Financial Review
Overview
The following discussion of the financial condition and results of operations of Basilea Pharmaceutica Ltd. and its subsidiaries should be read in conjunction with the consolidated financial statements, which have been prepared in accordance with US GAAP, and the related notes thereto included in this Annual Report. This discussion contains forward-looking statements, which are based on assumptions about the Company’s future business that involve risks and uncertainties. The Company’s actual results may differ materially from those anticipated in these forward-looking statements.
Basilea Pharmaceutica Ltd. is an integrated biopharmaceutical company actively engaged in the discovery, development and preparing for commercialization of innovative drugs for the treatment of diseases associated with high unmet medical needs in the hospital and specialty care setting. Basilea’s fully integrated research and development operations are currently focused on new antibacterial and antifungal agents to fight drug resistance, and on the development of dermatology drugs.
The Company currently has two compounds in registration: ceftobiprole, a broad-spectrum, anti-MRSA cephalosporin antibiotic, which is developed in collaboration with Johnson & Johnson and alitretinoin, an oral retinoid for the treatment of patients with chronic hand eczema who do not respond to topical steroids. Isavuconazole, a novel broad-spectrum antifungal for the treatment of severe invasive fungal infections is in phase III clinical development.
In 2007, the Company invested CHF 115.7 million in research and development activities, mainly related to the preparations of the product registration filings for alitretinoin as well as conducting the phase III clinical trials for alitretinoin and isavuconazole. In addition, the research and development expenses in 2007 include an amount of CHF 11.4 million related to manufacturing of pharmaceutical material which may be used for commercialization of one of its compounds, subject to regulatory approval. General and administrative expenses amounted to CHF 29.0 million in 2007 and include expenses for the establishment of an international commercialization organization. The Company recognized revenues of CHF 7.9 million in 2007
(2006: CHF 7.2 million), of which CHF 6.6 million (2006: CHF 5.2 million) related to the release of deferred revenue in connection with upfront and milestone payments received from Johnson & Johnson for ceftobiprole.
The Company received additional milestone payments in 2007 in the amount of CHF 36.4 million related to the filings of the new drug applications for ceftobiprole in the United States and Europe. These payments were deferred and will be recognized as revenues over the remaining term of the agreement. In addition, the Company completed a secondary offering in March 2007 and received net proceeds of CHF 310.1 million.
The cash and cash equivalents and short-term investments amounted to CHF 424.8 million as of December 31, 2007, compared to CHF 176.6 million
at year-end 2006.
Results of Operations
The following table outlines the Company’s consolidated results of operations for the fiscal years 2007 and 2006:
Revenues
The revenues in 2007 are mainly associated with the upfront and milestone payments, which the Company received under the license agreement with Johnson & Johnson related to ceftobiprole. These upfront and milestone payments were recorded as deferred revenue and recognized as revenue on a straight-line basis over the remaining term of the agreement. In 2007, the Company recognized revenues of CHF 6.6 million (2006: CHF 5.2 million) related to these upfront and milestone payments. In addition, the Company recognized revenues in connection with services, which the Company
provides to its partner Johnson & Johnson.
Research and Development
The research and development expenses amounted to CHF 115.7 million in 2007, representing 80% of the total operating expenses (2006: 87%).
The research and development expenses in 2007 were mainly incurred in connection with the preparations of the product registration filings for alitretinoin as well as conducting the phase III trials for alitretinoin and isavuconazole. In addition, the research and development expenses in 2007 include CHF 11.4 million related to manufacturing of pharmaceutical material which may be used for commercialization of one of its compounds, subject to
regulatory approval. The research and development expenses in 2007
also included stock-based compensation expenses of CHF 8.0 million
(2006: CHF 6.1 million), which increased as compared to 2006 mainly
because of the increased fair value of stock options. Furthermore, expenses were incurred for the Company’s research projects.
The research and development expenses primarily contain expenses for third-party services in connection with clinical trials and research projects, costs for producing substance to be used in such trials and projects, personnel expenses for the research and development groups of the Company as well as depreciation of equipment used for its research and development activities. In addition, research and development expenses contain expenses for producing pharmaceutical material which may be used for commercialization and which was produced prior to obtaining regulatory approval or evidence being available that regulatory approval can reasonably be expected.
General and Administrative Expenses
The general and administrative expenses amounted to CHF 29.0 million or approximately 20% (2006: 13%) of total operating expenses in 2007. The general and administrative expenses in 2007 included stock-based compensation expenses of CHF 5.7 million (2006: CHF 3.9 million), which increased compared to 2006 mainly because of the increased fair value of stock
options.
General and administrative expenses mainly consist of expenses related to commercial strategy, corporate management, finance, human resources, business development, licensing and investor relations, including personnel expenses for these functions. The general and administrative expenses also include expenses related to the establishment of an international commercialization organization. In 2007, the Company incorporated subsidiaries in the U.S., Canada, United Kingdom, Germany, Italy, Spain, Denmark and France in this context.
Net Financial Income
Net financial income increased to CHF 9.7 million in 2007 compared to
CHF 2.8 million in 2006. This change mainly resulted from an increase in available funds related to the net proceeds from the secondary offering of the Company in March 2007. In addition, Swiss Franc denominated interest rates
increased further in 2007 compared to 2006.
Income Taxes
Due to the losses incurred to date, the Company has not paid any income taxes.
