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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-K x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended June 30, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period from  to
 Commission file number 0-27854 Bone Care International, Inc. (Exact Name of Registrant as Specified in its Charter)
 Wisconsin
(State or Other Jurisdiction of
Incorporation or Organization)
    
    39-1527471
(IRS Employer
Identification No.)1600 Aspen Commons
Middleton, Wisconsin
(Address of Principal Executive Offices)
    
    53562
(Zip Code)
 Registrants Telephone Number, Including Area Code: (608) 662-7800 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value
Preferred Stock Purchase Rights Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). x o
 The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant was $182,432,710 as of December 31, 2003,
assuming solely for purposes of this calculation that all directors and
executive officers of the registrant are affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes. As of September 1, 2004, there were 19,410,157 shares of the Registrants
Common Stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Bone Care International, Inc., Proxy Statement for its
2004 Shareholders Meeting (Part III). 1




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BONE CARE INTERNATIONAL, INC. INDEX TO
ANNUAL REPORT ON FORM 10-K
For the Year Ended June 30, 2004 PagePart IItem 1
    
    Business
    
    
    4Item 2
    
    Properties
    
    
    27Item 3
    
    Legal Proceedings
    
    
    27Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    27Part IIItem 5
    
    Market for
Registrants Common Equity and Related Stockholder Matters
    
    
    27Item 6
    
    Selected Financial Data
    
    
    28Item 7
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    30Item 7A
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    36Item 8
    
    Financial Statements and Supplementary Data
    
    
    37Item 9
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    55Item 9A
    
    Controls and Procedures
    
    
    55Item 9B
    
    Other Information
    
    
    55Part IIIItem 10
    
    Directors and Executive Officers of the Registrant
    
    
    55Item 11
    
    Executive Compensation
    
    
    55Item 12
    
    Security Ownership of Certain Beneficial Owners and Management and related stockholder matters
    
    
    55Item 13
    
    Certain Relationships and Related Transactions
    
    
    55Item 14
    
    Principal Accountant Fees and Services
    
    
    55Part IVItem 15
    
    Exhibits and Financial Statement Schedules
    
    
    56Signatures
    
    
    57Index to Exhibits
    
    
    58CO-PROMOTION AGREEMENT BETWEEN CARDINAL HEALTH AND REGISTRANTSEVERANCE AGREEMENT BETWEEN REGISTRANT AND PAUL L. BERNSSEVERANCE AGREEMENT BETWEEN REGISTRANT AND JAMES V. CARUSOSEVERANCE AGREEMENT BETWEEN REGISTRANT AND BRIAN J. HAYDENSEVERANCE AGREEMENT BETWEEN REGISTRANT AND JEFFREY J. FREITAGSEVERANCE AGREEMENT BETWEEN REGISTRANT AND CARMINE J. DURHAMSEVERANCE AGREEMENT BETWEEN REGISTRANT AND R. ANDREW MORGANSEVERANCE AGREEMENT BETWEEN REGISTRANT AND C. BASIL MUNDYCONSENT OF DELOITTE & TOUCHERULE 13A-14(A) CERTIFCATION OF CEORULE 13A-14(A) CERTIFCATION OF CFOCEO CERTIFICATION PURSUANT TO SECTION 1350CFO CERTIFICATION PURSUANT TO SECTION 1350
  In this Annual Report on Form 10-K, the Company, Bone Care, we, us
and our refer to Bone Care International, Inc., unless the context suggests
otherwise. Bone Care® is a registered trademark of Bone Care International, Inc. in
the United States. Hectorol® is a registered trademark of Bone Care
International, Inc. in the United States, the European Community, Japan and
other selected countries. Hectorol® is Bone Cares brand name for the active
drug substance, doxercalciferol. This filing also includes trademarks of other
companies. 2




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FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K and the documents incorporated by
reference into this Form 10-K contain forward-looking statements. Statements
relating to future net sales, costs of sales, other expenses, profitability,
financial resources, or products and production schedules, or statements that
predict or indicate future events and trends and which do not relate solely to
historical matters identify forward-looking statements. Forward-looking
statements are made in reliance on the safe harbor provisions of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 and are based on managements current plans and expectations as well as
assumptions made by and information currently available to management.
Accordingly, our actual results may differ materially from those expressed or
implied in such forward-looking statements due to known and unknown risks and
uncertainties that exist in our operations and business environment, including,
among other factors:  
    
    general economic and market conditions in the U.S., Europe and the
rest of the world;
    
    our expectations and estimates concerning future financial
performance, financing plans and the impact of competition;
    
    the ability of us and each of our suppliers of doxercalciferol,
Hectorol® Injection and Hectorol® Capsules to meet our anticipated
production schedules;
    
    technical risks associated with the development of new products;
    
    regulatory policies in the U.S. and other countries;
    
    risks associated with our ability to avoid or minimize delays in/or
interruption of the manufacture and supply of our products, including
the approvals of regulatory authorities in connection therewith;
    
    reimbursement policies of public and private health care payors;
    
    introduction and acceptance of new drug therapies;
    
    competition from existing products and from new products or technologies;
    
    the failure by us to produce anticipated cost savings or improve productivity;
    
    the timing and magnitude of capital expenditures and acquisitions; and
    
    other risk factors set forth under Risk Factors and Managements
Discussion and Analysis of Financial Condition and Results of
Operations in this Annual Report on Form 10-K. In addition, in this Annual Report, the words believe, may, will,
estimate, continue, anticipate, intend, expect and similar
expressions, as they relate to us, our business or our management, are intended
to identify forward-looking statements. Unless otherwise required by law, we undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise after the date of this annual report.
However, we acknowledge our obligation to disclose material developments
related to previously disclosed information. In light of these risks and
uncertainties, the forward-looking events and circumstances discussed in the
filing may not occur, and actual results could differ materially from those
anticipated or implied in the forward-looking statements. 3




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PART I 
 ITEM 1.BUSINESS Overview We are a specialty pharmaceutical company engaged in the discovery,
development and commercialization of innovative therapeutic products to treat
the unmet medical needs of patients with debilitating conditions and
life-threatening diseases. Our current commercial and therapeutic focus is in
nephrology utilizing Hectorol®, our novel vitamin D hormone therapy, to treat
secondary hyperparathyroidism in patients with moderate to severe chronic
kidney disease and end-stage renal disease. Secondary hyperparathyroidism is a
disease characterized by excessive secretion of parathyroid hormone which, if
left untreated, can eventually result in cardiovascular disease, reduced immune
system function, muscle weakness and bone disease, including mineral loss and
fractures. Many patients with moderate to severe chronic kidney disease and
most end-stage renal disease patients suffer from this disease. Hectorol®, a
safe and effective vitamin D pro-hormone therapy in the management of secondary
hyperparathyroidism in moderate to severe chronic kidney disease and end-stage
renal disease, reduces elevated levels of parathyroid hormone while maintaining
consistent levels of vitamin D with a low incidence of adverse events. Vitamin
D therapies are currently used to treat patients with a variety of diseases,
including kidney disease, osteoporosis and psoriasis, and research has shown
that they may be useful in treating certain cancers such as prostate, breast
and colon. Our principal clinical development programs focus on chronic kidney
disease and hyperproliferative disorders such as cancer and psoriasis. We have two products approved by the U.S. Food and Drug Administration
(FDA): Hectorol® Injection and Hectorol® Capsules. Hectorol® Injection and
Hectorol® 2.5 mcg Capsules are approved for the treatment of secondary
hyperparathyroidism in end-stage renal disease. Hectorol® 0.5 mcg Capsules are
approved for the treatment of secondary hyperparathyroidism in moderate to
severe chronic kidney disease. We obtained FDA approval for Hectorol® 2.5 mcg
Capsules in June 1999, and we began selling this orally administered product in
the U.S. in October 1999. We obtained FDA approval for Hectorol® Injection in
April 2000. We launched this intravenous product in the U.S. in August 2000 and
we received a national Medicare reimbursement code for Hectorol® Injection in
January 2002. The National Kidney Foundation estimates that as of 2003 there
were approximately 300,000 end-stage renal disease patients in the U.S. and
projects that this population will double by 2010. In April 2004 we obtained
FDA approval for Hectorol® 0.5 mcg Capsules to treat secondary
hyperparathyroidism in moderate to severe chronic kidney disease prior to
end-stage renal disease, or pre-dialysis. We launched this product in the U.S.
in July 2004. We are also developing Hectorol® and other vitamin D hormones for
expanded indications. In 2002, the National Kidney Foundation issued clinical practice
guidelines for evaluating and classifying chronic kidney disease. These
guidelines classify kidney disease into five stages based on kidney function as
measured by glomerular filtration rate, a widely accepted overall measure of
kidney function. In October 2003, the National Kidney Foundation published the
Kidney Disease Outcomes Quality Initiative Clinical Practice Guidelines for
Bone Metabolism and Disease in Chronic Kidney Disease. These guidelines,
referred to as the K/DOQI guidelines, include recommendations for the treatment
of bone disease and disorders of calcium and phosphorus metabolism which may
encourage a shift in clinical practice to begin earlier treatment of patients
with Stages 3 and 4 (moderate to severe) chronic kidney disease, in addition to
Stage 5 (end-stage renal disease) chronic kidney disease. The National Kidney
Foundation estimates that as of 2003 there were approximately 7,600,000 Stage 3
patients, 400,000 Stage 4 patients and 300,000 Stage 5 patients. According to
the United States Renal Data System, approximately 65% of Stage 5 patients are
treated with vitamin D hormone therapy. We believe that this potential shift in
practice, together with our recently approved expanded indication for Hectorol®
Capsules, could expand the potential use of Hectorol® to a broader range of
chronic kidney disease patients. 4




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Business Strategy Our strategy is to build a specialty pharmaceutical company with a strong
distribution channel through research, development, commercialization and
acquisition of key therapeutics. We plan to achieve these goals by:  
    
    Expanding our sales and marketing infrastructure.We plan to continue
to develop our internal sales and marketing capabilities to compete in
the $400 million vitamin D hormone market in the U.S. for end-stage
renal disease, in the market for the estimated 8 million patient
population with moderate to severe chronic kidney disease and in related
markets for vitamin D hormone therapies that we believe could be
effectively addressed with a highly focused sales and marketing effort.
    
    Expanding the indications for Hectorol®.We plan to pursue new
indications, new formulations and product life cycle management
strategies for Hectorol®. The FDA recently approved the use of Hectorol®
0.5 mcg Capsules to treat secondary hyperparathyroidism in pre-dialysis.
    
    Developing additional product offerings.We plan to leverage our
vitamin D hormone platform and use our research and development,
clinical and regulatory capabilities to seek to develop and improve
products for targeted diseases such as secondary hyperparathyroidism,
psoriasis and cancers.
    
    Licensing and acquiring compounds that fit into our strategic plans.
We are evaluating marketed products and compounds in development that
fit into our strategic plans. In-licensing and acquisition targets may
include products in the traditional nephrology therapeutic area,
products that treat co-morbid conditions commonly seen in chronic kidney
disease patients related to metabolic syndrome or other targeted
specialty pharmaceutical markets.
    
    Entering into strategic partnerships to globally commercialize our
current products and assets or new products.We plan to establish
mutually beneficial strategic partnerships, alliances and
commercialization arrangements with partners who can penetrate
geographic markets or compete in therapeutic areas where we have no
current or planned sales presence. We also may seek to enter into
strategic alliances to develop or commercialize new products. Products for Secondary Hyperparathyroidism Background Vitamin D hormones are produced in the body from vitamin D precursors that
are either ingested or activated in the skin from sunlight exposure. These
hormones have essential roles in human health. Vitamin D hormones regulate (1)
parathyroid hormone secretion by the parathyroid glands, (2) the absorption of
calcium by the small intestine, (3) bone mineralization, (4) muscle function,
and (5) the proliferation and maturation of several types of cells. Vitamin D
hormone deficiency in chronic kidney disease occurs when the kidneys are unable
to produce adequate active vitamin D hormones. Without sufficient active
vitamin D hormone levels, parathyroid hormone secretion is increased and
calcium absorption in the small intestine is reduced, leading to hypocalcemia,
hyperparathyroidism, and eventually to bone disease. Hyperparathyroidism is a disease characterized by excessive secretion of
parathyroid hormone by the parathyroid glands. The medical community classifies
hyperparathyroidism as either primary or secondary, depending on the
underlying cause. Primary hyperparathyroidism is less common and is caused by a
disorder in one or more of the parathyroid glands, usually a tumor. Surgical
removal of the affected parathyroid glands is the only effective treatment.
Secondary hyperparathyroidism is the more common type of hyperparathyroidism
and is caused by diseases unrelated to the parathyroid glands, but which
stimulates increased production of parathyroid hormone by the parathyroid
glands. It is seen in varying severity in the majority of patients with
moderate to severe chronic kidney disease (Stages 3 and 4) and in most
end-stage renal disease patients (Stage 5), in whom normal kidney function is
lost and dialysis is required for survival. Secondary hyperparathyroidism in
renal disease generally continues to worsen unless treated with vitamin D
hormone therapy. 5




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The goals of vitamin D hormone therapy in this setting are to decrease
blood parathyroid hormone levels and to normalize blood calcium, thereby
treating or preventing bone disease, and other adverse effects of elevated
parathyroid hormone. The challenge in administering vitamin D hormone therapy
is to deliver a sufficient dose to be effective without causing adverse effects
including:  
    
    Excessive phosphorus and/or calcium in the blood, which increases the
risk that mineral deposits will develop in soft tissues, such as in the
heart and arteries, contributing to cardiac disease, or in the kidneys,
accelerating kidney failure in chronic kidney disease patients.
    
    Excessive phosphorus in the blood, which stimulates secretion of
parathyroid hormone by the parathyroid glands and exacerbates secondary
hyperparathyroidism.
    
    Excessive calcium in the urine, which increases the risk that
calcium-rich deposits will develop in the kidneys and accelerate kidney
failure in chronic kidney disease patients. Due to the risks of these side effects, vitamin D hormones are customarily
administered at low dosages. Starting dosages are increased cautiously, to
minimize the chance of these adverse side effects and optimize therapeutic
response. The pharmacokinetic profiles of intravenous calcitriol and
paricalcitol, two key competing FDA approved vitamin D hormone products,
typically demonstrate supraphysiological spikes occurring rapidly after
administration, followed by trough levels at concentrations below the
physiologic range of activated vitamin D prior to the next dose in hemodialysis
patients. This is in contrast to the relatively constant blood levels of
vitamin D hormones that are maintained in individuals with normal kidney
function, yielding consistent, efficient regulation of parathyroid hormone
secretion. Products and Product Candidates We have two FDA approved products, Hectorol® Injection and Hectorol®
Capsules, and two products in development, LR-103 and BCI-202, for the
treatment of secondary hyperparathyroidism. Hectorol® offers:  
    
    Safe and Effective Treatment.Data obtained from our clinical trials
have demonstrated that Hectorol® is a safe and effective therapy for
treating secondary hyperparathyroidism in moderate to severe chronic
kidney disease and in end-stage renal disease. In these trials,
Hectorol® reduced blood levels of parathyroid hormone in more than 90%
of the treated patients with minimal side effects. Based on these and
other trials, we believe that Hectorol® compares favorably to
competitive vitamin D hormones, including calcitriol and paricalcitol;
however, we have not performed prospective comparative trials to
demonstrate these conclusions.
    
    Oral Delivery that Expands Market Opportunities.Hectorol® Capsules
provide a safe, convenient and effective oral vitamin D therapy for the
management of parathyroid hormone levels in patients with moderate to
severe chronic kidney disease and end-stage renal disease. Intravenous
vitamin D hormone products are generally used in hemodialysis patients
and only under medical supervision. Competitive vitamin D hormones may
be less well suited for oral delivery because they are fully active on
delivery, which may cause certain cells lining the small intestine to
absorb too much calcium and phosphorus, leading to side effects.
Hectorol®, on the other hand, is an inactive pro-hormone that, after
oral delivery, should not be immediately available to these intestinal
cells.
    
    A Pro-Hormone that Provides Consistent Levels of Natural Vitamin D
Hormones.Hectorol® is a vitamin D pro-hormone, an inactive vitamin D
analog that is metabolized by the liver into two active and naturally
occurring vitamin D hormones. Activated Hectorol® is released into the
bloodstream at a rate which appears to mimic the normal physiologic
production of active vitamin D hormones by normal kidneys. Normal
physiologic blood levels of vitamin D hormones allow efficient
regulation of parathyroid hormone secretion by the parathyroid glands
with few side effects. 6




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
    
    A Potentially Wider Therapeutic Window.We believe that there is
indirect evidence through animal studies that Hectorol® has a wider
range, or therapeutic window, between a minimum effective dose and a
dose with significant side effects, as compared to other vitamin D
hormone therapies. Animal studies have demonstrated that Hectorol® has
fewer side effects than calcitriol or alfacalcidol when delivered at
doses of equivalent potency. No clinical trials have been conducted
directly comparing Hectorol® to any other vitamin D hormone therapy in
patients with moderate to severe chronic kidney disease or end-stage
renal disease. We have not conducted any comparative trials of vitamin D
hormones in any human subjects. A wider therapeutic window would improve
safety and facilitate improved patient management. Hectorol®Injection End-Stage Renal Disease.Hectorol® Injection is approved for use in the
approximately 300,000 end-stage renal disease patients in the U.S. We obtained
FDA approval for Hectorol® Injection in April 2000. We began selling the
product in August 2000. We received a national Medicare reimbursement code for
Hectorol® Injection in January 2002, which has facilitated Medicare
reimbursement. Our FDA submission included data from two Phase III trials, which included
a total of 70 patients and consisted of an eight-week monitoring period in
which no vitamin D hormone therapies were given, followed by a 12-week period
in which patients received open-label treatment with Hectorol® Injection at
hemodialysis. The study endpoint for effectiveness was the observed reduction
in blood parathyroid hormone levels, and the endpoints for safety were the
observed rates of hypercalcemia and hyperphosphatemia. In both trials, after 12
weeks of open-label treatment, mean blood parathyroid hormone levels were
reduced approximately 45%. These reductions were statistically significant
(p<0.01). In both studies, blood parathyroid hormone reached a predetermined
optimal range in more than 70% of treated patients. Hectorol® Injection
maintained normal blood calcium with only infrequent episodes of hypercalcemia
and hyperphosphatemia. We believe that U.S. physicians and dialysis providers favor intravenous
products because of several factors: (1) healthcare professionals can assure
patient compliance with drug administration at the time of dialysis; (2)
repeated oral delivery of active vitamin D hormones promotes their breakdown in
the intestine, thereby increasing intestinal absorption of calcium and reducing
the desired amount delivered to the parathyroid glands; and (3) Medicare
reimbursement is only available for intravenous products. Hectorol®Capsules End-Stage Renal Disease.Hectorol® 2.5 mcg Capsules are approved for use
in the approximately 300,000 end-stage renal disease patients in the U.S. The
FDA approved Hectorol® 2.5 mcg Capsules for end-stage renal disease in June
1999 based on the results of two Phase III trials analyzing a total of 99
subjects, all of which were dosed with Hectorol® 2.5 mcg Capsules during the
16-week open-label period. Each trial consisted of an eight-week monitoring
period in which no vitamin D hormone therapies were given, followed by a
16-week period in which patients received open-label treatment with Hectorol®
2.5 mcg Capsules at hemodialysis, and an eight-week period in which patients
received, in a double-blinded randomized fashion, continuing treatment with
either Hectorol® 2.5 mcg Capsules or a matching placebo. The study endpoint for
effectiveness was the observed reduction in blood parathyroid hormone levels,
and the endpoints for safety were the observed rates of hypercalcemia and
hyperphosphatemia. In both trials, after 16 weeks of open-label treatment, mean
blood parathyroid hormone levels were reduced more than 50%. These reductions
were statistically significant (p<0.001). In addition, blood parathyroid
hormone reached a pre-determined optimal range in 73% of the treated patients.
At the end of the eight additional weeks of blinded treatment, mean blood
parathyroid hormone levels increased toward baseline in patients receiving
placebo; however, in patients receiving Hectorol®2.5 mcg Capsules parathyroid
hormone levels remained approximately 50% below those receiving a matching
placebo  a clinically and statistically significant difference. Hectorol® 2.5
mcg Capsules maintained normal blood calcium levels with only infrequent
episodes of hypercalcemia and hyperphosphatemia. 7




