been accumulated as of December 31, 2001.  Includes $2,815,000 and $717,000 ofcapitalized interest, labor and other expenses as of December 31, 2001 and2000, respectively.

 

(2)           At December 31, 2001, the Company had outstandingcommitments of $4,467,000 related to completion of the construction in progressof its new facility.

 

Depreciation expense was approximately$1,896,000, $1,982,000 and $2,097,000 for the years ended December 31, 1999,2000 and 2001, respectively.

 

NOTE 4 - ACQUISITIONS AND INVESTMENTS

 

(a)           Acquisitionof Myelos Corporation. 

 

On March 19, 2001, the Company acquiredMyelos Corporation, a privately-held biopharmaceutical company focused on thedevelopment of novel therapeutics to treat diseases of the nervous system.  Under the terms of the acquisition agreement,the Company paid Myelos shareholders $35,000,000 in a combination of cash andstock ($14,000,000 in cash and $21,000,000 through the issuance ofapproximately 2,344,700 shares 

63

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of the Company’s common stock (based on a value of$8.9564, representing the average closing price of the Company’s common stockfor the 20 trading day period ending one day prior to February 21, 2001, thedate the acquisition 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 month aftercommercial introduction of Prosaptide in the United States for the treatment ofneuropathic pain or neuropathy and (ii) April 1, 2010. At least 50% of thispayment must be in shares of Company common stock, with the remainder payable,at the Company’s option, in cash, shares of Company common stock or acombination thereof.  In no event is theCompany required to issue more than 10,962,000 shares of its common stock; anyequity required to be issued in excess of that amount will be issued in sharesof Company preferred stock.  Thepreferred stock would be non-voting, non-convertible, non-transferable,non-dividend paying (except to the extent a cash dividend is paid on theCompany common stock), with no mandatory redemption for a period of 20 yearsand one day from the closing date of the acquisition, and a right to share inproceeds in liquidation, up to the liquidation amount. 

 

The transaction was treated as a “purchase”for accounting purposes.  The purchaseprice for accounting purposes is approximately $34,387,000 (includingacquisition costs of $1,387,000), based on a value for the approximately2,344,700 shares of Company common stock issued in the acquisition of $8.1172,representing the average closing price of the Company’s common stock for thefour day period preceding the date the terms of the acquisition were agreed to(February 21, 2001).  In connection withthe merger 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 mergerthe 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. TheCompany recorded negative goodwill of $18,030,000 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 is being amortizedover its expected useful life of five years. In accordance with SFAS No. 142, amortization of the negative goodwillwill cease beginning January 1, 2002, and the balance remaining will bemaintained as a deferred credit until it is either netted against thecontingent payments or reflected in net income as an extraordinary item shouldthe contingent payments not become due because the technology did not meet themilestones which trigger payment.

 

The Company allocated values to thein-process research and development based on an independent valuation of theresearch and development project.  Thevalue assigned to these assets was determined by estimating the costs todevelop the acquired technology into a commercially viable product, estimatingthe resulting net cash flows from the product, and discounting the net cashflows to their present value.  Therevenue projection used to value the in-process research and development was basedon estimates of relevant market size and growth factors, expected trends intechnology, and the nature and expected timing of new product introductions bythe Company and its competitors.  Theresulting net cash flows from such product are based on management’s estimatesof 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 orprofitability, or the events associated with such product, will transpire asestimated.  For these reasons, actualresults may vary from projected results. The most significant and uncertain assumptions relating to thein-process research and development relate to the ability to successfullydevelop a product and the projected timing of completion of, and revenuesattributable to, that product. 

 

The following unaudited pro formaconsolidated results of operations for the years ended December 31, 2000and 2001 were prepared assuming the acquisition of Myelos occurred on January1, 2000.  The pro forma results ofoperations are not necessarily indicative of the consolidated results whichactually would have occurred if the acquisition had been consummated at thebeginning of the year presented, nor does it purport to represent the resultsof operations for future periods. 

 

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|                            |   | **Year ended December 31,**               |   |
|---------------------------------|--------|-------------------------------------------|--------|
|                            |   | **2000**                                  |   | **2001** |   |
|                            |   | **As Reported**                           |   | **Pro Forma** |   | **As Reported** |   | **Pro Forma** |   |
|                            |   | **(In thousands except per share  data)** |   |
| Total revenues                  |   | $                                         | 84,944 |   | $ | 84,944 |   | $ | 101,965 |   | $ | 101,965 |   |
| Net income (loss)               |   | $                                         | 7,717  |   | $ | 8,263 |   | $ | (30,287 | ) | $ | (30,654 | ) |
| Basic income (loss) per share   |   | $                                         | 0.14   |   | $ | 0.15 |   | $ | (0.53 | ) | $ | (0.54 | ) |
| Diluted income (loss) per share |   | $                                         | 0.15   |   | $ | 0.15 |   | $ | (0.53 | ) | $ | (0.54 | ) |

 

The pro formaresults include the effect of the amortization of negative goodwill.  

 

(b)           Investmentin Omrix Biopharmaceuticals, Inc. 

 

In January 2001, in order to obtain a periodof exclusivity to negotiate a possible strategic relationship with OmrixBiopharmaceuticals, Inc., the Company loaned $2,500,000 to Omrix and agreed toconvert the loan into, and to purchase an additional $2,500,000 of, shares ofOmrix preferred stock if it did not pursue a relationship.  The Company determined not to pursue astrategic relationship with Omrix, and on March 31, 2001 converted the existingloan into, and purchased an additional $2,500,000 of, shares of Omrix preferredstock, which is convertible into approximately 4.5% of Omrix common stock (on afully-diluted basis).  Omrix is aprivately-held company that develops and markets a unique surgical sealant anda number of immunology products based on blood plasma processingtechnology.  Omrix currently sells itsproducts in Europe, South America and the Middle East. 

 

During the fourth quarter of 2001, theCompany determined that the decline in the value of its investment in Omrix wasother than temporary and, accordingly, wrote-down the value of this investmentby $3,000,000 based on management’s evaluation of current market conditions andOmrix’s operations and forecasts.  

