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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-28308
COLLAGENEX PHARMACEUTICALS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1758016
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
41 University Drive, Newtown, Pennsylvania 18940
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (215)579-7388
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
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None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(Title of Class)
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
State the aggregate market value of the voting common stock held by
non-affiliates of the registrant: $40,406,361 at March 15, 2001 based on the
last sales price on that date.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 15, 2001:
Class Number of Shares
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Common Stock, $0.01 par value 10,550,638
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the registrant's definitive Proxy Statement for
its 2001 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
TABLE OF CONTENTS
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Item Page
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PART I 1. Business................................................ 1
2. Properties.............................................. 24
3. Legal Proceedings....................................... 24
4. Submission of Matters to a Vote of Security Holders..... 24
PART II 5. Market for the Company's Common Equity and Related
Stockholder Matters.................................. 25
6. Selected Consolidated Financial Data.................... 25
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 28
7A. Quantitative and Qualitative Disclosures about
Market Risk.......................................... 35
8. Financial Statements and Supplementary Data............. 35
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 35
PART III 10. Directors and Executive Officers of the Company......... 36
11. Executive Compensation.................................. 36
12. Security Ownership of Certain Beneficial Owners and
Management........................................... 36
13. Certain Relationships and Related Transactions.......... 36
PART IV 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................ 37
SIGNATURES............................................................... 38
EXHIBIT INDEX............................................................ 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE.............................................................. F-1
i
PART I
ITEM 1. BUSINESS.
GENERAL
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CollaGenex Pharmaceuticals, Inc. and subsidiaries ("CollaGenex", or the
"Company") is a specialty pharmaceutical company focused on providing innovative
medical therapies to the dental market. The Company's first product,
Periostat(R), is an orally administered, prescription pharmaceutical product
that was approved by the United States Food and Drug Administration (the "FDA")
in September 1998 and is the first and only pharmaceutical to treat adult
periodontitis by inhibiting the enzymes that destroy periodontal support
tissues. In December 2000 and February 2001, the United Kingdom Medicines
Control Agency (the "UK MCA") and the FDA, respectively, granted marketing
approval for a new tablet formulation of Periostat which is smaller, easier to
swallow and offers manufacturing cost advantages. This formulation will replace
the currently marketed capsule formulation during 2001. Periostat is indicated
as an adjunct to scaling and root planing ("SRP"), the most prevalent therapy
for adult periodontitis, to promote attachment level gain and to reduce pocket
depth in patients with adult periodontitis. Adult periodontitis, a chronic
disease characterized by the progressive loss of attachment between the tooth
root and the surrounding periodontal structures, may result in tooth loss if
untreated. See "- Periostat."
The Company believes that it is the only specialty pharmaceutical company
specifically focused on the dental market. There are approximately 120,000
dentists in the United States, who write about 55 million prescriptions per
year. Most of these prescriptions are for drugs that treat the symptoms
associated with dental diseases, such as pain, inflammation and infection.
Periostat is the first orally administered, systemically delivered
pharmaceutical developed and approved specifically to treat a dental disease.
Research has shown that the enzyme-suppression technology underlying
Periostat may also be applicable to other diseases involving destruction of the
body's connective tissues, including cancer metastasis, osteoporosis,
osteoarthritis, rheumatoid arthritis, diabetes and acute lung injury. The
Company is also developing a series of novel, proprietary compounds known as
IMPACS(R) (Inhibitors of Multiple Proteases and Cytokines) to address other
applications. Phase I clinical trials for Metastat(R), the Company's lead
compound for the treatment of metastatic cancer, were initiated in January 1998
under the sponsorship of the National Cancer Institute (the "NCI"). In Phase I
clinical trials, Metastat demonstrated an overall tumor response rate of 44% in
patients with Kaposi's sarcoma, and the NCI has elected to continue testing
Metastat in Phase II clinical trials.
The Company's core technology is licensed on an exclusive basis from the
Research Foundation of the State University of New York at Stony Brook ("SUNY").
SUNY also conducts research and development on other potential applications of
the core technology pursuant to a contract with the Company.
Periostat is marketed to the professional dental community in the United
States through a professional pharmaceutical sales force comprised of
approximately 120 sales representatives
1
and managers. Currently, the Company's sales force is also marketing Vioxx(R), a
prescription non-steroidal anti-inflammatory drug (NSAID) developed by Merck &
Co., Inc. ("Merck") that the Company promotes for the treatment of acute dental
pain, and Denavir(R), a prescription drug owned by Novartis Pharmaceuticals
Corporation ("Novartis") for the treatment of cold sores. Novartis notified the
Company by letter dated March 14, 2001 of its intention to terminate its
co-promotion agreement with the Company with respect to Denavir and the Company
and Novartis are discussing potential alternate partnering arrangements, if any.
The Company recently initiated a direct-to-consumer ("DTC") advertising campaign
to build patient awareness of Periostat and to drive prescription and revenue
growth. The Company is actively pursuing other prescription and non-prescription
products to market to the professional dental community and directly to the
consumer, and may enter directly into manufacturing arrangements for additional
complementary products, such as dental neutraceuticals.
The Company was incorporated in Delaware in January 1992 under the name
CollaGenex, Inc. The Company's name was changed to CollaGenex Pharmaceuticals,
Inc. in April 1996. The Company's executive offices are located at 41 University
Drive, Newtown, Pennsylvania 18940, and its telephone number is (215) 579-7388.
"Periostat(R)", "Metastat(R)" and "IMPACS(R)" are United States trademarks
of the Company. All other trade names, trademarks or service marks appearing in
this Annual Report on Form 10-K are the property of their respective owners and
are not property of the Company.
PERIOSTAT
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Adult periodontitis is a chronic disease characterized by the progressive
loss of attachment between the periodontal ligament and the surrounding alveolar
bone, ultimately resulting in tooth loss. According to industry data, in the
United States alone, an estimated one-third of all adults, or approximately 67
million people, suffer from some form of periodontal disease. Approximately 13
million people seek professional treatment annually for periodontal disease,
resulting in over 15 million periodontal procedures and annual expenditures of
approximately $6 billion, primarily for procedures and surgeries performed by a
periodontist or a dental professional.
The most prevalent therapy for adult periodontitis is SRP, a mechanical
procedure that removes bacteria and bacteria deposits called plaque from tooth
and root surfaces above and below the gum line. Periostat is the first orally
administered, systemically delivered pharmaceutical indicated as an adjunct to
SRP to promote attachment level gain and to reduce pocket depth in patients with
adult periodontitis.
Periostat, a 20 mg dose of doxycycline, is a unique sub-anti-microbial
dosage strength that suppresses the chronic and progressive tissue degradation
characteristic of periodontitis without exerting any anti-microbial effect.
Doxycycline is an active ingredient of several FDA approved drugs and has been
in use for approximately 35 years for the treatment of microbial infections and,
along with other tetracyclines, has a well established safety record.
Periostat's mechanism of action is believed in part to be through the
down-regulation of the activity of collagenases, enzymes which are members of a
broad class of enzymes known as matrix metalloproteinases ("MMPs") that are
excessively produced as a result of inflammation resulting
2
from bacterial infection in the gums. Periostat is intended to be taken orally
by the patient between dental visits. In September 1998, the FDA granted the
Company marketing approval for Periostat as an adjunct to SRP to promote
attachment level gain and reduce pocket depth in patients with adult
periodontitis. Periostat was made available for prescription in November 1998
and was fully launched commercially in January 1999. Since January 1999, more
than 975,000 Periostat prescriptions have been filled and over 34,000 dentists
have written a Periostat prescription.