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Chronic Kidney Disease or Pre-Dialysis.Secondary hyperparathyroidism
begins to develop in patients with modest reductions in kidney function and
becomes more severe as chronic kidney disease progresses. Evidence from
published clinical research suggests that early intervention with vitamin D
hormone replacement therapy can slow the progression and enhance the treatment
of secondary hyperparathyroidism in chronic kidney disease patients not yet on
maintenance dialysis therapy. Calcitriol is approved in the U.S., and we
believe oral alfacalcidol, which is not FDA approved, is used in certain
foreign markets to treat chronic kidney disease patients. As with their use in
dialysis patients, however, these competitive oral products may cause side
effects. In April 2004 the FDA approved Hectorol® 0.5 mcg Capsules for moderate to
severe chronic kidney disease (Stages 3 and 4). The FDA approval was based on
the results of two randomized, double-blind, placebo-controlled Phase III
trials for Hectorol® 0.5 mcg Capsules to treat secondary hyperparathyroidism in
patients with moderate to severe chronic kidney disease (Stages 3 and 4). The
trials consisted of an eight-week monitoring period in which no vitamin D
hormone therapies were given, followed by a 24-week period in which patients
were treated with either Hectorol® 0.5 mcg Capsules or a matching placebo. The
study endpoint for effectiveness was the observed reduction in blood
parathyroid hormone levels, and the endpoints for safety were the observed
rates of hypercalcemia, hyperphosphatemia and hypercalciuria, and significant
decreases in kidney function. In both studies, Hectorol® significantly reduced
blood parathyroid hormone levels by 46% at 24 weeks, a statistically
significant result relative to a matching placebo (p<0.01). There were no
significant differences in side effects or safety profiles. In two clinical
studies, the incidences of hypercalcemia and hyperphosphatemia during therapy
with 0.5 mcg Hectorol® Capsules were similar to placebo therapy, and no
episodes of hypercalciuria were observed. LR-103 and BCI-202 We have two product candidates, LR-103 and BCI-202, in development for the
treatment of secondary hyperparathyroidism. We have synthesized and evaluated a
series of compounds with chemical structures related to Hectorol®. From our
research, we have determined that our current compound, Hectorol®, is activated
in part to an active metabolite unlike the competing compounds calcitriol,
paricalcitol and alfacalcidol which cannot be so activated. We have labeled
this active metabolite as LR-103. We believe that LR-103 is as potent as
calcitriol in vitro,but may be 30 times less likely than calcitriol to cause
toxic side effects. We continue to study the pharmacological properties of
LR-103 in biological models. In a mouse model for secondary
hyperparathyroidism, LR-103 reduced parathyroid hormone levels without
producing hypercalcemia. LR-103 is readily absorbed after oral delivery and
circulates through the bloodstream to tissues which respond to vitamin D
hormones. BCI-202 is a novel pro-hormone vitamin D analog in early pre-clinical
development. Product Candidates for Hyperproliferative Diseases In addition to having a role in parathyroid function and calcium and
phosphorus metabolism, vitamin D hormones may have an important role in
regulating the growth and differentiation of skin, prostate, breast and colon
cells. We are investigating the use of Hectorol® Capsules and other development
stage vitamin D hormone therapies in diseases associated with
hyperproliferative or neoplastic cell growth such as in cancers of the prostate
and colon. Data from preclinical models indicate that vitamin D analogs inhibit
the growth of cancer cells expressing the vitamin D receptor. Prostate, Breast and Colon Cancers We are evaluating Hectorol® and LR-103 in the treatment of cancers which
have the potential to respond to vitamin D therapy, such as prostate, breast
and colon cancers. We also intend to evaluate BCI-202 in this disease state as
well. Pre-clinical models have demonstrated that vitamin D analogs inhibit the
growth of prostate, breast and colon tumor cells. Oncologists consider vitamin
D hormones to be a potentially promising treatment for cancers expressing the
vitamin D receptor. Our vitamin D compounds, with their safety profile, have
the potential to benefit the treatment of cancer. Currently, no vitamin D
hormone has received marketing approval for cancer anywhere in the world. Prostate cancer has become the most commonly diagnosed tumor in American
men. The American Cancer Society estimates that in the year 2003, approximately
221,000 men would have been diagnosed with, and approximately 29,000 men would
have died from, prostate cancer. Breast cancer is the second leading cause of
death among women in the U.S. The American Cancer Society estimates that in the
year 2003, approximately 211,000 women would have been diagnosed with, and
about 40,000 women would have died from, breast cancer. Colon cancer is also a
common cancer in American men and women. The American Cancer Society estimates
that in the year 2003, approximately 105,000 men and women would have been
diagnosed with colon cancer. 8




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Hectorol®.We have completed a Phase I dose escalation trial of daily,
Hectorol® Capsules in patients with hormone refractory prostate cancer. A total
of 25 patients were enrolled in this study. Oral doses of Hectorol® ranging
from 5 to 15 mcg/day were administered. Patients were closely followed for side
effects in order to determine the maximum tolerated dose of daily, Hectorol®
Capsules. Patients were monitored for response by objective imaging techniques.
Two patients had radiographically confirmed partial responses while five other
patients maintained stable disease for at least 6 months. The most common
toxicity observed during this trial was reversible hypercalcemia. Based on the
results of this study, a maximum daily dose of 12.5 mcg was recommended for
further evaluation in Phase II clinical trials in cancer patients. The results
of a Phase II Hectorol® monotherapy trial in patients with hormone refractory
prostate cancer are being evaluated. A Phase II study of Hectorol® Capsules in
combination with the chemotherapeutic agent Taxotere in the treatment of
hormone refractory prostate cancer has also been initiated under an
investigator sponsored investigational new drug application. We are
collaborating with the University of Wisconsin and other institutions to
further explore the use of Hectorol® in prostate cancer and other oncology
settings. LR-103.We initiated a Phase I study of LR-103 in cancer patients in
February 2004 to assess safety and pharmacokinetic parameters. We have used
LR-103, in animal models for cancer. LR-103 slowed tumor growth of breast
cancer xenografts in mice without producing any apparent adverse effects on
serum calcium. We have also observed that LR-103 inhibits growth of cancer
cells in vitro. LR-103 has been shown in vitroto act synergistically with
known chemotherapeutic agents to inhibit the proliferation of cultured breast
and prostate cancer cell lines. Psoriasis We may seek to develop Hectorol®, LR-103 and BCI-202 as oral vitamin D
hormone therapies for psoriasis. Preclinical data indicates that LR-103 is
readily absorbed after oral delivery and circulates through the blood stream to
tissues which respond to vitamin D hormones. We have observed that LR-103
inhibits growth of skin cells in vitro. According to the National Psoriasis Foundation, psoriasis affects
approximately 4.5 million individuals in the U.S. of which a physician is
treating approximately 1.5 million. A similar prevalence rate is observed in
Europe. Psoriasis affects people of all ages, with most exhibiting mild or
moderate lesions. Psoriatic lesions are characterized by an abnormal thickening
or growth of the skin, usually on the scalp, elbows, knees and shins.
Microscopic examination of these lesions reveals an increased rate of skin cell
division, together with a decrease in the time required for these cells to
migrate to the skin surface, resulting in thickening or growth of the skin. No
cure for psoriasis exists. Dovonex® (topical calcipotriol marketed by
Bristol-Myers Squibb Company) is a synthetic vitamin D hormone analog of
calcitriol and is approved to treat psoriasis in the U.S. Dovonex and
tacalcitol, another vitamin D hormone analog, are approved to topically treat
psoriasis in many countries outside of the U.S. Currently, no oral vitamin D
hormones are approved to treat psoriasis in the U.S. Research and Development Research and development activities are essential to maintaining and
enhancing our business. As of June 30, 2004, our research and development group
consisted of 27 employees, including a Vice President/ Medical Director and 9
clinical support specialists. Our research and development expenses were
approximately $9.1 million, $6.7 million and $6.8 million in the years ended
June 30, 2004, 2003, and 2002, respectively. We intend to continue to focus our
research and development activities on developing and evaluating the clinical
utility of Hectorol®, LR-103 and BCI-202 in secondary hyperparathyroidism and
hyperproliferative diseases, as well as developing additional products and
product candidates. Sales and Marketing We commercially introduced Hectorol® 2.5 mcg Capsules in October 1999 and
Hectorol®Injection in August 2000. Both products are currently marketed for
end-stage renal disease patients in the U.S. by our direct sales force. In
addition, we have commercially introduced the Hectorol® 0.5 mcg Capsules
through a co-promotion partnership in July 2004 for patients in the U.S. with
moderate to severe chronic kidney disease. We believe that the chronic kidney
and end-stage renal disease markets in the U.S. are well defined, and are
therefore suitable for a highly focused, direct sales and marketing effort. In
addition, we believe that the clinical benefits of our products combined with
competitive pricing allow us to offer a strong value proposition to patients
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We are directing our marketing efforts to the following key decision
makers:  
    
    Nephrologists.We estimate that in the U.S. there are approximately
4,800 office-based nephrologists. The nephrologist is the physician
responsible for the care of patients diagnosed with chronic kidney and
end-stage renal disease. This care includes delivering vitamin D hormone
replacement therapy, which may be administered based on protocols
developed in conjunction with the dialysis clinics.
    
    Dialysis Clinics.The nephrologist is generally associated with a
clinic that performs dialysis procedures. In the U.S., a limited number
of large corporations control the majority of these clinics with the
largest five corporations controlling approximately 46% of in-center
dialysis facilities. Generally these clinics bill for services provided
to end-stage renal disease patients, including vitamin D hormone
therapy.
    
    Third-Party Payors.Dialysis clinics that administer intravenous
vitamin D hormones seek reimbursement from third-party payors who
generally are either insurance companies or governmental agencies,
including Medicare and Medicaid. These payors set reimbursement levels
for products and services which the clinics provide to dialysis
patients. Because dialysis patients all suffer from end-stage renal
disease which qualifies all such patients for Medicare, dialysis clinics
generally derive a high percentage of their revenues from the Medicare
program. Pre-dialysis patients primarily seek reimbursement from
third-party payors who generally are either insurance companies or
governmental agencies, such as Medicaid. As of June 30, 2004, our sales and marketing department consisted of 73
people, including a direct sales force of 62 people, of which four focus on
national accounts and third-party payors including Medicare and Medicaid.
Additionally, we may seek to establish mutually beneficial alliances or
marketing agreements with partners who can access geographic markets and
therapeutic areas where we have no current or planned sales presence. Hectorol® is distributed to patients and dialysis centers through both
direct and traditional wholesale and retail channels. A third party provides
select administrative and distribution services for our wholesale and retail
customers in the continental U.S., Hawaii and Puerto Rico. Copromotion of Hectorol® 0.5 mcg Capsules On June 14, 2004, we entered into a multi-year co-promotion agreement for
the launch and commercialization of Hectorol® 0.5 mcg Capsules with
nephrologists in pre-dialysis Stages 3 and 4 chronic kidney disease. Under the
terms of the agreement, Cardinal Health PTS, LLC will provide contract sales
force and medical communication services to support a specified level of
promotion. We will sell Hectorol® 0.5 mcg Capsules through its distribution
network and support the promotional effort through its nephrology focused sales
force with an additional specified level of investment. For its efforts,
Cardinal Health will receive a variable co-promotion fee based on the
performance of Hectorol® 0.5 mcg Capsule sales. The fee as a percentage of
Hectorol® 0.5 mcg Capsules declines gradually over the term of the agreement. Intellectual Property Our success will depend in part on our ability to continue to develop
patentable products and technologies and obtain patent protection for our
products and technologies both in the U.S. and other countries. We currently
have over 150 issued patents and over 100 pending applications worldwide. We
have several U.S. patents covering the use of Hectorol® for the prevention and
treatment of hyperparathyroidism and metabolic bone disease, including renal
osteodystrophy. Patents covering the treatment of hyperparathyroidism secondary
to end stage renal disease with Hectorol® begin to expire in 2014. Patents
covering treatment of hyperparathyroidism secondary to pre-dialysis chronic
kidney disease begin to expire in 2008. We have filed a patent application
directed toward the treatment of hyperparathyroidism associated with chronic
kidney disease (Stages 1 through 4). Should the application issue as a U.S.
patent, it would expire in 2015. Patents covering metabolic bone disease begin
to expire in 2009. Corresponding patents for the use of Hectorol® to prevent and manage
secondary hyperparathyroidism in kidney dialysis patients have been issued in
Europe, Australia, Canada, Japan and Korea. All of these patents expire or
would expire in 2016. A corresponding patent for the use of Hectorol® to
prevent and treat metabolic bone disease has been issued by the European Patent
Office and expires in 2009. 10




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We also own U.S. patents for the use of Hectorol® for treating prostate
cancer that expire in 2013. We have filed counterpart patent applications in
Europe and other geographic markets, including Japan, that would expire in
2017. We own U.S. and European patents for delayed sustained release
formulations of Hectorol®, which expire in 2013. Foreign counterpart
applications are also pending in Japan and other major markets. The issued composition-of-matter patent covering Hectorol® has expired. We
have filed applications directed toward a stabilized form of doxercalciferol
(Hectorol®). Our issued patents relating to Hectorol® are method-of-use
patents. A method-of-use patent encompasses the use of a compound or
composition to treat a specified condition but does not encompass the compound
itself, the active ingredient used in the composition or composition itself, or
the method of making the composition or the compound used in the composition.
Method-of-use patents provide less protection than composition-of-matter
patents because of the possibility of the composition being used in ways that
fall outside the scope of the claimed method-of-use and difficulties in
detecting acts of infringement in particular due to off-label prescriptions
if other companies market or make the composition for other uses. We own issued patents and have pending patent applications in the U.S. and
other countries relating to other vitamin D hormones. Our patents and pending
applications include claims to compounds, compositions, methods of synthesizing
the compounds and compositions, methods of use and methods of delivery of
active vitamin D hormone and vitamin D hormone analogs. In addition to patent protection, we also rely on proprietary information
and trade secrets. We require our employees, consultants and advisors to
execute confidentiality and invention assignment agreements upon commencement
of an employment or a consulting relationship with us. Licensing Agreements We have a license from the Wisconsin Alumni Research Foundation to
practice several of their process patents for the synthesis of Hectorol®. Under
this license, which extends at least through July 2, 2013 and terminates upon
the expiration of the last licensed patent, the Wisconsin Alumni Research
Foundation has agreed not to license to other parties its patents to
manufacture Hectorol® for use or sale anywhere in the world as long as the
license agreement is in effect and we pay royalties based on Hectorol® sales. We had initially granted Draxis Health Inc. a license to use and sell
Hectorol® in Canada for secondary hyperparathyroidism, osteoporosis and other
metabolic bone diseases. We also granted Draxis a license in Canada to all
know-how developed by or on behalf of us relating to the use of Hectorol® for
those indications. Draxis received marketing approval for Hectorol® 2.5 mcg
Capsules in Canada in May 2001. Draxis sold its Canadian pharmaceutical
business to Shire Pharmaceuticals Group in July 2003. In conjunction with that
sale, we entered into a new manufacturing and supply agreement and patent and
trademark license agreement with Shire that replaced and superceded all
previous agreements with Draxis. The patent and trademark agreement transfers
to Shire the exclusive right to use and sell Hectorol® previously granted to
Draxis and requires a royalty for use of the Hectorol® trademark. The
manufacturing and supply agreement provides for the sale of Hectorol® from us
to Shire for distribution in Canada only. We and the U.S. Department of Agriculture jointly own rights to LR-103
under issued patents and pending patent applications. The U.S. Department of
Agriculture has granted to us an exclusive worldwide license to make, use and
sell products covered under their rights. This agreement calls for us to
commercialize LR-103 by December 31, 2006, or the U.S. Department of
Agriculture may modify or terminate the license. In any circumstance, however,
because of our joint ownership of the licensed patents, we would retain
non-exclusive marketing rights under these patents. The U.S. Department of
Agriculture license terminates upon the expiration of the last licensed patent. Manufacturing We currently have no internal manufacturing capabilities. We rely on
third-party contractors to produce our active pharmaceutical ingredient and for
the subsequent manufacturing and packaging of finished drug products. We purchase our active pharmaceutical ingredient for Hectorol® from a sole
supplier, although we are currently in the process of obtaining regulatory
approval for an additional supplier. In addition, we rely on one manufacturer
for Hectorol® Injection, one supplier to formulate Hectorol® Capsules and
another supplier to package Hectorol® Capsules. 11




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Although we believe that other manufacturers, suppliers, formulators and
vendors may be available to provide these goods and services to us, any change
in suppliers could cause an increase in costs, a delay in manufacturing and a
possible loss of sales, any of which would affect operating results adversely. All of our suppliers have FDA-inspected facilities that are required to
operate under current Good Manufacturing Practices regulations established by
the FDA. These regulations govern all stages of the drug manufacturing process
and are intended to assure that drugs produced will have the identity,
strength, quality and purity represented in their labeling for all intended
uses. If we were to establish our own manufacturing facility, we would need
substantial additional funds and would have to hire and train additional
personnel and comply with the extensive regulations applicable to the facility.
We believe our relationships with our suppliers are good. Competition We operate in a field in which new discoveries occur at a rapid pace.
Competitors may succeed in developing technologies or products that are more
effective than ours or in obtaining regulatory approvals for their drugs more
rapidly than us, which could render our products obsolete or noncompetitive.
Competition is significant and is expected to increase. Many competitors,
including biotechnology and pharmaceutical companies, are actively engaged in
the research and development of products in similar areas, including the fields
of hyperparathyroidism, osteoporosis, psoriasis, and cancers of the prostate,
breast and colon. Dialysis providers typically select which therapy a patient
receives based on safety, efficacy, and cost. Abbott Laboratories, Inc. markets
intravenous calcitriol (brand name Calcijex®) and intravenous paricalcitol
(brand name Zemplar®) for end-stage renal disease patients and is developing
oral paricalcitol for pre-dialysis and dialysis patients. Current intravenous
versions of these drugs are approved to manage secondary hyperparathyroidism in
end-stage renal disease patients in the U.S. and in European countries. A
number of companies have launched or are planning to launch generic intravenous
calcitriol in the U.S. In March 2004, Amgen, Inc. received FDA approval for a new oral
calcimimetic agent for the treatment of secondary hyperparathyroidism in
patients with chronic kidney disease on dialysis. The majority of patients
studied on this calcimimentic agent were also taking vitamin D hormone to treat
secondary hyperparathyroidism. Roche Pharmaceuticals markets oral calcitriol (brand name Rocaltrol®) and
TEVA Pharmaceuticals markets generic oral calcitriol in the U.S. to manage
secondary hyperparathyroidism in chronic kidney disease patients. These two
competitive products are approved in the U.S. for the treatment of elevated
parathyroid hormone in both end-stage renal disease and chronic kidney disease,
pre-dialysis. A number of companies, including Leo Pharmaceutical Products A/S, TEVA
Pharmaceuticals and Chugai Pharmaceutical Company Co., Ltd., market oral or
intravenous alfacalcidol, a synthetic analog of calcitriol, in Europe and Asia
under various trade names for both secondary hyperparathyroidism and
osteoporosis. Several companies, including Leo Pharmaceutical Products A/S,
ILEX Oncology, Inc. and Chugai Pharmaceutical Co. LTD, are developing vitamin D
hormone therapies to treat cancers. Leo Pharmaceutical Products A/S,
Bristol-Myers Squibb Company and other companies are marketing a topical
vitamin D hormone (brand name Dovonex®) in major markets of the world to treat
psoriasis. Teijin Limited is marketing topical tacalcitol to treat psoriasis
outside the U.S. Government Regulation Pharmaceutical products are subject to extensive regulation under the
Federal Food, Drug and Cosmetic Act by the FDA in the U.S. and similar health
authorities in foreign countries. This rigorous regulation governs, among other
things, testing for safety and effectiveness, manufacturing, labeling, storage,
record keeping, import, export, advertising, marketing and distribution of
pharmaceutical products. Any new drug candidate must undergo lengthy, rigorous
and costly pre-clinical testing, clinical trials and other procedures mandated
by the FDA and foreign regulatory authorities prior to approval for sale.
Before testing agents with potential therapeutic value in healthy human test
subjects, stringent government requirements for pre-clinical data must be
satisfied. The data, obtained from studies in several animal species, as well
as from laboratory studies, are submitted in an investigational new drug
application to the FDA or its equivalent in countries outside the U.S. where
clinical studies are to be conducted. Pre-clinical data must provide an
adequate basis for evaluating both the safety and the scientific rationale for
the initiation of clinical trials. Clinical trials are typically conducted in three sequential phases,
although these phases may overlap. Phase I frequently begins with initial
introduction of the compound into healthy human subjects. Prior to patient
introduction, the product is tested for safety, adverse affects, dosage,
tolerance, absorption, metabolism, excretion and preclinical 12