 

NOTE 5 - LONG-TERM DEBT 

 

In June 2000 the Company entered into a $20,000,000revolving credit facility with Bank Hapoalim B.M. to finance a portion of thecost of completing its new production facility.  Short-term borrowings under the facility are due 12 months fromthe date of borrowing and long-term borrowings are due five years from the dateof borrowing.  Loans under the facilitybear interest at the rate of LIBOR plus 0.5% in the case of short-termborrowings and LIBOR plus 1% in the case of long-term borrowings.  Amounts repaid under the facility can bereborrowed.  The credit facility issecured by the assets of BTG-Israel and has been guaranteed by theCompany.  At December 31, 2001 theCompany had long-term borrowings of $20,000,000 outstanding under the facility,of which $1,111,000 is included in current portion of long-term debt.  At December 31, 2001, the loans are at anaverage interest rate of approximately 3.5% and the principal is payable asfollows: in 2002 - $1,111,000; in 2003 - $6,667,000; in 2004 - $6,667,000 and in2005 - $5,555,000.

 

NOTE 6 - STOCKHOLDERS’ EQUITY 

 

In the years ended December 31, 1999, 2000and 2001, the Company issued 1,087,000 shares, 1,223,000 shares and 873,000shares, respectively, of the Company’s common stock upon the exercise ofoutstanding stock options and received proceeds of $5,689,000, $7,915,000 and$5,760,000, respectively. 

 

In 1998 the Company adopted a stockholderrights plan intended to deter hostile or coercive attempts to acquire theCompany.  Under the plan, if any personor group acquires more than 20% of the Company’s common stock without approvalof the Board of Directors under specified circumstances, the Company’s otherstockholders have the right to purchase shares of the Company’s common stock,or shares of the acquiring company, at a substantial discount to the publicmarket price.  The stockholder rightsplan continues the Company’s commitment to ensuring fair value to allstockholders in the event of an unsolicited takeover offer.

 

65

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NOTE 7 - EMPLOYEE BENEFITS 

 

(a)           EmployeeStock Purchase Plan 

 

In April 1998, the Company adopted the 1998Employee Stock Purchase Plan (the “1998 ESPP”).  The 1998 ESPP is qualified as an employee stock purchase planunder Section 423 of the Internal Revenue Code of 1986, as amended.  The total number of shares reserved forissuance under the 1998 ESPP is 3,000,000 shares. 

 

All full-time employees of the Company areeligible to participate in the 1998 ESPP. From time to time, the Board of Directors may fix a date or a series ofdates on which the Company will grant rights to purchase shares of common stockunder the 1998 ESPP (“Rights”) at prices not less than 85% of the lesser of (i)the fair market value of the shares on the date of grant of such Rights or (ii)the fair market value of the shares on the date such Rights are exercised.  Rights granted under the 1998 ESPP will runfor a maximum of 27 months.  No employeemay be granted a Right that permits such employee to purchase shares under the1998 ESPP having a fair market value that exceeds $25,000 (determined at thetime such Right is granted) for each calendar year in which such Right isoutstanding, and no Right granted to any participating employee may cover morethan 12,000 shares.  In 1999, 2000 and2001 the Company issued 251,000 shares, 339,000 shares and 268,000 shares,respectively, of common stock under the 1998 ESPP.

 

(b)           401(k)Profit-Sharing Plan 

 

The Company also has a 401(k) profit-sharingplan.  As of December 31, 2001, the401(k) plan permits employees who meet the age and service requirements tocontribute up to $10,500 of their total compensation on a pretax basis, whichis matched 50% by the Company.  TheCompany’s contribution to the plan amounted to approximately $391,000 and$348,000 for the years ended December 31, 2001 and 2000, respectively.  

 

NOTE 8 - STOCK OPTIONS 

 

In 1992 the Company adopted theBio-Technology General Corp. 1992 Stock Option Plan (the “1992 Stock OptionPlan”).  The 1992 Stock Option Planpermits the granting of options to purchase up to an aggregate of 12,000,000shares of the Company’s common stock to key employees (including employees whoare directors) and consultants of the Company. Under the 1992 Stock Option Plan, the Company may grant either incentivestock options, at an exercise price of not less than 100% of the fair marketvalue of the underlying shares on the date of grant, or non-qualified stockoptions, at an exercise price not less than the par value of the common stockon the 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.

 

In 2001 the Company adopted the 2001 StockOption Plan (the “2001 Stock Option Plan”). The 2001 Stock Option Plan permits the granting of options to purchaseup to an aggregate of 10,000,000 shares of the Company’s common stock toemployees (including employees who are directors) and consultants of theCompany.  Under the 2001 Stock OptionPlan, the Company may grant either incentive stock options, at an exerciseprice of not less than 100% of the fair market value of the underlying shareson the date of grant, or non-qualified stock options, at an exercise price notless than 85% of the fair market value of the underlying shares on the date ofgrant.  Options generally becomeexercisable ratably over two or four-year periods, with unexercised options expiringafter the earlier of 10 years or shortly after termination of employment.  Terminated options are available forreissuance.  Under this plan, 9,283,000shares remain available for future grant. 

 

The Company also established a Stock OptionPlan for New Directors (the “New Director Plan”) that, upon an individual’sinitial election or appointment to the Board of Directors, provides for thegrant of an option to purchase 20,000 shares of common stock at an exerciseprice equal to the market value of the common stock on the date of grant.  Options become exercisable over a three-yearperiod. 

 

In June 1997 the Company adopted theBio-Technology General Corp. 1997 Stock Option Plan for Non-Employee Directors(the “Directors Plan”).  The DirectorsPlan provides that each non-employee director will automatically receive anoption to purchase 7,500 shares of the Company’s common stock on each date suchperson is re-elected a director of the Company.  The exercise price of each option is equal to the market value ofthe common stock on the date of grant. Options become exercisable over a three-year period.  An 

 

66

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aggregate of 500,000 shares of common stock hasbeen reserved for issuance under the Directors Plan.  The Board of Directors terminated the Directors Plan in February2002, and instead provided that each non-employee director would receive underthe 2001 Stock Option Plan an option to purchase 5,000 shares of the Company’scommon stock on the last business day of each quarter, commencing with thequarter ended March 31, 2002.  The  exercise price of each option is equal tothe market value of the common stock on the date of grant, and options becomefully exercisable on the first anniversary of the date of grant. 