In December 2000 and February 2001, the UK MCA and the FDA, respectively,
granted marketing approval for the Company's new tablet formulation of
Periostat. Such tablets will be manufactured by Pharmaceutical Manufacturing
Research Services, Inc. ("PMRS") a contract manufacturing company. Tablets will
also be supplied to the Company's foreign marketing partners upon receipt of
requisite regulatory approvals, if at all, which will be applied for in 2001.
VIOXX
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Pursuant to a Co-Promotion Agreement executed with Merck in September
1999, the Company received the exclusive right to co-promote Vioxx to the dental
community. Vioxx is a prescription strength NSAID that was approved by the FDA
on May 20, 1999 for the treatment of osteoarthritis, the management of acute
pain in adults, including dental pain, and the treatment of primary
dysmenorrhea. Merck promotes Vioxx to the general physician community. The
agreement provides for certain payments by Merck to the Company upon sales of
Vioxx to the dental community.
Vioxx belongs to a new class of NSAIDs that are believed to work by
selectively inhibiting the cyclooxygenase-2 (COX-2) enzyme, which plays a role
in pain and inflammation. Vioxx spares a related enzyme (COX-1) that helps
maintain the normal stomach lining and platelet homeostasis. In general, most
NSAIDs block both enzymes. Such medications treat pain and inflammation, but may
damage the stomach lining, potentially leading to ulcers in some patients. In
recent clinical trials, Vioxx was shown to be more effective than acetominophen
plus codeine, a narcotic, in relieving pain, with a much lower risk of the
gastrointestinal side effects and prolonged bleeding commonly associated with
NSAID pain relievers. Vioxx may also now be promoted for osteoarthritis of the
temporomandibular joint ("TMJ"), a painful chronic disorder of the jaw.
Prescribed as a once-a-day dose, Vioxx offers patients a convenient alternative
to the multiple daily doses required for many other NSAIDs.
DENAVIR
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Denavir is an FDA approved topical antiviral cream used for the treatment
of cold sores. It is the first and only prescription-strength medicine for
treating recurrent cold sores in healthy adults. The Company has marketed
Denavir to the dental community under a Co-Promotion Agreement with Novartis,
since October 13, 1998, which agreement provided for certain payments by
Novartis to the Company. Novartis notified the Company by letter dated March 14,
2001 of its intention to terminate its co-promotion agreement with the Company
with respect to Denavir, and the Company and Novartis are discussing potential
alternative partnering arrangements, if any.
3
SALES AND MARKETING
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The Company markets and sells its products in the United States through a
dedicated sales force comprised of approximately 120 sales representatives and
managers. The Company intends to market Periostat in foreign markets, upon
receipt of all requisite regulatory approvals, primarily through marketing and
distribution partnerships with companies in these markets. The Company currently
has such agreements with foreign companies, subject to requisite regulatory
approvals, covering Japan, Germany, Italy, Canada, Spain, Portugal, Greece,
Israel, Austria and Switzerland, and has an export marketing agreement for
countries in the Middle East. A capsule formulation of Periostat was approved by
the UK MCA in February 2000, and the Company launched a modest direct marketing
effort in the United Kingdom to dentists through the Company's United Kingdom
subsidiary in September 2000. In December 2000 the UK MCA approved a tablet
formulation of Periostat and during 2001 the Company intends to file for
regulatory approvals in European countries through the Mutual Recognition
Procedure. The Company's foreign marketing and distribution agreements provide
for milestone payments upon the achievement of various regulatory and commercial
events as well as supply agreements for manufactured product. The Company's
Swiss and Israeli distributors will also file for regulatory approval during
2001.
United States
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The field sales organization is currently comprised of two regional
managers, eleven district managers and approximately 105 full-time equivalent
("FTE") sales representatives. Each FTE is responsible for covering a territory
that includes approximately 250 dentists and periodontists that are believed to
be high volume potential prescribers of Periostat based on the estimated number
of SRPs performed in their respective practices.
The Company believes that its sales effort is distinguished from other
dental sales forces by its focus on education and the clinical benefits of
pharmaceutical dentistry, a new approach to treating dental diseases.
Accordingly, the Company produces educational marketing materials, detail aids
and product samples that are used extensively by the representatives in their
presentations to dentists. Clinical reprints and video presentations are also
provided. The Company believes that peer-to-peer communications are vital to
increasing the acceptance of Periostat and arranges speaking engagements and
teleconferences where Periostat advocates share their experiences with other
dental professionals.
Sales training is an important component of the Company's marketing
efforts. New representatives receive four weeks of field training and two weeks
of intensive office training in periodontal disease, host response, pain
management, territory management and selling skills. Training continues at
district-level meetings throughout the year.
In order to provide an integrated dental product line and leverage the
Company's sales and marketing organization, the Company is actively seeking to
in-license or acquire other high-quality therapeutic dental products.
4
United States Direct-to-Consumer Advertising Campaign
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DTC is a relatively new but highly effective marketing tool used by
pharmaceutical companies to build patient awareness of prescription drugs and to
drive prescription and revenue growth. In conducting market research, the
Company learned that there was a greater than 90% awareness of Periostat among
dentists but less than a 10% awareness of Periostat among patients with adult
periodontitis.
In October 2000, the Company initiated a test DTC campaign in Tampa and
St. Louis to evaluate the potential effectiveness of this tool for increasing
Periostat prescription growth. The Company's advertisements were developed by
Bozell Healthcare, the fourth largest healthcare advertising firm in the world,
and were placed in both print and television media in Tampa and St. Louis. The
test campaign was conducted from October 8 through December 11, 2000 and resumed
again in January 2001 for one month.
During the fourth quarter of 2000, new Periostat prescriptions in the test
cities were 48% higher than the third quarter of 2000 compared to a 1.4%
increase in new Periostat prescriptions in the rest of the United States.
Periostat is typically prescribed for 30 days with two or more refills. Total
Periostat prescriptions, which include refills, in the test markets in the
fourth quarter of 2000 increased 32.4% over new prescriptions in the third
quarter compared to a 3.3% increase in the rest of the United States.
Based on these results, in January 2001 the Company expanded its DTC
campaign to include Philadelphia, Washington, Houston and Chicago. The Company
plans a further expansion of the campaign in up to eight additional advertising
markets over the course of 2001.
International
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The Company is establishing relationships with key partners to market and
sell Periostat internationally, upon receipt of the requisite foreign regulatory
approvals. In 1996, the Company executed a manufacturing and distribution
agreement with Roche S.P.A. (formerly Boehringer Mannheim Italia) pursuant to
which Roche S.P.A. has the exclusive right to market Periostat in Italy, San
Marino and The Vatican City pending requisite regulatory approval. In 1997, the
Company announced that a Marketing Authorization for Approval was filed for
Periostat by Roche S.P.A. with the Italian Ministry of Health. Due to delays
incurred in the review of national filings, Roche S.P.A. has agreed to withdraw
the Marketing Authorization for Approval in Italy, and this country will now be
included under the pan-European Mutual Recognition Procedure. Such filing will
take place during 2001.