Liquidity and Capital Resources
As of the date of inception of Basilea, the Company had available cash funds in the amount of CHF 206.0 million as a result of an initial capital contribution from Roche. In June 2003, Basilea performed a capital increase, in which Basilea raised net proceeds of CHF 20.7 million through the issuance of new shares in a private placement. In March 2004, Basilea issued 2.1 million registered shares in connection with its initial public offering and raised net proceeds of CHF 192.8 million. Since 2005, the Company received payments under its license agreement with Johnson & Johnson in the total amount of CHF 139.3 million. In March 2007, Basilea issued 1.4 million registered shares in connection with a secondary offering and realized net proceeds of CHF 310.1 million. In addition, the Company further realized proceeds from the issuance of shares in 2007 and 2006 in connection with exercises of stock options in the amount of CHF 23.8 million and CHF 21.1 million, respectively.
The cash used by the Company in 2007 was primarily related to its operating activities, in particular the research and development programs as well as the establishment of an international commercialization organization. The cash and cash equivalents and short-term investments, available as of December 31, 2007, amount to CHF 424.8 million.
The Company’s policy is to invest its available funds in low risk investments, including interest-bearing deposits, bonds and other debt instruments. As of December 31, 2007, CHF 255.0 million were invested in short-term bank deposits denominated in Swiss Francs.
The Company has not entered and has not planned to enter into any commitments for any material investments other than for investments in the normal course of the business.
The financial needs of Basilea’s wholly owned and fully consolidated subsidiaries, are exclusively covered by the Company. None of the subsidiaries had any significant third-party debt outstanding as of December 31, 2007.
Critical Accounting Policies
The consolidated financial statements of the Company have been prepared in accordance with US GAAP. The preparation of the financial statements requires management to make estimates and assumptions, which have an effect on the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and on the reported amounts of revenues and expenses during the reporting period. These estimates are based on management’s knowledge of current events and actions the Company may undertake in the future, however, actual results ultimately may differ from those estimates.
The upfront and milestone payments received under the license agreement for ceftobiprole were recorded as deferred revenue and are recognized on a straight-line basis over the remaining term of the agreement in accordance with the Company’s policy on revenue recognition.
The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R related to accounting for stock-based compensation. As a result, stock options are measured based on the grant-date fair value of the award. The Company recorded total expenses related to stock-based compensation of CHF 13.7 million in 2007 (2006: CHF 10.0 million).
Please refer to the Consolidated Financial Statements of the Company included elsewhere in this Annual Report for further information on the Company’s accounting policies.
Foreign Currency Exchange Rate Risk
The functional currency of the Company is Swiss Francs. Besides the expenses, which are denominated in Swiss Francs, the Company also incurs expenses in foreign currencies, especially in Euro, US dollars, British pounds, Canadian dollars, Danish Kronen and Chinese Yuan Renminbi. Although the Company believes that the current exposure to foreign currency risk is not significant, it cannot be excluded that unfavorable developments of the value of the Swiss Franc could have a material adverse effect on the Company’s financial condition, results of operations, and prospects in the future.
As the subsidiaries of Basilea are mainly located outside Switzerland, the value of the assets and liabilities of these subsidiaries are translated into Swiss Francs for purposes of the Company’s consolidated financial statements. Consequently, the values of these assets and liabilities are subject to foreign currency fluctuations. However, due to the limited relative book value of the assets and liabilities involved in the subsidiaries, the related exposure to foreign currency risk is not deemed to be significant for the Company.
Recent Developments
There have been no material adverse changes in the business or financial situation of the Company since December 31, 2007.
Report of the Group Auditors
Report of the Group Auditors to the General Meeting of
Basilea Pharmaceutica Ltd., Basel, Switzerland
As Group Auditors of Basilea Pharmaceutica Ltd. and its subsidiaries, we have audited the accompanying consolidated balance sheets as of
December 31, 2007 and 2006, the related consolidated statements of operations, cash flows and changes in shareholders’ equity and the accompanying notes for the years then ended, included. These consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America, as described in Note 1.
These consolidated financial statements are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We confirm that we meet the Swiss legal requirements concerning professional qualification and independence.
We conducted our audits of these consolidated financial statements in accordance with Swiss Auditing Standards and with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Basilea
Pharmaceutica Ltd. and its subsidiaries at December 31, 2007 and 2006 and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America, and comply with relevant Swiss law.
We recommend that the consolidated financial statements submitted to you be approved.
PricewaterhouseCoopers AG
Ralph R. Reinertsen Raphael H. Rutishauser
Auditor in charge
Basel, January 31, 2008
Consolidated Financial Statements
Basilea Pharmaceutica Ltd. and subsidiaries
Consolidated Balance Sheets as of December 31, 2007 and 2006 (in CHF)
These financial statements should be read in conjunction with the accompanying notes.
Basilea Pharmaceutica Ltd. and subsidiaries
Consolidated Statements of Operations for the years ended
December 31, 2007 and 2006 (in CHF)
These financial statements should be read in conjunction with the accompanying notes.
Basilea Pharmaceutica Ltd. and subsidiaries
Consolidated Statements of Cash Flows for the years ended
December 31, 2007 and 2006 (in CHF)
These financial statements should be read in conjunction with the accompanying notes.