 

The Company accounts for all plans under APBOpinion No. 25, under which no compensation cost has been recognized as alloptions granted during 1999, 2000 and 2001 were granted at the fair marketvalue of the Company’s common stock. Had compensation cost for these plans and the Company’s 1998 ESPP beendetermined in accordance with SFAS No. 123, the Company’s net income and EPSwould have been reduced as follows:

 
|              |         |   | **Year Ended December 31,**              |   |
|-------------------|--------------|--------|------------------------------------------|--------|
|              |         |   | **1999**                                 |   | **2000** |   | **2001** |   |
|              |         |   | **(in thousands except per share data)** |   |
| Net income (loss) | As  reported |   | $                                        | 13,862 |   | $ | 7,717 |   | $ | (30,287 | ) |
|              | Pro  forma   |   | 4,305                                    |   |  (3,874 | ) | (44,204 | ) |
| Basic EPS:        | As  reported |   | $                                        | 0.26   |   | $ | 0.14 |   | $ | (0.53 | ) |
|              | Pro  forma   |   | 0.08                                     |   |  (0.77 | ) |  (0.77 | ) |
| Diluted EPS:      | As  reported |   | $                                        | 0.26   |   | $ | 0.14 |   | $ | (0.53 | ) |
|              | Pro  forma   |   | 0.08                                     |   | (0.07 | ) |  (0.77 | ) |

 

Under SFAS No. 123, the fair value of eachoption is estimated on the date of grant using the Black-Scholes option-pricingmodel with the following weighted average assumptions used for grants in 1999,2000 and 2001: (i) expected life of option of seven years; (ii) dividend yieldof 0%; (iii) expected volatility of 58%, 59% and 62%; and (iv) risk-freeinterest rate of 5.66%, 5.62% and 3.50%, respectively. 

 

Transactions under the Plan, the 1992 StockOption Plan, the 2001 Stock Option Plan, the New Director Plan, the DirectorsPlan and other plans during 1999, 2000 and 2001 were as follows:

 
|                                            |   | **Year ended December 31,** |   |
|-------------------------------------------------|--------|-----------------------------|--------|
|                                            |   | **1999**                    |   | **2000** |   | **2001** |   |
|                                            |   | **Shares (‘000s)**     |   | **Weighted  Average   Exercise   Price** |   | **Shares (‘000s)** |   | **Weighted   Average   Exercise   Price** |   | **Shares (‘000s)** |   | **Weighted   Average  Exercise   Price** |   |
| Options  outstanding at beginning of year       |   | 6,332                       |   | $ | 7.33 |   | 7,487 |   | $ | 7.38 |   | 7,037 |   | $ | 8.39 |   |
| Granted                                         |   | 2,752                       |   | 6.78 |   | 1,506 |   | 11.85 |   | 2,095 |   | 11.89 |   |
| Exercised                                       |   | (1,087                      | )      | 5.23 |   | (1,223 | ) | 6.47 |   | (873 | ) | 6.59 |   |
| Terminated                                      |   | (510                        | )      | 8.10 |   | (733 | ) | 8.39 |   | (342 | ) | 9.42 |   |
| Options outstanding at end of year              |   | 7,487                       |   | 7.38 |   | 7,037 |   | 8.39 |   | 7,917 |   | 9.47 |   |
| Exercisable at end of year                      |   | 2,804                       |   |   |   | 2,706 |   |   |   | 4,319 |   |   |   |
| Weighted average fair value of options  granted |   |                        |   | 4.34 |   |   |   | 7.62 |   |   |   | 7.65 |   |
|                                                 |        |                             |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Of the 7,917,000 options outstanding as ofDecember 31, 2001: 

 

•     2,367,000 have exercise prices between $2.37 and $7.50 with a weightedaverage exercise price of $6.09 and a weighted average remaining contractuallife of 5.98 years. Of these 2,367,000 options, 1,831,000 are exercisable;their weighted average exercise price is $5.82.

 

•       2,962,000 options have exercise pricesbetween $7.56 and $10.62 with a weighted average exercise price of $8.73 and aweighted average remaining contractual life of 6.94 years.  Of these 2,962,000 options, 1,885,000 areexercisable; their weighted average exercise price is $8.36.

 

67

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•       2,587,000 options have exercise pricesbetween $10.81 and $20.44 with a weighted average exercise price of $13.40 anda weighted average remaining contractual life of 8.57 years. Of these 2,587,000options, 603,000 are exercisable; their weighted average exercise price is$14.22.

 

Subsequent to December 31, 2001, no materialamount of options have been exercised.  

 

NOTE 9 - FOREIGN OPERATIONS 

 

The Company’s operations are treated as oneoperating segment as it only reports profit and loss information on anaggregate basis to chief operating decision makers of the Company.  Information about the Company’s operationsin the United States and Israel is presented below: 