In July 1998, the Company executed a licensing agreement with Laboratoires
Pharmascience S.A. ("Laboratories Pharmascience") pursuant to which Laboratoires
Pharmascience was to market and distribute Periostat following the requisite
regulatory approval on an exclusive basis in France, Morocco, Algeria, Tunisia
and other countries of French speaking Africa. On March 31, 2000 the Company
received notice from Laboratories Pharmascience terminating the 1998 license
agreement. After negotiation, the parties mutually agreed to discontinue their
relationship. The Company is actively seeking a partner to market and distribute
Periostat in France, upon receipt of requisite regulatory approvals in such
region.
5
In October 1998, the Company announced that a Marketing Authorization
Application ("MAA") had been filed with the UK MCA with respect to Periostat. In
February 2000, the UK MCA granted marketing approval for Periostat for the
adjunctive treatment of chronic adult periodontitis. On May 2, 2000, the Company
announced that it had filed another MAA with the UK MCA seeking marketing
approval of a tablet-formulation of Periostat, which application was
subsequently granted in December 2000. Sales of Periostat capsules commenced in
the United Kingdom in September 2000. A new filing incorporating data from both
the capsule and tablet MAAs was filed with the UK MCA in February 2001 and, when
approved, will form the basis for an application for approval of Periostat under
the European Mutual Recognition Procedure. Such a filing will take place during
2001. There can be no assurance that the Company will achieve other foreign
regulatory approvals or will be successful in marketing Periostat in the United
Kingdom or other European countries.
The Company executed a licensing agreement with Pharmascience Inc.
("Pharmascience") in June 1999 pursuant to which Pharmascience will market and
distribute Periostat in Canada pending requisite regulatory approval. In the
fourth quarter of 1999, Pharmascience submitted an application to the Canadian
Therapeutic Products Program of Health Canada for Canadian marketing approval of
Periostat. This application remains under review by the Canadian authorities.
On May 2, 2000, the Company announced that it had executed an exclusive
marketing and distribution agreement with ISDIN S.A., a joint venture between
the Spanish companies Laboratorios del Dr. Esteve S.A. and Antonio Puig S.A, for
the marketing and distribution of Periostat tablets in Spain and Portugal,
pending requisite regulatory approval. Such agreement was subsequently extended,
granting ISDIN S.A. the right to market and distribute Periostat in Greece,
pending requisite regulatory approval.
On June 9, 2000, the Company announced that it had executed marketing and
distribution agreements with Willvonseder & Marchesani Ges.m.b.H & Co. KG, a
Vienna based company and Karr Dental Ltd., a Zurich based company, with respect
to the marketing and distribution of Periostat tablets in Austria and
Switzerland, respectively, pending requisite regulatory approval.
On August 9, 2000, the Company announced that it had executed an exclusive
marketing and supply agreement with Showa Yakuhin Kako Co. Ltd., a Japanese
company, with respect to the marketing and supply of Periostat tablets in Japan,
pending requisite regulatory approval.
On August 24, 2000, the Company announced that it had executed an
agreement for the marketing and distribution of Periostat in Israel with Taro
International Ltd. ("Taro"), a wholly-owned subsidiary of Taro Pharmaceutical
Industries Limited, an Israeli company, pending requisite regulatory approval.
Such agreement between the Company and Taro provides for the payment of
milestone fees to the Company associated with the regulatory approvals of
Periostat, if any.
On December 5, 2000, the Company announced that it had signed a
Distribution and Marketing Agreement with Hain Diagnostika GmbH ("Hain") for the
distribution and marketing of Periostat in Germany, pending requisite regulatory
approval of Periostat. Hain will pay milestone fees associated with such
regulatory approvals, if any.
6
On January 30, 2001, the Company announced that it had signed an exclusive
Middle East Export Marketing Agreement with Pharma Med Inc. ("Pharma Med") to
distribute and manage the introduction of Periostat in certain Middle Eastern
countries, pending requisite regulatory approval. In return for such services,
Pharma Med will be paid a fee contingent on Periostat sales to the distributors.
MANUFACTURING, DISTRIBUTION AND SUPPLIERS
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The Company has entered into a supply agreement with Hovione International
Limited ("Hovione") pursuant to which the active ingredient in Periostat,
doxycycline, is supplied by Hovione from its offshore facilities. Hovione
supplies a substantial portion of the doxycycline used in the United States from
two independent, FDA-registered and approved facilities, providing for a back-up
supply in the event that one facility is unable to manufacture. The initial term
of the supply agreement expired on January 25, 2000 and thereafter automatically
renewed and will continue to renew for successive two-year periods unless, 90
days prior to the expiration of any such periods, either party gives the other
party written notice of termination. In addition, in the event of a default,
uncured for 90 days, the non-defaulting party can terminate the supply agreement
effective immediately at the end of such 90-day period. The Company relies on
Hovione as its sole supplier of doxycycline.
The Company currently relies on a single third-party contract
manufacturer, Applied Analytical Industries, Inc. ("AAI"), of Wilmington, North
Carolina, for the commercial manufacturing of Periostat in a capsule
formulation. This agreement with AAI, which initially had a three-year term,
will terminate in November 2001 subject to AAI's limited ongoing commitment to
provide product to the Company as discussed below. AAI is required to comply
with Good Manufacturing Practices ("GMP") requirements.
In October 2000, AAI notified the Company of AAI's belief that it was
commercially impracticable for AAI to continue to manufacture Periostat at
current pricing levels as a result of certain manufacturing specifications for
Periostat that were mandated by the FDA. AAI sought to recover certain costs
that AAI claims it incurred since beginning commercial manufacturing of
Periostat in late 1998. The Company resolved this dispute with AAI and agreed to
pay a de minimus amount to AAI and to incur certain price increases on future
quantities of Periostat manufactured for the Company. Concurrent with the
resolution of their dispute, AAI served notice of its intent to terminate the
agreement to supply as of November 2001. The agreement with AAI provides for AAI
to commit to an additional 12 months supply of product at a price premium,
should CollaGenex be unable to qualify an alternative manufacturing source
subsequent to the termination of the AAI Agreement. The Company plans to convert
manufacturing to the tablet formulation prior to the termination of the AAI
Agreement.
The Company also intends to rely on PMRS as its sole manufacturer of
Periostat in a tablet formulation. CollaGenex and PMRS entered into a Service
and Supply Agreement on September 26, 2000 for Periostat with an initial three
year term, during which time CollaGenex has committed to certain minimum needs,
and PMRS has committed to certain guaranteed supply terms. This agreement shall
be automatically extended for consecutive one-year periods unless twelve (12)
months prior to the expiration of any such period, either party gives the other
party written notice of termination. The Company has placed an initial purchase
order with
7
PMRS and committed to certain minimum purchases through 2002 to take advantage
of volume price discounts. PMRS is required to comply with GMP requirements.
In November 1998, the Company executed a Distribution Services Agreement
with Cord Logistics, Inc. ("Cord"), pursuant to which Cord acts as the Company's
exclusive logistics provider for Periostat in the United States and Puerto Rico.
Cord is a subsidiary of Cardinal Health, Inc., a leading wholesale distributor
of pharmaceutical and related healthcare products. Under this agreement, Cord
warehouses and ships Periostat from its central distribution facility to
wholesalers and large national retail chains which in turn distribute Periostat
to pharmacies throughout the United States for prescription sale to patients.
Cord also provides sample fulfillment services for the Company's sales force and
various customer and financial support services to the Company, including
billing and collections, contract pricing maintenance, cash application,
chargeback processing and related reporting services. The Distribution Services
Agreement has an initial term of three years and will renew automatically for
successive one-year periods unless notice of termination is provided by either
party 90 days prior to expiration.