Basilea Pharmaceuwtica Ltd. and subsidiaries
Consolidated Statement of changes in Shareholders’ Equity
for the years ended December 31, 2007 and 2006
(in CHF, except for number of shares)
These financial statements should be read in conjunction with the accompanying notes.
Basilea Pharmaceutica Ltd. and subsidiaries
Notes to the Consolidated Financial Statements
(all amounts in CHF)
1 Summary of Significant Accounting Policies
Business Purpose and History
Basilea Pharmaceutica Ltd., Basel, Switzerland (“Basilea”), together with its subsidiaries (collectively “the Company”), is an integrated biopharmaceutical company actively engaged in the discovery, development and preparing for commercialization of innovative drugs for the treatment of bacterial infections, fungal infections and skin diseases. The Company was founded in
October 2000.
In 2007, the Company incorporated subsidiaries in the U.S., Canada, United Kingdom, Germany, Italy, Spain, Denmark and France in the context of establishing an international sales and marketing organization. These subsidiaries are wholly-owned and fully consolidated.
Basilea further owns 100% of the shares of BPh Investitionen AG, Baar, Switzerland, a subholding company, which holds a 100% investment in Basilea Pharmaceutica China Ltd., Haimen, China, that performs chemical supply research and development services. Both BPh Investitionen AG and Basilea Pharmaceutica China Ltd. are fully consolidated.
Basis of Presentation
The consolidated financial statements of the Company have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“US GAAP”). The financial statements are presented in Swiss Francs (CHF).
Reclassifications of prior period amounts have been made related to intangible assets and other income within the consolidated balance sheet, statement of operations and statement of cash flows to conform to the current period presentation.
Principles of Consolidation
Subsidiaries in which Basilea has a controlling interest directly or indirectly are consolidated. Investments in which the Company exercises significant influence (generally between 20 and 50 percent of the voting rights), but which the Company does not control, are accounted for applying the method of equity accounting. Investments in which the Company does not exercise significant influence (generally ownership of less than 20 percent of voting rights) are accounted for at cost. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions which have an effect on the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet date and on the reported amounts of revenues and expenses during the reporting period. These estimates are based on management’s knowledge of current events and actions the Company may undertake in the future, however, actual results ultimately may differ from those estimates.
Cash and Cash Equivalents
The Company considers cash equivalents to be investments, which are highly liquid, readily convertible to cash with original maturities of not more than three months.
Foreign Currencies
Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transactions. Gains and losses from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognized in the statement of operations.
For consolidation purposes, income, expenses and cash flows are translated at the average exchange rate during the period. Assets and liabilities are translated at the period-end exchange rate. The resulting translation adjustment is recorded as other comprehensive income/loss in shareholders’ equity.
Short-Term Investments
Short-term investments include time deposits with banks with original maturities of more than three months and remaining maturities of up to twelve months. These investments are carried at cost approximating fair value. Gains and losses resulting from such investments are included as a component of other financial income/expense in the statement of operations.
Accounts Receivable
Accounts receivable are recorded at net realizable value after consideration of an allowance for doubtful accounts.
Inventories
Costs related to the manufacturing of inventories are expensed as research and development expenses when incurred prior to obtaining regulatory approval or evidence being available that regulatory approval can reasonably be expected. As of December 31, 2007, the Company had not capitalized any inventories. The Company recognized CHF 11.4 million as research and development expenses in 2007 related to manufacturing of pharmaceutical material which may be used for commercialization of one of its compounds, subject to regulatory approval. No corresponding expenses were recognized in 2006.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost less accumulated depreciation. Depreciation is determined on a straight-line basis over the estimated useful lives of the assets of approximately 20 years for buildings, 5 years for R&D equipment, 3–5 years for furniture and office equipment (primarily 3 years), and 3 years for IT hardware and equipment. Leasehold improvements are depreciated over the shorter of 5–10 years or the lease term. Land-use rights are depreciated over the term of the granted right.
Intangible Assets
Intangible assets with definitive lives consist mainly of acquired or developed internal use software. The intangible assets are amortized on a straight-line basis over the estimated useful lives, which is 3 years for software.
Impairment of Long-Lived Assets
Whenever events or changes in circumstances indicate that the carrying amounts of long-lived assets held for use, including property, plant and equipment as well as intangible assets, may not be recoverable, the Company assesses such long-lived assets for impairment. An impairment loss is recognized where an impairment review indicates that the sum of future cash flows, on an undiscounted basis, expected to result from the use of the asset and its eventual disposition is less than the carrying amount of the asset. In this case, an impairment is recognized to the extent the carrying value of the asset exceeds its fair value.
Leases
Property, plant and equipment acquired through capital lease arrangements are recorded at the lower of the present value of the minimum lease payments or fair value. These assets are depreciated over the shorter of the useful life of the assets or the lease term.
Revenue Recognition
The Company generally recognizes revenue if the criteria of Staff Accounting Bulletin (”SAB”) No. 101, as amended by SAB No. 104, are met, which is when there is evidence of an arrangement, the price is fixed or determinable, collectibility is reasonably assured and the service has been rendered or delivery has occurred. For agreements with multiple deliverables, the Company recognizes revenue separately for each deliverable in accordance with Emerging Issues Task Force (“EITF”) Issue
No. 00-21. The Company records revenues net of any sales and value added taxes.
