BIODELIVERY SCIENCES INTERNATIONAL, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Report. All amounts and percentages are approximate due to rounding. When we cross-reference to a "Note," we are referring to our "Notes to Consolidated Financial Statements," unless the context indicates otherwise. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those which are not within our control.
Our Strategy
Our growth strategy continues to evolve from our capable and successful commercial organization. We seek to further build a well-balanced, diversified, high-growth specialty pharmaceuticals company focused on delivering innovative therapies for patients living with serious and debilitating diseases. Through our industry-leading commercialization infrastructure, we continue to deliver strong growth of our existing portfolio and also possess the skills to launch new product initiatives. As part of our corporate growth strategy, we have licensed and acquired products and will pursue additional product opportunities in therapeutic areas that meet the needs of our patients. With focused attention on patient access and a structured business-development process for transformative acquisitions or licensing opportunities, we will fully leverage our experience and apply it toward developing new partnerships that enable us to commercialize novel products that can improve the lives of people suffering from challenging medical conditions. We will continue to drive value from our product portfolio with a strong emphasis on BELBUCA growth, including further adoption in the large long-acting opioid market. The product uses our proprietary BEMA technology and maintains a unique delivery profile, strong payer access position and growing physician interest. Symproic continues to climb in both prescriptions and prescribers, proving to be a valuable complementary product for our called upon universe of BELBUCA targets. Our latest portfolio addition, ELYXYB, will furthermore benefit from our sales and marketing expertise and will provide a building foundation in the neurology specialty to fuel future growth opportunities for the business.
Recent Highlights
•OnAugust 4, 2021 , we announced that we entered into an agreement onAugust 3, 2021 with Dr. Reddy's Laboratories Limited (which closedSeptember 9, 2021 ) to acquire theU.S. and Canadian rights to ELYXYB, the only FDA-approved ready-to-use oral solution for the acute treatment of migraine, with or without aura, in adults. •OnOctober 21, 2021 , we announced the appointment ofJohn Golubieski as Chief Accounting Officer, effectiveOctober 25, 2021 , and Chief Financial Officer, effectiveNovember 4, 2021 .Mr. Golubieski brings to BDSI more than 30 years of financial and operational experience and will serve as a member of our company's executive leadership team. •OnDecember 20, 2021 , we announced that theU.S. District Court of Delaware issued an opinion in favor of BDSI in our patent litigation againstAlvogen Group, Inc. and its affiliates, who filed an Abbreviated New Drug Application (ANDA) for our BELBUCA product onMay 23, 2018 . •OnFebruary 14, 2022 , we announced that we entered into an agreement and plan of merger with Collegium Pharmaceutical, Inc., andBristol Acquisition Company Inc. , aDelaware corporation and wholly owned subsidiary of Collegium. Refer to Note 15 "Subsequent Events" of our consolidated financial statements for more information related to the merger.
•On
Critical Accounting Policies and Estimates
Estimates
The preparation of consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those estimates. We
review all significant estimates affecting the consolidated financial statements
on a recurring basis and records the effect of any necessary adjustments prior
to their issuance. Significant estimates include: revenue recognition associated
with sales allowances such as government program rebates, customer voucher
redemptions, commercial contracts, rebates and chargebacks; sales returns
reserves; sales bonuses; stock-based compensation; and deferred income taxes.