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pharmacology. Phase II typically involves studies in a small sample of the
intended patient population to assess the efficacy of the compound for a
specific indication to determine dose tolerance and the optimal dose range as
well as to gather additional information relating to safety and potential
adverse effects. Phase III trials are undertaken to further evaluate clinical
safety and efficacy in an expanded patient population which suffers from the
targeted illness at geographically dispersed study sites to determine the
overall risk-benefit ratio of the compound and to provide an adequate basis for
product labeling. Each trial is conducted in accordance with certain standards
under protocols that detail the objectives of the study, the parameters to be
used to monitor safety and the efficacy criteria to be evaluated. Each protocol
must be submitted to the FDA as part of the investigational new drug
application. Data from pre-clinical and clinical trials are submitted to the FDA as a
new drug application for marketing approval and to other health authorities as
a marketing authorization application. The process of completing clinical
trials for a new drug is likely to take a number of years and requires the
expenditure of substantial resources. Preparing a new drug application or
marketing authorization application involves considerable data collection,
verification, analysis and expense. The approval process is affected by a
number of factors, primarily the risks and benefits demonstrated in clinical
trials as well as the severity of the disease and the availability of
alternative treatments. The FDA or other health authorities may deny a new drug
application or marketing authorization application if the authoritys
regulatory criteria are not satisfied or may require additional testing or
information. Even after initial FDA or other health authority approval has been
obtained, further studies, including Phase IV post-marketing studies, may be
required to provide additional data on safety. Additional studies will be
required to gain approval for the use of a product as a treatment for clinical
indications other than those for which the product was initially tested and
will be required if we seek additional indications for Hectorol® Injection and
Hectorol® Capsules. Also, the FDA or other regulatory authorities require
post-marketing reporting to monitor the side effects of the drug. Results of
post-marketing programs may limit or expand marketing of the products. Further,
if there are any modifications to the drug, including changes in indication,
manufacturing process or labeling or a change in manufacturing facility, an
application seeking approval of such changes will be required to be submitted
to the FDA or other regulatory authority. The manufacture and marketing of Hectorol® is subject to ongoing
regulation, including compliance with the FDAs current Good Manufacturing
Practices, adverse event reporting requirements and the FDAs general
prohibitions against promoting products for off-label uses, or uses not
listed on the FDA-approved labeling. We and our manufacturers also are subject
to inspection and market surveillance by the FDA for compliance with these and
other requirements. Any enforcement action resulting from failure to comply
with these requirements could affect the manufacture and marketing of
Hectorol®. In addition, the FDA could withdraw a previously approved product
from the market upon receipt of new information. We participate in the Medicaid Rebate Program established by the Omnibus
Budget Reconciliation Act of 1990. The Medicaid Rebate Program requires us to
report certain pricing information, including but not limited to average
manufacturer price and best price, to the Centers for Medicare and Medicaid
Services on a periodic basis. We are also required to pay a periodic rebate for
each unit of our product reimbursed by Medicaid to each state participating in
the Medicaid program that is based on the pricing submissions we make to the
Centers for Medicare and Medicaid Services. If we learn that pricing
information reported to the Centers for Medicare and Medicaid Services in
previous periods were incorrect, we are required to correct that pricing
information. Such corrections could increase our rebate liability and interest
for past periods. In addition, if we were found to have knowingly submitted
false or inaccurate pricing information to the government, we could be subject
to penalties under the False Claims Act, monetary penalties of $100,000 per
item of false information under the federal Medicaid statute, penalties under
the Civil Monetary Penalties Law, and potentially other civil and criminal
penalties under federal and/or state law. In addition, some states have initiated supplemental rebate programs under
which pharmaceutical companies are required to agree to supplemental rebates to
avoid pre-authorization requirements. Companies that do not agree to
supplemental rebates may lose sales as their drugs are subject to
pre-authorization screening before the drug is covered for individual patients.
As more states adopt such supplemental programs, pharmaceutical company
revenues are likely to decline. As a condition of having our products covered by Medicaid, we signed an
agreement with the Department of Health & Human Services that requires us to
offer substantial discounts to Public Health Service Act covered entities.
Under a formula set out in the Veterans Health Care Act of 1992, Public Health
Service discounts are based on calculations from the Medicaid Rebate Program.
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information associated with the Medicaid Rebate Program, any errors in
reporting Medicaid information would likely result in inaccurate Public Health
Service prices. If we were found to have knowingly calculated false or
inaccurate Public Health Service pricing, we could be subject to penalties
under the False Claims Act, monetary penalties under the Civil Monetary
Penalties Law, and potentially other civil and criminal penalties under federal
law. We also makes our products available to authorized federal government
users under the Federal Supply Schedule of the General Services Administration.
The Veterans Health Care Act of 1992 requires that prices for products
purchased by certain federal entities (such as the Department of Veterans
Affairs, the Department of Defense and the Public Health Service, including the
Indian Health Service) be discounted under a formula set forth in the Act. As
with pricing information reported under the Medicaid Rebate Program and the
Public Health Service pricing program, we could face penalties under the False
Claims Act, the Civil Monetary Penalties Act, and other civil and criminal
statutes if we knowingly report inaccurate pricing information to these federal
entities. Our products are also reimbursed by Medicare. On December 8, 2003, the
President signed the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 referred to as MMA. The MMA adds a prescription drug benefit to the
Medicare program and replaces the existing Medicare + Choice managed care
option with a new managed care option, called Medicare Advantage. The
prescription drug benefit, which begins in 2006, is voluntary and beneficiaries
would pay a monthly premium after enrolling. Until that time, beneficiaries
will have access to a drug discount card to obtain discounts on their drug
purchases. The MMA also contains extensive changes to other aspects of the
Medicare program, including payments for currently covered outpatient drugs and
end-stage renal disease services. During 2004, the MMA reduces Medicare
reimbursement for many covered outpatient drugs furnished in 2004 from 95% to
85% (or in some cases as low as 80%) of the average wholesale price that was in
effect on April 1, 2003. Beginning in 2005, payment will be made on the basis
of an average sales price methodology or a new competitive acquisition program.
Drug products furnished in connection with renal dialysis services, such as
Hectorol® Injection, will continue to be reimbursed at 95% of average wholesale
price during 2004. Starting in 2005, Medicares payment will be based on
manufacturers average selling price, and beginning in 2006, the Secretary of
Heath and Human Services, referred to as the Secretary, has the authority to
adopt a new payment methodology, which may include the average sales price
methodology or acquisition costs. The Secretary is also required by the MMA to
conduct a 2-year demonstration where payment is made for drugs and biologicals
prescribed as replacements for existing drugs furnished as incident to a
physicians services under Part B of Medicare. The demonstration is required to
provide for cost-sharing in the same manner as applies under the new
prescription drug benefits of Part D of Medicare. The demonstration is required
to begin within 90 days of enactment and is limited to 50,000 Medicare
beneficiaries in sites selected by the Secretary. The MMA directs the Secretary to establish a new prospective payment
system for renal dialysis services. Currently, Medicare pays a composite rate
for each dialysis treatment. The composite rate includes dialysis services, but
excludes separately billable injectable drugs, such as Hectorol® Injection,
which are separately reimbursable at 95% average wholesale price to end-stage
renal disease dialysis facilities. The MMA requires the Secretary to: (1)
establish a basic case-mix adjusted prospective payment system for dialysis
services beginning in 2005; (2) report to the Congress on the design and
features of a bundled, fully case-mix adjusted prospective payment system for
dialysis services; (3) conduct a demonstration study of a bundled payment
system; and (4) make other changes, including increasing the composite rate by
1.6 percent in 2005 and restoring the exemption to the composite rate for
pediatric facilities. By January 1, 2005, the Secretary is required to
implement a basic case-mix adjusted payment system for dialysis services. The
basic system will include two components: payment for those services currently
under the composite rate and payment for the base line difference, or spread,
between the Medicare payment amount to end-stage renal disease facilities for
separately billed drugs and the facilities acquisition costs for the drugs.
Under the basic system, Medicare will continue to pay providers separately for
certain injectable drugs that are excluded from the current composite rate. By
October 1, 2005, the Secretary is required to propose to Congress a fully
case-mix adjusted, bundled prospective payment system for services furnished by
end-stage renal disease facilities, including to the extent feasible, drugs and
other items that currently are separately billed by end-stage renal disease
facilities. The Secretary also is required to establish a 3-year demonstration
project of the fully case-mix adjusted payment system for end-stage renal
disease services, beginning January 1, 2006. Beginning in 2006, the Secretary will increase the case-mix adjusted
payments to end-stage renal disease dialysis facilities to reflect the
estimated growth in expenditures for certain injectable drugs. Beginning in
January 1, 2007, the Secretary is required to adjust the spread component for
new injectable drugs in the case-mix adjusted payment. The Secretary will
determine these adjustments based on information about the acquisition cost of
injectable drugs and the rate of growth in expenditures for these items from
studies which will be conducted by the Office of Inspector General. 14




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Further, the MMA requires that the case-mix adjusted payment system result
in the same aggregate amount of expenditures for such services as would have
been made in 2005, 2006, and 2007 if payments were not case mix adjusted. Medicare has sought to limit or reduce reimbursement paid to dialysis
centers. Under the composite rate reimbursement paid to dialysis centers, each
center has a financial incentive to reduce the costs that it incurs in
providing treatment to patients. Dialysis centers generally seek substantial
discounts from suppliers and shift to other suppliers of therapeutically
similar services that are less expensive. These pressures are expected to
increase and put pressure on our ability to increase our prices or recoup price
increases. Medicare currently bases its reimbursement on a discount off of average
wholesale price. Average wholesale price is usually determined on the basis of
prices we report to national reporting services, such as RedBook and First
DataBank. We could face liability under false claims or anti-kickback laws if
the federal government determined that we reported prices with the intent to
set an artificially high average wholesale price to increase the profit for
customers who are reimbursed by Medicare. In addition, under the MMA, we are
required to report average sales price to the Centers for Medicare and Medicaid
Services beginning in the first quarter of 2004. As with all prices reported to
the federal government, we could be subject to penalties under the False Claims
Act, Civil Monetary Penalties Law, and other criminal and civil statutes for
knowingly reporting inaccurate prices. Before our products can be marketed outside of the U.S., they are subject
to regulatory approval similar to FDA requirements in the U.S., although the
requirements governing the conduct of clinical trials and other premarket
approval requirements vary widely from country to country, and the time spent
in gaining approval varies from that required for FDA approval. FDA approval
does not assure approval by other regulatory authorities, and we cannot predict
whether foreign regulatory approvals will be granted. In some countries, the
sales price of a drug product must also be approved. The pricing review period
often begins after market approval is granted. Even if a foreign regulatory
authority approves any of our products, we cannot predict whether satisfactory
prices for our products will be approved. We and our manufacturers must also comply with numerous federal, state and
local laws, regulations and recommendations relating to safe working
conditions, current Good Laboratory Practices, current Good Manufacturing
Practices and the experimental use of animals. We cannot predict the extent of
governmental regulation or the impact of new governmental regulations which
might have an adverse effect on the discovery, development, production and
marketing of our products and require us to incur significant costs to comply
with the regulations. Our research and development processes involve the controlled use of
hazardous materials, chemicals and radioactive materials and produce waste
products. We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of such
materials and waste products. Although we believe that our safety procedures
for handling and disposing of such materials comply with the standards
prescribed by such laws and regulations, the risk of accidental contamination
or injury from these materials cannot be eliminated completely. In the event of
such an accident, we could be held liable for any damages that result, and any
such liability could exceed our financial resources. We believe we comply in
all material respects with applicable environmental laws and regulations. We are also subject to various federal and state laws pertaining to health
care fraud and abuse, including anti-kickback laws and false claims laws.
Anti-kickback laws make it illegal for a prescription drug manufacturer to
solicit, offer, receive, or pay any remuneration in exchange for, or to induce,
the referral of business, including the purchase or prescription of a
particular drug. Due to the breadth of the statutory provisions and the absence
of guidance in the form of regulations or court decisions addressing some of
our practices, it is possible that our practices might be challenged under
anti-kickback or similar laws. False claims laws prohibit anyone from knowingly
presenting, or causing to be presented, for payment to either government payors
(such as Medicare, Medicaid, and programs of the Departments of Defense and
Veterans Affairs) or non-governmental third-party payors, claims for
reimbursed drugs or services that are false or fraudulent, claims for items or
services not provided as claimed, or claims for medically unnecessary items or
services. Our activities relating to the sale and marketing of our products may
be subject to scrutiny under these laws. Violations of fraud and abuse laws are
punishable by criminal and/or civil sanctions, including fines and civil
monetary penalties, as well as the possibility of exclusion from federal health
care programs (such as Medicare, Medicaid, and programs of the Departments of
Defense and Veterans Affairs). If the government were to allege that we
violated these laws or if we were convicted of violating these laws, there
could be a material adverse effect on us. Our activities could be subject to
challenge for the reasons discussed above as a result of the broad scope of
these laws and the increased focus on pharmaceutical practices by state and
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Federal law enforcement agencies and many state attorneys general have
ongoing civil and criminal investigations against pharmaceutical companies
alleging violations of Medicaid Rebate statutes, federal and state
anti-kickback statutes, and false claims laws related to drug pricing. These
enforcement actions arise from allegations that the companies fraudulently
billed, reported, manipulated, or inflated prices for their pharmaceutical
products that resulted in millions of dollars in overcharges to states. Many
cases have been filed under seal under federal and state anti-kickback and
false claims statutes and therefore are unknown to the pharmaceutical companies
who may be the targets. Employees As of June 30, 2004, we had 140 full-time employees, including 27 in
research and development, 22 in compliance, quality and regulatory affairs, 73
in sales and marketing and 18 in administration. Four of our employees have
Ph.D. degrees and one is an MD. None of our employees are represented by a
union, and we consider our employee relations to be good. Customers Our customers primarily consist of wholesale distributors of
pharmaceutical products. We utilize these wholesale distributors as the
principal means of distributing our products to clinics and hospitals. Five
individual wholesaler distributors comprise 97% of the net accounts receivable
balance as of June 30, 2004. These same five wholesaler distributors
represented 95% of our product sales for the year ended June 30, 2004, with the
largest of the five wholesaler distributors representing 39% of product sales.
Metro Medical, Amerisource/Bergen, and American Medical Distributors each
comprise greater than 10% of product sales. Available Information We make available free of charge on our website at www.bonecare.com our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable
after electronically filing or furnishing such material to the Securities and
Exchange Commission. Information on our website is not part of this filing. 16




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RISK FACTORS Investors and prospective investors in Bone Care should consider carefully the
risks described below, in addition to other information in this filing. The
risks and uncertainties described below are not the only ones facing our
company. If any of the following risks actually occur, our business, financial
condition or results of operations would likely suffer. In that event, the
trading price of our common stock could decline and investors may lose all or
part of their investment. RISKS RELATED TO OUR BUSINESS Our business is at an early stage of development and we do not have a
significant history for you to evaluate us on. Our business is at an early stage of commercialization and product
development, and historically has not had significant revenues or positive cash
flow. Even if we are able to achieve positive cash flow from operations, we
will face many challenges as we strive to maintain profitability. Hectorol®
Injection is approved for one indication and Hectorol® Capsules are approved
for two indications. Our product candidates and any expansion of indications
for our current products will require extensive research and development and
clinical testing before we can submit a new drug application to the FDA. In
addition, we have not commercialized Hectorol® in foreign markets. The
successful commercialization of Hectorol® or any of our other product
candidates will require significant further research, testing, development and
regulatory approvals and additional investment. There can be no assurance that
we will be successful in any of our commercialization efforts. Our experience
with, and history in, conducting these activities has been limited. Any
predictions you make about our future success or viability may not be as
accurate as they would be if we had a longer operating history. We have a history of losses and our losses may continue. We have incurred losses since we began operating. As of June 30, 2004,
our accumulated deficit was approximately $54.7 million. To date, we have
primarily spent our funds on product development and more recently on sales,
marketing and manufacturing expenses incurred to commercialize Hectorol®
Injection and Hectorol®Capsules. In fiscal year 2004 and subsequent fiscal
years, we plan to make large expenditures to manufacture, market and sell
Hectorol® and to develop other products, which may result in losses in future
periods. These expenditures include costs associated with continuing our
research and development, performing clinical trials for new products,
expanding our patent portfolio and seeking U.S. and foreign regulatory
approvals for Hectorol®, and business development activities. The amount of
these expenditures is difficult to forecast accurately. It is possible,
depending on the rate at which our revenues increase and our marketing,
research and development, and other business development activities expand,
that our losses will continue. Our ability to generate revenues in the near
future will depend primarily on our ability to continue to obtain products
manufactured by third parties and on our success in marketing and selling
Hectorol® Injection and Hectorol® Capsules. We do not know whether we will
achieve profitability or, if we do, whether we will be able to sustain
profitability. We currently derive all of our revenue from Hectorol®, and expect to do so
for the foreseeable future. If sales of Hectorol®decrease, our results of
operations will be significantly adversely affected. We currently derive all of our revenue from the sale of Hectorol®. In June
1999, we received FDA approval to market Hectorol® 2.5 mcg Capsules in the U.S.
to manage secondary hyperparathyroidism in kidney dialysis patients and began
selling Hectorol® 2.5 mcg Capsules in October 1999. In April 2000, we received
FDA approval to market Hectorol® Injection to manage secondary
hyperparathyroidism in dialysis patients and began selling Hectorol® Injection
in the U.S. in August 2000. In April 2004 we obtained FDA approval for
Hectorol® 0.5 mcg Capsules to manage secondary hyperparathyroidism in
pre-dialysis patients with moderate to severe chronic kidney disease and we
began selling this product in the U.S. in July 2004. We believe that sales of
Hectorol® Capsules and Hectorol® Injection will continue to constitute a
significant portion of our total revenues for the foreseeable future.
Accordingly, any factor adversely affecting sales of Hectorol®, such as the
introduction by other companies of generic equivalents of Hectorol® or
alternatives to Hectorol® or any delay in marketing for pre-dialysis, may have
a material adverse effect on our results of operations. There can be no
assurance that the vitamin D hormone market will not decline in the future. 17




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We may not be able to commercialize our existing or new products if we do
not enter into successful strategic alliances or other marketing arrangements. As part of our business strategy, we plan to establish strategic
partnerships, alliances and commercialization arrangements with partners who
can penetrate geographic markets and compete in therapeutic areas where we have
no current or planned sales presence. In addition, we may seek to enter into
strategic alliances or collaborations in connection with the development or
commercialization of new products. We have been in discussions with several
potential collaborators but have not entered into any agreements other than
with Cardinal Health for the promotion of Hectorol® 0.5 mcg Capsules to
nephrologists. We may not be able to negotiate collaborative arrangements on
acceptable terms, if at all. If we are not able to establish collaborative
arrangements, we will have to either delay further development of some of our
programs or increase our expenditures and undertake the development activities
at our own expense. We may encounter significant delays in commercializing our
products or find that the development, manufacture or sale of our products is
hindered due to the absence of collaborative agreements. We have limited experience establishing and maintaining collaborative
agreements. Our agreement with Cardinal Health, and any other collaborative
agreements we may enter into in the future, may pose additional risks,
including the following:  
    
    the terms of our contracts with our collaborators may not be
favorable to us in the future;
    
    a collaborator with marketing and distribution rights to one or
more of our products may not commit enough resources to the marketing
and distribution of such products;
    
    disputes with our collaborators may arise, leading to delays in
or termination of the development or commercialization of our
products, or resulting in significant litigation or arbitration;
    
    contracts with our collaborators may fail to provide
significant remedies if one or more of them fail to perform;
    
    our contracts with collaborators may be terminated and we may
not be able to replace our collaborators;
    
    in some circumstances, if a collaborator terminates an
agreement, or if we are found to be in breach of our obligations, we
may be unable to secure all of the necessary intellectual property
rights and regulatory approval to continue developing the same
compound or product; and
    
    our collaborators could independently develop, or develop with
third parties, products that compete with ours. If we make any acquisitions, we will incur a variety of costs and may
never realize the anticipated benefits. If appropriate opportunities become available, we may attempt to acquire
licenses, technologies, products or companies that we believe fit strategically
with our business. We currently have no understandings, commitments or
arrangements with respect to any such acquisitions. If we do undertake any
transaction of this sort, the process of integrating an acquired license,
technology, product or company may result in operating difficulties and
expenditures and may absorb significant management attention that would
otherwise be available for our ongoing business development plans. Moreover, we
may never realize the anticipated benefits of any acquisition. Future
acquisitions could result in in-process research and development expenses,
potentially dilutive issuances of equity securities, the incurrence of debt,
contingent liabilities and/or impairment of goodwill and amortization or
impairment of other intangible assets, which could adversely affect our
business, financial condition and results of operations. We have limited experience commercializing our products and may not be
able to successfully do so. To date, our experience in commercializing our products has been primarily
limited to marketing Hectorol® to treat patients with end-stage renal disease.
In order to successfully commercialize Hectorol® or any other products, we will
need to have adequate sales, marketing and distribution capabilities in place.
Our sales force has been limited in number, current product experience and
training. We have only recently begun to expand our sales force and marketing
capabilities, and our efforts to expand may not be successful. We may not be
able to attract skilled sales/marketing personnel in a timely manner or at all.
In addition, we may not be able to maintain a commercial infrastructure with
the technical expertise to support manufacturing oversight, product release and
distribution capabilities. If we are unsuccessful in our commercialization
efforts, our growth prospects will be diminished. 18