Revenue from non-refundable, upfront license fees and milestone payments under licensing agreements, where the Company has continuing involvement, is recognized over the estimated performance or agreement period, depending on the terms of the agreement. Performance based milestone payments are recognized upon achievement of the respective event and if there is no continuous involvement by the Company related to this milestone payment. To the extent that the Company receives payments, including non-refundable payments, in excess of the recognized revenue, such excess is recorded as deferred revenue until the respective revenue is earned.
Revenue for research and development services provided by the Company is recorded as earned based on the performance requirements of the underlying contracts.
Research and Development Expenses
Research and development costs are expensed as incurred. Research and development equipment with alternative future uses is capitalized and depreciated over its respective useful life.
Research and development expenses primarily contain costs for third-party services in connection with clinical trials and research projects, costs for producing substance to be used in such trials and projects, personnel expenses for the research and development groups of the Company as well as depreciation of equipment used for its research and development activities. In addition, research and development expenses contain expenses for producing pharmaceutical material which may be used for commercialization and which was produced prior to obtaining regulatory approval or evidence being available that regulatory approval can reasonably be expected.
Stock-Based Compensation
As of July 1, 2005, the Company adopted the Statement of Financial Accounting Standards (“SFAS”) No. 123R related to Accounting for Stock-Based Compensation. According to SFAS No. 123R, the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Under the modified prospective application method of SFAS No. 123R, the Company applies this accounting treatment to awards issued, modified, repurchased or cancelled after June 30, 2005 as well as to portions of awards, to the extent they have not vested by June 30, 2005.
The stock-based compensation expenses are allocated over the vesting period of the award. For awards, which consist of portions with different vesting periods, the compensation expense is recognized pro rata for each portion of the award over the respective vesting period of such portion.
Income Taxes
The Company applies the asset and liability method for the determination of provisions for income taxes. The income taxes for the reporting period consist of the current taxes (taxes paid and taxes payable) plus the change in the deferred taxes for the respective period. Deferred taxes represent the estimated future tax consequences of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.
Earnings/Loss per Share
Basic earnings/loss per share is calculated by dividing the net income/loss attributable to the shareholders by the weighted average shares outstanding during the period.
Diluted earnings per share is calculated by dividing the net income attributable to the shareholders by the weighted average shares outstanding during the period adjusted for potential dilution that could occur if dilutive securities, such as stock options and convertible debt, were exercised or converted into shares or resulted in the issuance of shares that then shared in the earnings of the Company. The potential dilution related to stock options is calculated by application of the treasury stock method.
Certain Risks and Uncertainties
The Company is subject to risks common to companies in its industry, including, but not limited to: uncertainty of results of clinical trials for its compounds; ability to achieve regulatory approval for its compounds; acceptance of Company’s products by the market once they are marketed; ability to market its products; ability to manufacture its products at reasonable costs; protection of proprietary technology; development of new technological innovations by its competitors; dependence on key personnel; dependence on key suppliers and compliance with governmental and other regulations.
New Accounting Pronouncements
As new accounting pronouncements are released, the Company reviews such pronouncements for the potential impact on the Company’s financial statements. The accounting pronouncements below may have an impact on the financial statements of the Company.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157 related to fair value measurements. This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. For the Company, this accounting pronouncement will become effective as of January 1, 2008. The Company currently does not expect that the adoption of SFAS No. 157 will significantly impact its financial position or results of operations.
In September 2006, the FASB issued SFAS No. 158 related to accounting for defined benefit and other postretirement plans. This statement requires that the funded status of defined benefit plans is recognized on the balance sheet. In addition, this statement requires that the measurement of plan assets and obligations is performed as of the fiscal year-end. Furthermore, SFAS No. 158 establishes certain additional disclosure provisions. The Company adopted the recognition provisions of SFAS No. 158 in 2006 and recognized the funded status of its defined benefit pension plan in its consolidated balance sheet as of December 31, 2006. With respect to the change in measurement date, the Company currently uses September 30 as the measurement date for its plan assets and obligations. The Company plans to adopt December 31 as the measurement date in the business year 2008 in accordance with SFAS No. 158. The Company does not expect that the change in measurement date will have a significant impact on its financial position or results of operations.
In February 2007, the FASB issued FAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115”. This statement becomes effective from January 1, 2008 and provides entities the option, at specific election dates, to measure many financial instruments and certain other items at fair value. The Company currently does not intend to exercise this fair value option and consequently does not expect that this statement will have a significant impact on its financial position or results of operations.
In June 2007, the FASB ratified the consensus reached by the EITF on EITF Issue No. 07-3 “Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities”. EITF No. 07-3 states that non-refundable advance payments for future research and development activities should be capitalized until the goods have been delivered or the related services have been performed. The Company will adopt this accounting treatment prospectively for new contracts entered into beginning from January 1, 2008, the effective date of this issue.
In December 2007, the FASB ratified the consensus reached by the EITF on the EITF Issue No. 07-1 “Accounting for Collaborative Arrangements”. EITF No. 07-1 prohibits the application of the equity method of accounting for collaborative arrangements unless a legal entity exists. In addition, EITF
No. 07-1 states that payments between collaborative partners would be evaluated and reported in the income statement based on applicable
accounting principles. The Company will adopt this accounting treatment from January 1, 2009, the effective date of this issue and does not expect that the adoption will have a significant impact on its financial position or results of operations.