 
|                                        |   | **U.S.**                           |   | **Israel**   |   | **Eliminations** |    | **Consolidated** |   |
|---------------------------------------------|--------|------------------------------------|--------|--------------|--------|------------------|---------|------------------|--------|
|                                        |   | **(in thousands of U.S. dollars)** |   |
| Year ended December 31, 1999:               |   |                               |   |         |   |             |    |             |   |
| Revenues                                    |   | §73,250                       |   | 12,070       |   |             |    | 85,320           |   |
| Intercompany transactions                   |   | 800                                |   | 2,290        |   | (3,090           | )       |             |   |
| Reimbursement of subsidiary’s expenses |   |                               |   | 10,795       |   | (10,795          | )  |             |   |
| Depreciation and amortization               |   | 1,601                              |   | 1,413        |   |             |    | 3,014            |   |
| Interest income                             |   | 4,561                              |   | 72           |   |             |    | 4,633            |   |
| Income tax expense                          |   | 4,609                              |   | 288          |   |             |    | 4,897            |   |
| Net income                                  |   | 9,545                              |   | 3,262        |   | 1,055            |    | 13,862           |   |
| Identifiable assets*                        |   | 160,408                            |   | 28,640       |   | (24,403          | )       | 164,645          |   |
| Foreign liabilities*                        |   |                               |   | ‡7,027  |   |             |    | 7,027            |   |
| Investment in subsidiaries (cost basis)     |   | 15,310                             |   |         |   | (15,310          | )       |             |   |
|                                        |   |                               |   |         |   |             |    |             |   |
| Year ended December 31, 2000:               |   |                               |   |         |   |             |    |             |   |
| Revenues                                    |   | §69,908                       |   | 15,036       |   |             |    | 84,944           |   |
| 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            |   |
| Interest income                             |   | 7,425                              |   | 71           |   |             |    | 7,496            |   |
| Income tax expense                          |   | 4,205                              |   | 270          |   |             |    | 4,475            |   |
| Net income                                  |   | 641                                |   | 6,557        |   | 519              |    | 7,717            |   |
| Identifiable assets*                        |   | 179,011                            |   | 45,730       |   | (11,516          | )       | 213,225          |   |
| Foreign liabilities*                        |   |                               |   | ‡28,034 |   |             |    | 28,034           |   |
| Investment in subsidiaries (cost basis)     |   | 15,298                             |   |         |   | (15,298          | )       |             |   |
|                                        |   |                               |   |         |   |             |    |             |   |
| Year ended December 31, 2001:               |   |                               |   |         |   |             |    |             |   |
| Revenues                                    |   | §89,597                       |   | 12,368       |   |             |    | 101,965          |   |
| Intercompany transactions                   |   | 318                                |   | 4,863        |   | (5,181           | )       |             |   |
| Reimbursement of subsidiary’s expenses |   |                               |   | 13,498       |   | (13,498          | )       |             |   |
| Depreciation and amortization               |   | 1,147                              |   | 1,561        |   |             |    | 2,708            |   |
| Interest income                             |   | 7,417                              |   | 274          |   |             |    | 7,691            |   |
| Income tax expense                          |   | 3,346                              |   | 2,025        |   |             |    | 5,371            |   |
| Net income (loss)                           |   | (34,376                            | )      | 3,422        |   | 667              |    | (30,287          | )      |
| Identifiable assets*                        |   | 191,695                            |   | 60,565       |   | (15,590          | )       | 236,670          |   |
| Foreign liabilities*                        |   |                               |   | ‡32,639 |   |             |    | 32,639           |   |
| Investment in subsidiary (cost  basis)      |   | 15,298                             |   |         |   | (15,298          | )       |             |   |

 

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§              Includes export sales of$27,645,000, $27,515,000 and $31,664,000 in 1999, 2000 and 2001, respectively.

*              At year end. 

‡              Excludes liability to parent.  

 

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NOTE 10 - COMMITMENTS AND CONTINGENTLIABILITIES 

 

a.             TheCompany has leased approximately 23,000 square feet of office space in NewJersey for its executive office, having an average annual rental expense ofapproximately $415,000.  The leaseexpires in October 2003.  In addition,the Company is obligated to pay its proportional share of any annual increasein taxes and operating expenses.  TheCompany also leases approximately 2,000 square feet in New York City, primarilyfor its investor and public relations activities, having an average annualrental expense of $100,000 and expiring in September 2003.  Myelos leases approximately 10,000 squarefeet in San Diego California, having an average annual rental expense of$104,000 and expiring in October 2004. BTG-Israel currently leases approximately 95,000 square feet of spacefor its research, development and production facilities in Israel, having anaverage annual rental expense of $1,112,000. The lease of substantially all of this space will expire in December2002; the lease for the remainder of the space will expire in December 2003. 

 

Rent expense was approximately $1,679,000,$1,787,000 and $1,830,000 for the years ended December 31, 1999, 2000 and 2001,respectively. 

 

The future annual minimum rentals (exclusiveof amounts for real estate taxes, maintenance, etc.) for each of the next threeyears are as follows:  2002—$1,728,000;2003—$582,000; and 2004—$89,000.  Thereis also a bank guarantee outstanding in favor of the lessor of the Israelifacility for $720,000 secured by the assets of BTG-Israel. 

 

b.             TheCompany is obligated, for products resulting from research and developmentprojects partially funded by the Chief Scientist, to pay royalties to theIsraeli government of 3%-5% on commercial sales, if any, of these products ifproduced in Israel up to the amount so funded, or royalties of 4%-6% ifproduced outside Israel up to 120%-300% of the amount so funded.  As of December 31, 2001, the Company isobligated to repay to the Chief Scientist, out of revenue from future productsales, a minimum of $7,752,000 of research and development funding for productsthat are currently being sold and a minimum of $6,502,000 of research anddevelopment funding for products currently under development if these productswill be sold. During the years ended December 31, 1999, 2000 and 2001, theCompany accrued approximately $353,000, $529,000 and $304,000, respectively, asroyalties to the Chief Scientist. 

 

The Company is also committed to payroyalties on future sales, if any, of certain of its products to licensees fromwhich the Company licensed these products. 

 

c.             TheCompany currently has employment agreements with seven senior officers.  Under these agreements, the Company hascommitted to total aggregate base compensation per year of approximately$1,950,000 plus other normal customary fringe benefits and bonuses.  These employment agreements generally have aterm of three years and are automatically renewed for successive one-yearperiods unless either party gives the other notice of non-renewal. 

 

d.             TheCompany has received notification of claims filed against certain of itspatents in the normal course of operations. Management believes that these claims have no merit, and the Companyintends to defend them vigorously and does not expect significant adverseimpact on its financial position as a result of the outcome.  

