BGMD BG Medicine Inc (CE)

You should read the following in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto that appear elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K  for the year ended December 31, 2013. In addition to historical information, the following discussion and analysis includes forward-looking information that involves risks, uncertainties and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2013.

Overview

We are developing and commercializing diagnostic products that may be used to help guide the care and management of patients who suffer from heart failure and related disorders.

Our BGM Galectin-3 Test is our first U.S. Food and Drug Administration, or FDA, cleared and CE Marked diagnostic product. It is currently available as a blood test in the United States and the European Union, or EU. Our BGM Galectin-3 Test was included in the 2013 American College of Cardiology Foundation and the American Heart Association Guideline for the Management of Heart Failure.

We market and sell our BGM Galectin-3 Test kits to health care clinical laboratories, hospitals, and health care providers. We hope to accelerate the clinical and commercial adoption of galectin-3 testing by generating, publishing and publicizing data derived from clinical research studies that have incorporated our BGM Galectin-3 Test and by expanding our BGM Galectin-3 Test’s indications for use. We have entered into licensing agreements with leading diagnostic instrument manufacturers to develop and commercialize galectin-3 assays that will be performed on automated platforms that have been incorporated into routine practice in laboratories throughout the world.

We are developing a pipeline of diagnostic products by leveraging our intellectual property and the mining of data generated from the BioImage Study, a patient cohort and specimen repository to which we have exclusive access for the development of diagnostic products. Among the products in development is our CardioSCORE ^™ Test, a biomarker-based blood test designed as an aid in the assessment of near-term risk for significant cardiovascular events, such as heart attack and stroke.

Our BGM Galectin-3 Test

Our BGM Galectin-3 Test is our first FDA cleared and CE Marked diagnostic product. It is an in vitro diagnostic device that quantitatively measures galectin-3 in serum or plasma by enzyme linked immunosorbent assay (ELISA) on a microtiter plate platform. Heart failure patients with elevated galectin-3 levels as measured using our BGM Galectin-3 Test have been found to be at significantly greater risk of adverse outcomes, including death or hospitalization. Measurement of this protein biomarker is intended to be used in conjunction with clinical evaluation.

Galectins are a family of proteins that play many important roles in inflammation, immunity and cancer. Galectin-3, a member of this family of proteins, is a protein biomarker that has been shown to play an important role in heart failure in both animal and human studies. In animal experiments, administration of galectin-3 to the heart led to the development of cardiac fibrosis, or stiffening, in the heart muscle, a process that is often referred to as cardiac remodeling. In these animal studies, adverse remodeling reduced the heart’s ability to pump normally, causing the animals to develop heart failure. This link between galectin-3 and cardiac remodeling is significant and suggests that galectin-3 may be a useful biomarker for adverse cardiac remodeling, an important determinant of the clinical outcome of patients suffering from heart failure. We have obtained an exclusive worldwide license to certain galectin-3 rights that relate to the association of this protein biomarker with heart failure. We have also filed several of our own patent applications related to galectin-3. Our BGM Galectin-3 Test is currently available as a blood test in the United States and the EU.

Automated Testing For Galectin-3

Overview

We believe that automation of our galectin-3 test will broaden its acceptance by laboratory customers and, as a result, accelerate its clinical adoption. To that end, we have entered into licensing and commercialization agreements with four leading diagnostic instrument manufacturers to develop and commercialize automated instrument versions of our galectin-3 test. We have entered into worldwide license, development and commercialization agreements with Abbott Laboratories, or Abbott, bioMérieux SA, or bioMérieux, Siemens Healthcare Diagnostics Inc., or Siemens, and Alere Inc., or Alere. These diagnostic instrument manufacturers account for a significant percentage of the automated laboratory testing instruments that are used throughout the world. The installed customer base of these automated partners reflects all major segments of the diagnostics market, including hospital laboratories, national reference laboratories, regional laboratories and others.

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Progress to Date

In January 2013, bioMérieux obtained a CE Mark for its VIDAS ^® Galectin-3 assay and initiated its commercial launch in the EU. The VIDAS ^® Galectin-3 assay was developed by bioMérieux for the quantitative measurement of galectin-3 levels in blood using the bioMérieux VIDAS ^® automated and multiparametric immunoassay testing system.