2 Property, Plant and Equipment
The insurance value of property, plant and equipment amounts to
CHF 95.7 million as of December 31, 2007.
3 Intangible assets
The intangible assets as of December 31, 2007 and 2006 consist of internal use software.
The expected future annual amortization of intangible assets is as follows:
Segment and Geographic Information
The Company operates in one segment, which is the discovery, development and commercialization of pharmaceutical products. The CEO of the Company reviews the profit and loss of the Company on an aggregated basis and manages the operations of the Company as a single operating segment.
The geographical allocation of the long-lived assets of the Company is
presented in the following table:
The revenues with external customers were realized in the following geographies:
The attribution of revenues to geography was done according to the location of the customer.
5 Accounts Receivable
The accounts receivable result primarily from contract research and development services provided by the Company. No allowance for doubtful accounts was recorded on receivables as of December 31, 2007 and 2006.
6 Short-term Investments and Financial Instruments
Short-term Investments
The short-term investments as of December 31, 2007 contain short-term time deposits with banks, all denominated in Swiss Francs, in the amount of
CHF 255.0 million (December 31, 2006: CHF 140.0 million).
Fair Values of Financial Instruments
The book values of the short-term financial assets and liabilities, including cash and cash equivalents, short-term investments, accrued interest and accruals and other current liabilities, approximate the fair values due to the short-term nature of these positions.
7 Cash and cash equivalents
Cash and cash equivalents consisted of the following components:
8 Licensing Agreement
In February 2005, Basilea Pharmaceutica Ltd. (“Basilea”) entered into a licensing, development and co-promotion agreement with Cilag GmbH International, Zug, Switzerland (“Licensee”), a subsidiary of Johnson & Johnson, under which the Company grants the Licensee an exclusive worldwide license to develop and commercialize the Company’s antibiotic compound ceftobiprole (BAL5788). In 2006, the Company exercised its option to co-promote ceftobiprole in major market countries.
Under this agreement, the Company is eligible for a non-refundable upfront payment and non-refundable milestone payments based on the achievement of milestones related to development, regulatory filing, regulatory
approval and commercialization of ceftobiprole. In addition, the Company is also eligible for royalty payments in the event of commercialization of ceftobiprole.
In 2007, the Company received further milestone payments in the amount of CHF 36.4 million related to filing of the new drug applications in the United States and Europe. The non-refundable upfront and milestone payments
received under this agreement were recognized as deferred revenue and are subsequently being recognized as revenue on a straight-line basis over the estimated remaining term of the agreement. The Company recognized CHF 6.6 million as revenue in 2007 related to these payments (2006: CHF 5.2 million).
9 Accruals and Other Current Liabilities
Accruals and other current liabilities as of December 31, 2007 and 2006
consisted of the following:
10 Income Taxes
The Company has tax loss carryforwards of CHF 469.5 million as of December 31, 2007 (December 31, 2006: CHF 342.9 million) of which CHF 215.9 million will expire within the next five years, CHF 249.9 million will expire between six and eight years and CHF 0.4 million will expire thereafter. CHF 3.3 million of the tax loss carryforwards do not expire.
The significant components of net deferred taxes as of December 31, 2007 and 2006 are shown in the following table:
The Company recorded a valuation allowance in 2007 and 2006 to reduce the net deferred taxes to zero in each year, as there is not sufficient positive evidence related to the realizability of the deferred tax assets.
The effective tax rate was zero for the years ended December 31, 2007 and 2006, and the Company did not pay any income taxes in 2007 and 2006. The expected tax rate for 2007 was 26% (2006: 25%). The following table shows the reconciliation between expected and effective tax rate:
Basilea and its subsidiaries file income tax returns in Switzerland and in foreign jurisdictions. Basilea’s income tax position in Switzerland is finally assessed up to the fiscal year 2006.
The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN 48, the Company has not recognized any unrecognized tax benefits as of January 1, 2007 and December 31, 2007. The Company did not incur any interest or penalties in connection with income taxes in the years 2007 and 2006.
11 Stock-Based Compensation
Stock options
The Company has established a stock option plan effective on December 13, 2000, to provide incentives to directors, executives, and employees with an opportunity to obtain stock options on registered shares of Basilea. The shareholders approved conditional capital necessary for the issuance of shares upon the exercise of stock options, of which CHF 2.2 million remains available as of December 31, 2007. CHF 1.4 million of this remaining available conditional capital is reserved for stock options, which are granted and outstanding as of December 31, 2007.
Each stock option entitles the participant to the purchase of one registered share at the strike price pursuant to the rules of the stock option plan. At the end of the option term, all unexercised stock options expire without value.
The vesting periods of the stock options outstanding as of December 31, 2007, which represent the requisite service periods, range from one to four years with contractual terms of the stock options of ten years. The stock option plan foresees accelerated vesting if there is a change of control as defined by the stock option plan.
The following table summarizes the activity under the stock option plan mentioned above:
The following table provides information on the stock options outstanding and the stock options exercisable as of December 31, 2007:
Based on (a) the stock options exercisable as of December 31, 2007, including stock options expected to vest in the future and (b) the stock options exercisable as of December 31, 2007, the aggregate intrinsic values of such number of options were CHF 104.0 million and CHF 77.0 million, respectively. The exercise prices of the options granted in 2007 and 2006 equalled the market price of the shares at the respective grant date.