 

NOTE 11 - OTHER CURRENT LIABILITIES

 
|                            |   | **December 31,**   |   |
|---------------------------------|--------|--------------------|--------|
|                            |   | **2000**           |   | **2001** |   |
|                            |   | **(in thousands)** |   |
| Salaries and related expenses   |   | $                  | 4,006  |   | $ | 3,836 |   |
| Accrued subcontracting payable  |   | 3,077              |   | 3,516 |   |
| Governmental and state agencies |   | 802                |   | 875 |   |
| Legal and professional fees     |   | 657                |   | 978 |   |
| Royalties and commissions       |   | 1,947              |   | 1,512 |   |
| Other                           |   | 666                |   | 451 |   |
|                            |   | $                  | 11,155 |   | $ | 11,168 |   |

 

69

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NOTE 12 - CONCENTRATIONS 

 

In1999, 2000 and 2001, one customer for human growth hormone, located solely inJapan, represented $10,507,000, $12,975,000 and $16,292,000, or 13%, 17% and17% of revenues (exclusive of interest income), respectively.  In 1999, 2000 and 2001, one customer forOXANDRIN and DELATESTRYL, located solely in the United States, represented$32,813,000, $33,249,000 and $43,718,000, or 41%, 44% and 46% of revenues(exclusive of interest income), respectively. In 2001, one additional customer for Oxandrin, located solely in theUnited States, represented $12,404,000, or 13% of revenues (exclusive ofinterest income). In 1999, 12% of revenues (exclusive of interest income)resulted from the license of product distribution rights to a licensee.  In 2001, the Company’s product salesconsisted primarily of sales of OXANDRIN, human growth hormone, BIOLON andDELATESTRYL in the amount of approximately $47,150,000, $23,862,000, $8,226,000and $7,253,000, or 54%, 27%, 10% and 8% of total product sales,respectively.  One customer accountedfor  59% and 36% of total accountsreceivable as of December 31, 2000 and 2001, respectively.  Another customer accounted for 34% of totalaccounts receivable as of December 31, 2001. BTG currently has one supplier for its OXANDRIN product and one supplierfor its DELATESTRYL product.  

 

NOTE 13 - INCOME TAXES 

 

At December 31, 2001, BTG had a capitalloss carry over of approximately $2,000,000 available to offset future capitalgains, which expires at various times with respect to various amounts through2006, a net operating loss carry over of approximately $18,000,000 available tooffset future taxable income in limited amounts per year, which expires atvarious times with respect to various amounts through 2020, and a research andexperimental (“R&E”) credit carryover of approximately $2,250,000 availableto reduce future income taxes, which expires at various times with respect tovarious amounts through 2020. 

 

                Provision for income taxes hasnot been made for U.S. or additional foreign taxes on undistributed earnings ofBTG-Israel.  Those earnings have beenand will continue to be permanently reinvested.  It is not practicable to determine the amount of additional taxthat might be payable on the foreign earnings. The cumulative amount of reinvested earnings was approximately$12,500,000 at December 31, 2001. 

 

70

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The components of current and deferredincome tax expense (benefit) are as follows:

 
|                     |   | **Year Ended December 31,** |   |
|--------------------------|--------|-----------------------------|--------|
|                     |   | **1999**                    |   | **2000** |   | **2001** |   |
|                     |   | **(in thousands)**          |   |
| Current                  |   |                        |   |   |   |   |   |
| State                    |   | $                           | 332    |   | $ | 183 |   | $ | 434 |   |
| Federal                  |   | 3,066                       |   | 3,662 |   | 5,842 |   |
| Foreign                  |   | 378                         |   | 299 |   | 2,364 |   |
|                     |   | 3,776                       |   | 4,144 |   | 8,640 |   |
| Deferred:                |   |                        |   |   |   |   |   |
| State                    |   | 98                          |   | 28 |   | (238 | ) |
| Federal                  |   | 1,113                       |   | 332 |   | (2,692 | ) |
| Foreign                  |   | (90                         | )      | (29 | ) | (339 | ) |
|                     |   | 1,121                       |   | 331 |   | (3,269 | )  |
|                     |   |                        |   |   |   |   |   |
| Total income tax expense |   | $                           | 4,897  |   | $ | 4,475 |   | $ | 5,371 |   |

 

The domestic and foreign components ofincome (loss) before income taxes are as follows:

 
|     |   | **Year Ended December 31,** |   |
|----------|--------|-----------------------------|--------|
|     |   | **1999**                    |   | **2000** |   | **2001** |   |
|     |   | **(in thousands)**          |   |
| Domestic |   | $                           | 15,045 |   | $ | 12,365 |   | $ | (31,022 | ) |
| Foreign  |   | 3,714                       |   | 8,005 |   | 6,106 |   |
|     |   | $                           | 18,759 |   | $ | 20,370 |   | $ | (24,916 | ) |

 

71

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The components ofdeferred income tax expense (benefit) are:

 
|                          |   | **Year Ended December 31,** |        |
|-------------------------------|--------|-----------------------------|-------------|
|                          |   | **1999**                    |        | **2000** |   | **2001** |   |
|                          |   | **(in thousands)**          |        |
| R&E credit                |   | $                           |  899   |   | $ |  (437 | ) | $ |  563 |   |
| Net operating loss            |   | —                      |        | — |   | 741 |   |
| Capital loss                  |   | —                      |        | — |   | (754 | ) |
| Valuation of securities       |   | —                      |        | — |   | (3,761 | ) |
| Deferred revenues             |   | —                      |        | 232 |   | 372 |   |
| Accrued amounts               |   | 229                         |        | 174 |   | 172 |   |
| Depreciation and amortization |   | (7                          | )           | 362 |   | (602 | ) |
|                          |   | $                           |  1,121 |   | $ |  331 |   | $ |  (3,269 | ) |

 