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We lack sufficient long-term data regarding the safety and efficacy of
Hectorol®and we could find that our long-term data do not support our current
clinical findings which may limit our efforts to commercialize Hectorol®. Hectorol® is supported by only five or less years of patient follow-up,
and therefore, we could discover that our current clinical results cannot be
supported by actual long-term clinical experience. If longer-term patient
studies or clinical experience indicate that treatments with our products do
not provide patients with sustained benefits, our sales could significantly
decline. If longer-term patient studies or clinical experience indicate that
our procedures cause tissue or muscle damage, motor impairment or other
negative effects, we could be subject to significant liability. We are not
certain how long it may take for patients to show significant increases in side
effects. Further, because some of our data have been produced in studies that
are not randomized and involved small patient groups, our data may not be
reproduced in wider patient populations. We have not conducted prospective clinical trials comparing Hectorol® and
competitive vitamin D hormone therapies in end-stage renal disease. We, and
others not affiliated with us, have compared the toxicity and efficacy of
Hectorol® to some other vitamin D hormone therapies
(1-a-calcidol and
calcitriol) in rats and mice. We cannot be sure, however, that the results of
additional clinical trials will prove that our assumptions, based on animal
studies, are correct as applied to humans. Hectorol® may not compare favorably
to existing or new vitamin D hormone therapies. If Hectorol® or our future
products do not prove to be superior to competing products, we may face severe
difficulties and may incur greater marketing expenses. If additional clinical
trials prove that Hectorol® is inferior to competitive vitamin D hormone
therapies, we may be forced to suspend our efforts to commercialize Hectorol®
and to delay or suspend our planned efforts to develop Hectorol® for additional
indications. If the medical community does not accept our products, our business will
suffer. The success of our products depends on acceptance of those products by the
medical community, which is based on a number of factors including:  
    
    perceptions about the safety and efficacy of our products;
    
    cost-effectiveness of our products relative to competing products;
    
    availability of reimbursement for our products from government or third-party payors; and
    
    effectiveness of marketing and distribution efforts by us and our licensees and distributors, if any. If doctors and patients do not use our products, we may not become
profitable. We cannot predict how quickly, if at all, the medical community
will accept our products or the extent to which these products will be used. If
we encounter difficulties introducing our products into our targeted markets,
our operating results and business may be substantially impaired. Failure to raise additional funds in the future may delay or eliminate
some or all of our efforts to develop, manufacture and sell Hectorol®and any
of our future products. In recent years we have significantly increased our sales and marketing
expenditures and we continue to spend significant amounts on research and
development. We cannot be sure that our estimates of capital expenditures for
Hectorol® and the development of our other new products will be accurate. We
could have significant cost overruns that could reduce our ability to
commercialize new products. Reimbursement for Hectorol®or any future products could be reduced or
modified. Sales of our products will depend, in part, on the extent to which the
costs of our products will be paid by health maintenance, managed care,
pharmacy benefit and similar health care management organizations, or
reimbursed by government health administration authorities, private health
coverage insurers and other third-party payors. These health care management
organizations and third-party payors are increasingly challenging the prices
charged for medical products and services and frequently require predetermined
discounts from list prices. Additionally, the containment of health care costs
has become a priority of federal and state governments, and the prices of drugs
have been targeted in this effort. Our current and potential products may not
be considered cost effective, and reimbursement to the consumer 19




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may not be available or sufficient to allow us to sell our products on a
competitive basis. Legislation and regulations affecting reimbursement for our
products have recently changed and may change at any time, including in ways
that are adverse to us. Currently, only Hectorol® Injection is eligible to be
reimbursed under Medicare but there is no guarantee as to the level of this
reimbursement or whether it will continue at all. Any reduction in Medicare or
other third-party payor reimbursements could have a negative effect on our
operating results. We currently have no manufacturing capabilities so we must rely
exclusively on suppliers who are outside of our control to manufacture
our products, including Hectorol®. The manufacture of pharmaceutical products requires significant expertise,
oversight, and capital investment. We do not have the internal capability to
manufacture pharmaceutical products, and we currently use others to formulate,
manufacture and package Hectorol® and other drug candidates and manufacture our
active pharmaceutical ingredient. Our manufacturers are required to adhere to
current Good Manufacturing Practices regulations enforced by the FDA. Our
dependence upon others to manufacture our active pharmaceutical ingredient and
products may adversely affect our profit margins and our ability to develop and
commercialize products on a timely and competitive basis. Delays or
difficulties with contract manufacturers in manufacturing active pharmaceutical
ingredient and producing, packaging or distributing our products would
adversely affect the results of operations of Hectorol® or introduction of
other products. If we were to need to seek alternative sources of supply, we
may be unable to enter into alternative supply arrangements on commercially
acceptable terms, if at all. Any disruption of these activities could impede
our ability to sell our products, which would significantly reduce our results
of operations. All of our suppliers have FDA inspected facilities that are required to
operate under current Good Manfacturing Practices regulations established by
the FDA. In December 2001, Akorn, Inc. (previously the sole manufacturer of
Hectorol® Injection) halted production of Hectorol® Injection until such time
as certain general deviations from the FDAs current Good Manufacturing
Practices could be remediated. The FDAs site inspection, which concluded in
February 2003, resulted in additional inspectional observations that preclude
submission of a supplement with respect to the manufacture and process
improvements at Akorn. Accordingly, supply of Hectorol® Injection was
constrained from December 2002 to March 2003. We entered into a manufacturing
agreement with Draxis Pharma Inc., a subsidiary of Draxis Health Inc., to serve
as a manufacturer of Hectorol®Injection and began commercial distribution in
March 2003. There is no assurance that Draxis will have sufficient production
capacity to meet future demand or that Draxis will perform its contractual
obligations. We purchase our active pharmaceutical ingredient for Hectorol® from a sole
supplier, although we are currently in the process of obtaining regulatory
approval for an additional supplier. We rely on one supplier to formulate
Hectorol®Capsules and another supplier to package Hectorol®. In addition, one
of our suppliers is located in the Middle East, a geographic location subject
to increased political instability, which could disrupt or halt the operations
of this supplier. Although we believe that other suppliers may be available,
any change in suppliers could cause an increase in cost, a delay in
manufacturing, and a possible loss of sales, any of which would affect
operating results adversely. All of our current suppliers are, and any future
suppliers will be, subject to extensive government regulation by the FDA and
other comparable foreign regulators. While we currently do not intend to manufacture any products ourselves, we
may choose to do so in the future. If we were to manufacture products
ourselves, we would need substantial additional financing to build
manufacturing facilities and to hire and train qualified personnel. We also
would be subject to additional regulatory requirements and would be subject to
risks associated with delays or difficulties encountered in manufacturing a
product. We may not be able to manufacture any products successfully or in a
cost-effective manner. If we are unable to satisfy the FDA with the results of our Phase IV
commitment studies for Hectorol®Capsules or are otherwise required to meet any
additional FDA obligation with respect to Hectorol®Injection, our operating
results and business will be substantially impaired. After initial FDA or other health authority approval has been obtained,
further studies, including Phase IV post-marketing studies, may be required to
provide additional data on safety. The FDA or other regulatory authorities may
also require post-marketing reporting to monitor the side effects of a drug.
Results of post-marketing requirements may limit the marketing of such
products. 20




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The FDA allowed us to market Hectorol® 2.5 mcg Capsules to end-stage renal
disease patients, but required us to complete post-approval Phase IV research
and development pertaining to the analysis of this product and its active
ingredients by July 2000. We have completed and submitted the results of our
Phase IV commitments for Hectorol® 2.5 mcg Capsules to the FDA. In addition, in
connection with our recent FDA approval of Hectorol® 0.5 mcg Capsules, the FDA
required us to commit to complete, by April 2006, a post-marketing Phase IV
study of Hectorol® 0.5 mcg Capsules in pediatric patients ages 5 through 18
with Stage 3 or 4 chronic kidney disease, pre-dialysis. We are also required to
complete, by February 2007, a post-marketing Phase IV study of Hectorol® 0.5
mcg Capsules in adult vitamin D sufficient patients with Stage 3 or 4 chronic
kidney disease to address recommendations made in the K/DOQI guidelines.
Lastly, we are required to complete, by June 2008, a post-marketing Phase IV
carcinogenicity study in a single species. We do not know if we will be able to
timely complete these studies, if the FDA will be satisfied with the results or
if the FDA will require additional post-marketing commitments. We cannot assure you that we will obtain regulatory approvals for
Hectorol®or any of our future products. Obtaining required regulatory approvals may take several years to complete
and consume substantial capital resources. There can be no assurance that the
FDA or any other regulatory authority will act quickly or favorably on any of
our current or future requests for product approval, or that the FDA or any
other regulatory authority will not require us to provide additional data that
we do not currently anticipate to obtain product approvals. We cannot apply for
FDA approval to market our future products until we successfully complete
pre-clinical and clinical trials. If we are not able to obtain regulatory
approvals for use of our future products, or if the patient populations for
which they are approved are not sufficiently broad, the commercial success of
these products could be limited. We filed an investigational new drug application in September of 2003 for
LR-103. Our investigational new drug will be tested in refractory cancer
patients. Several factors could prevent successful completion or cause
significant delays of these trials, including an inability to enroll the
required number of patients or failure to demonstrate adequately that the
product is safe and effective for use in humans. If safety problems develop, we
or the FDA could stop our trials before completion. Our failure to obtain regulatory approvals in foreign jurisdictions would
prevent us from marketing our products abroad. We may also market our products in international markets, including the
European Union and Japan. In order to do so, we must obtain separate regulatory
approvals from these other foreign jurisdictions. The regulatory approval
processes differ among these jurisdictions. Approval in any one jurisdiction
does not ensure approval in a different jurisdiction. Hectorol® has not been
approved for marketing by any governmental entity outside of the U.S. except
for Hectorol® 2.5 mcg Capsules which are approved in Canada. We will require
substantial additional funds to develop the product, conduct clinical trials
and gain the necessary regulatory approvals for Hectorol® Injection, Hectorol®
Capsules or other products in foreign countries. As a result, in order to
commercialize our products outside the U.S. we will need to invest additional
resources or enter into arrangements with partners. Our success depends on our key personnel, the loss of whom could impair
our business. Our success depends upon our ability to attract and retain qualified
personnel including our management, scientific, regulatory, sales, marketing
and financial personnel. Pharmaceutical companies, academic and government
organizations, research institutions and other entities compete for the
services of qualified personnel. We may not be able to attract and retain such
personnel. Furthermore, our anticipated growth and expansion into areas and
activities requiring additional expertise will require additional personnel. Our failure to expand our management systems and controls to support
anticipated growth could harm our business. Sustaining our growth has placed significant demands on management and our
administrative, operational, information technology, financial and personnel
resources. Accordingly, our future operating results will depend on the ability
of our officers and other key employees to continue to implement and improve
our operational, quality compliance, regulatory support and financial control
systems, and effectively expand, train and manage our employee base. We may not
be able to manage our growth successfully, which could seriously harm our
operating results and business. 21




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RISKS RELATED TO OUR INDUSTRY We have many competitors, several of which have significantly greater
financial and other resources. We face competition from several companies that are focused on developing
vitamin D hormone therapies, particularly to treat secondary
hyperparathyroidism and hyperproliferative diseases. We also compete with other
companies that produce vitamin D hormones and vitamin D hormone analogs for
international marketplaces where these treatments have already been approved
for secondary hyperparathyroidism and hyperproliferative diseases. Competition
may increase further as additional companies begin to enter our markets and/or
modify their existing products to compete directly with ours. Companies also
compete indirectly with us utilizing different therapeutic approaches. Many of
our competitors have substantially greater financial, research and development
and marketing resources than we do and may be better equipped to develop,
manufacture and market products. Our competitors include companies that market
products that compete with Hectorol® Injection and Hectorol® Capsules and may
in the future include companies that are developing vitamin D hormone therapies
to treat cancer or psoriasis. Our competitors may have broad product lines which allow them to negotiate
exclusive, long-term supply contracts and offer comprehensive pricing for their
products. Broader product lines may also provide our competitors with a
significant advantage in marketing competing products to group purchasing
organizations and other managed care organizations that are increasingly
seeking to reduce costs through centralized purchasing. Greater financial
resources and product development capabilities may allow our competitors to
respond more quickly to new or emerging technologies and changes in customer
requirements that may render our products obsolete. These technological
developments may result in Hectorol® becoming obsolete or non-competitive. If our competitors develop more effective and/or affordable products, or
achieve earlier patent protection or product commercialization than we do, our
operations will likely be negatively affected. We also face competition for marketing, distribution and collaborative
development agreements, for establishing relationships with academic and
research institutions, and for licenses to intellectual property. In addition,
academic institutions, government agencies and other public and private
research organizations also may conduct research, seek patent protection and
establish collaborative arrangements for discovery, research, clinical
development and marketing of products similar to ours. These companies and
institutions compete with us in recruiting and retaining qualified scientific
and management personnel as well as in acquiring technologies complementary to
our programs. Our products and development activities are subject to extensive
government regulation, which could make it more expensive and time-consuming
for us to conduct our business and could adversely affect the manufacturing and
marketing of our products. Any new drug product, including any new indication for Hectorol®, must
undergo lengthy and rigorous clinical testing and other extensive, costly and
time-consuming procedures mandated by the FDA and foreign regulatory
authorities. We may elect to delay or cancel our anticipated regulatory
submissions for new indications for Hectorol® or proposed new products for a
number of reasons, including:  
    
    unanticipated clinical testing results;
    
    lack of sufficient resources;
    
    changes in, or adoption of, new FDA regulations;
    
    unanticipated enforcement of existing regulations or guidelines;
    
    an inability to enroll the required number of patients in trials;
    
    unexpected technological developments; and
    
    developments by our competitors. The FDA continues to review products even after they receive FDA approval.
The manufacture, distribution and marketing of Hectorol® is subject to
extensive ongoing regulation, including compliance with the FDAs current Good
Manufacturing Practices, adverse event reporting requirements and the FDAs
general prohibitions against promoting 22




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products for off-label uses, or uses not listed on the FDA-approved
labeling. We and our manufacturers also are subject to inspection and market
surveillance by the FDA for compliance with these and other requirements.
Failure to comply with these requirements could result in:  
    
    warning letters;
    
    fines;
    
    civil penalties;
    
    injunctions;
    
    recall or seizure of products;
    
    total or partial suspension of production;
    
    refusal of the government to grant approvals; or
    
    withdrawal of existing approvals and criminal prosecution. Any such enforcement action could adversely affect the manufacturing and
marketing of our products. We must also comply with numerous federal, state and local laws,
regulations and recommendations relating to safe working conditions, current
Good Laboratory Practices and the experimental use of animals. Additionally,
products using inventions that are fully or partially funded by federal
research grants are subject to government rights. We cannot predict the extent
of government regulation or the impact of new governmental regulations which
might have an adverse effect on the discovery, development, production and
marketing of our products, and require us to incur significant costs to comply
with the regulations. Our distributor base is highly concentrated and if we lose any of our
distributors our business could be materially harmed. Five individual wholesale distributors represented 95% of our product
sales for the year ended June 30, 2004, with the largest of those distributors
representing 39% of product sales. The loss or bankruptcy of any of these
distributors could materially and adversely affect our results of operations
and financial condition. We are exposed to product liability risks which may exceed our existing
coverage and could result in significant liabilities and costly litigation. Our business exposes us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of pharmaceutical
products. The use of our products in the marketplace and the use of our
products and drug candidates in clinical trials may expose us to product
liability claims. Any product liability claims, with or without merit, could
result in costly litigation, reduced sales, significant liabilities and
diversion of our managements time, attention and resources. We have obtained
product liability insurance relating to clinical trials and our current
products. We cannot be sure that our product liability insurance coverage is
adequate or that it will continue to be available to us on acceptable terms, if
at all. Claims or losses in excess of any product liability insurance coverage
that we have or may obtain, or a series of unsuccessful claims against us,
could have a material adverse effect on our business, financial condition and
results of operations. Our use of hazardous materials exposes us to the risk of material
environmental liabilities. Because we use hazardous substances in our research and development
activities, we are potentially subject to material liabilities related to
personal injuries or property damages that may be caused by hazardous substance
releases or exposures at or from our facility. Decontamination costs, other
clean-up costs and related damages or liabilities could impair our business and
operating results. We are required to comply with stringent laws and
regulations governing environmental protection and workplace safety, including
requirements governing the handling, storage and disposal of hazardous
substances. 23




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RISKS RELATED TO INTELLECTUAL PROPERTY If we are unable to protect our patents, our competitiveness and business
prospects may be materially damaged. Our success will depend to a significant degree on our ability to obtain
and enforce patents and licenses to patent rights, both in the U.S. and in
other countries. The patent position, however, of pharmaceutical companies is
often uncertain and involves complex legal and factual questions, not the least
of which is that we cannot predict the breadth of patent claims in
pharmaceutical patents. In addition, a substantial backlog of pharmaceutical
patent applications exists at the U.S. Patent and Trademark Office. The backlog
may delay review and potential issuance of patents. Further, patents once
granted are subject to challenge and may, in litigation or administrative
proceedings before the U.S. Patent and Trademark Office, be found invalid. To date, in addition to a number of issued patents, we have filed a number
of patent applications in the U.S. and other countries. We have filed patent
applications directed toward a stabilized form of doxercalciferol (Hectorol®)
and the use of Hectorol® for the treatment of hyperparathyroidism associated
with chronic kidney disease (Stages 1 through 4) . Should neither of these
applications issue as a U.S. patent, our patent protection covering the
treatment of hyperparathyroidism in patients with moderate to severe chronic
kidney disease (Stages 1 through 4) would cease in 2008, although our patent
protection for the use of Hectorol® for the treatment of hyperparathyroidism
associated with end-stage renal disease (Stage 5), which begins to expire in
2014, would not be affected. If we were to lose this patent protection relating
to Stages 1 through 4, our future sales and results could be significantly
adversely affected. In addition, our issued patents and pending patent
applications relating to Hectorol® are method-of-use patents which cover only
the use of certain compounds to treat specified conditions, rather than
composition-of-matter patents which would cover the chemical composition of the
active ingredient. Method-of-use patents provide less protection than
composition-of-matter patents because of the possibility of off-label uses if
other companies market or make the compound for other uses. We actively
continue to file applications as appropriate for patents covering our products,
uses and processes. We cannot guarantee that we will obtain patent protection
for our products or processes. We also cannot guarantee that competitors will not successfully challenge
our patents on the basis of validity and/or enforceability. Nor can we
guarantee that they will not circumvent or design around our patent position.
We could face increased competition as a result of the failure of patents to be
issued on our pending applications or a finding of invalidity and/or
unenforceability of one of our patents. In the U.S., most patent applications are maintained in secrecy until a
patent application publishes 18 months after filing or is issued. We cannot be
certain that others have not filed unpublished patent applications for
compounds, uses or processes covered by our pending applications. We also
cannot be certain that we were the first to invent or discover the compound,
use or process that is the subject of our applications. Competitors may have
filed applications for, or may have received patents and may obtain additional
patents and proprietary rights relating to, compounds, uses or processes that
block or compete with our patents and rights. We are aware of a significant
number of patent applications relating to vitamin D hormones filed by, and
patents issued to, third parties. If any of our competitors have filed patent
applications in the U.S. that claim compounds, uses or processes also claimed
by us, we may have to participate in an interference proceeding declared by the
U.S. Patent and Trademark Office to determine priority of invention and the
corresponding right to a patent for the compounds, uses or processes in the
U.S. Any such proceeding could result in substantial cost to us even if the
outcome is favorable. We have not filed patent applications in every country. In certain
countries, obtaining patents for our products, processes and uses may be
difficult or impossible. Patents issued in countries and regions other than the
U.S., Japan and Europe may be harder to enforce than, and may not provide the
same protection as, patents obtained in the U.S., Europe and Japan. In addition, litigation may be necessary to enforce our patents, if
infringed, and in that connection to determine the scope and validity of the
proprietary rights of third parties. Litigation could result in substantial
cost to us. We cannot guarantee that our patents or those of licensors from
whom we have licensed rights will not be challenged, invalidated, found
unenforceable or circumvented. Nor can we guarantee that the rights granted
under licenses will provide any proprietary protection or commercial advantage
to us. 24




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If we are unable to protect our proprietary rights and trade secrets, our
competitiveness and business prospects may be materially damaged. Operation of our business also relies on our ability to protect
proprietary information and trade secrets. We require our employees,
consultants and advisors to execute confidentiality and invention assignment
agreements upon commencement of employment or consulting relationships with us.
We cannot guarantee, however, that these agreements will provide meaningful
protection or adequate remedies for our proprietary information and trade
secrets in the event of unauthorized use or disclosure of such information nor
can we guarantee that the parties to the agreements will not breach their
agreements. We also cannot guarantee that third parties will not know, discover
or develop independently equivalent proprietary information or techniques, that
they will not gain access to our trade secrets or disclose our trade secrets to
the public. Therefore, we cannot guarantee that we can maintain and protect
unpatented proprietary information and trade secrets. We may be accused of infringing upon the patents or other proprietary
rights of others and any related litigation could damage our business. Our commercial success depends significantly on our ability to operate our
business without infringing upon the patents and other proprietary rights of
third parties. We cannot guarantee that our compounds, uses or processes do not
and will not infringe upon the patents and proprietary rights of third parties.
In the event of an infringement determination, we may be enjoined from
research, development or commercialization of our products. We may also be
required to enter into royalty or license arrangements with third parties
claiming infringement or otherwise to design around their patents. Any required
license, if available at all, may not be obtained on commercially reasonable
terms. If we do not obtain the licenses or are unable to design around the
patent, we may be delayed or prevented from pursuing the development of some of
our product candidates. We may lose the exclusive rights to market LR-103 if we are unable to
commercialize it by December 31, 2006. We and the U.S. Department of Agriculture jointly own rights to LR-103
under issued patents and pending patent applications. The U.S. Department of
Agriculture has granted to us a worldwide exclusive license under its rights in
the jointly owned patents to make, use and sell products covered under their
rights. This agreement calls for us to commercialize LR-103 by December 31,
2006, or the U.S. Department of Agriculture may modify or terminate the
license. If the U.S. Department of Agriculture terminates the license, we would
lose our exclusivity and the U.S. Department of Agriculture could license the
right to make, use and sell the product to a third party or do it themselves. RISKS RELATED TO OUR STOCK Concentration of ownership in our company by a few shareholders and
features of our corporate charter may make it more difficult to replace or
remove our current management and may have the effect of delaying, deferring or
preventing takeover transactions. Based on the number of shares outstanding at September 1, 2004, our
executive officers and directors beneficially own approximately 15% of the
outstanding shares of our common stock and, as a result, have significant
control of us, which they could exert to make it more difficult to replace or
remove our current management or could be used to delay, defer or prevent a
change in control of the company. In addition, certain provisions of our articles of incorporation and
by-laws and certain provisions of Wisconsin law may make it more difficult for
a third party to acquire, or may discourage acquisition bids for, Bone Care and
could limit the price that certain investors might be willing to pay in the
future for shares of our common stock. Such provisions, among other things,
include:  
    