The weighted average grant-date fair values of options granted in 2007 and 2006 were CHF 59.80 per option and CHF 56.81 per option respectively. The total aggregate intrinsic value of stock options exercised during 2007 was CHF 70.0 million (2006: CHF 41.6 million). The total grant-date fair value of the stock options vested in 2007 was CHF 9.7 million (2006: CHF 5.8 million).
The fair value of the stock options granted in 2007 and 2006 was determined at the grant date using a binomial model. The weighted average assumptions used for these determinations are outlined in the table below:
In 2007, the expected volatility was determined based on the historic volatility of the Company’s share price. In 2006, the expected volatility was determined based on both the historic volatility of the Company’s share price and the historic volatilities of comparable companies, as the Company’s history of share prices was limited at that time. The expected volatility was determined based on the historic volatility of the Company’s share price. The expected term of stock options granted was determined based on management’s best estimate of assumed future exercise patterns, considering the expected future development of the Company.
The unrecognized compensation cost as of December 31, 2007 related to stock options amounts to CHF 29.7 million and is expected to be recognized over a weighted average period of 2.4 years.
Stock-based Cash Bonus Program
The Company implemented a cash bonus program in 2007 for the employees of one of its subsidiaries, under which the bonus depends on the development of the Company’s share price. The bonus program includes a vesting period of three years. As of December 31, 2007, the Company recorded a liability of CHF 0.0 million in its consolidated balance sheet related to this cash bonus program in accruals and other current liabilities.
The Company recorded total stock-based compensation expenses of
CHF 13.7 million in 2007 related to its stock-based compensation award programs (2006: CHF 10.0 million), of which CHF 8.0 million was recorded in
research & development expenses (2006: CHF 6.1 million) and CHF 5.7 million as part of general & administrative expenses (2006: CHF 3.9 million) in the statement of operations.
12 Shareholders’ Equity
As of December 31, 2007, Basilea had 9,543,678 registered shares (Namenaktien) issued and outstanding with a par value of CHF 1 per share. As of December 31, 2006, Basilea had
7,785,506 registered shares with a par value of CHF 1 per share issued and outstanding respectively.
In March 2007, Basilea increased its share capital by an amount of
CHF 1,380,000 through issuance of 1,380,000 registered shares with a nominal value of CHF 1 per share through a secondary offering. Basilea realized net proceeds of approximately CHF 310.1 million through this capital increase.
In 2007, 378,172 stock options were exercised, using conditional capital, which resulted in the issuance of 378,172 registered shares with a par value of CHF 1 per share. In 2006, 349,004 stock options were exercised resulting in the issuance of 349,004 registered shares with a par value of CHF 1 per share.
Basilea had a total approved conditional capital of CHF 2,856,463 as of
December 31, 2007 for the issuance of a maximum of 2,856,463 registered shares with a nominal value of CHF 1 per share. This conditional capital contained CHF 2,216,463 (2,216,463 registered shares with a nominal value of
CHF 1 per share) reserved for the issuance of shares under the stock option plan available to directors, executives and employees. In addition, the shareholders approved conditional capital of CHF 640,000, consisting of 640,000 registered shares with a nominal value of CHF 1 each, available for the exercise of option or conversion rights granted with new option or convertible bonds.
The Company is authorized, through March 2009, to increase its share capital by a maximum of CHF 660,000 by issuing a maximum of 660,000 registered shares with a par value of CHF 1 per share.
In the ordinary shareholders’ meeting on March 7, 2007, the shareholders of the Company approved the release of reserves in the amount of
CHF 79,219,144 to offset the accumulated loss for Swiss statutory purposes.
The accumulated other comprehensive income/loss as of December 31, 2007 and 2006 consisted of the following components:
13 Earnings/Loss per Share
In 2007 and 2006, there was no difference between basic and diluted loss per share. The weighted average number of shares outstanding and the loss per share for the years ended December 31, 2007 and 2006 were as follows:
The computation of the dilutive loss per share for 2007 excludes 570,754
incremental shares (2006: 576,497 incremental shares) related to potential exercises of 1,421,789 stock options (2006:
1,499,949 stock options), as the effect would have been anti-dilutive.
14 Pension Plan
The Company maintains a pension plan, which covers the employees of Basilea Pharmaceutica Ltd. The pension plan of Basilea qualifies as a defined benefit plan in accordance with US GAAP. Both Basilea and the participants provide monthly contributions to the pension plan, which are based on the covered salary. These contributions are credited to employees’ accounts. In addition, interest is credited to the employees’ accounts at the rate provided in the plan. The pension plan provides for retirement benefits as well as benefits on death or long-term disability.
The following table provides information on the pension plan as of December 31, 2007 and 2006 and for the years then ended. The measurement date for Basilea’s pension plan is September 30 of each year.
The reconciliation of the projected benefit obligation and the changes of the fair value of the plan assets of Basilea’s pension plan are shown in the following table:
The Company recorded a prepaid pension asset of CHF 5.5 million and
CHF 2.6 million in other non-current assets in the consolidated balance sheet as of December 31, 2007 and 2006, respectively.