There can be no assurance that the Company will be able to enter into
additional, or maintain existing manufacturing, distribution or supply
agreements on acceptable terms, if at all. In the event that the Company is
unable to obtain sufficient quantities of doxycycline or Periostat on
commercially reasonable terms, or in a timely manner, or if the Company's
suppliers fail to comply with GMP, or if the Company's distributors are unable
to ship or support the Company's products, the Company's business, financial
condition and results of operations may be materially adversely affected. See
"--Government Regulation."
CUSTOMERS
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During 2000, net product sales to each of McKesson Drug Company, Cardinal
Health, Inc., Bergen Brunswig and Walgreens, Inc. accounted for 31%, 17%, 14%
and 10%, respectively, of the Company's aggregate net product sales.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company's research and development activities are conducted primarily
by third parties, such as contract research organizations, academic and
government institutions. The main focus of these activities is the
identification and development of novel tetracycline-based compounds for
application in a variety of inflammatory and tissue-destructive disorders. Other
than Periostat, the most advanced program involves Metastat, the Company's lead
compound for treating metastatic cancer.
On October 18, 2000, the Company announced that it had received a Phase I
STTR grant from the National Heart, Lung and Blood Institute, a division of the
National Institute of Health. The grant will support the potential development
of one of the Company's compounds known as IMPACS for the prevention and
treatment of acute lung injury.
8
Technology
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The Company's core technology involves the prevention of the destruction
of the connective tissues of the body and the down-regulation of a pathological
host response to a variety of external and internal mediators of inflammation
and tissue destruction.
One manifestation of this technology is the ability of the compounds under
development by CollaGenex to pharmaceutically modulate the activity of MMPs.
MMPs are responsible for the normal turnover of collagen and other proteins that
are integral components of a variety of connective tissues such as skin, bone,
cartilage and ligaments.
Under normal physiological conditions, the natural breakdown of collagen
is in part regulated by the interaction between the degradative properties of
MMPs and a group of naturally occurring biomolecules called tissue inhibitors of
metalloproteinases ("TIMPs"), which modulate the level of MMP activity. In many
pathological conditions, however, the balance between collagen production and
degradation is disrupted resulting in excessive loss of tissue collagen, a
process called collagenolysis. One such example is the progressive destruction
of the periodontal ligament and alveolar bone in adult periodontitis. Similar
degradative activity is associated with other disorders and conditions such as
cancer metastasis, wounds, osteoarthritis, osteoporosis, rheumatoid arthritis
and diabetic nephropathy.
The Company's core technology is licensed on an exclusive basis from SUNY
and results from the research of Drs. Lorne M. Golub and Thomas F. McNamara and
their colleagues at SUNY. These researchers demonstrated that tetracyclines can
significantly reduce the pathologically excessive collagen degradation
associated with periodontitis. They also were able to demonstrate that this
result was unrelated to the antibiotic properties of tetracyclines. Furthermore,
they demonstrated that the administration of doses of antibiotic tetracyclines
well below the dosage levels necessary to destroy microbes (sub-antibiotic
doses) was still effective in preventing the loss of connective tissue in models
of periodontitis. Studies published in scientific journals support the
hypothesis that the mechanism of action for this activity is the result, in
part, of the direct binding of tetracyclines to certain metal binding sites
associated with the MMP structure.
Although commercially available antibiotic tetracyclines show effective
anti-collagenolytic potential, long-term administration of these compounds at
normal antibiotic doses can result in well-known complications of long-term
antibiotic therapy, such as gastrointestinal disturbance, overgrowth of yeast
and fungi, and the emergence of antibiotic-resistant bacteria. The Company's
Phase III clinical trials using Periostat demonstrated that the administration
of sub-antimicrobial doses of doxycycline over a 12-month period exerted no
anti-microbial effects. Thus, the use of this dosage strength provides the
anti-collagenolytic effects without the complications of long-term antibiotic
therapies. The Company has conducted and is currently conducting Phase IV
clinical studies to support future marketing activities of Periostat.
The Company's license from SUNY also covers a broad class of chemically
modified tetracyclines (IMPACS) that have been chemically modified to retain and
enhance their anti-collagenolytic properties but which have had the structural
elements responsible for their antibiotic activity removed. These compounds,
which lack any antibiotic activity, have shown
9
potential in a number of pre-clinical models of excessive connective tissue
breakdown. The Company's current research and development programs focus on the
use of IMPACS in drug therapies for potential applications where more potent
doses of tetracyclines may enhance the efficacy of the treatment as well as on
the Phase IV clinical studies for Periostat.
Periostat
---------
The Company is planning and conducting various Phase IV clinical trials
that evaluate the use of Periostat for other therapeutic indications. Phase IV
studies being conducted at Boston University, SUNY at Stony Brook and the
University of Michigan are evaluating Periostat's ability to promote attachment
level, decrease pocket depth and promote healing in patients undergoing
periodontal flap surgery. Another Phase IV study being conducted at the
University of Southern California was designed to study the use of Periostat to
prevent root resorption during orthodontic tooth movement. Other Phase IV
clinical trials are being conducted or are planned to evaluate the ability of
Periostat to arrest or reverse the degradation of the attachment apparatus that
is sometimes associated with dental implants, the evaluation of Periostat as an
adjunct to SRP in institutionalized geriatric patients, and the evaluation of
Periostat as an adjunct to SRP in patients with Type I and Type II diabetes. To
extend the possible therapeutic use of Periostat beyond the oral cavity, the
Company and its collaborators are planning or conducting clinical trials to
evaluate whether Periostat can manage posterior blepharitis, prevent repeat
heart attack, decrease bone loss in postmenopausal women, prevent the growth and
rupture of aortic aneurysms and prevent or reverse the clinical manifestations
of disease secondary to diabetes.
A Phase IV clinical trial conducted at the University of Pittsburgh Dental
School, the results of which were announced by the Company in October 2000,
demonstrated significant clinical benefit in patients who were administered
Periostat in conjunction with traditional mechanical therapy compared to the
same therapy plus a placebo.
Metastat
--------
Cancer metastasis is the spread of cancer cells from a diseased organ to
the lymphatic or circulatory system, where such cells then migrate throughout
the body causing cancer to develop in other organs. Tumor cell invasion is a
complex process that involves the destruction of the basement membrane, or
structural support tissue, of the lymphatic or circulatory system, and the
migration of tumor cells to secondary sites, followed by proliferation of these
cells. Data from pre-clinical studies sponsored by the Company at two major
universities suggest that several of the Company's IMPACS drug candidates have
potent activity in models of cancer invasion, including prostate, breast, lung,
colon and melanoma.
These studies also demonstrated that the down-regulation of the invasive
phenotype by conventional tetracyclines and IMPACS results in a decreased
ability of tumor cells to invade the lung in models of metastasis. For example,
IMPACS have been shown to modulate the specific type of MMP isolated from human
lung cancer cells, the activity of which has been correlated with the metastatic
potential of tumors. In animal models involving a variety of human cancer cell
types, including prostate, breast, lung, colon and melanoma, IMPACS developed by
the Company exhibited an ability to inhibit metastasis.
10
In October 1996, the Company and the NCI executed a letter of intent to
formalize a collaborative research and development agreement pursuant to which
the NCI agreed to perform pharmacology, toxicology and Phase I clinical trials
using the Company's lead compound for the prevention of cancer metastasis,
Metastat.