    We have a board of directors serving staggered three-year terms;
    
    Certain provisions of Wisconsin law which may discourage certain
types of transactions involving an actual or potential change of
control;
    
    Our board of directors may authorize the issuance of up to 2,000,000
shares of preferred stock and determine the price, rights, preferences
and priviledges of those shares without any vote or action by
shareholders; and
    
    We have a shareholders rights plan. 25




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Under Wisconsin law, shareholders may be personally liable for debts we
owe to our employees. We are incorporated under the laws of the State of Wisconsin. Wisconsin
law provides that shareholders of a Wisconsin corporation are personally liable
for, in the case of shares without par value (such as our shares), up to an
amount equal to the price for which the shares were issued, for all debts owing
to employees for services performed for the corporation. Shareholders are not
liable for wages to employees in excess of six months service for any
individual employee. Our future operating results and the trading price of our common stock is
likely to fluctuate substantially in the future. Our stock price has fluctuated substantially since we became a public
company in May 1996. Our stock price, like that of many other biotechnology
and pharmaceutical companies, is likely to remain volatile. The trading price
of our common stock may fluctuate widely as a result of a number of factors,
some of which are not in our control, including:  
    
    market perception and customer acceptance of our products;
    
    our efforts to increase sales of our Hectorol® products;
    
    quarter-to-quarter variations in our operating results;
    
    timely implementation of new and improved products;
    
    our level of investment in research and development;
    
    increased competition;
    
    our establishment of strategic alliances or acquisitions;
    
    changes in our relationships with suppliers;
    
    litigation concerning intellectual property rights in the industry;
    
    announcements regarding clinical activities or new products by us or our competitors;
    
    timing of regulatory actions, such as product approvals or recalls;
    
    costs we incur in anticipation of future sales, such as
inventory purchases or expansion of manufacturing facilities;
    
    general and economic conditions in the biotechnology and
pharmaceutical industry and the state of healthcare cost containment
efforts, including reimbursement policies;
    
    limited research coverage by independent securities analysts; and
    
    changes in earnings estimates by analysts. In addition, the market for our stock has experienced extreme price and
volume fluctuations, which have often been unrelated to our operating
performance. We believe that period-to-period comparisons of our historical
and future results will not necessarily be meaningful and that investors and
prospective investors in Bone Care should not rely on them as an indication of
future performance. To the extent we experience the factors described above,
our future operating results may not meet the expectations of securities
analysts or investors from time to time, which may cause the market price of
our common stock to decline or be volatile. Substantial future sales of our common stock in the public market may
depress our stock price. Most of our outstanding shares of common stock are freely tradable. The
market price of our common stock could drop due to sales of a large number of
shares or the perception that such sales could occur, including sales or
perceived sales by our directors, officers or principal shareholders. These
factors also could make it more difficult to raise funds through future
offerings of common stock. 26




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##### Table of Contents



ITEM 2.PROPERTIES We lease approximately 34,000 square feet of office and laboratory space
in Middleton, Wisconsin, which will expire in 2009. We believe our
facilities are adequate to meet our needs for the foreseeable future. 
 ITEM 3.LEGAL PROCEEDINGS We may be a defendant from time to time in actions arising out of our
ordinary business operations. There are no material legal proceedings pending. 
 ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 PART II 
 ITEM 5.MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is quoted on the Nasdaq National Market under the symbol
BCII and has been publicly traded since May 1996. The following table sets
forth high and low sales prices per share of our common stock, as reported on
the Nasdaq National Market for fiscal years 2003 and 2004 as indicated. High
    
    LowFiscal Year Ended June 30, 2003First Quarter
    
    $
    7.82
    
    
    $
    3.00Second Quarter
    
    
    12.64
    
    
    
    5.53Third Quarter
    
    
    10.25
    
    
    
    5.00Fourth Quarter
    
    
    14.00
    
    
    
    6.95Fiscal Year Ending June 30, 2004First Quarter
    
    $
    14.97
    
    
    $
    11.00Second Quarter
    
    
    15.05
    
    
    
    11.77Third Quarter
    
    
    20.60
    
    
    
    12.46Fourth Quarter
    
    
    26.60
    
    
    
    18.51
 As of August 24, 2004, approximately 170 shareholders of record held our
common stock. This does not reflect beneficial shareholders who hold their
stock in nominee or street name through various brokerage firms. We have never declared or paid any cash dividends on our common stock, and
we do not plan on paying any in the near future. Any future determination as to
the declaration and payment of dividends will be at the discretion of our board
of directors and will depend on then existing conditions, including our
financial condition, results of operations, contractual restrictions, capital
requirements, business prospects and other factors our board of directors deem
relevant. 27




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ITEM 6.SELECTED FINANCIAL DATA The following table sets forth selected financial data for each of the
five years in the period ended June 30, 2004.. Certain prior period amounts in
the financial statements and the notes have been reclassified to conform to the
fiscal 2004 presentation. You should read the financial statement data in
conjunction with the discussion in Managements Discussion and Analysis of
Financial Condition and Results of Operations and the financial statements and
notes thereto included elsewhere in this filing. Our historical results are
not necessarily indicative of results to be expected for any future period. Year Ended June 30,2000
    
    2001
    
    2002
    
    2003
    
    2004(in thousands, except per share data)Statements of Operations Data:Revenues:Product sales
    
    $
    259
    
    
    $
    5,997
    
    
    $
    14,991
    
    
    $
    19,518
    
    
    $
    43,605Other revenues
    
    
    126
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    385
    
    
    
    5,997
    
    
    
    14,991
    
    
    
    19,518
    
    
    
    43,605Cost and expenses:Cost of product sales
    
    
    503
    
    
    
    1,905
    
    
    
    3,557
    
    
    
    6,983
    
    
    
    11,460Research and development
    
    
    4,048
    
    
    
    4,873
    
    
    
    6,772
    
    
    
    6,670
    
    
    
    9,108Selling, General and administrative
    
    
    6,282
    
    
    
    9,542
    
    
    
    12,823
    
    
    
    18,117
    
    
    
    24,83310,833
    
    
    
    16,320
    
    
    
    23,152
    
    
    
    31,770
    
    
    
    45,401Loss from operations
    
    
    (10,448
    )
    
    
    (10,323
    )
    
    
    (8,161
    )
    
    
    (12,252
    )
    
    
    (1,796
    )Interest income, net
    
    
    656
    
    
    
    1,309
    
    
    
    1,257
    
    
    
    574
    
    
    
    275Loss before income tax
    
    
    (9,792
    )
    
    
    (9,014
    )
    
    
    (6,904
    )
    
    
    (11,678
    )
    
    
    (1,521
    )Income taxes
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (9,805
    )
    
    $
    (9,014
    )
    
    $
    (6,904
    )
    
    $
    (11,678
    )
    
    $
    (1,521
    )Net loss per common share-basic and diluted
    
    $
    (0.89
    )
    
    $
    (0.70
    )
    
    $
    (0.49
    )
    
    $
    (0.82
    )
    
    $
    (0.10
    )Shares used in computing basic and diluted
net loss per common share
    
    
    11,071
    
    
    
    12,884
    
    
    
    14,084
    
    
    
    14,175
    
    
    
    14,869
 28




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As of June 30,2000
    
    2001
    
    2002
    
    2003
    
    2004(in thousands)Balance Sheet Data:Current assets:Cash and cash equivalents
    
    $
    4,736
    
    
    $
    1,843
    
    
    $
    2,024
    
    
    $
    3,065
    
    
    $
    45,326Marketable securities
    
    
    4,972
    
    
    
    15,080
    
    
    
    18,437
    
    
    
    13,625
    
    
    
    68,777Accounts receivable, net
    
    
    30
    
    
    
    3,347
    
    
    
    4,286
    
    
    
    2,815
    
    
    
    4,733Inventory
    
    
    639
    
    
    
    1,811
    
    
    
    2,099
    
    
    
    2,080
    
    
    
    6,785Other current assets
    
    
    229
    
    
    
    1,085
    
    
    
    776
    
    
    
    779
    
    
    
    2,336Total current assets
    
    
    10,606
    
    
    
    23,166
    
    
    
    27,622
    
    
    
    22,364
    
    
    
    127,957Marketable
securities - noncurrent .
    
    
    
    
    
    
    14,424
    
    
    
    3,720
    
    
    
    913
    
    
    
    908Property, plant, and equipment, net
    
    
    446
    
    
    
    1,503
    
    
    
    1,785
    
    
    
    1,889
    
    
    
    1,527Patent fees, net
    
    
    959
    
    
    
    1,025
    
    
    
    1,198
    
    
    
    1,323
    
    
    
    1,785Goodwill
    
    
    449
    
    
    
    359
    
    
    
    359
    
    
    
    359
    
    
    
    359Total assets
    
    $
    12,460
    
    
    $
    40,477
    
    
    $
    34,684
    
    
    $
    26,848
    
    
    $
    132,536Current liabilities
Accounts payable
    
    
    401
    
    
    
    1,612
    
    
    
    1,770
    
    
    
    2,685
    
    
    
    6,490Accrued compensation payable
    
    
    137
    
    
    
    209
    
    
    
    510
    
    
    
    2,029
    
    
    
    2,891Accrued clinical study and research costs
    
    
    214
    
    
    
    148
    
    
    
    152
    
    
    
    603
    
    
    
    1,002Other accrued liabilities
    
    
    152
    
    
    
    70
    
    
    
    2
    
    
    
    102
    
    
    
    214Due to customers
    
    
    409
    
    
    
    135
    
    
    
    
    
    
    
    
    
    
    
    Allowance for sales returns
    
    
    
    
    
    
    205
    
    
    
    226
    
    
    
    337
    
    
    
    100Deferred income
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total current liabilities
    
    
    1,377
    
    
    
    2,379
    
    
    
    2,660
    
    
    
    5,756
    
    
    
    10,697Long-term liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    650
    
    
    
    100Total shareholders equity
    
    
    11,083
    
    
    
    38,098
    
    
    
    32,024
    
    
    
    20,442
    
    
    
    121,739Total liabilities and shareholders equity
    
    $
    12,460
    
    
    $
    40,477
    
    
    $
    34,684
    
    
    $
    26,848
    
    
    $
    132,536
 29




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ITEM 7.MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with
the Selected Financial Data and the accompanying financial statements and
the related notes included elsewhere in this filing. Overview We are a specialty pharmaceutical company engaged in the discovery,
development and commercialization of innovative therapeutic products to treat
the unmet medical needs of patients with debilitating conditions and
life-threatening diseases. Our current commercial and therapeutic focus is in
nephrology utilizing Hectorol®, our novel vitamin D hormone therapy, to treat
secondary hyperparathyroidism in patients with moderate to severe chronic
kidney disease and end-stage renal disease. Secondary hyperparathyroidism is a
disease characterized by excessive secretion of parathyroid hormone which, if
left untreated, can eventually result in cardiovascular disease, reduced immune
system function, muscle weakness and bone disease, including mineral loss and
fractures. Many patients with moderate to severe chronic kidney disease and
most end-stage renal disease patients suffer from this disease. Hectorol®, a
safe and effective vitamin D pro-hormone therapy in the management of secondary
hyperparathyroidism in moderate to severe chronic kidney disease and end-stage
renal disease, reduces elevated levels of parathyroid hormone while maintaining
consistent levels of vitamin D with a low incidence of adverse events. Vitamin
D therapies are currently used to treat patients with a variety of diseases,
including kidney disease, osteoporosis and psoriasis, and research has shown
that they may be useful in treating certain cancers such as prostate, breast
and colon. Our principal clinical development programs focus on chronic kidney
disease and hyperproliferative disorders such as cancer and psoriasis. From our inception in 1984, we have generated revenues primarily from the
sale of our products, and from our inception substantially all of our resources
have been dedicated to:  
    
    the development, patenting, pre-clinical testing, and clinical trials
of Hectorol® Capsules and Hectorol® Injection;
    
    the development of manufacturing processes for Hectorol® Capsules and Hectorol® Injection;
    
    pursuing U.S. regulatory approvals of Hectorol® Capsules and Hectorol® Injection;
    
    the sales and marketing associated with the launch of Hectorol® Capsules and Hectorol® Injection; and
    
    research and development and pre-clinical testing of other potential product candidates. Historically we have incurred losses since we began operating. In both the
third and fourth fiscal quarters of 2004, we generated profits from operations,
however, for the fiscal year ended June 30, 2004 we were unprofitable. As of
June 30, 2004 we had an accumulated deficit of approximately $54.7 million. Our
only sources of revenue have been:  
    
    from the launch of Hectorol® 2.5 mcg Capsules and Hectorol®
Injection;
    
    licensing fees associated with our early stage research
collaborations, which licenses have since expired; and
    
    fees from conducting incidental laboratory assay services. We estimate that total operating expenses will continue to increase in
fiscal 2005. Further, development of LR-103, BCI-202 and other product
candidates, or expansion of Hectorol® into other therapeutic areas, will
require significant, time-consuming and costly research and development,
pre-clinical testing and extensive clinical trials prior to submission of any
regulatory application for commercial use. We plan to continue pre-clinical
testing of LR-103 and BCI-202 and began Phase I clinical trials on LR-103 in
February 2004. The amount and timing of our operating expenses will depend on
many factors, including:  
    
    the extent to which Hectorol® Capsules and Hectorol® Injection obtain
expanded market acceptance; 30




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
    
    the costs of sales and marketing activities associated with Hectorol®
Capsules and Hectorol® Injection and commercialization strategies with
respect to Hectorol® 0.5 mcg Capsules;
    
    the success of our co-promotion results with Cardinal Health for the Hectorol® 0.5 mcg Capsules;
    
    the status of our research and development activities;
    
    the costs involved in preparing, filing, prosecuting, maintaining,
protecting and enforcing our patent claims and other proprietary rights;
    
    our ability to maintain our current manufacturing capabilities
through relationships with third parties or establish those capabilities
internally;
    
    technological and other changes in the competitive landscape; and
    
    evaluation of the commercial viability or potential of product
candidates, which could significantly affect future expenditures for
sales, marketing and product development. As a result, we believe that period-to-period comparisons of our financial
results are not necessarily meaningful. On June 14, 2004, we entered into a multi-year co-promotion agreement for
the launch and commercialization of Hectorol® 0.5 mcg Capsules with
nephrologists in pre-dialysis Stages 3 and 4 chronic kidney disease. Under the
terms of the agreement, Cardinal Health PTS, LLC will provide contract sales
force and medical communication services to support a specified level of
promotion. We will sell Hectorol® 0.5 mcg Capsules through its distribution
network and support the promotional effort through its nephrology focused sales
force with an additional specified level of investment. For its efforts,
Cardinal Health will receive a variable co-promotion fee based on the
performance of Hectorol® 0.5 mcg Capsule sales. The fee as a percentage of
Hectorol® 0.5 mcg Capsule revenue declines gradually over the term of the
agreement. Initial sales of Hectorol® 0.5mcg Capsules are planned for the first
quarter of fiscal 2005. Based on the terms of the variable co-promotion fee,
Cardinal Health rather than us bears a significant portion of the costs of the
product launch. As a result, we do not expect to realize any losses and
depending on the success of the launch in 2005, may not realize significant
profits in 2005. Critical Accounting Policies and Estimates Our significant accounting policies are described in Note 1 to the Notes
to the Financial Statements included elsewhere in this filing. Those financial
statements have been prepared in accordance with accounting principles
generally accepted in the U.S. The preparation of those financial statements
requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of
contingent liabilities. On an on-going basis, we evaluate our estimates,
including those related to our provision for sales returns and allowances,
allowance for doubtful accounts, and our estimate of excess and obsolete
inventory. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis of judgments regarding the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. Sales Returns and Allowances Revenue is recognized when product is shipped into the marketplace. When
revenue is recognized, we simultaneously record an estimate of various costs,
which reduce product sales. These costs include estimates for product returns,
chargebacks, rebates, and discounts. Estimates are based on a variety of
factors including historical return experience, rebate and chargeback
agreements, inventory levels at our wholesale customers, and estimated sales by
our wholesale customers to other third parties who have contracts with us.
Actual experience associated with any of these items may differ materially from
our estimates. Factors are reviewed that influence our estimates and, if
necessary, adjustments are made when we believe that actual product returns,
chargebacks, rebates, and discounts may differ from established reserves. 31




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Allowance for Doubtful Accounts An allowance is maintained for estimated losses resulting from the
inability of customers to make required payments. Credit terms are extended on
an uncollateralized basis primarily to wholesale drug distributors and
independent clinics throughout the U.S. Management specifically analyzes
accounts receivable, historical bad debts, customer credit-worthiness,
percentage of accounts receivable by aging category, and changes, if any, in
customer payment terms when evaluating the adequacy of the allowance for
doubtful accounts. If the financial condition of our customers were to
deteriorate, resulting in impairment in their ability to make payments,
additional allowances may be required. Our actual losses from uncollectible
accounts have been immaterial to date. Excess and Obsolete Inventory Inventories are stated at the lower of cost or market, with cost
determined on the first-in, first-out method. In evaluating whether inventory
is stated at the lower of cost or market, management considers such factors as
the amount of inventory on hand, expiration dates, and the estimated time to
sell such inventory. As appropriate, provisions are made to reduce inventories
to their net realizable value. Cost of inventories that potentially may not
sell prior to expiration or are deemed of no commercial value have been
written-off when identified. Cost of Inventory Finished goods inventories are recorded at standard cost and reflect the
average actual costs. Hectorol® Injection inventory is manufactured and
purchased under a contract with calendar year terms that specifies base price
per unit and the volume rebate scale. Based on annual forecasts and the
contract terms, the average annual net cost per unit is calculated and
recognized for finished goods inventory and cost of product sales. The actual
rebate received may differ based upon differences between our forecasted
purchases and actual purchases. Income Taxes We currently have significant deferred tax assets, resulting primarily
from net operating loss carryforwards and tax credit carryforwards. These
deferred tax assets may reduce taxable income in future periods. A valuation
allowance is required when it is more likely than not that all or a portion of
a deferred tax asset will not be realized. Forming a conclusion that a
valuation allowance is not needed is difficult when there are cumulative losses
in recent years, as cumulative losses weigh heavily in the overall assessment
of the need for a valuation allowance. We expect to continue to maintain a full valuation allowance on future tax
benefits until an appropriate level of profitability is sustained. Achieving
sufficient profitability is dependent upon success in our commercial

operations, including growth in sales of Hectorol® and our historical
performance of achieving and sustaining profitability. At the point in which we
would have realized a cumulative profit over a period of three consecutive
fiscal years, we would expect to have a sufficient basis for concluding that
some or all of the deferred tax assets would be realized and we may reduce some
or all of the valuation allowance. We would report any reduction in the
valuation allowance as an income tax benefit in our statement of operations. During any period in which we continue to maintain a full valuation
allowance against deferred tax assets, we would generally not report any income
tax provision in our statement of operations during a profitable period and
would not report any income tax benefit during a loss period. If we reach the
point such that we no longer require a valuation allowance on future tax
benefits, we would expect subsequent periods would reflect a tax provision in
the statement of operations based on the statutory income tax rates. Results of Operations for Fiscal Year Ended June 30, 2004 compared to June 30,
2003 Product sales of Hectorol® (Injection and Capsules) were $43,604,628 for
the year ended June 30, 2004, an increase of $24,086,354, or 123%, from the
year ended June 30, 2003. Sales of Hectorol® Injection were $38,749,562 for
the year ended June 30, 2004, an increase of $23,627,338, or 156%, from the
year ended June 30, 2003. The increase in sales of Hectorol® Injection for
fiscal year 2004 was primarily the result of: 32




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
    
    The efforts of an expanded and experienced sales force and
contract initiatives with national dialysis companies (approximately
$16.1 million);
    
    A price increase effective July 1, 2003 (approximately $7.4 million);
    