In April 2013, Abbott obtained a CE mark for its ARCHITECT ^® Galectin-3 assay and initiated its commercial launch in the EU. Abbott is offering the ARCHITECT ^® Galectin-3 assay on its ARCHITECT ^® immunoassay platform. In the United States, Fujirebio Diagnostics, Incorporated, or Fujirebio, on behalf of Abbott, is the first of our automated partners to have filed for 510(k) regulatory clearance of an automated version of the galectin-3 test. Fujirebio is developing the test for use on Abbott’s ARCHITECT ^® immunochemistry instrument platform. Fujirebio initially submitted its 510(k) to the FDA in July 2012. Subsequently, Fujirebio received a letter from the FDA requesting additional information on various matters, including the geographic composition of the patient cohort that provided the blood samples used to support the 510(k) submission. Due to the nature of the additional information requested and the time required to address the FDA’s questions, Fujirebio was unable to submit a complete response to the FDA by the FDA-designated deadline on February 25, 2013 and withdrew the submission. Fujirebio submitted its new 510(k) to the FDA in February 2014.

Reimbursement for Galectin-3 Testing

Approximately 70% of heart failure patients in the United States are of Medicare age. Therefore, reimbursement by Medicare is of considerable interest to our laboratory customers. In the United States, for the 2014 calendar year, the Centers for Medicare and Medicaid Services (CMS) published a 2014 Medicare national limitation amount for the galectin-3 blood test (analyte-specific CPT ^® Code 82777) at the amount of a crosswalked test (analyte-specific CPT ^® Code 84244) whose 2014 national limitation amount is $30.01. This national limitation replaces the galectin-3 blood test’s national limitation amount of $17.80 that was effective in 2013. The 2014 national limitation amount applies across the U.S. except in Ohio and West Virginia where rates of $23.99 and $26.40, respectively, will apply. In Europe, the Company’s sales efforts are currently directed to hospital situated emergency departments whose reimbursement is covered under the hospital budgeting process.

Our Product Pipeline

New Clinical Claims and Indications for the BGM Galectin-3 Test

We believe that the clinical and commercial value of our BGM Galectin-3 Test may extend beyond its current indications for use. We expect to pursue new clinical claims and indications for its use in assessing heart failure, as well as, in related disorders. Expansion of the product label to include new clinical claims and indications for use will require additional clinical studies and clearance, or approval, by regulatory bodies, such as the FDA, and inclusion in our CE Mark for use in the EU.

CardioSCORE™ Test

Our CardioSCORE test is a multi-analyte biomarker-based blood test that is designed as an aid in the assessment of near-term risk for significant atherothrombotic cardiovascular events, such as heart attack and ischemic stroke. The CardioSCORE test is a proprietary in vitro diagnostic multi-analyte assay in which the levels of multiple biomarkers are measured in blood and the results are mathematically integrated to yield a single numerical score that is predictive of an individual’s near-term atherothrombotic cardiovascular risk. Our development work indicates that the CardioSCORE test has the potential to offer significant improvement over conventional risk factor-based diagnostics, such as the Framingham Risk Score, to identify near-term cardiovascular risk.

In December 2012, we obtained a CE Mark for the CardioSCORE test, which will enable us to market the test in Europe and other countries that recognize CE Mark. However, as a result of our decision to focus our efforts on increasing the adoption and sales of our galectin-3 test, we have decided to redirect investments from a launch of the CardioSCORE test in Europe to support our galectin-3 efforts. We may move forward with a European launch in test markets, when and if appropriate partnership opportunities arise.

In December 2011, we submitted a 510(k) to the FDA in order to obtain regulatory clearance to market the CardioSCORE test in the United States as an aid in the assessment of near-term risk for significant cardiovascular events, such as heart attack and stroke. In response to this submission, FDA requested that we engage an independent committee of physicians to conduct a medical review and adjudication of clinical endpoints reported in the submission. Due to the time involved in responding to this request, we withdrew the 510(k) on August 8, 2012. Our review also included the assessment of sample stability and the evaluation of other technical issues raised by the FDA. We are currently analyzing the results of the medical review. When completed, the results obtained from our analysis of data collected from the review will guide our go-forward regulatory, commercial and investment strategy for the CardioSCORE test in the United States.

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BioImage Study Patient Cohort and Banked Specimens

We have exclusive rights to diagnostic inventions arising from our analysis of data generated from the BioImage Study, a proprietary observational and community-based cohort of over 6,800 individuals who have been followed since 2009. Baseline blood serum, plasma, DNA, and RNA samples collected from all participants have been stored and are available for our analysis. In addition, insurance claims data, including information regarding diagnoses, procedures, and therapies related to over 1,200 non-fatal cardiovascular events that were experienced by participants in the cohort over the more than four years since follow-up was initiated is available to us for data mining. We believe that this asset provides us with a unique and proprietary platform from which we may develop new diagnostic products.

Results of Operations

Comparison of the Three Months ended March 31, 2014 and 2013

Revenues

Our product revenues are primarily derived from sales of the BGM Galectin-3 Test. Our product revenues have tended to be concentrated with a small number of laboratory providers generating a significant percentage of our revenues in any given reporting period. As a result, the timing of orders from these customers may fluctuate significantly from month to month and quarter to quarter.