As the Company adopted SFAS No. 158, actuarial gains/losses and differences between expected and actual returns on plan assets are recorded in other comprehensive income/loss. Such gains/losses and differences are amortized to the consolidated statement of operations to the extent that they exceed 10% of the greater of projected benefit obligations or pension assets. As of December 31, 2007, the accumulated other comprehensive income/loss includes an amount of CHF 1.2 million representing a pension-related net gain that has not yet been recognized as a component of net periodic pension cost (December 31, 2006: pension-related net loss of
CHF 1.2 million). As such gain does not exceed specified levels as indicated above, the Company will not amortize this pension-related net gain as a component of net periodic pension cost in its consolidated statement of operations in 2008.
The following table shows the pension-related net gains or losses in accumulated other comprehensive income/loss that have not yet been recognized as components of net periodic benefit cost:
The Company does not expect that any plan assets will be returned to the Company in 2008.
The weighted average of the key assumptions used to compute the benefit obligations were as follows:
The assumption of the expected long-term rate of return on plan assets was based on the target asset allocation and the long-term historical rates of returns for the different investment categories, which were adjusted, where appropriate, to reflect financial market developments.
The accumulated benefit obligation (ABO) as of December 31, 2007 and 2006 amounts to CHF 27.2 million and CHF 26.2 million respectively.
The investment policy for the plan assets of Basilea’s pension plan on a long-term basis is to generate sufficient returns to cover the obligations of the Company’s plan as they become payable. Factors considered in connection with this policy include effective risk management and liquidity needs.
The allocation of the plan assets as of the respective measurement dates in 2007 and 2006 were as follows:
The expected amount of employer contributions to the Company’s defined benefit pension plan in 2008 is CHF 1.7 million.
While the Company does not expect to make any retirement benefit payments before 2012, the following table provides information on all estimated future undiscounted benefit payments under the Company’s pension plan for each of the next five years and the aggregate for the five years thereafter. Besides the retirement benefit payments, these amounts also include payments resulting from death, disability and transfers-out of transportable amounts during the relevant period. Potential payments transferred into the Company’s pension plan resulting from hiring of employees are excluded from the amounts below.
In addition to Basilea’s defined benefit plan, the Company recognized
CHF 0.1 million of expenses related to defined contribution plans of Basilea’s subsidiaries in 2007 (2006: CHF 0.0 million).
15 Lease commitments
The Company entered into operating lease contracts, mainly for office space. The leases expire between 2008 and 2013. The aggregate minimum operating lease payments are expensed on a straight-line basis over the term of the related lease. The total rent expenses under operating leases were CHF 0.2 million and CHF 0.0 million for the years ended December 31, 2007 and 2006, respectively.
The future minimum payments as of December 31, 2007 for operating leases with initial or remaining non-cancelable terms in excess of one year are as follows:
16 Concentration of risk
The Company is generally subject to credit risk related to financial investments. The Company mitigates such credit risk by investing the funds only with counterparties, which are rated as high quality investment grade by a major rating agency at the time of placing the respective investment. As of December 31, 2007, the short-term investments were invested with six different banks. The highest total amount invested in short-term investments with one bank was CHF 90.0 million as of December 31, 2007 (December 31, 2006: CHF 60.0 million).
17 Related Party Transactions
The Company has an agreement with F. Hoffmann-La Roche Ltd. (”Roche”), an affiliate of the Company’s shareholder, Roche Finance Ltd., with respect to certain of its research molecules, that allows Roche to opt-in on such compounds in exchange for milestone payments and potential future royalties. The Company is currently not pursuing those research molecules for which Roche has opt-in rights.
In 2006, the Company entered into an agreement with Roche related to the manufacturing of commercial material for one of the Company’s compounds.
For the year ended December 31, 2007, the Company purchased materials and services from Roche and Roche’s subsidiaries, in the amount of
CHF 9.0 million (CHF 0.1 million for the year ended December 31, 2006).
The accounts receivable, accounts payable and accruals and other current liabilities do not include significant positions due to or from related parties as of December 31, 2007 and 2006.
For information related to compensation to members of the Board of Directors and executive management, please refer to the financial statements of Basilea Pharmaceutica Ltd.
18 Commitments and Contingencies
The Company entered into various purchase commitments for services and materials as well as for equipment as part of the ordinary business. These commitments are not in excess of current market prices in all material respects and reflect normal business operations.
As of December 31, 2007, there are no significant contingencies.
Report of the Statutory Auditors
Report of the Statutory Auditors to the General Meeting of
Basilea Pharmaceutica Ltd., Basel, Switzerland
As statutory auditors, we have audited the accounting records and the financial statements (balance sheet, income statement and notes) of Basilea Pharmaceutica Ltd. for the year ended December 31, 2007.
These financial statements are the responsibility of the Board of Directors. Our responsibility is to express an opinion on these financial statements based on our audit. We confirm that we meet the legal requirements concerning professional qualification and independence.
Our audit was conducted in accordance with Swiss Auditing Standards, which require that an audit be planned and performed to obtain reasonable assurance about whether the financial statements are free from material misstatement. We have examined on a test basis evidence supporting the amounts and disclosures in the financial statements. We have also assessed the accounting principles used, significant estimates made and the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the accounting records and financial statements and the proposed appropriation of loss carried forward comply with relevant Swiss law and the company’s articles of incorporation.
We recommend that the financial statements submitted to you be
approved.