    The implementation of new and effective marketing programs; and
    
    Manufacturing constraints in the first and second quarters of 2003. Hectorol® Capsules sales were $4,855,066 for the year ended June 30, 2004,
compared to $4,396,050 for the year ended June 30, 2003. The increase was due
primarily to a price increase implemented in July 2003, a decrease in product
returns, and prescription growth. Gross margin on sales of Hectorol® was $32,144,668, or 74% of product
sales, for the year ended June 30, 2004, compared to $12,535,099, or 64% of
product sales for the year ended June 30, 2003. Gross margins for Hectorol®
Injection and Hectorol® Capsules were 73% and 81% respectively, for 2004
compared to 59% and 83%, respectively, for 2003. The increase in gross margins
was due to increased sales levels and reductions in manufacturing validation
costs primarily for Hectorol® Injection. Research and development (R&D) expense was $9,107,472 for the year ended
June 30, 2004, an increase of $2,437,441, or 37%, from the year ended June 30,
2003. The increase in R&D expense was primarily due to purchases of LR-103
active pharmaceutical ingredients for clinical and preclinical research of
approximately $1.0 million, personnel expenses primarily for senior management
additions of approximately $0.5 million, expansion of our clinical support
activities of approximately $0.7 million, and for consulting support of
approximately $0.3 milllion. Selling, general and administrative (SG&A) expense was $24,833,152 for the
year ended June 30, 2004, an increase of $6,715,716, or 37%, from the year
ended June 30, 2003. The increase in SG&A expense was primarily due to the
planned expansion of our sales organization representing $2.5 million,
marketing promotional programs representing approximately $1.7 million,
consulting and marketing research expenses related to strategic business
activities of approximately $0.7 million, recruitment fees and compensation
expense for our board of directors including non-cash stock option expense of
approximately $0.4 million, severance expenses for the former Vice President of
Finance of approximately $0.4 million, an increase in management incentive
compensation of approximately $0.4 million, expenses associated with the
recruitment, hiring, and relocation of the new Vice President of Finance of
approximately $0.2 million, and professional legal fees of approximately $0.2
million principally related to an increase in contractual, personnel and
corporate governance activity. Interest income was $274,795 for the year ended June 30, 2004, a decrease
of $299,600 from the year ended June 30, 2003. The decrease was primarily due
to lower average cash and marketable securities balances for the year ended
June 30, 2004, as well as a decline in yield on our investments due to market
conditions. Results of Operations for Fiscal Year Ended June 30, 2003 compared to June 30,
2002 Product sales of Hectorol® increased to $19,518,274 for the year ended
June 30, 2003, from $14,990,749 for the year ended June 30, 2002. This
increase resulted from increased sales of Hectorol® Injection offset by a
decrease in sales of Hectorol® Capsules. Hectorol® Injection, launched in
August 2000, generated sales of $15,122,224 during the year ended June 30, 2003
compared to $9,448,115 in the year ended June 30, 2002, reflecting increased
market acceptance in spite of our inability to supply Hectorol® Injection for
approximately three months between December 2002 and March 2003. Hectorol®
Capsule sales were $4,396,050 for the year ended June 30, 2003, compared to
$5,542,634 for the year ended June 30, 2002. Fiscal year 2002 Hectorol® Capsule
revenues benefited from a temporary supply shortage of the competitive drug
Rocaltrol between August and December 2001. Gross margins on product sales were $12,535,099, or 64% of product sales,
for the year ended June 30, 2003 compared to $11,434,062, or 76% of product
sales, for the year ended June 30, 2002. The gross margin on Hectorol®
Injection sales was 59% and 71% for the years ended June 30, 2003 and 2002,
respectively. The gross margin on Hectorol® Capsule sales was 83% and 85% for
the years ended June 30, 2003 and 2002, respectively. Overall gross margins
were lower as a percentage of sales in fiscal year 2003 compared to fiscal year
2002 due to an increased cost of Hectorol® Injection supplied by Draxis Pharma
Inc. as compared to Akorn, Inc. of approximately 34%, increased spending for
quality assurance of approximately $0.5 million, and costs associated with the
validation activities for the Hectorol® Injection manufacturing processes of
approximately $1.1 million. 33




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##### Table of Contents



R&D expense was $6,670,031 in the year ended June 30, 2003, compared to
$6,772,553 in the year ended June 30, 2002. The $102,522 decrease is
attributable to a decrease in clinical support staff offset by consulting
expenses related to validating computer network systems used in operating
clinical software and internal costs to file a supplemental new drug
application (NDA) for Hectorol® 0.5mcg Capsules. SG&A expense was $18,117,436 for the year ended June 30, 2003, an increase
of $5,294,860 from the year ended June 30, 2002. The increase was primarily
due to market research and promotional spending for Hectorol® of approximately
$2.7 million, the personnel expenses related to the recruitment, hiring and
relocation of senior management personnel of approximately $2.0 million,
insurance premiums for property, casualty and liability policies of
approximately $0.4 million and legal fees of approximately $0.3 million. Interest income decreased $682,776 to $574,395 in the year ended June 30,
2003, from $1,257,171 in the year ended June 30, 2002. The decrease was due to
lower average cash and marketable security balances for the year ended June 30,
2003, as well as a decline in yield on our investments. Research and Development Research and development efforts are focused on developing and evaluating
the clinical utility of Hectorol®, LR-103, and BCI-202 in secondary
hyperparathyroidism and hyperproliferative diseases, as well as developing
additional products and product candidates. All research and development costs
are expensed as incurred, which include, but are not limited to, personnel, lab
supplies, preclinical and clinical studies, active ingredients for use in
clinical trial drugs, manufacturing costs, sponsored research at other labs,
consulting, and research-related overhead. For the years ended June 30, 2004,
June 30, 2003, and June 30, 2002, we have spent $9,107,472, $6,670,031, and
$6,772,552, respectively, on R&D expenses. The major portion of these expenses
were for personnel in research, clinical development, clinical support and
regulatory compliance. In addition, we purchased approximately $1.0 million of
LR-103 in 2004 for use in preclinical research and clinical trials. The expense of research and clinical trial projects has not, on a project
basis, been significant in 2004. The addition of new projects and trials and
the future development of LR-103 and BCI 202 may have a material impact on our
future operations, financial position, and liquidity. The impact of these
projects, if any, are difficult to predict due to their early stage of progress
and uncertainty. Liquidity and Capital Resources We require cash to fund our operations, make capital expenditures and for
strategic investments. In May and June 2004, we completed an offering of five
millon shares of common stock which resulted in approximately $101.4 of net
proceeds. Our cash and cash equivalents, marketable securities and noncurrent
marketable securities balances as of June 30, 2004 were $45,325,671,
$68,776,698 and $908,376, respectively, totaling $115,010,745, an increase of
$97,407,300 from the June 30, 2003 balances. Our cash and
investments are invested in highly
liquid, interest-bearing, investment grade and government securities in order
to preserve principal. Cash used in operating activities was $4,120,868 for the year ended June
30, 2004 primarily to fund the net operating loss of $1,521,161, for inventory
purchases of our products and to pay liabilities, principally management bonus
compensation related to the fiscal year ended June 30, 2003. We used $498,506 in cash for the purchase of capital assets, primarily
computer and laboratory equipment. Our cash position was enhanced by
$1,014,932 and $184,349 primarily from the exercise of stock options and for
vehicle sales that were leased back, respectively. Our cash and investments to-date and our profits in the third and fourth
quarters of the fiscal year ended June 30, 2004 have been used to fund our
operations and capital needs. We anticipate that annual expenditures for our
active pharmaceutical ingredient, contract manufacturing, research projects,
development of our current and planned products, regulatory activity, growth of
our sales force, expansion of our marketing programs and development of the
infrastructures to accommodate the planned growth and development, will
increase in future years. Although we believe that our current cash and
investments and our planned profits from product sales will be adequate to
sustain our operations at least until June 30, 2005, there can be no assurance
that we will be able to maintain profitability or positive 34




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##### Table of Contents



cash flow from operations. We may require additional financing in the
future to finance strategic investments, capital acquisitions and anticipated
growth and development of existing and new products. As in the past, we plan
to finance these activities largely through equity or debt financing and/or
strategic or corporate collaborations. There can be no assurance that
additional equity or debt financing or corporate collaborations will be
available on terms acceptable to us, if at all. Our failure to maintain
profitability or to raise additional capital on acceptable terms if and when
needed could have a material adverse effect on our business, financial
condition and results of operations. We currently have no internal manufacturing capabilities. We rely on third
party contractors to produce our active pharmaceutical ingredient and for the
subsequent manufacturing and packaging of finished drug products. We purchase
our active pharmaceutical ingredient from a sole supplier, although we are
currently in the process of obtaining regulatory approval for an additional
supplier. In addition, we rely on one manufacturer for Hectorol® Injection,
one supplier to formulate Hectorol® Capsules and another supplier to package
Hectorol® Capsules. Although other manufacturers, suppliers, formulators and
vendors may be available to provide these goods and services to us, any change
in suppliers could cause a delay in manufacturing and a possible loss of sales,
which would affect operating results adversely. All of our suppliers have
FDA-inspected facilities that are required to operate under current Good
Manufacturing Practices regulations established by the FDA. These regulations
govern all stages of the drug manufacturing process and are intended to assure
that drugs produced will have the identity, strength, quality and purity
represented in their labeling for all intended uses. If we were to establish a
our own manufacturing facility, we would need additional funds and would have
to hire and train additional personnel and comply with the extensive
regulations applicable to the facility. We believe that our relationships with
our suppliers are good. We lease approximately 34,000 square feet of office and laboratory space
in Middleton, Wisconsin. In June 2004, we entered into a new lease for new and
existing space for approximately the same square footage within the current
facility. This lease will become effective on our date of occupancy of the new
space and has a term of five years. We expect to occupy the new space before
the end of calendar year 2004. In conjunction with the construction of the new
space, we plan to incur some costs related to leasehold improvements, furniture
and computer equipment. The cash required for these planned capital purchases
is not expected to have a significant negative impact on the existing cash and
investment balances. At June 30, 2004, we had state tax net operating loss carryforwards of
approximately $46,036,000 and state research and development tax credit
carryforwards of approximately $756,000, which will begin expiring in 2006 and
2012, respectively. We also had federal net operating loss carryforwards of
approximately $50,872,000 and research and development tax credit carryforwards
of approximately $2,394,000, which will begin expiring in 2011 and 2013,
respectively. Contractual Obligations and Commitments As outlined in Note 6 of the Notes to Financial Statements included in
this annual report on Form 10-K, we have entered into various contractual
obligations and commercial commitments. The following table summarizes these
contractual obligations as of June 30, 2004: Less Than
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    1 Year
    
    2-3 Years
    
    4-5 Years
    
    5 YearsPurchase Commitment (1)
    
    $
    9,042,714
    
    
    $
    9,042,714
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating Lease Obligations (2)
    
    
    5,032,481
    
    
    
    1,061,824
    
    
    
    2,103,499
    
    
    
    1,602,494
    
    
    
    264,664Capital Lease Obligations (3)
    
    
    123,998
    
    
    
    55,876
    
    
    
    68,122
    
    
    
    
    
    
    
    Total
    
    $
    14,199,193
    
    
    $
    10,160,414
    
    
    $
    2,171,621
    
    
    $
    1,602,494
    
    
    $
    264,464
  (1)
    
    Purchase commitments for purchases of the active pharmaceutical
ingredients used in Hectorol® production and clinical and preclinical
research, commitments for the manufacture of Hectorol® Injection and
Hectorol® Capsules, and other service commitments, including consulting
contracts, in the ongoing operations of the company.(2)
    
    Represents primarily office and laboratory facilities in Middleton,
Wisconsin and operating leases, primarily for fleet vehicles used by
field personnel.(3)
    
    Represents fleet vehicles used by field personnel that were sold and
leased back. 35




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Recent Accounting Pronouncements In December 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation 46R (FIN 46R), a revision to Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46R clarifies some of the
provisions of FIN 46 and exempts certain entities from its requirements. FIN
46R is effective at the end of the first interim reporting period ending after
March 15, 2004. Entities that have adopted FIN 46 prior to this effective date
can continue to apply the provisions of FIN 46 until the effective date of FIN
46R or the early adoption of FIN 46R. The adoption of FIN 46 and FIN 46R had no
impact on our financial statements. In March 2004, the FASB ratified the recognition and measurement guidance
and certain disclosure requirements for impaired securities as described in
Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments. The
recognition and measurement guidance will be applied to other-than-temporary
impairment evaluations in reporting periods beginning with our first fiscal
quarter 2005. We do not believe the adoption of the recognition and measurement
guidance in EITF Issue No. 03-1 will have a material impact on our financial
statements. 
 ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our sales from inception to date have been made solely to U.S. customers
and, as a result, we have not had any exposure to factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
However, in future periods, we expect to sell in foreign markets, including
Europe and Asia. Because our sales are made in U.S. dollars, a strengthening of
the U.S. dollar could make our products less competitive in foreign markets. As of June 30, 2004, we held $68,776,698 of short-term marketable
securities and $908,376 of long-term marketable securities. The investments
have been made for investment (as opposed to trading) purposes. Interest rate
risk with respect to our investments is not significant because all such
investments are U.S. dollar denominated and are:  
    
    short-term investments, which are by their nature less sensitive to
interest rate movements, or  
    
    less than $1 million of our investments have maturities in excess of
one year and those securities are expected to be held to maturity,
thereby eliminating the risks associated with interest rate changes. 36




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##### Table of Contents



ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA BONE CARE INTERNATIONAL, INC. INDEX TO FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    
    38Balance Sheets as of June 30, 2003 and 2004
    
    
    39Statements of Operations for the Years Ended June 30, 2002, 2003 and 2004
    
    
    40Statements of Shareholders Equity for the Years Ended June 30, 2002, 2003 and 2004
    
    
    41Statements of Cash Flows for the Years Ended June 30, 2002, 2003 and 2004
    
    
    42Notes to the Financial Statements
    
    
    43
 37




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders of
Bone Care International, Inc.: We have audited the accompanying balance sheets of Bone Care
International, Inc. as of June 30, 2004 and 2003, and the related statements of
operations, shareholders equity, and cash flows for each of the three years in
the period ended June 30, 2004. Our audits also included the financial
statement schedule included in Item 15. These financial statements and
financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material
respects, the financial position of Bone Care International, Inc. as of June
30, 2004 and 2003, and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 2004, in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein. Deloitte & Touche LLP Milwaukee, Wisconsin
September 8, 2004 38




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##### Table of Contents



BONE CARE INTERNATIONAL, INC.
BALANCE SHEETS
As of June 30, 2003 and 2004 ASSETS
    
    2003
    
    2004Current assets:Cash and cash equivalents
    
    $
    3,065,218
    
    
    $
    45,325,671Marketable securities
    
    
    13,624,826
    
    
    
    68,776,698Accounts receivable, net
    
    
    2,814,753
    
    
    
    4,732,698Inventory
    
    
    2,080,604
    
    
    
    6,785,288Other current assets
    
    
    778,725
    
    
    
    2,336,362Total current assets
    
    
    22,364,126
    
    
    
    127,956,717Marketable
securities - noncurrent
    
    
    913,401
    
    
    
    908,376Property, plant, and equipment,
net
    
    
    1,889,000
    
    
    
    1,526,638Patent fees, net
    
    
    1,322,670
    
    
    
    1,785,045Goodwill
    
    
    359,165
    
    
    
    359,165$
    26,848,362
    
    
    $
    132,535,941LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,684,838
    
    
    $
    6,490,488Accrued compensation payable
    
    
    2,028,783
    
    
    
    2,890,728Accrued clinical study and research costs
    
    
    603,048
    
    
    
    1,001,818Other accrued liabilities
    
    
    102,601
    
    
    
    214,010Allowance for sales returns
    
    
    336,620
    
    
    
    100,000Total current liabilities
    
    
    5,755,890
    
    
    
    10,697,044Long-term
liabilities
    
    
    649,880
    
    
    
    100,388Commitments and Contingencies (Note 6)
    
    
    
    
    
    
    Shareholders equity:Preferred stockauthorized 2,000,000 shares of $.001 par value; none
issued
    
    
    
    
    
    
    Common stockauthorized 28,000,000 shares of no par value; issued and
outstanding 14,218,522 and 19,395,585 shares as of June 30,
2003 and
2004,
respectively
    
    
    73,640,801
    
    
    
    178,868,933Unearned
compensation
    
    
    
    
    
    
    (2,411,054
    )Accumulated deficit
    
    
    (53,198,209
    )
    
    
    (54,719,370
    )Total shareholders equity
    
    
    20,442,592
    
    
    
    121,738,509$
    26,848,362
    
    
    $
    132,535,941
 The accompanying notes to the financial statements are an integral part of these statements. 39




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##### Table of Contents



BONE CARE INTERNATIONAL, INC. STATEMENTS OF OPERATIONS Years Ended June 30, 2002, 2003 and 2004 2002
    
    2003
    
    2004Product sales
    
    $
    14,990,749
    
    
    $
    19,518,274
    
    
    $
    43,604,628Cost and expenses:Cost of product sales
    
    
    3,556,687
    
    
    
    6,983,175
    
    
    
    11,459,960Research and development
    
    
    6,772,552
    
    
    
    6,670,031
    
    
    
    9,107,472Selling, general and administrative
    
    
    12,822,576
    
    
    
    18,117,436
    
    
    
    24,833,15223,151,815
    
    
    
    31,770,642
    
    
    
    45,400,584Loss from operations
    
    
    (8,161,066
    )
    
    
    (12,252,368
    )
    
    
    (1,795,956
    )Interest income, net
    
    
    1,257,171
    
    
    
    574,395
    
    
    
    274,795Loss before income tax
    
    
    (6,903,895
    )
    
    
    (11,677,973
    )
    
    
    (1,521,161
    )Income taxes
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (6,903,895
    )
    
    $
    (11,677,973
    )
    
    $
    (1,521,161
    )Net loss per common sharebasic and diluted
    
    $
    (0.49
    )
    
    $
    (0.82
    )
    
    $
    (0.10
    )Shares used in computing basic and diluted
net loss per common share
    
    
    14,084,313
    
    
    
    14,174,594
    
    
    
    14,868,525
 The accompanying notes to the financial statements are an integral part of these statements. 40




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##### Table of Contents



BONE CARE INTERNATIONAL, INC. STATEMENTS OF SHAREHOLDERS EQUITY Years Ended June 30, 2002, 2003, and 2004 AccumulatedOtherUnearned
    
    Accumulated
    
    ComprehensiveShares
    
    Common Stock
    
    Compensation
    
    Deficit
    
    Income (loss)
    
    TotalBalance at June 30, 2001
    
    
    13,955,372
    
    
    $
    72,634,080
    
    
    $
    
    
    
    $
    (34,616,341
    )
    
    $
    80,366
    
    
    $
    38,098,105Net loss for the year ended
June 30, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,903,895
    )
    
    
    
    
    
    
    (6,903,895
    )Unrealized loss on securities
during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,409
    )
    
    
    (26,409
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,930,304
    )Issuance of shares under
stock option plan
    
    
    201,400
    
    
    
    856,075
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    856,075Balance at June 30, 2002
    
    
    14,156,772
    
    
    
    73,490,155
    
    
    
    
    
    
    
    (41,520,236
    )
    
    
    53,957
    
    
    
    32,023,876Net loss for the year ended
June 30, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,677,973
    )
    
    
    
    
    
    
    (11,677,973
    )Unrealized loss on securities
during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (53,957
    )
    
    
    (53,957
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,731,930
    )Issuance of shares under
stock option plan
    
    
    61,600
    
    
    
    150,646
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,646Issuance of stock awards
    
    
    150
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at June 30, 2003
    
    
    14,218,522
    
    
    
    73,640,801
    
    
    
    
    
    
    
    (53,198,209
    )
    
    
    
    
    
    
    20,442,592Net loss for the year ended
June 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,521,161
    )
    
    
    
    
    
    
    (1,521,161
    )Issuance of restricted stock units to
executives
    
    
    
    
    
    
    2,428,800
    
    
    
    (2,428,800
    )
    
    
    
    
    
    
    
    
    
    
    Recognition of restricted stock
compensation expense
    
    
    
    
    
    
    
    
    
    
    17,746
    
    
    
    
    
    
    
    
    
    
    
    17,746Acceleration of stock option
vesting
    
    
    
    
    
    
    350,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350,500Issuance of common stock, net of
offering costs
    
    
    5,000,000
    
    
    
    101,433,258
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101,433,258Issuance of shares under
stock option plan
    
    
    177,013
    
    
    
    1,014,932
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,014,932Issuance of stock awards
    
    
    50
    
    
    
    642
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    642Balance at June 30, 2004
    
    
    19,395,585
    
    
    $
    178,868,933
    
    
    $
    (2,411,054
    )
    
    $
    (54,719,370
    )
    
    $
    
    
    
    $
    121,738,509
 The accompanying notes to the financial statements are an integral part of these statements. 41




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##### Table of Contents



BONE CARE INTERNATIONAL, INC. STATEMENTS OF CASH FLOWS Years Ended June 30, 2002, 2003, and 2004 2002
    
    2003
    
    2004Cash flows from operating activities:Net loss
    
    $
    (6,903,895
    )
    
    $
    (11,677,973
    )
    
    $
    (1,521,161
    )Adjustments to reconcile net loss to net cash used in operating
activitiesDepreciation of fixed assets
    
    
    720,138
    
    
    
    771,790
    
    
    
    824,083Amortization of patents
    
    
    177,720
    
    
    
    152,451
    
    
    
    179,475Inventory write-off
    
    
    165,817
    
    
    
    11,144
    
    
    
    199Loss on disposal of fixed assets
    
    
    4,041
    
    
    
    
    
    
    
    800Loss on write-off of patents
    
    
    
    
    
    
    63,167
    
    
    
    Equity based compensation expense
    
    
    
    
    
    
    
    
    
    
    368,888Changes in assets and liabilities(Increase) decrease in accounts receivable
    
    
    (938,269
    )
    
    
    1,470,816
    
    
    
    (1,917,945
    )(Increase) decrease in inventory
    
    
    (454,712
    )
    
    
    7,721
    
    
    
    (4,704,883
    )(Increase) decrease in other current assets
    
    
    309,507
    
    
    
    (3,129
    )
    
    
    (1,557,637
    )Increase in accounts payable
    
    
    157,122
    
    
    
    915,173
    
    
    
    3,805,650Increase in current liabilities
    
    
    102,231
    
    
    
    2,070,479
    
    
    
    1,321,664Increase (decrease) in long term liabilities
    
    
    
    
    
    
    649,880
    
    
    
    (649,880
    )Increase (decrease) in allowance for sales returns
    
    
    21,100
    
    
    
    110,520
    
    
    
    (236,620
    )Net cash used in operating activities
    
    
    (6,639,200
    )
    
    
    (5,457,961
    )
    
    
    (4,087,367
    )Cash flows from investing activities:Maturities of marketable securities
    