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Impairment Testing
In accordance with Generally Accepted Accounting Principles, or GAAP, goodwill impairment testing is performed at the reporting unit level annually, or more frequently if indicated by events or conditions. We performed an evaluation and determined that there is only one reporting unit. In performing a goodwill impairment test, GAAP allows for either a qualitative or a quantitative assessment to be performed. If a qualitative evaluation determines that no impairment exists, then no further analysis is performed. If a qualitative evaluation is unable to determine whether impairment has occurred, a quantitative evaluation is performed. The quantitative impairment test first identifies potential impairments by comparing the fair value of the reporting unit with its carrying value. If the carrying value exceeds the fair value, an impairment charge is recorded based on that difference. The determination of goodwill impairment is highly subjective. It considers many factors both internal and external and is subject to significant changes from period to period. No goodwill impairment charges have resulted from this analysis for 2021, 2020 or 2019. An impairment of a long-lived asset other than goodwill is recognized under GAAP if the carrying value of the asset (or the group of assets of which it is a part) exceeds (i) the future estimated undiscounted cash flow from the use of the asset (or group of assets) and (ii) the fair value of the asset (or asset group). In making this impairment assessment, we predominately use an undiscounted cash flow model derived from internal forecasts. Factors that could change the result of our impairment test include, but are not limited to, different assumptions used to forecast future net sales, expenses, capital expenditures, and working capital requirements used in our cash flow models. If our management determines that the value of intangible assets have become impaired using this approach, we will record an accounting charge for the impairment. No impairment charges have been recorded for other amortizing intangibles in 2021, 2020 or 2019.
Inventory Valuation
We provide inventory write-downs determined primarily by the accumulated cost to manufacture our inventory, which is impacted by component costs and manufacturing yields. The write-down is measured as the difference between the cost of the inventory and net realizable value and charged to cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. We provide a reserve for excess and obsolete inventories identified by a lot-by-lot analysis of our finished goods inventory which considers the expiration dates and future demand forecasts. The write-down is measured as the difference between the cost of the inventory on-hand and the expected demand of the inventory. At the point of the loss recognition, a charge to cost of sales is recorded and a reserve is established for that inventory. The inventory reserve is relieved upon the future sale or disposal of that inventory.
Stock-Based Compensation and other Stock-Based Valuation Issues
We account for stock-based awards to employees and non-employees using fair value-based method to determine compensation for all arrangements where shares of stock or equity instruments are issued for compensation. Fair values of equity securities issued are determined by management based predominantly on the trading price of our common stock. The values of these awards are based upon their grant-date fair value. That cost is recognized over the period during which the employee is required to provide service in exchange for the award.
We use the Black-Scholes option pricing model to determine the fair value of stock option and warrant grants. Refer to Note 1, "Nature of business and summary of significant accounting policies" for more information related to assumptions in applying the Black-Scholes option pricing model.
Fair Value of Financial Instruments
We measure the fair value of instruments in accordance with GAAP which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. We consider the carrying amount of our cash and cash equivalents to approximate fair value due to short-term nature of this instrument.
Revenue Recognition
Revenue from Contracts with Customers
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Under Accounting Standards Codification, or ASC, Topic 606, "Revenue from Contracts with Customers," we are required to evaluate the impact of estimating variable consideration related to our product sales and licensing contracts. We use the expected value method to estimate the total revenue of the contract, constrained by the probability that there would not be a significant revenue reversal in a future period. We evaluate the expected value of revenue over the term of the contract and adjust revenue recognition as appropriate.
Refer to Note 1, "Nature of business and summary of significant accounting policies" for more information related to, (i) product sales, (ii) performance obligations, (iii) adjustments to product sales and (iv) gross to net accruals.
License and development agreements
We periodically enter into license and development agreements to develop and commercialize our products. The arrangements typically are multi-deliverable arrangements that are funded through upfront payments, milestone payments and other forms of payment. Depending on the nature of the contract these revenues are classified as research and development reimbursements or contract revenue.
Product Royalty Revenues
Product royalty revenue amounts are based on sales revenue of the PAINKYL product under the Company's license agreement with TTY and the BREAKYL product under the Company's license agreement with Mylan.