Reconciliation of income taxes between thestatutory and effective tax rates on income before income taxes is as follows:

 
|                                                   |   | **Year Ended December 31,** |        |
|--------------------------------------------------------|--------|-----------------------------|-------------|
|                                                   |   | **1999**                    |        | **2000** |   | **2001** |   |
|                                                   |   | **(in thousands)**          |        |
| Income tax at U.S. statutory rate                      |   | $                           |  6,566 |   | $ |  7,129 |   | $ |  (8,720 | ) |
| State and local income taxes (net of  federal benefit) |   | 280                         |        | 138 |   | 128 |   |
| Non-deductible expenses                                |   | 761                         |        | 333 |   | 122 |   |
| R&E credit                                         |   | (772                        | )           | (720 | ) | (1,229 | ) |
| Foreign income subject to a reduced rate  of tax       |   | (2,016                      | )           | (2,779 | ) | (1,415 | ) |
| In process research and development  acquired          |   | —                      |        | — |   | 15,960 |   |
| Goodwill amortization                                  |   | —                      |        | — |   | (1,058 | ) |
| Foreign taxes in respect of previous years             |   | —                      |        | — |   | 1,530 |   |
| Other                                                  |   | 78                          |        | 374 |   | 53 |   |
| Income tax expense                                     |   | $                           |  4,897 |   | $ |  4,475 |   | $ |  5,371 |   |

 

72

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

 
|                          |   | **December 31,**   |   |
|-------------------------------|--------|--------------------|--------|
|                          |   | **2000**           |   | **2001** |   |
|                          |   | **(in thousands)** |   |
| Net operating loss carry over |   | $                  | — |   | $ | 6,687 |   |
| Capital loss carry over       |   | 328                |   | 754 |   |
| R&E credit                |   | 2,816              |   | 2,253 |   |
| Valuation of securities       |   | —             |   | 3,761 |   |
| Deferred revenues             |   | 4,148              |   | 3,776 |   |
| Accrued amounts               |   | 1,874              |   | 1,702 |   |
|                          |   | 9,166              |   | 18,933 |   |
| Depreciation and amortization |   | (648               | )      | (46 | ) |
|                          |   | 8,518              |   | 18,887 |   |
| Valuation allowance           |   | (328               | )      | — |   |
|                          |   | $                  | 8,190  |   | $ | 18,887 |   |

 

BTG-Israel is now undergoing a tax audit forthe fiscal years 1997 through 2000.  Asa result, the Company has recorded in the year ended December 31, 2001, aprovision for additional tax liabilities for those years.

 

NOTE 14 - QUARTERLY DATA (UNAUDITED) 

 

Following are the quarterly results of operationsfor the years ended December 31, 2000 and 2001: 

 

73

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|                                                             |   | **March 31,** |   | **June 30,** |   | **September 30,** |   | **December 31,** |   |
|------------------------------------------------------------------|--------|---------------|--------|--------------|--------|-------------------|--------|------------------|--------|
|                                                             |   | **2000**      |   | **2001**     |   | **2000**          |   | **2001**         |   | **2000** |   | **2001** |   | **2000** |   | **2001** |   |
| Revenues:                                                        |   |          |   |         |   |              |   |             |   |   |   |   |   |   |   |   |   |
| Product sales                                                    |   | $             | 12,507 |         | $      | 29,887            |   | $                | 14,082 |   | $ | 25,303 |   | $ | 18,206 |   | $ | 15,541 |   | $ | 17,354 |   | $ | 16,375 |   |
| Contracts fees                                                   |   | 1,838         | (1)    | 289          |   | 7,713             | (1)    | 290              |   | 213 | (1) | 289 |   | 463 |   | 288 |   |
| Other                                                            |   | 2,418         |   | 3,560        |   | 3,048             |   | 2,614            |   | 3,037 |   | 4,301 |   | 4,064 |   | 3,228 |   |
|                                                             |   | 16,763        |   | 33,736       |   | 24,843            |   | 28,207           |   | 21,456 |   | 20,131 |   | 21,881 |   | 19,891 |   |
| Expenses:                                                        |   |          |   |         |   |              |   |             |   |   |   |   |   |   |   |   |   |
| Research and development                                         |   | 5,397         |   | 5,930        |   | 5,635             |   | 7,185            |   | 5,436 |   | 5,562 |   | 5,892 |   | 6,899 |   |
| Cost of products sales                                           |   | 2,336         |   | 5,139        |   | 1,911             |   | 3,819            |   | 2,850 |   | 2,710 |   | 2,790 |   | 2,335 |   |
| General and administrative                                       |   | 3,446         |   | 3,277        |   | 3,182             |   | 2,641            |   | 3,531 |   | 2,062 |   | 2,526 |   | 2,449 |   |
| Marketing and sales                                              |   | 3,256         |   | 4,741        |   | 5,315             |   | 4,557            |   | 4,365 |   | 3,046 |   | 4,678 |   | 4,553 |   |
| Other                                                            |   | 684           |   | 46,263       |   | 281               |   | 265              |   | 299 |   | 642 |   | 764 |   | 12,806 |   |
|                                                             |   | 15,119        |   | 65,350       |   | 16,324            |   | 18,467           |   | 16,481 |   | 14,022 |   | 16,650 |   | 29,042 |   |
|                                                             |   | 1,644         |   | (31,614      | )      | 8,519             |   | 9,740            |   | 4,975 |   | 6,109 |   | 5,231 |   | (9,151 | ) |
| Income tax expense (benefit)                                     |   | 559           | (2)    | 4,515        |   | 2,922             | (2)    | 2,747            |   | 555 | (2) | 1,664 |   | 438 |   | (3,555 | ) |
|                                                             |   | 1,085         |   | (36,129      | )      | 5,597             |   | 6,993            |   | 4,420 |   | 4,445 |   | 4,793 |   | (5,596 | ) |
| Cumulative effect of change in accounting  principle             |   | 8,178         |   | —       |   | —            |   | —           |   | — |   | — |   | — |   | — |   |
| Net Income (loss)                                                |   | $             | (7,093 | )            | $      | (36,129           | )      | $                | 5,597  |   | $ | 6,993 |   | $ | 4,420 |   | $ | 4,445 |   | $ | 4,793 |   | $ | (5,596 | ) |
|                                                             |   |          |   |         |   |              |   |             |   |   |   |   |   |   |   |   |   |
| Earnings (loss) per common share:                                |   |          |   |         |   |              |   |             |   |   |   |   |   |   |   |   |   |
| Basic                                                            |   | $             | (0.13  | )(3)         | $      | (0.66             | )      | $                | 0.10   | (3) | $ | 0.12 |   | $ | 0.08 | (3) | $ | 0.08 |   | $ | 0.09 |   | $ | (0.10 | ) |
| Diluted                                                          |   | $             | (0.12  | )(4)         | $      | (0.66             | )      | $                | 0.10   | (4) | $ | 0.12 |   | $ | 0.08 | (4) | $ | 0.07 |   | $ | 0.09 |   | $ | (0.10 | ) |
| Weighted average number of common and  common equivalent shares: |   |          |   |         |   |              |   |             |   |   |   |   |   |   |   |   |   |
| Basic                                                            |   | 53,748        |   | 55,117       |   | 54,303            |   | 57,388           |   | 54,493 |   | 58,078 |   | 54,729 |   | 58,294 |   |
| Diluted                                                          |   | 57,373        |   | 55,117       |   | 57,015            |   | 58,899           |   | 56,993 |   | 59,411 |   | 55,779 |   | 58,294 |   |
|                                                             |   |          |   |         |   |              |   |             |   |   |   |   |   |   |   |   |   |
| (1) As reported                                                  |   | $             | 2,475  |         |   |              | $      | 7,500            |   |   |   | $ | — |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                         |   | (637          | )      |         |   | $                 | 213    |             |   |   | 213 |   |   |   |   |   |   |   |
|                                                             |   | $             | 1,838  |         |   |              | $      | 7,713            |   |   |   | $ | 213 |   |   |   |   |   |   |   |
| (2) As reported                                             |   | $             | 796    |         |   |              | $      | 2,843            |   |   |   | $ | 476 |   |   |   |   |   |   |   |
| Adjustment see note 1k)                                          |   | (237          | )      |         |   | 79                |   |             |   | 79 |   |   |   |   |   |   |   |
|                                                             |   | $             | 559    |         |   |              | $      | 2,922            |   |   |   | $ | 555 |   |   |   |   |   |   |   |
| (3) As reported                                                  |   | $             | 0.03   |         |   |              | $      | 0.10             |   |   |   | $ | 0.08 |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                         |   | (0.16         | )      |         |   | —            |   |             |   | — |   |   |   |   |   |   |   |
|                                                             |   | $             | (0.13  | )            |   |              | $      | 0.10             |   |   |   | $ | 0.08 |   |   |   |   |   |   |   |
| (4) As reported                                                  |   | $             | 0.03   |         |   |              | $      | 0.10             |   |   |   | $ | 0.08 |   |   |   |   |   |   |   |
| Adjustment (see note 1k)                                         |   | (0.15         | )      |         |   | —            |   |             |   | — |   |   |   |   |   |   |   |
|                                                             |   | $             | (0.12  | )            |   |              | $      | 0.10             |   |   |   | $ | 0.08 |   |   |   |   |   |   |   |