The following table summarizes our total revenues for the three months ended March 31, 2014 and 2013:

Total revenues decreased by 17%, or $149,000, to $739,000 in the three months ended March 31, 2014 from $888,000 in the three months ended March 31, 2013.

Product revenues are comprised primarily of sales of our BGM Galectin-3 Test and decreased in the three months ended March 31, 2014 by $81,000, to $739,000, from $820,000 in the three months ended March 31, 2013. The decrease in product revenues resulted primarily from a decline in orders due to inclement weather in the Eastern half of the United States, where our clinical laboratory customers are concentrated, and purchases relating to independent research studies which, typically, vary from quarter to quarter. We have not yet recorded significant royalties from Abbott or bioMerieux’s automated versions of their galectin-3 assays.

Service revenues decreased by 100%, or $68,000, to $0 in the three months ended March 31, 2014 from $68,000 in the three months ended March 31, 2013. Service revenues in 2013 related to the High Risk Plaque initiative program and there is no further revenue to recognize under the project. Accordingly, we do not expect to record service revenues for the remainder of 2014 and beyond.

Product Costs

Our product costs consist of expenses related to our BGM Galectin-3 Test. These expenses include the contract-manufacturing of the tests, the medical device excise tax, freight and royalty expenses payable to the licensor of certain intellectual property relating to galectin-3 based on revenues generated from the sales of the test. Product costs exclude depreciation and amortization included in operating expenses.

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The following table provides information with respect to our product costs and product margins for the three months ended March 31, 2014 and 2013:

Product costs decreased by 11%, or $32,000, to $248,000 in the three months ended March 31, 2014 as compared to $280,000 in the three months ended March 31, 2013. The decrease in product costs was commensurate with the decrease in product revenue.

Service Costs

Our service costs consist primarily of expenses incurred to support our initiatives, collaborative research and development agreements and biomarker discovery and analysis services agreements. These expenses include outside services and internal personnel costs, laboratory consumables, license fees and overhead expenses.

The following table provides information with respect to our service costs for the three months ended March 31, 2014 and 2013:

Service costs decreased by 100%, or $68,000, to $0 in the three months ended March 31, 2014 as compared to $68,000 in the three months ended March 31, 2013. Service costs in the three months ended March 31, 2013 consisted of costs related to the High Risk Plaque initiative program. There are no further costs to incur under this project. Accordingly, we do not expect to record service costs for the remainder of 2014 and beyond.

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Research and development

Historically, we have incurred research and development expenses in connection with our internal biomarker discovery and development efforts. Our research and development expenses consist primarily of direct personnel costs, fees for consultants and outside services, laboratory consumables and overhead expenses. We use consultants and outside services to provide expertise or services that we do not have.

Research and development expenses decreased by 59%, or $816,000, to $560,000 in the three months ended March 31, 2014 as compared to $1.4 million in the three months ended March 31, 2013. The decrease was primarily attributable to decreased biomarker discovery research costs of $332,000 from a strategic reorganization during the fourth quarter of 2012 and the first half of 2013 that sought to eliminate our early stage biomarker discovery activities and re-focus our resources on building additional commercialization capabilities, as well as, decreased professional service costs of $331,000, and decreased costs related to the CardioSCORE medical review and adjudication process of $319,000, offset by costs related to an amendment to an agreement with one of our automated partners in the amount of $150,000.

Selling and marketing

Selling and marketing expenses consist primarily of costs related to supporting commercialization activities associated with our BGM Galectin-3 Test.

Selling and marketing expenses decreased by 68%, or $1.5 million, to $688,000 in the three months ended March 31, 2014 as compared to $2.1 million in the three months ended March 31, 2013. The decreased expenditures were primarily due to costs related to refocusing our marketing activities from market education to commercialization of $868,000 and a decrease in compensation related costs and travel of $417,000.

General and administrative

General and administrative expenses consist primarily of personnel-related expenses, allocated occupancy costs, and expenses related to operating as a public company. These expenses include legal and regulatory costs, directors’ and officers’ insurance premiums, investor relation services, and accounting and financial reporting expenses.

General and administrative expenses decreased by 35%, or $631,000, to $1.2 million in the three months ended March 31, 2014 as compared to $1.8 million in the three months ended March 31, 2013. This decrease is due primarily to a decrease in compensation related charges and travel of $370,000 and decreased legal and audit related fees of $232,000.

Other income and expense

The following table summarizes other (expense) income for the three months ended March 31, 2014 and 2013:

Other (expense) income decreased by $379,000 primarily resulting from the non-cash commitment fee required by our stock purchase agreement with Aspire Capital Fund, LLC that we paid during the three months ended March 31, 2013 for which we had no corresponding expense during the three months ended March 31, 2014, and less interest expense due to lower loan balances on our term loan because of our principal payments.