Cost of Sales
Cost of sales in 2021 includes direct costs attributable to the production of BELBUCA, Symproic, BREAKYL and PAINKYL. Cost of sales also includes royalty expenses owed to third parties. Cost of sales in 2020 and 2019 also included BUNAVAIL. For BELBUCA, Symproic and formerly BUNAVAIL, cost of sales includes raw materials, production costs at our contract manufacturing sites, quality testing directly related to the product, lower of cost of market, and depreciation on equipment that we have purchased to produce BELBUCA, Symproic and BUNAVAIL. It also includes any batches not meeting specifications, raw material yield loss and reserves for excess and obsolete inventory. Cost of sales for BELBUCA, Symproic and BUNAVAIL are recognized when sold to the wholesaler from our distribution center. There were no deferred cost of sales for the years endedDecember 31, 2021 nor 2020. Yield losses and batches not meeting specifications are expensed as incurred. For the year endedDecember 31,2019 , depreciation expense included accelerated depreciation for BUNAVAIL specific equipment due to the discontinuation of marketing BUNAVAIL inJune 2020 . For BREAKYL and PAINKYL, we do not take ownership of the subject product as we do not have inventory. Accordingly, raw material product is transferred to Mylan, in the case of BREAKYL and TTY in the case of PAINKYL, immediately in accordance with the terms of our contractual arrangements with Mylan and TTY. LTS manufactures both products for us. Mylan's and TTY's royalty payments to us include an amount related to cost of sales. Ownership and title to the product, including insurance risk, belong to LTS through completion and inventory of the subject product, and then to Mylan and TTY upon shipment of such subject product. This is in accordance with our contracts with LTS and Mylan and TTY, which identify the subject product as FOB manufacturer.
Income taxes
Refer to Note 10, "Income taxes" for more information related to (i) the impact
of the Tax Act to our Company, (ii) reconciliation of the Federal statutory
income tax rate to the effective rate, (iii) the tax effects of temporary
differences and net operating losses that give rise to significant components of
deferred tax assets and liabilities and (iv) our federal and state net operating
loss carry forward ("NOLs").
Results of Operations
For the Year Ended
Product Sales. We recognized$164.6 million and$154.6 million in product sales during the years ended 2021 and 2020, respectively, from our products BELBUCA, Symproic and minimally from BUNAVAIL in 2020. The increase in 2021 is principally due to growth of BELBUCA sales, offset by the discontinuation of BUNAVAIL in 2020. Product Royalty Revenues. We recognized$2.1 million and$1.9 million in product royalty revenue during the years ended 2021 and 2020, respectively, which are composed of BREAKYL sales from Mylan and PAINKYL sales from TTY. 31
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Cost of Sales. We incurred$23.4 million and$24.7 million in cost of sales during the years ended 2021 and 2020, respectively. Cost of sales includes product cost, royalties paid, and yield adjustments. The decrease in cost of sales in 2021 is driven by a credit received from our contract manufacturer in 2021 of$1.4 million . Selling, General and Administrative Expenses. During the years ended 2021 and 2020, selling, general and administrative expenses totaled$106.2 million and$98.8 million , respectively. Selling, general and administrative costs include BELBUCA, and Symproic sales, marketing, commercial and amortization expenses. These costs also include legal expenses, professional fees, wages and stock-based compensation expense. The year over year increase in SG&A costs were driven primarily by increased sales and marketing efforts, higher legal expenditures, and the preparation of the ELYXYB launch, which occurred in Q1 2022. Interest Expense, Net. During the year endedDecember 31, 2021 , we had net interest expense of$7.5 million , consisting of$7.2 million of scheduled interest payments and$0.3 million of related amortization of discount and loan costs for the new debt arrangement. This has been partially offset by interest income of$0.04 million .
During the year ended
Information pertaining to fiscal year 2019 was included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 on page 28 under Part II, Item 7, "Management's Discussion and Analysis of Financial Position and Results of Operations," which was filed with theSEC onMarch 12, 2021 .
Refer to Note 9, "Net sales by product" for more information related to (i) net product sales for BELBUCA, Symproic and BUNAVAIL, and (ii) the percentages related to each product.
Non-GAAP Financial Information:
We report our consolidated financial results in accordance with GAAP; however,
we believe that earnings before interest, taxes, depreciation and amortization
("EBITDA") and other non-GAAP results should not be considered in isolation of
or as an alternative for, earnings measures prepared in accordance with GAAP.