 

74

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**ITEM 9.  CHANGES INAND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None

 

 

**PART III**

 

**ITEM 10.  DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Directors

 

The section entitled “Proposal No. —Election of Directors” in the Company’s Proxy Statement for the Annual Meetingof Stockholders is incorporated herein by reference.

 

ExecutiveOfficers

 

See “Part I - Item 1. Business - ExecutiveOfficers of the Company”. 

 

**ITEM 11.  EXECUTIVECOMPENSATION**

 

The section entitled “ExecutiveCompensation” in the Company’s Proxy Statement for the Annual Meeting ofStockholders is incorporated herein by reference.

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

 

The section entitled “Beneficial Ownershipof Common Stock” in the Company’s Proxy Statement for the Annual Meeting ofStockholders is incorporated herein by reference. 

 

**ITEM 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

The sections entitled “ExecutiveCompensation - Compensation Committee Interlocks and Insider Participation” and“Certain Transactions” in the Company’s Proxy Statement for the Annual Meetingof Stockholders is incorporated herein by reference. 

 

75

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**PART IV**

** **

**ITEM 14.  EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8–K**

 

(a)           Financial Statements

 

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

 

(3) Exhibits

 

Certain exhibits presented below containinformation that has been granted or is subject to a request for confidentialtreatment.  Such information has beenomitted from the exhibit.  Exhibit Nos.10.13, 10.14, 10.15, 10.16, 10.17, 10.18, 10.19, 10.20, 10.21, 10.22, 10.23,10.24, 10.25 and 10.26 are management contracts, compensatory plans orarrangements.

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.              |   | 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)                                                                                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 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)                                                                                                                                                                                                                                                                                                                                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 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 Option Plan, as amended through May 29, 1991.*(13)                                                                                                                                                                                                                                                                                                                                                                                                          |

 

76

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| 10.14  |   | Bio-Technology  General Corp. Stock Compensation Plan for Outside Directors, as amended  through March 1991.*(13)                                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                         |
| 10.15  |   | Bio-Technology  General Corp. Stock Option Plan for New Directors, as amended through March  1991.*(13)                                                      |
|   |   |                                                                                                                                                         |
| 10.16  |   | Bio-Technology  General Corp. 1992 Stock Option Plan, as amended.*(14)                                                                                       |
|   |   |                                                                                                                                                         |
| 10.17  |   | Bio-Technology  General Corp. 1997 Stock Option Plan for Non-Employee Directors.*(14)                                                                        |
|   |   |                                                                                                                                                         |
| 10.18  |   | Bio-Technology  General Corp. 1998 Employee Stock Purchase Plan.*(15)                                                                                        |
|   |   |                                                                                                                                                         |
| 10.19  |   | Bio-Technology  General Corp. 2001 Stock Option Plan.                                                                                                        |
|   |   |                                                                                                                                                         |
| 10.20  |   | Employment  Agreement, dated as of January 1, 2002, by and between Bio-Technology General  Corp. and Norman Barton.