In June 1997, the Company announced that it had formally extended its
Collaboration Agreement with the NCI with respect to the development of
Metastat. On December 5, 1997, the Company announced that the NCI had filed an
investigational new drug application ("IND") for Metastat. In January 1998, the
Company initiated Phase I clinical trials with respect to Metastat. Such studies
were sponsored by the NCI pursuant to the Company's Collaboration Agreement with
the NCI. In February 1999, the Company released initial findings related to such
studies. Following oral administration, desired plasma concentrations of the
compound were achieved and no dose-limiting side effects other than manageable
phototoxicity were encountered. In February 1999, the Company also announced the
allowance of a United States patent which provides intellectual property
protection for the use of Metastat for the inhibition of cancer metastasis.
Subsequently, the NCI advised the Company that it believed that the level of
photosensitivity, although manageable, could limit the commercial viability of
Metastat. However, the NCI also advised the Company that it remained interested
in the mechanism of action of this class of compounds and it intended to
complete the current clinical trials to establish "proof of principal" with
respect to a variety of surrogate markers. Two Phase I clinical trials were
completed in 1999, one Phase I clinical trial is ongoing and a fourth is
currently planned to initiate in the first half of 2001.
On May 18, 2000, the Company announced positive findings from an
18-patient, NCI sponsored Phase I dose-escalating study of Metastat,
administered once daily to patients with Kaposi's sarcoma, a disfiguring and
potentially deadly malignancy frequently associated with human immunodeficiency
virus (HIV). In such Phase I clinical trials, Metastat demonstrated an overall
tumor response rate of 44% in patients with Kaposi's sarcoma and the NCI has
elected to continue testing Metastat in Phase II clinical trials.
Preclinical Research and Development Activities
-----------------------------------------------
The Company has an active preclinical program in place to identify and
characterize IMPACS that exhibit enhanced biological activities compared to
Periostat and Metastat. In collaboration with the University of Rochester, the
Company has synthesized over thirty new IMPACS. These are being evaluated in a
variety of in vitro and in vivo assay systems under a three-year research
agreement with SUNY, which will conclude in May 2001.
The Company receives certain proprietary rights to inventions or
discoveries that arise as a result of this research. The Company's current
research and development objective is to develop additional products utilizing
its IMPACS technology, preferably in conjunction with development partners.
The Company's research and development expenditures were approximately
$4.7 million, $5.0 million and $3.1 million in 1998, 1999 and 2000,
respectively.
11
PATENTS, TRADE SECRETS AND LICENSES
- -----------------------------------
The Company's success will depend in part on patent and trade secret
protection for its technologies, products and processes, and on its ability to
operate without infringement of proprietary rights of other parties both in the
United States and in foreign countries. Because of the substantial length of
time and expense associated with bringing new products through development to
the marketplace, the pharmaceutical industry places considerable importance on
obtaining and maintaining patent and trade secret protection for new
technologies, products and processes.
The Company depends on the license from the Research Foundation of the
State of New York at Stony Brook for all of its core technology (the "SUNY
License"). The SUNY License grants the Company an exclusive worldwide license to
make and sell products employing tetracyclines that are designed or utilized to
alter a biological process. Twenty-eight (28) United States patents and four (4)
United States patent applications held by SUNY are licensed to the Company under
the SUNY License. Two (2) of the twenty-eight (28) patents have been co-assigned
to the University of Miami, Florida, and another patent has been co-assigned to
Washington University. Other institutions are co-owners with SUNY as follows:
one (1) patent is co-owned with the Hospital for Joint Diseases in New York
City; three (3) patents are co-owned with the University of Helsinki; and one
(1) patent is co-owned with the University of Rochester. The primary United
States patent claims methods of use of conventional tetracyclines to inhibit
pathologically excessive collagenolytic activity (the "Primary Patent"), while a
related United States patent claims methods of use of tetracyclines which have
no antibiotic activity (the "Secondary Patent"). The twenty-six (26) other
United States patents relate to the compositions of certain CMTs with
anti-collagenolytic properties, methods of use of tetracyclines to reduce bone
loss and methods of use of tetracyclines to enhance bone growth and inhibit
protein glycosylation. SUNY did not apply in foreign countries for patents
corresponding to the Primary Patent but has obtained patents that correspond to
the Secondary Patent in Australia, Canada and certain European countries. One of
the Secondary Patents has also been issued in Japan. SUNY also has obtained
patents in certain European countries, Canada and Japan, and has pending patent
applications in certain other foreign countries which correspond to its United
States patents relating to methods of use of tetracyclines to reduce bone loss.
Sixty-nine (69) patents have been issued in foreign countries. All of SUNY's
United States and foreign patents expire between 2004 and 2018. The Company's
rights under the SUNY License are subject to certain statutory rights of the
United States government resulting from federal support of research activities
at SUNY. The failure to obtain and maintain patent protection may mean that the
Company will face increased competition in the United States and in foreign
countries. The SUNY License is terminable by SUNY on 90 days prior notice only
upon the Company's failure to make timely payments, reimbursements or reports,
if the failure is not cured by the Company within 90 days. The termination of
the SUNY License, or the failure to obtain and maintain patent protection for
the Company's technologies, would have a material adverse effect on the
Company's business, financial condition and results of operations.
One of the United States patents and a corresponding Japanese patent
application licensed to the Company under the SUNY License are owned jointly by
SUNY and a Japanese company. These patent rights, which expire in 2012, cover
particular CMTs (the "Jointly Owned CMTs") that were involved in research
activities between SUNY and the Japanese company. The
12
Japanese company may have exclusive rights to these Jointly Owned CMTs in Asia,
Australia and New Zealand and may have a non-exclusive right to exploit these
Jointly Owned CMTs in other territories. These Jointly Owned CMTs are not
involved in the Company's Periostat product but could, in the future, prove to
be important for one or more of the Company's other potential applications of
its technology. If the Company does incorporate the Jointly Owned CMTs in any
future product, it may be precluded from marketing these products in Asia,
Australia and New Zealand and could experience increased competition in other
markets from the joint owner.
In consideration of the license granted to the Company, the Company: (i)
issued to SUNY 78,948 shares of common stock; and (ii) has agreed to pay SUNY
royalties on the net sales of products employing tetracyclines, with minimum
annual royalty payments per year. The term of the license is: (i) until the
expiration of the last to expire of the licensed patents in each country; or
(ii) until November 18, 2018, at which time the Company has a fully paid,
non-exclusive license.
In addition to the patents and patent applications licensed from SUNY
which represent the core technology, the Company owns additional technology for
which applications for United States patents have been filed and have been
issued. In this regard, the Company reports the existence of an issued patent
for a toothpaste/mouthwash formulation for the amelioration of dentin
hypersensitivity. Furthermore, the Company reports pending applications covering
new tetracycline derivatives having increased lipophilicity.
The Company intends to enforce its patent rights against third-party
infringers. Due to the general availability of generic tetracyclines for use as
antibiotics, the Company could become involved in infringement actions, which
could entail substantial costs to the Company. Regardless of the outcome,
defense or prosecution of patent claims is expensive and time consuming, and
results in the diversion of substantial financial, management and other
resources from the Company's other activities.
The patent positions of pharmaceutical firms, including the Company, are
generally uncertain and involve complex legal and factual questions.