Management uses these non-GAAP measures internally to measure the ongoing
operating performance of our Company along with other metrics, and for planning
and forecasting purposes. In addition, when evaluating non-GAAP results, we
exclude certain items that are considered to be non-cash and if applicable,
non-recurring, in nature.
EBITDA and Non-GAAP Income/(Loss):
We have presented EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our operating performance and to develop operational goals for managing our business. We believe this financial measure helps identify underlying trends in our business that could otherwise be masked by the effect of the expenses that we exclude. In particular, we believe that the exclusion of the expenses eliminated in calculating EBITDA can provide a useful measure for period-to-period comparisons of our core operating performance. Accordingly, we believe that EBITDA provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational decision-making. EBITDA is not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of adjusted EBITDA rather than net income/(loss), which is the nearest GAAP equivalent. Some of these limitations are: •EBITDA excludes depreciation and amortization and, although these are non-cash expenses, the assets being depreciated or amortized may have to be replaced in the future, the cash requirements for which are not reflected in EBITDA;
•EBITDA does not reflect provision for (benefit from) income taxes or the cash requirements to pay taxes; and
•EBITDA excludes net interest, including both interest expense and interest income.
Non-GAAP net income/(loss) is an alternative view of our performance that we are
providing because management believes this information enhances investors'
understanding of our results as it permits investors to better understand the
ongoing operations of the business, the impact of any non-recurring one-time
events, the cash results of the organization and is an additional measure used
by management to assess performance.
Non-GAAP net income/(loss) is not prepared in accordance with GAAP, and should
not be considered in isolation of, or as an alternative to, measures prepared in
accordance with GAAP. There are a number of limitations related to the use of
non-GAAP net income/(loss) rather than net income/(loss), which is the nearest
GAAP equivalent. Some of these limitations are:
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•Non-GAAP income/(loss) excludes certain one-time items because of the nature of the items and the impact that those have on the analysis of underlying business performance and trends. Specifically, in the presentation of non-GAAP income/(loss) for the year endedDecember 31, 2021 , we have excluded the deferred tax benefit of$56.7 million , as it is non-recurring. Also, for the year endedDecember 31, 2019 , we have excluded the financial impact of our debt refinancing which closed inMay 2019 , as it is non-recurring. This excluded item is a significant component in understanding and assessing ongoing financial performance. The one-time expenses related to the payoff of the CRG loan consisted of$5.2 million in unamortized deferred loan fees,$3.9 million in unamortized warrant discount costs and$2.8 million in loan prepayment fees and realized losses, for a cumulative total of$11.9 million in one-time costs. Also, we have excluded the non-recurring financial impact of the BUNAVAIL discontinuation, for a cumulative total of$0.3 million in 2020 and$3.8 million in 2019, and we have excluded the cash portion of the non-recurring financial impact of the CEO transition, for a cumulative total of$1.7 million in 2020; •The expenses and other items that we exclude in our calculation of non-GAAP net income/(loss) may differ from the expenses and other items, if any, that other companies may exclude from non-GAAP net income/(loss) when they report their operating results since non-GAAP income/(loss) is not a measure determined in accordance with GAAP, and it has no standardized meaning prescribed by GAAP; •We exclude stock-based compensation expense from non-GAAP net income/(loss) although (a) it has been, and will likely continue to be for the foreseeable future, a significant recurring expense for our business and an important part of our compensation strategy and (b) if we did not pay out a portion of our compensation in the form of stock-based compensation, the cash salary expense included in operating expenses would likely be higher, which would affect our cash position; •We exclude amortization of intangible assets from non-GAAP net income/(loss) due to the non-cash nature of this expense and although it has been and will continue to be for the foreseeable future a recurring expense for our business, these expenses do not affect our cash position; and •Amortization of warrant discount costs associated with the CRG loan which was dissolved inMay 2019 are excluded given these expenses did not affect our cash position;
Reconciliations of non-GAAP metrics to most directly comparable
The following tables reconcile net income/(loss) earnings and computations (in thousands) under GAAP to a Non-GAAP basis.