    
    7,320,964
    
    
    
    7,564,508
    
    
    
    17,375,000Purchase of marketable securities
    
    
    
    
    
    
    
    
    
    
    (72,521,847
    )Proceeds from the sale of property, plant, and equipment
    
    
    
    
    
    
    
    
    
    
    35,985Purchase of property, plant and equipment
    
    
    (1,006,059
    )
    
    
    (875,905
    )
    
    
    (498,506
    )Patent
Fees
    
    
    (350,649
    )
    
    
    (340,039
    )
    
    
    (641,850
    )Net cash (used) provided in investing activities
    
    
    5,964,256
    
    
    
    6,348,564
    
    
    
    (56,251,218
    )Cash flows from financing activities:Proceeds from issuance of common stock, net
    
    
    
    
    
    
    
    
    
    
    101,433,258Proceeds from exercise of stock options
    
    
    856,075
    
    
    
    150,646
    
    
    
    1,014,932Proceeds
from capital lease obligation from sale-leaseback
    
    
    
    
    
    
    
    
    
    
    184,349Repayment of
capital lease obligation from sale-leaseback
    
    
    
    
    
    
    
    
    
    
    (33,501
    )Net cash provided by financing activities
    
    
    856,075
    
    
    
    150,646
    
    
    
    102,599,038Net increase in cash and cash equivalents
    
    
    181,131
    
    
    
    1,041,249
    
    
    
    42,260,453Cash and Cash Equivalents at beginning of year
    
    
    1,842,838
    
    
    
    2,023,969
    
    
    
    3,065,218Cash and Cash Equivalents at end of year
    
    $
    2,023,969
    
    
    $
    3,065,218
    
    
    $
    45,325,671
 The accompanying notes to the financial statements are an integral part of these statements. 42




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BONE CARE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS Years Ended June 30, 2002, 2003 and 2004 (1) Summary of Significant Accounting Policies Description of Business Bone Care International, Inc. (Bone Care, we, or the Company) is a
specialty pharmaceutical company engaged in the discovery, development and
commercialization of innovative therapeutic products to treat the unmet medical
needs of patients with debilitating conditions and life-threatening diseases.
Our current commercial and therapeutic focus is in nephrology utilizing
Hectorol®, our novel vitamin D hormone therapy, to treat secondary
hyperparathyroidism in patients with moderate to severe chronic kidney disease
and end-stage renal disease. Vitamin D therapies are currently used to treat
patients with a variety of diseases, including kidney disease, osteoporosis and
psoriasis, and research has shown that they may be useful in treating certain
cancers such as prostate, breast and colon. In June 1999, we received approval
from the U.S. Food and Drug Administration for Hectorol® 2.5 mcg Capsules, and
in April 2000 we received approval for Hectorol® Injection, for the treatment
of secondary hyperparathyroidism in end-stage renal disease. In April 2004, we
received approval from the U.S. Food and Drug Administration for Hectorol® 0.5
mcg Capsules for the treatment of secondary hyperparathyroidism in moderate to
severe chronic kidney disease. Revenue Recognition We record sales and the related costs of Hectorol® Capsules and Hectorol®
Injection based on shipments to customers reduced by the estimated future
returns and allowances. Revenue is recognized at the time of shipment as risk
of loss has transferred to the customer, delivery has occurred, and
collectibility is reasonably certain. Customers have a right to return product
in accordance with our returns policy. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 48, Revenue Recognition When Right
of Return Exists, our June 30, 2003 and June 30, 2004 balance sheets include
an accrual of $336,620 and $100,000, respectively, for the estimated amount of
future returns, based on historical experience related to Hectorol® Capsules
and Hectorol® Injection. Segments Our current commercial focus is in nephrology utilizing Hectorol®, our
novel vitamin D hormone therapy, to treat secondary hyperparathyroidism in
patients with moderate to severe chronic kidney disease and end-stage renal
disease. We currently derive our revenues from two products, Hectorol®
Injection and Hectorol® 2.5 mcg Capsules. Hectorol® 0.5 mcg Capsules were
approved by the FDA in April 2004. As of June 30, 2004 no product sales for
Hectorol® 0.5 mcg Capsules have been recognized. Revenue performance by
product is as follows: Years EndedJune 30,2002
    
    2003
    
    2004Hectorol® Injection
    
    $
    9,448,115
    
    
    $
    15,122,224
    
    
    $
    38,749,562Hectorol® Capsules 2.5mcg
    
    
    5,542,634
    
    
    
    4,396,050
    
    
    
    4,855,066$
    14,990,749
    
    
    $
    19,518,274
    
    
    $
    43,604,628
 43




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BONE CARE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS(Continued) Years Ended June 30, 2002, 2003 and 2004 Cash, Cash Equivalents and Marketable Securities Highly liquid investments with original maturities of ninety days or less
at the time of purchase are considered to be cash equivalents. Other highly
liquid marketable securities with remaining maturities of one year or less at
the balance sheet date are classified as marketable securities. Bone Care
classifies its investment securities as held to maturity when management has
the positive intent and ability to hold the securities to maturity. All other
investment securities are classified as available for sale. Those investments
classified as available-for-sale are carried in the balance sheet at fair
value, with unrealized gains and losses recorded within accumulated other
comprehensive income, net of tax. Those investments classified as held to
maturity are carried in the balance sheet at amortized cost, net of unamortized
discounts or premiums. Dividends, interest income and amortization of discounts
and premiums are recorded in current earnings. Investments are considered to be impaired when a decline in fair value is
judged to be other than temporary. If the cost of an investment exceeds its
fair value, we evaluate, among other factors, general market conditions, the
duration and extent to which fair value is less than cost, and our intent and
ability to hold the investment. Once a decline in fair value is determined to
be other than temporary, an impairment charge is recorded and a new cost basis
in the investment is established. In March 2004, the FASB ratified the recognition and measurement guidance
and certain disclosure requirements for impaired securities as described in
Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments. The
recognition and measurement guidance will be applied to other-than-temporary
impairment evaluations in reporting periods beginning with our first fiscal
quarter 2005. We do not believe the adoption of the recognition and measurement
guidance in EITF Issue No. 03-1 will have a material impact on our financial
statements. Accounts Receivable Accounts receivable is stated net of allowance for doubtful accounts of
$111,200 and $72,070 at June 30, 2003 and June 30, 2004, respectively. Inventory Inventory is stated at the lower of cost or market; cost is determined by
the first-in, first-out method. Inventory consists of: June 30,2003
    
    2004Raw materials
    
    $
    1,293,329
    
    
    $
    1,659,734Work-in-process
    
    
    182,998
    
    
    
    89,388Finished goods
    
    
    604,277
    
    
    
    5,036,166$
    2,080,604
    
    
    $
    6,785,288
 We periodically reviews our inventory carrying levels. During fiscal years
2002, 2003 and 2004, we wrote-off $165,817, $11,144 and $199, respectively, of
inventory representing amounts, which we estimated would not be sold prior to
expiration. 44




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BONE CARE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS(Continued) Years Ended June 30, 2002, 2003 and 2004 Property, Plant and Equipment We periodically evaluate the carrying value of property and equipment in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. Long-lived assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. If the expected future undiscounted cash flows are less than the
carrying amount of the asset, a loss is recognized for the differences between
the fair value and the carrying value of the asset. Property, plant and
equipment consisted of the following: June 30,
    
    June 30,2003
    
    2004Leasehold Improvements
    
    $
    588,632
    
    
    $
    588,632Furniture and Fixtures
    
    
    545,547
    
    
    
    524,455Machinery and Other Equipment
    
    
    3,100,108
    
    
    
    3,502,2214,234,287
    
    
    
    4,615,308Less: Accumulated Depreciation
    
    
    (2,345,287
    )
    
    
    (3,088,670
    )$
    1,889,000
    
    
    $
    1,526,638
 Depreciation and Amortization Depreciation and amortization are provided for in amounts sufficient to
relate the cost of depreciable assets to operations over their estimated
service lives. Accelerated methods of depreciation are used for financial
statement and income tax reporting purposes for all asset classes except for
leasehold improvements, which are depreciated based on straight-line for
financial statement reporting and accelerated methods for income tax reporting.
The cost of property, plant and equipment are depreciated over the following
estimated useful lives: Asset classification
    
    Estimated useful lifeMachinery, furniture, and fixtures
    
    37 yearsLeasehold improvements
    
    Lesser of 5 years or remaining leasehold period
 Intangible Assets Legal costs incurred to register patents are capitalized when incurred and
are amortized on a straight line basis over the life of the patent. We
continuously evaluate whether events and circumstances have occurred that
indicate the remaining estimated useful life of intangibles may warrant
revision or that the remaining balance of intangibles may not be recoverable.
If the future undiscounted cash flows are less than the carrying value, a loss
is recognized for the difference between the fair value and the carrying value
of the intangible asset. The cost and accumulated amortization for patents at
June 30, 2003 was $2,454,622 and $1,131,952, respectively. The cost and
accumulated amortization for patents at June 30, 2004 was $3,096,472 and
$1,311,427, respectively. The average remaining useful life of our patents as
of June 30, 2004 was approximately 10.7 years. The aggregate amounts of anticipated amortization of patent fees for each
of the next five fiscal years and thereafter are as follows: Year2005
    
    $
    201,9282006
    
    
    200,6502007
    
    
    190,6112008
    
    
    189,2832009
    
    
    169,201Thereafter
    
    
    833,372Total
    
    $
    1,785,045
 45




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BONE CARE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS(Continued) Years Ended June 30, 2002, 2003 and 2004 The Company evaluates goodwill in accordance with SFAS No. 142, Goodwill
and Other Intangible Assets. Under SFAS No. 142, an assessment of fair value
is used to test for impairment of goodwill on an annual basis or when
circumstances indicate a possible impairment. The Company performed the annual
assessment on June 30, 2002, 2003, and 2004 and found no instances of
impairment. Shipping and Handling Costs Shipping and handling costs associated with product sales are included in
cost of sales. Research and Development Costs Materials, labor and overhead expenses related to research and development
projects are charged to operations as incurred. Stock-based Compensation Stock-based compensation related to employees and non-employee directors
is recognized using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and thus there is no compensation expense for options granted with exercise
prices equal to the fair value of our common stock on the date of the grant.
Restricted stock awards are valued at the fair value of our common stock on the
date of grant and reflected in the equity section as part of common stock.
Compensation expense is recognized for restricted stock awards on a
straight-line basis over the vesting period of the entire award with the
balance of unearned compensation reflected in the equity section of the balance
sheet. For disclosure purposes only under SFAS No. 123, Accounting for
Stock-Based Compensation, the Black-Scholes option pricing model was used to
calculate the fair value of stock options using the following weighted-average
assumptions: 2002
    
    2003
    
    2004Risk-free interest rate
    
    
    4.1
    %
    
    
    3.4
    %
    
    
    3.6
    %Expected market price volatility factor
    
    
    0.60
    
    
    
    0.62
    
    
    
    0.67Weighted average expected life
    
    6.0 years
    
    6.0 years
    
    6.0 years
 No dividends are expected to be paid. The effect on net loss and net loss per share if we had applied the fair
value recognition provisions of SFAS 123, Accounting for Stock-Based
Compensation, to the stock options issued under these plans was as follows: 2002
    
    2003
    
    2004Net loss as reported
    
    $
    (6,903,895
    )
    
    $
    (11,677,973
    )
    
    $
    (1,521,161
    )Compensation expense in reported
net income
    
    
    
    
    
    
    
    
    
    
    368,888Less pro forma compensation expense
    
    
    (1,054,582
    )
    
    
    (1,656,210
    )
    
    
    (3,831,247
    )Pro forma net loss
    
    $
    (7,958,477
    )
    
    $
    (13,334,183
    )
    
    $
    (4,983,520
    )Net loss per sharebasic and diluted:As reported
    
    $
    (0.49
    )
    
    $
    (0.82
    )
    
    $
    (0.10
    )Pro forma
    
    $
    (0.57
    )
    
    $
    (0.94
    )
    
    $
    (0.34
    )
 46




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BONE CARE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS(Continued) Years Ended June 30, 2002, 2003 and 2004 Compensation expense of $350,500 was recognized for the year-ended June
30, 2004 due to the acceleration of unvested stock options as part of a
severance agreement for the former VP Finance and for a retiring Board member.
The expense recognized was based on the difference between the option grant
price and the fair market value at the respective dates of separation. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair market value
estimate, in managements opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options. Net Loss Per Share Net loss per share is based on a weighted average number of shares of
common stock of 14,084,313, 14,174,594, and 14,868,525 for the years ended June
30, 2002, 2003 and 2004, respectively. Options to purchase common stock and
restricted stock grants have been excluded from the calculation of diluted
earnings per share as the impact of these options and restricted stock grants
on diluted earnings per share would be antidilutive. The excluded options and
restricted stock units totaled 689,133, 1,931,233, and 2,486,135 for the years
ended June 30, 2002, 2003 and 2004, respectively. Income Taxes Income taxes are accounted for under the asset and liability method
prescribed by FASB Statement No. 109. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and credit carry forwards.
Deferred tax assets and liabilities are measured using enacted rates expected
to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The amount of deferred tax assets is reduced to
the amount of any tax benefits that Bone Care believes are more likely than not
to be realized. Because Bone Care has not yet reached profitability and future
profitability cannot be assured, no value has been recorded for deferred tax
assets. Fair Value of Financial Instruments The fair value of financial instruments other than securities, which
consisted of cash and cash equivalents, receivables, accounts payable and
accrued liabilities, approximated their carrying values at June 30, 2003 and
2004 due to the short-term nature or underlying terms of these instruments.
The fair value of marketable securities is based on quoted market prices. 47




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BONE CARE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS(Continued) Years Ended June 30, 2002, 2003 and 2004 Concentration of Risk We currently have no internal manufacturing capabilities. We rely on
third-party contractors to produce our active pharmaceutical ingredient and for
the subsequent manufacturing and packaging of finished drug products. We purchase our active pharmaceutical ingredient for Hectorol® from a sole
supplier, although we are currently in the process of obtaining regulatory
approval for an additional supplier. In addition, we rely on one manufacturer
for Hectorol® Injection, one supplier to formulate Hectorol® Capsules and
another supplier to package Hectorol® Capsules. Although, we believe that other
manufacturers, suppliers, formulators, and vendors may be available to provide
these goods and services to us, any change in suppliers could cause an increase
in costs, a delay in manufacturing and a possible loss of sales, any of which
would affect operating results adversely. Our customers primarily consist of wholesale distributors of
pharmaceutical products. We utilize these wholesale distributors as the
principal means of distributing our products to clinics and hospitals. Five
individual wholesale distributors comprised 97% of the net accounts receivable
balance as of June 30, 2004. These same five wholesale distributors represented
95% of our product sales for the year ended June 30, 2004, with the largest of
the five wholesale distributors representing 39% of product sales. As of June
30, 2003 five individual customers comprised 88% of the net accounts receivable
balance. These same five customers represented 92% of our product sales for the
year ended June 30, 2003, with the largest of the five companies representing
34% of product sales. As of June 30, 2002 five individual customers comprised
62% of the net accounts receivable balance. These same five customers
represented 69% of our product sales for the year ended June 30, 2002, with the
largest of the five companies representing 27% of product sales. At
June 30, 2004, cash and cash equivalents includes $22.0 million of commercial paper and a
$10.0 million certificate of deposit, bothfrom a single issuer, as well as,
$10.0 million in a single money market fund. Our marketable securities at June 30, 2004 consisted of $40.0 million of
commercial paper from four different issuers and a variety of corporate and
municipal bonds, with none of the bonds exceeding $2.0 million from any one
issuer. One of the four issuers of this $40.0 million of commercial paper is
the issuer of the $22.0 million of commercial paper classified as cash and cash
equivalents. Advertising Expenses We expense advertising costs as incurred. Advertising expenses were
$688,758, $944,362, and $891,315 for years ended June 30, 2002, 2003 and 2004,
respectively. Use of Estimates In preparing the financial statements in accordance with accounting
principles generally accepted in the U.S., management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Reclassifications Certain prior period amounts in the financial statements and the notes
have been reclassified to conform to the fiscal 2004 presentation. 48




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BONE CARE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS(Continued) Years Ended June 30, 2002, 2003 and 2004 (2) Shareholders Equity In May 2004, we completed a public offering of 4,500,000 shares of common
stock at a price of $21.75 per share. We received proceeds of $91,210,758 from
the sale of the shares of common stock, net of offering expenses. In June 2004,
the underwriters exercised their over-allotment option to acquire 500,000
additional shares of common stock at a price of $21.75 per share. We received
additional proceeds of $10,222,500 from the sale of the 500,000 shares of
common stock, net of offering expenses. Total offering costs were $7,316,742,
which consisted of underwriter fees, legal and audit fees, printing costs,
filing fees, and travel costs. (3) Stock Options and Restricted Stock Awards We have granted options to key employees and directors under three
separate programs. Under the first option program, titled the Bone Care International, Inc.,
1996 Stock Option Plan, a total of 1,000,000 shares of common stock were made
available. This stock option plan was amended in November 2000 and November
2001 to increase the number of available shares to 2,300,000 of which 78,889
remained available for grant at June 30, 2004. Options granted under this
program have an exercise price equal to our common stock trading price on the
date of the grant and vest over periods ranging from one to five years. The
options will expire 10 years from the grant date, or upon termination of
employment. Under the second option program, titled the Bone Care International, Inc.,
2002 Stock Incentive Plan, a total of 750,000 shares of common stock were made
available in November 2002 of which 445 remained available for grant at June
30, 2004. Under the 2002 Plan, the Board authorized Compensation Committee may
grant to eligible participants non-qualified stock options and incentive stock
options to purchase shares of common stock. Options granted under this program
have an exercise price equal to our common stock trading price on the date of
the grant and vest over a period of three years. The options will expire 10
years from the grant date, or upon termination of employment. Under the third option program, titled the Bone Care International, Inc.,
2003 Stock Incentive Plan, a total of 300,000 shares of common stock were made
available in November 2003 of which 144,918 remained available for grant at
June 30, 2004. Under the 2003 Plan, the Compensation Committee may grant to
eligible participants non-qualified stock options and incentive stock options
to purchase shares of common stock and restricted stock awards. Options granted
under this program have an exercise price equal to our common stock trading
price on the date of the grant and vest over a period of three years. The
options will expire 10 years from the grant date, or upon termination of
employment. Restricted stock awards are shares of common stock granted subject
to a restricted period that is designated by the Compensation Committee. 49




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BONE CARE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS(Continued) Years Ended June 30, 2002, 2003 and 2004 A summary of stock option activity and related information is presented
below: Year ended June 30,2002
    
    2003
    
    2004Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    average
    
    
    
    
    
    averageexercise
    
    
    
    
    
    exercise
    
    
    
    
    
    exerciseOptions
    
    price
    
    Options
    
    price
    
    Options
    
    priceOutstandingbeginning of year
    
    
    1,018,683
    
    
    $
    11.03
    
    
    
    689,133
    
    
    $
    12.51
    
    
    
    1,931,233
    
    
    $
    7.32Granted
    
    
    189,000
    
    
    
    16.30
    
    
    
    1,490,800
    
    
    
    4.99
    
    
    
    844,850
    
    
    
    15.16Exercised
    
    
    (201,400
    )
    
    
    4.25
    
    
    
    (61,600
    )
    
    
    2.45
    
    
    
    (177,013
    )
    
    
    5.73Terminated/canceled
    
    
    (317,150
    )
    
    
    15.24
    
    
    
    (187,100
    )
    
    
    9.46
    
    
    
    (227,935
    )
    
    
    11.66Outstandingend of year
    
    
    689,133
    
    
    $
    12.51
    
    
    
    1,931,233
    
    
    $
    7.32
    
    
    
    2,371,135
    
    
    $
    9.82Exercisable at end of year
    
    
    324,866
    
    
    $
    8.95
    
    
    
    299,033
    
    
    $
    12.16
    
    
    
    997,434
    
    
    $
    6.86Weighted average fair value of options
granted during year
    
    
    
    
    
    $
    9.78
    
    
    
    
    
    
    $
    3.00
    
    
    
    
    
    
    $
    9.52
 The options outstanding at June 30, 2004 have been segregated into six
ranges for additional disclosure as follows: Options outstanding
    
    Options exercisableOptions
    
    Weighted
    
    Weighted
    
    
    
    
    
    Weightedoutstanding
    
    average
    
    average
    
    Exercisable
    
    averageRange of
    
    at June 30,
    
    remaining
    
    exercise
    
    at June 30,
    
    exerciseexercise prices
    
    2004
    
    contractual life
    
    price
    
    2004
    
    price$2.11
    
    
    23,600
    
    
    
    1.6
    
    
    $
    2.11
    
    
    
    23,600
    
    
    $
    2.11$3.40$3.48
    
    
    788,952
    
    
    
    8.1
    
    
    
    3.42
    
    
    
    515,271
    
    
    
    3.42$5.55-$7.95
    
    
    206,900
    
    
    
    7.7
    
    
    
    6.19
    
    
    
    142,963
    
    
    
    6.21$9.00$13.00
    
    
    867,650
    
    
    
    8.7
    
    
    
    11.61
    
    
    
    176,467
    
    
    
    10.36$14.15-$21.12
    
    
    421,033
    
    
    
    8.7
    
    
    
    18.25
    
    
    
    136,733
    
    
    