Consequently, as to the patent applications licensed to it, even though the
Company currently is prosecuting such patent applications with United States and
foreign patent offices, the Company does not know whether any of such
applications will result in the issuance of any additional patents or, if any
additional patents are issued, whether they will provide significant proprietary
protection or will be circumvented or invalidated. Since patent applications in
the United States are maintained in secrecy until patents issue, and since
publication of discoveries in the scientific and patent literature tends to lag
behind actual discoveries by several months, the Company cannot be certain that
it was the first creator of inventions covered by pending patent applications or
that it was the first to file patent applications for such inventions.
There can be no assurance that patent applications to which the Company
holds rights will result in the issuance of patents, that any patents issued or
licensed to the Company will not be challenged and held to be invalid, or that
any such patents will provide commercially significant protection to the
Company's technology, products and processes. In addition, there can be no
assurance that others will not independently develop substantially equivalent
13
proprietary information not covered by patents to which the Company owns rights
or obtain access to the Company's know-how, or that others will not be issued
patents which may prevent the sale of one or more of the Company's products, or
require licensing and the payment of significant fees or royalties by the
Company to third parties in order to enable the Company to conduct its business.
In the event that any relevant claims of third-party patents are upheld as valid
and enforceable, the Company could be prevented from selling its products or
could be required to obtain licenses from the owners of such patents. There can
be no assurance that such licenses would be available or, if available, would be
on terms acceptable to the Company. The Company's failure to obtain these
licenses would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's success also is dependent upon know-how, trade secrets, and
the skills, knowledge and experience of its scientific and technical personnel.
The Company requires all employees to enter into confidentiality agreements that
prohibit the disclosure of confidential information to anyone outside the
Company. In addition, the Company seeks to obtain such agreements from its
consultants, advisors and research collaborators. There can be no assurance that
adequate protection will be provided for the Company's trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure. The Company occasionally provides information and chemical compounds
to research collaborators in academic institutions, and requests that the
collaborators conduct tests in order to investigate certain properties of the
compounds. There can be no assurance that the academic institutions will not
assert intellectual property rights in the results of the tests conducted by the
research collaborators, or that the academic institutions will grant licenses
under such intellectual property rights to the Company on acceptable terms. If
the assertion of intellectual property rights by an academic institution can be
substantiated, failure of the academic institution to grant intellectual
property rights to the Company could have a material adverse effect on the
Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
- ---------------------
Government authorities in the United States and other countries
extensively regulate, among other things, the research, development, testing,
manufacture, labeling, promotion, advertising, distribution, and marketing of
the Company's products. In the United States, the FDA regulates our approved
product, Periostat, and our products in development, as drugs under the Federal
Food, Drug, and Cosmetic Act and implementing regulations. Failure to comply
with FDA requirements may subject the Company to administrative or judicial
sanctions, such as the FDA's refusal to approve pending applications or warning
letters, product recalls, product seizures, total or partial suspension of
production or distribution, withdrawal of approvals, import detentions,
injunctions, and/or criminal prosecution.
The steps required before a drug may be marketed in the United States
include:
o pre-clinical laboratory tests, animal studies, and formulation
studies;
o submission to the FDA of an investigational new drug exemption, or
IND, for human clinical testing, which must become effective before
human clinical trials may begin;
14
o adequate and well-controlled clinical trials to establish the safety
and efficacy of the drug for each indication;
o submission to the FDA of a new drug application, or NDA, for
approval;
o satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the drug is produced to assess
compliance with Good Manufacturing Practice, or GMP; and
o FDA review and approval of the NDA.
Pre-clinical tests include laboratory evaluations of product chemistry,
toxicity, and formulation, as well as animal studies. The results of the
pre-clinical tests, together with manufacturing information, analytical data,
and a plan for studying the product in humans, are submitted to the FDA as part
of an IND, which must become effective before human clinical trials may begin.
An IND automatically becomes effective 30 days after receipt by the FDA, unless
before that time the FDA raises concerns or questions about issues such as the
conduct of the trials outlined in the IND. In that case, the IND sponsor and the
FDA must resolve any outstanding FDA concerns or questions before clinical
trials can proceed. Submission of an IND does not always result in the FDA
allowing clinical trials to commence.
Clinical trials involve administration of the investigational drug to
human subjects under the supervision of qualified investigators and are
conducted under protocols detailing the objectives of the study, the parameters
to be used in monitoring safety, and the effectiveness criteria to be evaluated.
Each protocol must be submitted to the FDA as part of the IND process, and must
be reviewed and approved by an independent Institutional Review Board before it
can begin. Clinical trials typically are conducted in three sequential phases,
but the phases may overlap or be combined. Phase 1 usually involves the initial
introduction of the investigational drug into people to evaluate its safety,
dosage tolerance, phamacodynamics, and, if possible, to gain an early indication
of its effectiveness. Phase 2 usually involves trials in a limited patient
population to evaluate dosage tolerance and appropriate dosage, identify
possible adverse effects and safety risks and evaluate preliminarily the
efficacy of the drug for specific indications. Phase 3 trials usually further
evaluate clinical efficacy and test further for safety by using the drug in its
final form in an expanded patient population. The Company cannot guarantee that
Phase 1, Phase 2, or Phase 3 testing for its products in development will be
completed successfully within any specified period of time, if at all. Many
products that initially appear promising are found, after clinical evaluation,
not to be safe and effective. Also, the Company or the FDA may suspend clinical
trials at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.
Assuming successful completion of the required clinical testing, the
results of the preclinical studies and of the clinical studies, together with
other detailed information, including information on the manufacture and
composition of the drug, are submitted to the FDA in the form of an NDA
requesting approval to market the product for one or more indications. Before
approving an application, the FDA usually will inspect the facility or the
facilities at which the drug is manufactured, and will not approve the product
unless compliance with GMP is satisfactory. If the FDA determines the
application and the manufacturing facilities are
15
acceptable, the FDA will issue an approval letter. If the FDA determines the
application or manufacturing facilities are not acceptable, the FDA will outline
the deficiencies in the submission and often will request additional testing or
information. Notwithstanding the submission of any requested additional
information, the FDA ultimately may decide that the application does not satisfy
the regulatory criteria for approval. The Company received an NDA for Periostat
in 1998; it cannot be sure that any additional approvals will be granted on a
timely basis, if at all. After approval, certain changes to the approved
product, such as adding new indications, manufacturing changes, or additional
labeling claims are subject to further FDA review and approval. For example,
before the Company can market Periostat for additional indications now being
evaluated, it will be required to obtain an additional FDA approval.
In some circumstances, approved drugs are provided protection from
competitive versions of the approved drug for specified time periods. For
example, the law provides for patent extension or market exclusivity in certain
circumstances. Periostat, however, is not eligible for such protection.
After NDA approval is obtained, the Company is required to comply with a
number of post-approval requirements. For example, as a condition of approval of
an application, the FDA may require postmarketing testing and surveillance to
monitor the drug's safety or efficacy. As part of the NDA for Periostat, the FDA
has requested a postmarket animal study related to long-term dosing and
carcogenicity, which was completed in 2000. It was found that up to 200 mg/kg
per day of doxycycline, the active ingredient in Periostat, produced no evidence
of carcinogenic activity in laboratory rats. In addition, holders of an approved
NDA are required to report certain adverse reactions and production problems, if
any, to the FDA, and to comply with requirements concerning advertising and
promotional labeling for their products. For example, the FDA does not permit a
manufacturer to market or promote an approved drug product for an unapproved
use. Also, quality control and manufacturing procedures must continue to conform
to GMP after approval. Accordingly, manufacturers must continue to expend time,
money, and effort in the area of production and quality control to maintain
compliance with GMP and other aspects of regulatory compliance. The FDA
periodically inspects manufacturers to assess compliance with GMP and other
requirements. The Company buys bulk active ingredient for Periostat and the
Company's products in development from third party suppliers and finishes the
products in third party manufacturing facilities. Failure of either the Company
or its suppliers to comply with FDA requirements could disrupt production and
subject the Company to enforcement sanctions.