PricewaterhouseCoopers AG
Ralph R. Reinertsen Raphael H. Rutishauser
Auditor in charge
Basel, January 31, 2008
Financial Statements of Basilea Pharmaceutica Ltd
Basilea Pharmaceutica Ltd.
Balance Sheets as of December 31, 2007 and 2006 (in CHF)
These financial statements should be read in conjunction with the accompanying notes.
Basilea Pharmaceutica Ltd.
Statements of Operations for the years ended
December 31, 2007 and 2006 (in CHF)
These financial statements should be read in conjunction with the accompanying notes.
Basilea Pharmaceutica Ltd.
Notes to the Financial Statements as of December 31, 2007
1 History
Basilea Pharmaceutica Ltd. (“Basilea”) was founded on October 17, 2000.
2 Fire Insurance Value
The fire insurance value of property, plant and equipment amounted to
CHF 88.9 million as of December 31, 2007 (December 31, 2006: CHF 88.0 million).
3 Liabilities due to Pension Fund
As of December 31, 2007 and 2006, no liability was outstanding due to the pension fund of Basilea.
4 Total Pledges
As of December 31, 2007 and 2006, there were no assets pledged to secure liabilities.
5 Investments
In addition to the direct investments, Basilea indirectly holds 100 % of the shares of Basilea Labs Inc., Andover, U.S., which is engaged in sales activities, as well as 100 % of Basilea Pharmaceutica China Ltd., Haimen, China, which performs research and development activities.
6 Share Capital, Authorized Capital and Conditional Capital
As of December 31, 2007, Basilea had 9,543,678 registered shares (Namenaktien) issued and outstanding with a par value of CHF 1 per share. As of December 31, 2006, Basilea had 7,785,506 registered shares with a par value of CHF 1 per share issued and outstanding respectively.
In March 2007, Basilea increased its share capital by an amount of
CHF 1,380,000 through issuance of 1,380,000 registered shares with a nominal value of CHF 1 per share through a secondary offering. Basilea realized net proceeds of approximately CHF 310.1 million through this capital increase.
In 2007, 378,172 stock options were exercised, using conditional capital, which resulted in the issuance of of 378,172 registered shares with a par value of CHF 1 per share. In 2006, 349,004 stock options were exercised resulting in the issuance of 349,004 registered shares with a par value of CHF 1 per share.
Basilea had a total approved conditional capital of CHF 2,856,463 as of December 31, 2007 for the issuance of a maximum of 2,856,463 registered shares with a par value of CHF 1 per share. This conditional capital contained CHF 2,216,463 (2,216,463 registered shares with a par value of CHF 1 per share) reserved for the issuance of shares under the stock option plan available to directors, executives and employees. In addition, the shareholders approved conditional capital of CHF 640,000, consisting of 640,000 registered shares with a par value of CHF 1 each, available for the exercise of option or conversion rights granted with new option or convertible bonds.
Furthermore, Basilea is authorized, through March 2009, to increase its share capital by a maximum of CHF 660,000 by issuing a maximum of 660,000 registered shares with a par value of CHF 1 per share.
In the ordinary shareholders’ meeting on March 7, 2007, the shareholders of the Company approved the release of general reserves to free reserves in the amount of CHF 170,411,941 and to offset the accumulated loss of CHF 79,219,144 with free reserves for Swiss statutory purposes.
7 Treasury Shares
In 2007 and 2006, Basilea did not purchase or sell any treasury shares and consequently did not hold any treasury shares as of December 31, 2007 and 2006.
8 Guarantees
During 2007, the Company granted guarantees for certain of its subsidiaries in connection with contracts that the subsidiaries entered into in the normal course of business. There are no significant contingencies as a result of these guarantees as of December 31, 2007.
9 Compensation and shareholdings
The total compensation of the members of the Board of Directors in 2007 is outlined below:
In addition to the compensation as Chairman of the Board of Directors,
Mr. Henrich acted as consultant to Basilea in 2007 and received a total compensation of CHF 27,950 for his consulting services. Furthermore, Mr. Schreiner acted as consultant to Basilea in 2007 and received a total compensation of CHF 9,351 for his consulting services. These compensations are included in the cash compensations as presented in the table above.
The total compensation and the highest individual compensation of the members of executive management in 2007 are outlined below:
The total compensation to current management and the total compensation to management, as presented in the table above, each include a severance payment to one member of management of CHF 400,000.
The Company has not granted any loans or guarantees to members of the Board of Directors or executive management in 2007.
The shareholdings in Basilea of members of the Board of Directors and executive management as of December 31, 2007 are outlined below:
The following table shows the holdings of stock options in Basilea of members of the Board of Directors and executive management as of December 31, 2007:
The indications above for Dr. Keller related to share and option holdings do not take into account the shares or options held by the significant shareholders Roche Finance Ltd. For information on significant shareholders, please refer to footnote 10 “Significant Shareholders”.
10 Significant Shareholders
According to the information available to Basilea, the following shareholders held a significant percentage of shares of Basilea as of December 31, 2007:
The ownership percentages in the table above are based on the 9,543,678 shares outstanding as of December 31, 2007.
Proposal of the Board of Directors
for the Appropriation of Loss Carried Forward
The Board of Directors proposes a release of CHF 28.4 million from legal reserve to free reserve and to offset an amount of CHF 119.6 million from free reserve with the accumulated loss.