    16.52$21.86-$24.66
    
    
    63,000
    
    
    
    9.7
    
    
    
    23.72
    
    
    
    2,400
    
    
    
    23.56
 Excluded from the stock option activity shown above were 115,000
restricted stock units that were granted on June 22, 2004 to the executive
management team. These restricted stock awards will vest one-third annually
over the next three years. The fair value of the restricted stock awards at the
date of grant of $2.4 million will be recognized as compensation expense over
the three-year vesting period. (4) Shareholders Rights Plan and Preferred Stock In 1996, we adopted a Shareholders Rights Plan. Under this plan, each
share of common stock has associated with it one preferred share purchase right
(a Right). Under certain circumstances, each Right would entitle holders to
purchase from us 1/200th of one share of Series A Junior Participating
Preferred Stock for the price of $12.50 per 1/200th of a share. The Rights do
not have voting or dividend rights and, until they become exercisable, have no
dilutive effect on per-share earnings. The Rights are not presently exercisable
and are transferable only with the related shares of common stock. The Board of
Directors has designated 140,000 shares of the Preferred Stock as Series A
Junior Participating Preferred Stock in connection with the Rights. 50




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BONE CARE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS(Continued) Years Ended June 30, 2002, 2003 and 2004 (5) Income Taxes As of June 30, 2004, we have federal net operating losscarryforwards of
$50,872,000 and R&D tax credit carryforwards of $2,394,000, which expire in
2011 through 2024. As of June 30, 2004, We also have state net operating
loss carryforwards of $46,036,000 and R&D tax credit carryforwards of $756,000,
which expire in 2006 through 2024. Significant components of our deferred tax assets at June 30, 2003 and
2004 are as follows: 2003
    
    2004Deferred tax assets:Inventory reserves
    
    $
    331,000
    
    
    $
    250,000Deferred income
    
    
    131,000
    
    
    
    39,000Accrued liabilities
    
    
    798,000
    
    
    
    979,000Allowance for doubtful accounts
    
    
    31,000
    
    
    
    28,000Other
    
    
    120,000
    
    
    
    172,000Federal net operating loss carryforward
    
    
    16,582,000
    
    
    
    17,296,000Federal R&D tax credit carryforward
    
    
    2,040,000
    
    
    
    2,394,000State net operating loss carryforward
    
    
    2,128,000
    
    
    
    2,210,000State R&D tax credit carryforward
    
    
    410,000
    
    
    
    499,000Valuation allowance
    
    
    (22,064,000
    )
    
    
    (23,184,000
    )Deferred tax assets
    
    
    507,000
    
    
    
    683,000Deferred tax liabilities:Patents
    
    
    (507,000
    )
    
    
    (683,000
    )Total deferred taxes
    
    $
    
    
    
    $
    
 At
June 30, 2004, $4.5 million of the federal net operating
loss carryforwards in the table above relates to the tax benefits of
stock option exercises. To the extent the related valuation allowance
for these amounts is reversed, they will be credited to common stock
rather then net income. Realization of deferred tax assets is dependent upon generating sufficient
taxable income prior to the expiration of the related carryforward period.
Because we have had cumulative losses in recent years, management has
concluded that a valuation allowance is needed for net deferred tax assets. At
the point intime in which we have realized a cumulative profit over a period of
the three consecutive fiscal years, management may have a sufficient basis to
conclude that some or all of the valuation allowance may be reduced. The following table summarizes the principal reasons for the difference
between the effective tax rate and the U.S. federal statutory income tax rate: 2002
    
    2003
    
    2004U.S. federal income tax (benefit) at statutory rate
    
    $
    (2,347,000
    )
    
    $
    (3,971,000
    )
    
    $
    (517,000
    )State income tax, net of federal benefit
    
    
    (337,000
    )

    
    (498,000
    )
    
    
    (209,000
    )Research activities
credits
    
    
    (490,000
    )
    
    
    (343,000
    )
    
    
    (354,000
    )Permanent
items and other
    
    
    279,000
    
    
    
    52,000

    
    
    247,000Change in valuation allowance
    
    
    2,895,000
    
    
    
    4,760,000
    
    
    
    833,000Income tax
expense

    
    $
    0
    
    
    $
    0
    
    
    $
    0
 51




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BONE CARE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS(Continued) Years Ended June 30, 2002, 2003 and 2004 (6) Contractual Obligations and Commitments We have entered into various contractual obligations and commercial
commitments. The following table summaries these contractual obligations as of
June 30, 2004. Less Than
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    1 Year
    
    2-3 Years
    
    4-5 Years
    
    5 YearsPurchase Commitment
(1)
    
    $
    9,042,714
    
    
    $
    9,042,714
    
    
    $
    
    
    

    $
    
    
    
    $
    Operating Lease
Obligations
(2)
    
    
    5,032,481
    
    
    
    1,061,824
    
    
    
    2,103,499
    
    
    
    1,602,494
    
    
    
    264,664Capital Lease
Obligations
(3)
    
    
    123,998
    
    
    
    55,876
    
    
    
    68,122
    
    
    
    
    
    
    
    Total
    
    $
    14,199,193
    
    
    $
    10,160,414
    
    
    $
    2,171,621
    
    
    $
    1,602,494
    
    
    $
    264,464
  (1)
    
    Purchase commitments for purchases of the active pharmaceutical
ingredients used in Hectorol® production and clinical and preclinical
research, commitments for the manufacture of Hectorol® Injection and
Hectorol® Capsules, and other service commitments including consulting
contracts in the ongoing operations of the company.  (2)
    
    Represents primarily office and laboratory facilities in Middleton,
Wisconsin and operating leases, primarily for fleet vehicles used by
field personnel.  (3)
    
    Represents fleet vehicles used by field personnel that were sold and
leased back. We lease approximately 34,000 square feet of office and laboratory space
in Middleton, Wisconsin. Total lease expense was $649,182, $668,045, and
$668,045 for the years ended June 30, 2002, 2003, and 2004, respectively. At
June 30, 2004 capitalized lease cost and accumulated amortization was $184,349
and $36,071, respectively. Gross future minimum operating and capital lease payments are as follows: Operating
    
    CapitalLeases
    
    Leases2005
    
    $
    1,061,824
    
    
    $
    55,8762006
    
    
    1,084,125
    
    
    
    50,8992007
    
    
    1,019,374
    
    
    
    17,2232008
    
    
    817,056
    
    
    
    2009
    
    
    785,438
    
    
    
    Thereafter
    
    
    264,664
    
    
    
    Total lease
obligation
    
    $
    5,032,481
    
    
    $
    123,998
 (7) Deferred Compensation Plan We have established a 401(k) plan covering substantially all employees.
Employer contributions to the plan are at the discretion of the Board of
Directors. Our policy is to fund the 401(k) plan contributions as they accrue.
401(k) expense amounted to $166,675, $163,072 and $232,008 for the years ended
June 30, 2002, 2003, and 2004, respectively. 52




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BONE CARE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS(Continued) Years Ended June 30, 2002, 2003 and 2004 (8) Marketable Securities Securities as of June 31, 2004 include the following: Amortized
    
    Unrealized
    
    UnrealizedCost
    
    Gain
    
    Loss
    
    Fair ValueHeld-to-MaturityCommercial paper
    
    $
    40,026,698
    
    
    $
    
    
    
    $
    (38,594
    )
    
    $
    39,988,104Corporate bonds
    
    
    1,908,376
    
    
    
    35,463
    
    
    
    
    
    
    
    1,943,83941,935,074
    
    
    
    35,463
    
    
    
    (38,594
    )
    
    
    41,931,943Available-for-SaleMunicipal bonds
    
    
    23,750,000
    
    
    
    
    
    
    
    
    
    
    
    23,750,000Corporate bonds
    
    
    4,000,000
    
    
    
    
    
    
    
    
    
    
    
    4,000,00027,750,000
    
    
    
    
    
    
    
    
    
    
    
    27,750,000Total marketable securities
    
    $
    69,685,074
    
    
    $
    35,463
    
    
    $
    (38,594
    )
    
    $
    69,681,943 At June 30, 2004, the unrealized loss on commercial paper
represents losses on fixed income securities and is primarily
attributable to changes in market interest rates. We do not
believe the unrealized loss represents an other-than temporary
impairment based on the short-term duration of the securities,
the issuers high credit quality and our ability and intent
to hold the investments for the foreseeable future. The commercial paper has
been in a loss position for less than twelve months. Securities as of June 30, 2003 include the following: Amortized
    
    Unrealized
    
    UnrealizedCost
    
    Gain
    
    Loss
    
    Fair ValueHeld-to-MaturityCorporate bonds
    
    $
    4,688,227
    
    
    $
    105,079
    
    
    $
    
    
    
    $
    4,793,306Available-for-SaleMunicipal bonds
    
    
    7,850,000
    
    
    
    
    
    
    
    
    
    
    
    7,850,000Corporate bonds
    
    
    2,000,000
    
    
    
    
    
    
    
    
    
    
    
    2,000,0009,850,000
    
    
    
    
    
    
    
    
    
    
    
    9,850,000Total marketable securities
    
    $
    14,538,227
    
    
    $
    105,079
    
    
    $
    
    
    
    $
    14,643,306 Scheduled maturities of marketable securities at June 30, 2004: Available-For-Sale
    
    Held-To-MaturityCost
    
    Fair Value
    
    Amortized Cost
    
    Fair ValueFiscal Year2005
    
    $
    27,750,000
    
    
    $
    27,750,000
    
    
    $
    41,026,698
    
    
    $
    40,988,1042006
    
    
    
    
    
    
    
    
    
    
    908,376
    
    
    
    943,839Total
    
    $
    27,750,000
    
    
    $
    27,750,000
    
    
    $
    41,935,074
    
    
    $
    41,931,943
 53




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BONE CARE INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS(Continued) Years Ended June 30, 2002, 2003 and 2004 (9) Related Party Transactions Martin
Barkin, M.D. was a member of our Board of Directors until April 2004 and
is the President and Chief Executive Officer of Draxis Health, Inc. (a
pharmaceutical company). Effective April 30, 2004, Martin Barkin resigned from
the board. We initially granted Draxis Health Inc. a license to use and sell
Hectorol® in Canada for secondary hyperparathyroidism, osteoporosis and other
metabolic bone diseases. We also granted Draxis a license in Canada to
all know-how developed by or on behalf of us relating to the use of
Hectorol® for those indications. Draxis received marketing approval for
Hectorol® Capsules in Canada in May 2001. Draxis sold its Canadian
pharmaceutical business to Shire Pharmaceuticals Group in July 2003. In
conjunction with that sale, we entered into a new manufacturing and
supply agreement and patent and trademark license agreement with Shire that
replaced and superceded all previous agreements with Draxis. The patent and
trademark agreement transfers to Shire the exclusive right to use and sell
Hectorol® previously granted to Draxis and requires a royalty for use of the
Hectorol® trademark. The manufacturing and supply agreement provides for the
sale of Hectorol® from us to Shire for distribution in Canada only. As
of June 30, 2004, no balance was reported as part of accounts receivable for
amounts owed from Draxis. In
April 2002, we entered into a manufacturing agreement with
Draxis Pharma, a division of Draxis Health Inc. to produce Hectorol® Injection
in Canada. We began receiving commercial shipments in March 2003 for
customer sales in the U.S. We purchased approximately $8.8 million and
$2.0 million of Hectorol® Injection from Draxis Pharma for the period July 1,
2003 through April 30, 2004 and in the year ended June 30, 2003, respectively. (10) Quarterly Financial Data (Unaudited) Summary quarterly financial data for the years ended June 30, 2004 and
2003 are summarized as follows: First
    
    Second
    
    Third
    
    FourthQuarter
    
    Quarter
    
    Quarter
    
    Quarter(In thousands except for per share data)2004:Product sales
    
    $
    8,125
    
    
    $
    9,116
    
    
    $
    11,617
    
    
    $
    14,747Gross margin
    
    
    5,707
    
    
    
    6,684
    
    
    
    8,689
    
    
    
    11,064Net earnings (loss)
    
    
    (2,102
    )
    
    
    (478
    )
    
    
    302
    
    
    
    757Net loss per sharebasic
    
    $
    (0.15
    )
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.05Net loss per sharediluted
    
    $
    (0.15
    )
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.042003:Product sales
    
    $
    5,417
    
    
    $
    3,743
    
    
    $
    3,078
    
    
    $
    7,280Gross margin
    
    
    3,908
    
    
    
    2,283
    
    
    
    1,551
    
    
    
    4,793Net loss
    
    
    (1,631
    )
    
    
    (4,128
    )
    
    
    (4,625
    )
    
    
    (1,294
    )Net loss per sharebasic and diluted
    
    $
    (0.12
    )
    
    $
    (0.29
    )
    
    $
    (0.33
    )
    
    $
    (0.09
    )
 The sum of the four quarters per share amounts may not equal the annual
per share amount due to changes during the year in the weighted average number

of shares outstanding and the dilutive impact of stock options for profitable
quarters. 54




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ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE None. 
 ITEM 9A.CONTROLS AND PROCEDURES As of June 30, 2004, our management, including our chief executive officer
and chief financial officer, have conducted an evaluation of the effectiveness
of disclosure controls and procedures, pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934, as amended. Based on that evaluation, our
chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this annual report has been made known to
them in a timely fashion. There were no changes in our internal control over financial reporting
that occurred during the quarter ended June 30, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. 
 ITEM 9B.OTHER INFORMATION None. 
 PART III 
 ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT We incorporate by reference the information required by Item 10 from our
definitive Proxy Statement for our 2004 Shareholders Meeting (Proxy
Statement), which will be filed with the Securities and Exchange Commission
not later than 120 days after the end of our fiscal year. 
 ITEM 11.EXECUTIVE COMPENSATION We incorporate by reference the information required by Item 11 from the
Proxy Statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of our fiscal year. 
 ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS We incorporate by reference the information required by Item 12 from the
Proxy Statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of our fiscal year. 
 ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS We incorporate by reference the information required by Item 13 from the
Proxy Statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of our fiscal year. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES We incorporate by reference the information required by Item 13 from the
Proxy Statement, which will be filed with the Securities and Exchange
Commission not later than 120 days after the end of our fiscal year. 55




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PART IV 
 ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  1.
    
    Financial statements
Reference is made to the separate index to our financial statements
contained on page 30 hereof.2.
    
    Financial statement schedule Valuation and Qualifying Accounts and Reserves For the Years Ended June 30, 2004, 2003, and 2002 Balance at
    
    Charged to
    
    Deductions
    
    Balance atbeginning of
    
    costsand
    
    and
    
    end ofperiod
    
    expenses
    
    other
    
    period2004: Allowance for doubtful accounts
    
    $
    111,200
    
    
    $
    (8,370
    )
    
    $
    30,760
    
    
    $
    72,0702004:Tax valuation allowance
    
    
    22,064,000
    
    
    
    1,120,000
    
    
    
    
    
    
    
    23,184,0002003: Allowance for doubtful accounts
    
    
    152,960
    
    
    
    39,738
    
    
    
    81,498
    
    
    
    111,2002003:Tax valuation allowance
    
    
    17,186,000
    
    
    
    4,878,000
    
    
    
    
    
    
    
    22,064,0002002:Allowance for doubtful accounts
    
    
    100,000
    
    
    
    40,007
    
    
    
    12,953
    
    
    
    152,9602002:Tax valuation allowance
    
    
    13,503,000
    
    
    
    3,683,000
    
    
    
    
    
    
    
    17,186,000
  3.
    
    Exhibits
Reference is made to the separate exhibit index contained on page 58
hereof. 56




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##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. BONE CARE INTERNATIONAL, INC./s/   PAUL L. BERNS
By: Paul L. Berns
    President and Chief Executive Officer
 Date: September 10, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated have signed this report below. /S/  PAUL L. BERNS

Paul L. Berns
    
    President and Chief Executive Officer
and Director
(Principal Executive Officer)
    
    September 10, 2004/S/  BRIAN J. HAYDEN

Brian J. Hayden
    
    Vice President  Finance
(Principal Financial and Accounting Officer)
    
    September 10, 2004/S/ MICHAEL D. CASEY

Michael D. Casey
    
    Director
    
    September 10, 2004/S/  HERBERT J. CONRAD

Herbert J. Conrad
    
    Director
    
    September 10, 2004/S/  CHARLES R. KLIMKOWSKI, CFA

Charles R. Klimkowski, CFA
    
    Director
    
    September 10, 2004/S/  RICHARD B. MAZESS, PH.D.

Richard B. Mazess, Ph.D.
    
    Director
    
    September 10, 2004/S/  GARY E. NEI

Gary E. Nei
    
    Director
    
    September 10, 2004/S/ EDWARD STAIANO

Edward Staiano, Ph.D.
    
    Director
    
    September 10, 2004/S/  KLAUS R. VEITINGER, M.D. PH.D.

Klaus R. Veitinger, M.D.  Ph.D.
    
    Director
    
    September 10, 2004
 57




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BONE CARE INTERNATIONAL, INC. 
 INDEX TO EXHIBITS
 ExhibitNumber
    
    Document Description3.1(a)
    
    Restated Articles of Incorporation of Registrant (1) (Exhibit 3.1, Amendment No. 3 to
Form 10/A).3.1(b)
    
    Articles of Amendment to Articles of Incorporation of Registrant (2) (Exhibit 3.1(b)).3.2
    
    By-Laws of Registrant (3) (Exhibit 3.2).4.1
    
    Shareholders Rights Agreement between Bone Care and Norwest Bank Minnesota, N.A. (1)
(Exhibit 4.1, Amendment No. 3 to Form 10/A).4.2
    
    First Amendment to Shareholder Rights Agreement between Bone Care and Norwest Bank
Minnesota, N.A. (1) (Exhibit 4.2, Amendment No. 4 to Form 10/A).10.1*
    
    Incentive Stock Option Plan (1) (Exhibit 10.4).10.2*
    
    1996 Stock Option Plan (4) .10.3
    
    Amended and Restated License Agreement effective as of June 8, 1998, by and between
Bone Care and Draxis Health, Inc. (5) (Exhibit 10.6).10.4*
    
    Form of Stock Option Agreement (2) (Exhibit 10.7).10.5
    
    Agreement, effective as of May 1, 1987, by and between the Wisconsin Alumni Research
Foundation and Bone Care (confidential material appearing in this document has been
omitted and filed separately with the Securities and Exchange Commission in accordance
with the Securities Act of 1933, as amended, and 17 C.F.R. 230.406 and 200.80
promulgated thereunder. Omitted information has been replaced with asterisks). (2) (Exhibit
10.8).10.6*
    
    2002 Stock Incentive Plan. (6)(Exhibit 4.6)10.7*
    
    2003 Stock Incentive Plan. (6)(Exhibit 4.7)10.8
    
    Co-Promotion Agreement dated as of
July 14, 2004 between Cardinal Health PTS, LLC and
Registrant (7).10.9*
    
    Severance Agreement between the Registrant and Paul L. Berns.10.10*
    
    Severance Agreement between the Registrant and James V. Caruso10.11*
    
    Severance Agreement between the Registrant and Brian J. Hayden10.12*
    
    Severance Agreement between the Registrant and Jeffrey J. Freitag10.13*
    
    Severance Agreement between the Registrant and Carmine J. Durham10.14*
    
    Severance Agreement between the Registrant and R. Andrew Morgan10.15*
    
    Severance Agreement between the Registrant and C. Basil Mundy23
    
    Consent of Deloitte & Touche LLP.31.1
    
    Rule 13a-14(a) Certification of President and Chief Executive Officer.31.2
    
    Rule 13a-14(a) Certification of Vice President and Chief Financial Officer.32.1
    
    Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the U.S. Code.32.2
    
    Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the U.S. Code.
   (1)
    
    Incorporated by reference to exhibits filed with Registrants
Form 10 Registration Statement (Registration Number 02-27854) filed
under the Securities Exchange Act of 1934. Parenthetical references
to exhibit numbers are to the exhibit numbers in the Form 10 or, if
applicable, the amendment to the Form 10.(2)
    
    Incorporated by reference to exhibits filed with the
Registrants Form S-1 Registration Statement (Registration Number
333-43923) filed under the Securities Act of 1933. Parenthetical
references to exhibit numbers are to exhibit numbers in the Form S-1.(3)
    
    Incorporated by reference to the exhibits filed with the Registrants
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999
(File No. 0-27854). Parenthetical references to exhibit numbers are to
the exhibit numbers in the Form 10-Q.(4)
    
    Incorporated by reference to exhibit 4.5 of the Registrants
Registration Statement on Form S-B (Registration Number 333-55174) filed
under the Securities Act of 1933.(5)
    
    Incorporated by reference to exhibits filed with the Registrants
Form S-1/A Registration Statement(Registration Number 333-43923) filed
under the Securities Act of 1933. Parenthetical references to exhibit
numbers are to exhibit numbers in the Form S-1/A. 58




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##### Table of Contents



(6)
    
    Incorporated by reference to exhibits filed with the
Registrants Registration Statement on Form S-8 (Registration Number
333-111968) filed under the Securities Act of 1933. Parathetical
references to exhibit numbers are to the exhibit numbers in Form S-8.(7)
    
    Confidential material appearing in this document was omitted
and filed separately with the Securities and Exchange Commission in
accordance with Section 24(b) of the Securities Exchange Act of 1934,
as amended, and rule 24b-2 promulgated thereafter. Omitted
information was replaced with asterisks.*
    
    Indicates a management contract or compensatory plan or
arrangement. 59