In addition to the applicable FDA requirements, the Company is subject to
foreign regulatory authorities governing clinical trials and drug sales. Whether
or not FDA approval has been obtained, approval of a pharmaceutical product by
the comparable regulatory authorities of foreign countries must be obtained
prior to the commencement of marketing of the product in those countries. The
approval process varies from country to country and the time required may be
longer or shorter than that required for FDA approval. The Company has filed for
and subsequently received approval from the UK MCA for the marketing of
Periostat tablets in the United Kingdom. Such application was filed with the
United Kingdom acting as a Reference Member State, thus providing a foundation
for the possible submission of applications, later in 2001, to other European
Union countries through the Mutual Recognition Procedure.
16
COMPETITION
- -----------
The pharmaceutical industry is subject to intense competition as well as
rapid and significant technological change. The Company expects that competition
in the periodontal area will be based on other factors, including product
efficacy, safety, cost-effectiveness, ease of use, patient discomfort,
availability, price, patent position and effective product promotion.
The Company believes that Periostat is distinguished from other existing
and known periodontitis treatments in that it is the only treatment which is
directed to suppression of the enzymes that degrade periodontal support tissues.
The Company believes that all other therapies focus on temporarily removing the
bacteria associated with periodontitis. Periostat is a prescription
pharmaceutical capsule indicated as an adjunct to SRP to promote attachment
level gain and to reduce pocket depth in patients with adult periodontitis that
is taken by the patient between dental visits. The Company believes that the
following chart summarizes the available forms of periodontitis treatment, other
than SRP and resective surgery:
Product Product Dental Delivery Patient Treatment
Name Manufacturer/Marketer Procedure Route Administered Focus
- ------------ --------------------- --------- -------- ------------ ----------
Periostat(R) CollaGenex No Systemic Yes Tissue
Pharmaceuticals, degradation
Inc.
Atridox(TM) Atrix Laboratories/ Yes Local No Bacteria
Glaxo Smith Kline
Beecham
Periochip(TM) Dexxon Ltd. Yes Local No Bacteria
Arestin(TM) Orapharma, Inc. Yes Local No Bacteria
Many of the companies participating in the periodontal area have
substantially greater financial, technical and human resources than the Company
and may be better equipped to develop, manufacture and market products. These
companies may develop and introduce products and processes competitive with or
superior to those of the Company.
EMPLOYEES
- ---------
The Company historically has outsourced its manufacturing, clinical
trials, NDA preparation and other activities. The Company intends to continue to
outsource many of the activities which it historically has outsourced. As of
December 31, 2000, the Company employed 146 persons. Each of its management
personnel has had extensive prior experience with pharmaceutical, biotechnology
or medical products companies. There can be no assurance that the Company will
be able to recruit and retain qualified inside sales and marketing personnel,
additional foreign sub-licensees or distributors or marketing partners or that
the Company's marketing and sales efforts will be successful. Currently, none of
the Company's employees are covered by collective bargaining agreements. In
general, the Company's employees are covered by confidentiality agreements. The
Company considers relations with its employees to be excellent.
17
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
- -------------------------------------------------
IF PERIOSTAT IS NOT ADOPTED ROUTINELY BY DENTAL PROFESSIONALS OR IF
MANAGED CARE PROVIDERS DO NOT CONTINUE TO REIMBURSE PATIENTS, THE COMPANY'S
SALES GROWTH WILL SUFFER.
The Company's growth and success depends in large part on its ability to
continue to demonstrate the safety and effectiveness of Periostat for the
treatment of gum disease to dental practitioners. Periostat is the first
long-term medical therapy for any dental disease, and dentists are not
accustomed to prescribing drugs for a minimum 90-day duration. Periostat works
by suppressing certain enzymes involved in the periodontal disease process,
which is a new concept for many dentists who believe that removing bacterial
plaque is the only way to treat this disease. Accordingly, the Company's sales
efforts are largely focused on educating dental professionals about an entirely
new approach to treating periodontitis. Although over 32,000 dentists in the
United States have written at least one prescription for Periostat, a number of
dentists have not adopted Periostat routinely into their treatment of adult
periodontitis. Other dentists have prescribed Periostat for only a subset of
their eligible patients, typically their most advanced or refractory cases. If
the Company is unable to initiate and/or expand usage of Periostat by dentists,
its sales growth will suffer.
Approximately 65% of the large managed care providers in the United States
(defined as those that cover 100,000 or more lives) reimburse their patients for
Periostat, typically requiring a modest co-payment. The Company's goal is to
achieve reimbursement from approximately 75% of the large managed care
providers, since the remainder have policies that do not reimburse for drugs to
treat dental conditions. Patients who are not reimbursed by managed care
providers may choose not to accept Periostat as a treatment. In addition, the
Company has not yet achieved reimbursement from the largest managed care
provider in California, thus limiting prescription and sales growth in that
state.
THE COMPANY RELIES ON PERIOSTAT FOR MOST OF ITS REVENUE.
During 1999 and 2000, Periostat accounted for 95% and 84%, respectively,
of the Company's total net revenues. Although the Company currently derives
revenues from co-promoting two (2) other products (for one of which the Company
has received a notice of termination effective in April 2001) and from licensing
fees from foreign marketing partners, the Company's revenue and profitability in
the near future will depend on the Company's ability to successfully market and
sell Periostat.
THE COMPANY ANTICIPATES FUTURE LOSSES.
From the Company's founding in 1992 through the commercial launch of
Periostat in November, 1998, the Company had no revenue from sales of its own
products. During the years ended December 31, 1999 and 2000, the Company
incurred net losses of approximately $14.6 million and $8.8 million,
respectively. From inception through December 31, 2000, the Company has incurred
an aggregate net loss of $61.3 million. The Company's historical losses have
resulted primarily from the expenses associated with its pharmaceutical
development program, clinical trials, the regulatory approval process associated
with Periostat and sales and marketing activities relating to Periostat. The
Company expects to incur significant future
18
expenses, particularly with respect to the sales and marketing of Periostat. As
a result, the Company anticipates losses through at least the first nine months
of 2001.
THE COMPANY HAS A LIMITED MARKETING AND SALES HISTORY AND MAY NOT BE ABLE
TO SUCCESSFULLY MARKET ITS PRODUCT CANDIDATES.
The Company has a limited history of marketing, distributing and selling
pharmaceutical products in the dental market. In January 1999, the Company first
trained a sales force of sales representatives and managers and began to promote
Periostat to the dental community. The Company markets and sells its products in
the United States through this direct sales force. Further, the Company has
entered into agreements to market Periostat, upon receipt of the necessary
foreign regulatory approvals, in certain countries in Europe, Israel, Japan and
Canada, and the Company continues to evaluate partnering arrangements in other
countries outside the United States. If the Company is unable to continue to
recruit, train and retain sales and marketing personnel, the Company will be
unable to successfully expand its sales and marketing efforts. Furthermore, if
the Company's foreign partners do not devote sufficient resources to perform
their contractual obligations, the Company may not achieve its foreign sales
goals.