                                   |
| 10.21  |   | Employment  Agreement, dated as of January 1, 2002, by and between Bio-Technology General  Corp. and John Bond.                                              |
|   |   |                                                                                                                                                         |
| 10.22  |   | Employment  Agreement, dated as of January 1, 2002, by and between Bio-Technology General  Corp. and Sim Fass.                                               |
|   |   |                                                                                                                                                         |
| 10.23  |   | Employment  Agreement, dated as of January 1, 2002, by and between Bio-Technology General  Corp. and Ernest Kelly.                                           |
|   |   |                                                                                                                                                         |
| 10.24  |   | Employment  Agreement, dated as of January 1, 2002, 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 Bernard Tyrell.                                         |
|   |   |                                                                                                                                                         |
| 10.26  |   | Employment  Agreement, dated as of January 23, 2000, by and between Bio-Technology  General Corp., Bio-Technology General (Israel) Ltd. and Dov Kanner.*(16) |
|   |   |                                                                                                                                                         |
| 21     |   | Subsidiaries  of Bio-Technology General Corp.                                                                                                                |
|   |   |                                                                                                                                                         |
| 23     |   | Consent  of Arthur Andersen LLP.                                                                                                                             |
|   |   |                                                                                                                                                         |
| 99     |   | Letter from Bio-Technology  General Corp. relating to Arthur Andersen LLP pursuant to Temporary Note 3T  to Article 3 of Regulation S-X.                     |

 

Exhibits have been included in copies ofthis Report filed with the Securities and Exchange Commission.  Stockholders of the Company will be providedwith copies of these exhibits upon written request to the Company.

 

----

+              Confidential treatment has beengranted for portions of such document.

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

(1)     Company’sCurrent Report on Form 8-K, dated March 19, 2001.

(2)     Company’sQuarterly Report on Form 10–Q for the quarter ended June 30, 1994.

(3)     Company’sCurrent Report on Form 8-K, dated October 7, 1998.

(4)     RegistrationStatement on Form S–1 (File No. 2–84690). 

(5)     Company’sAnnual Report on Form 10–K for the year ended December 31, 1983. 

(6)     RegistrationStatement on Form S–1 (File No. 33–2597).

(7)     RegistrationStatement on Form S–2 (File No. 33–12238).

(8)     Company’sQuarterly Report on Form 10–Q for the quarter ended June 30, 1987.

(9)     Company’sAnnual Report on Form 10–K for the year ended December 31, 1988.

(10)      RegistrationStatement on Form S–3 (File No. 33-39018).

(11)      Company’sAnnual Report on Form 10–K for the year ended December 31, 1992.

(12)      Company’sAnnual Report on Form 10-K for the year ended December 31, 1998.

(13)      Company’sAnnual Report on Form 10-K for the year ended December 31, 1991

(14)      Company’sAnnual Report on Form 10-K for the year ended December 31, 1997.

(15)      Company’sRegistration Statement on Form S-8 (File No. 333-64541).

 

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(16)   Company’sAnnual Report on Form 10-K for the year ended December 31, 1999.                   

 

(b) Reportson Form 8-K           .

 

(c)  Exhibits  See (a) (3) above.                 

 

(d) FinancialStatement Schedule

 

See “Index to Consolidated FinancialStatements and Supplemental Schedule” at Item 8 of this Annual Report on Form10-K.  Schedules not included herein areomitted because they are not applicable or the required information appears inthe Consolidated Financial Statements or notes thereto. 

 

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**SIGNATURES**

 

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

 
|           |   | Bio-Technology General Corp . |                          |
|----------------|--------|-------------------------------|-------------------------------|
|           |   |                          | (Registrant)                  |   |
|           |   |                          |                          |
|           |   | By:                           |  /s/ Sim  Fass           |   |
|           |   |                          | Chairman of the Board and CEO |
| March 28, 2002 |   |                          |                          |   |
|                |        |                               |                               |  |  |  |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, as amended, this report has been signed belowby the following persons on behalf of the Registrant and in the capacities andon the dates indicated. 

 
| **Signature**         |   | **Title**                                                              |   | **Date**        |
|-----------------------|--------|------------------------------------------------------------------------|--------|-----------------|
|                  |   |                                                                   |   |            |
| /s/  Sim Fass         |   | Chairman  of the Board, CEO and Director (Principal Executive Officer) |   | March  28, 2002 |
| (Sim  Fass)           |   |                                                                   |   |            |
|                  |   |                                                                   |   |            |
| /s/  Herbert Conrad   |   | Director                                                               |   | March  28, 2002 |
| (Herbert  Conrad)     |   |                                                                   |   |            |
|                  |   |                                                                   |   |            |
| /s/  Carl Kaplan      |   | Director                                                               |   | March  28, 2002 |
| (Carl  Kaplan)        |   |                                                                   |   |            |
|                  |   |                                                                   |   |            |
| /s/  Allan Rosenfield |   |                                                                   |   |            |
| (Allan  Rosenfield)   |   | Director                                                               |   | March  28, 2002 |
|                  |   |                                                                   |   |            |
| /s/  David Tendler    |   | Director                                                               |   | March  28, 2002 |
| (David  Tendler)      |   |                                                                   |   |            |
|                  |   |                                                                   |   |            |
| /s/  Virgil Thompson  |   |                                                                   |   |            |
| (Virgil  Thompson)    |   | Director                                                               |   | March  28, 2002 |
|                  |   |                                                                   |   |            |
| /s/  Dan Tolkwosky    |   | Director                                                               |   | March  28, 2002 |
| (Dan  Tolkowsky)      |   |                                                                   |   |            |
|                  |   |                                                                   |   |            |
| /s/  Faye Wattleton   |   |                                                                   |   |            |
| (Faye  Wattleton)     |   | Director                                                               |   | March  28, 2002 |

 

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| **Signature**          |   | **Title**                                                                   |   | **Date**        |
|------------------------|--------|-----------------------------------------------------------------------------|--------|-----------------|
|                   |   |                                                                        |   |            |
| /s/  Herbert Weissbach |   | Director                                                                    |   | March  28, 2002 |
| (Herbert  Weissbach)   |   |                                                                        |   |            |
|                   |   |                                                                        |   |            |
| /s/  John Bond         |   | Senior  Vice President-Finance (Principal Financial and Accounting Officer) |   | March  28, 2002 |
| (John  Bond)           |   |                                                                        |   |            |

 

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