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Liquidity and Capital Resources

Sources of Liquidity

Our primary sources of liquidity have included our cash balances, sales of our equity securities, term loan, product revenue from sales of the BGM Galectin-3 Test, and service revenue from the HRP initiative. As of March 31, 2014, we had $4.3 million of cash.

Follow-on Underwritten Public Offerings

On January 30, 2013, we closed a follow-on underwritten public offering of 6,900,000 shares of our common stock, which included the sale of 900,000 shares pursuant to the underwriters’ over-allotment option. The net offering proceeds received by us, after deducting underwriting discounts and commissions and expenses incurred in connection with the offering, were approximately $12.8 million.

On April 8, 2014, the Company closed a follow-on underwritten public offering of 6,452,000 shares of its common stock, at an offering price of $1.55 per share, for gross proceeds of $10.0 million. The net offering proceeds received by the Company, after deducting underwriting discounts and commissions and expenses incurred in connection with the offering, were approximately $9.0 million.

Common Stock Purchase Agreement with Aspire Capital

On January 24, 2013, we entered into a Common Stock Purchase Agreement, or the Purchase Agreement, with Aspire Capital Fund, LLC, or Aspire, to purchase, at our option, up to an aggregate of $12.0 million of shares of our common stock over a two-year term, which expires in May 2015. Under the Purchase Agreement, we initially issued 132,743 shares of our common stock as a commitment fee. Our sales to Aspire will be made subject to market conditions, in light of our capital needs and under various limitations contained in the Purchase Agreement. We have not yet sold any shares under the Purchase Agreement.

Over the term of the Purchase Agreement, assuming the Company’s common stock is trading above the $1.00 minimum floor price that is required to use the facility, we have two ways to elect to sell common stock to Aspire on any business day we select: (1) through a regular purchase of up to 100,000 shares at prices based on the market price of our common stock prior to the time of each sale, and (2) through a volume weighted average price, or VWAP, purchase of a number of shares up to 30% of the volume traded on the purchase date at a price equal to the lesser of the closing sale price or 95% of the VWAP for such purchase date.

We also entered into a Registration Rights Agreement with Aspire, which requires, among other things, that we maintain the effectiveness of our registration statement that registered the shares issued and issuable to Aspire under the Purchase Agreement.

Secured Term Loan Facility

In February 2012, we entered into a secured term loan facility with General Electric Capital Corporation and Comerica Bank, and a term loan in the aggregate principal amount of $10.0 million was funded to us upon the closing of the transaction. The term loan accrues interest at a rate of 8% per annum plus the higher of (a) the 3-month LIBOR rate or (b) 1.25%. The interest rate in effect at March 31, 2014 was 9.25%. Interest only payments were made for the first twelve months of the loan term. Following that initial twelve month period, principal and interest payments are required to be paid on a monthly basis through maturity at September 2015.

May 2013 Loan Amendment

In May 2013, the loan and security agreement was amended to allow for a three month deferral of principal payments beginning May 1, 2013 and to allow for up to an additional three months of deferral based on us meeting certain minimum liquidity requirements, as defined in the amendment. We made principal payments in March and April 2013 prior to the signing of the amendment. We did not meet the additional liquidity requirements, as defined in the amendment, and, accordingly, principal payments resumed on August 1, 2013. The amendment also increased certain loan fees by $50,000, and amended the terms of the warrants, as discussed below.

Warrants

In connection with the loan facility, we initially issued warrants to purchase 36,657 shares of our common stock with an exercise price of $6.82 per share. The warrants expire ten years from the date of issuance. The warrants were valued using the Black-Scholes

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option pricing model using the following assumptions: fair value of the underlying common stock of $8.51 per share; volatility of 70%; no dividend yield; risk free interest rate of 1.96%; and an expected life of ten years. The relative fair value of the warrants, aggregating $240,000, has been accounted for as a debt discount and is being recognized as interest expense over the term of the loan using the effective interest method. As part of the May 2013 amendment to the loan and security agreement, the number of shares for which the warrants were exercisable increased by 110,401 shares and the warrant price of the warrants was adjusted to $1.70 per share. At the loan modification date, we valued the warrants using the Black-Scholes option pricing model and recorded the incremental value of the increased number of warrants as additional debt discount in the amount of $163,000, which is being recognized as additional interest expense over the remaining term of the loan using the effective interest method. The warrants under the term loan have been classified as equity instruments and are included within additional paid-in capital.

At March 31, 2014, we had $6.3 million outstanding under the term loan and had an unamortized debt discount of $0.1 million.