Year Ended December 31,
Reconciliation of GAAP net income/(loss) to EBITDA
(non-GAAP) 2021 2020 2019
GAAP net income/(loss) $ 84,860 $ 25,711 $ (15,305)
Add back:
Provision for income taxes (55,238) 252 5
Net interest expense 7,156 7,013 19,036
Depreciation and amortization 7,424 7,521 8,748
EBITDA $ 44,202 $ 40,497 $ 12,484
Reconciliation of GAAP net income/(loss) to Non-GAAP net
income/(loss)
GAAP net income/(loss) 84,860 25,711 (15,305)
Non-GAAP adjustments:
Stock-based compensation expense 6,168 6,107 5,416
Amortization of intangible assets 7,284 6,982 6,981
Deferred tax benefit (56,527) - -
Amortization of warrant discount - - 448
Non-recurring financial impact of debt refinance - - 11,866
Non-recurring financial impact of BUNAVAIL discontinuation - 295 3,750
Non-recurring financial impact of CEO transition - 5,145 -
Non-GAAP net income/(loss) $ 41,785 $ 44,240 $ 13,156
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Liquidity and Capital Resources
Since inception, we have financed our operations principally from the sale of equity securities, proceeds from borrowings, convertible notes, and notes payable, funded research arrangements, revenue generated as a result of our worldwide license and development agreements and the commercialization of our BELBUCA, Symproic and BUNAVAIL products. We intend to finance our commercialization and working capital needs from existing cash, earnings from the commercialization of BELBUCA and Symproic, royalty revenue, new sources of debt and equity financing, existing and new licensing and commercial partnership agreements and, potentially, through the exercise of outstanding common stock options and warrants to purchase common stock. We expect to incur additional costs in preparation for the commercialization of ELYXYB in Q1 2022. AtDecember 31, 2021 , we had cash of approximately$114.3 million . We generated$41.0 million of cash in operations during the year endedDecember 31, 2021 and had stockholders' equity of$187.8 million , versus stockholders' equity of$108.2 million atDecember 31, 2020 . We believe that we have sufficient current cash, along with expected proceeds from sales of BELBUCA and Symproic, to manage the business as currently planned. Additional capital may be required to support the continued commercialization of our BELBUCA and Symproic products, our commercial launch of ELYXYB, or other products which may be acquired or licensed by us, and for general working capital requirements. Based on agreements with our partners, the ability to scale up or reduce personnel and associated costs are factors considered throughout the product life cycle. Available resources may be consumed more rapidly than currently anticipated, potentially resulting in the need for additional funding.
Accordingly, it is possible that we may be required to raise additional capital, which may be available to us through a variety of sources, including:
•public equity markets;
•private equity financings;
•commercialization agreements and collaborative arrangements;
•grants and new license revenues;
•bank loans;
•equipment financing;
•public or private debt; and
•exercise of existing warrants and options.
Readers are cautioned that additional funding, capital or loans (including, without limitation, milestone or other payments from commercialization agreements) may be unavailable on favorable terms, if at all. If adequate funds are not available, we may be required to significantly reduce or refocus our operations or to obtain funds through arrangements that may require us to relinquish rights to certain technologies and drug formulations or potential markets, either of which could have a material adverse effect on us, our financial condition and our results of operations in 2022 and beyond. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in ownership dilution to existing stockholders.
Term Loan Agreement
Refer to Note 8, "Notes payable" for more information related to (i) the 2017
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Contractual Obligations and Commercial Commitments
Our non-cancellable contractual obligations as of
Payments Due by Period
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
Operating lease obligations $ 607 $ 381 $ 226 $ - $ -
Secured loan facility 60,000 4,615 43,077 12,308 -
Interest on secured loan facility 13,628 5,667 7,521
440 -
Minimum royalty expenses* 8,250 1,500 3,000 3,000 750
Total contractual cash obligations
* Minimum royalty expenses represent a contractual floor that we are obligated to payCDC and NB Athyrium LLC regardless of actual sales. The minimum payment is$0.4 million per quarter or$1.5 million per year until patent expiry onJuly 23, 2027 .
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