THE COMPANY'S COMPETITIVE POSITION IN THE MARKETPLACE DEPENDS ON ENFORCING
AND SUCCESSFULLY DEFENDING ITS INTELLECTUAL PROPERTY RIGHTS.
In order to be competitive in the pharmaceutical industry, it is important
to establish, enforce, and successfully defend patent and trade secret
protection for the Company's established and new technologies. The Company must
also avoid liability from infringing the proprietary rights of others.
The Company's core technology is licensed from SUNY and other academic and
research institutions collaborating with SUNY. Under the SUNY License the
Company has an exclusive worldwide license to SUNY's rights in certain patents
and patent applications to make and sell products employing tetracyclines to
treat certain disease conditions. The SUNY License imposes various payment and
reporting obligations on the Company and the Company's failure to comply with
these requirements permits SUNY to terminate the SUNY License. If the SUNY
License is terminated, the Company would lose its right to exclude competitors
from commercializing similar products, and the Company could be excluded from
marketing the same products if SUNY licensed the underlying technology to a
competitor after terminating the SUNY License.
SUNY owns twenty-eight (28) United States patents and four (4) United
States patent applications that are licensed to the Company. The patents
licensed from SUNY expire between 2004 and 2018. Two (2) of the patents are
related to Periostat and expire in 2004 and 2007. Technology covered by these
patents becomes available to competitors as the patents expire.
Since many of the Company's patent rights cover new treatments using
tetracyclines, which are generally available for their known use as antibiotics,
the Company may be required to bring expensive infringement actions to enforce
the Company's patents and protect its technology. Although federal law prohibits
making and selling pharmaceuticals for infringing use, competitors and/or
practitioners may provide generic forms of tetracycline for treatment(s)
19
which infringe the Company's patents, rather than prescribe the Company's
Periostat product. Enforcement of patents can be expensive and time consuming.
The Company's success also depends upon know-how, trade secrets, and the
skills, knowledge and experience of its scientific and technical personnel. To
that end, the Company requires all of its employees and, to the extent possible,
all consultants, advisors and research collaborators, to enter into
confidentiality agreements prohibiting unauthorized disclosure. With respect to
information and chemical compounds the Company provides for testing to
collaborators in academic institutions, the Company cannot guarantee that the
institutions will not assert property rights in the results of such tests nor
that a license can be reasonably obtained from such institutions which assert
such rights. Failure to obtain the benefit of such testing could adversely
affect the Company's commercial position and, consequently, its financial
condition.
IF THE COMPANY LOSES ITS SOLE SUPPLIER OF DOXYCYCLINE OR THE COMPANY'S
CURRENT MANUFACTURER OF PERIOSTAT, THE COMPANY'S COMMERCIALIZATION OF PERIOSTAT
WILL BE INTERRUPTED OR LESS PROFITABLE.
The Company relies on a single supplier for doxycycline, the active
ingredient in Periostat. There are relatively few alternative suppliers of
doxycycline and this supplier produces the majority of the doxycycline used in
the United States. If the Company is unable to procure a commercial quantity of
doxycycline from its current supplier on an ongoing basis at a competitive
price, or if the Company cannot find a replacement supplier in a timely manner
or with favorable pricing terms, the Company's costs may increase significantly
and the Company may experience delays in the supply of Periostat.
The Company has historically relied on a single third-party contract
manufacturer, Applied Analytical Industries, Inc., to produce Periostat in a
capsule formulation. The Company's previously reported dispute with Applied
Analytical has been resolved and the Company has agreed to pay a de minimus
amount to Applied Analytical and to incur certain price increases on future
quantities of Periostat manufactured for the Company. Concurrent with the
resolution of their dispute, AAI served notice of its intent to terminate the
agreement to supply as of November 2001. The agreement with AAI provides for AAI
to commit to an additional twelve (12) months supply of product at a price
premium, should the Company be unable to qualify an alternative manufacturing
source subsequent to the termination of the AAI agreement. An inability to
maintain such arrangements with Applied Analytical could result in delays in the
supply of Periostat. The Company has entered into an agreement with another
contract manufacturer, PMRS, on a tablet formulation for Periostat. The Company
has placed an initial purchase order with PMRS and committed to certain minimum
purchases through 2002. Upon the termination of the Company's current
arrangements with AAI, PMRS will become the sole third-party contract
manufacturer to supply Periostat to the Company. Any inability of PMRS to
produce and supply product on agreed upon terms could result in delays in the
supply of Periostat. The Company also intends to contract with additional
manufacturers for the commercial manufacture of Periostat. The Company believes
that it could take up to one year to successfully transition to a new
manufacturer.
20
THE COMPANY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, INCLUDING THE
REQUIREMENT OF APPROVAL BEFORE ITS PRODUCTS MAY BE MARKETED.
The FDA has approved only one of the Company's products, Periostat, for
sale in the United States. The Company's other products are in development, and
will have to be approved by the FDA before they can be marketed in the United
States. If the FDA does not approve the Company's products in a timely fashion,
or does not approve them at all, the Company's business and financial condition
may be adversely affected.
In addition, the Company and its products are subject to comprehensive
regulation by the FDA both before and after products are approved for marketing.
The FDA regulates, for example, research and development, including preclinical
and clinical testing, safety, effectiveness, manufacturing, labeling,
advertising, promotion, export, and marketing of its products. The Company's
failure to comply with regulatory requirements may result in various adverse
consequences, including FDA delay in approving or refusal to approve a product,
recalls, withdrawal of an approved product from the market and/or the imposition
of civil or criminal sanctions.
The Company is, and will increasingly be, subject to a variety of foreign
regulatory regimes governing clinical trials and sales of its products. Other
than Periostat, which has been approved by the Medicines Control Agency for the
marketing in the United Kingdom, the Company's products have not been approved
in any foreign country. Whether or not FDA approval has been obtained, approval
of a product by the comparable regulatory authorities of foreign countries must
be obtained prior to the commencement of marketing of the product in those
countries. The approval process varies from country to country, and other
countries may also impose post-approval requirements.
IF THE COMPANY'S PRODUCTS CAUSE INJURIES, THE COMPANY MAY INCUR
SIGNIFICANT EXPENSE AND LIABILITY.
The Company's business may be adversely affected by potential product
liability risks inherent in the testing, manufacturing and marketing of
Periostat and other products developed by or for us. The Company has $10.0
million in product liability insurance for Periostat. This level of insurance
may not adequately protect the Company against product liability claims.
Insufficient insurance coverage or the failure to obtain indemnification from
third parties for their respective liabilities may expose us to product
liability claims and/or recalls and could cause the Company's business,
financial condition and results of operations to decline.
IF THE COMPANY NEEDS ADDITIONAL FINANCING, AND FINANCING IS UNAVAILABLE,
THE COMPANY'S ABILITY TO DEVELOP AND COMMERCIALIZE PRODUCTS AND ITS OPERATIONS
WILL BE ADVERSELY AFFECTED.
The Company has historically financed its operations through public and
private equity financings. The Company's capital requirements depend on numerous
factors, including its ability to successfully commercialize Periostat,
competing technological and market developments, the Company's ability to enter
into collaborative arrangements for the development, regulatory approval and
commercialization of other products, and the cost of
21
filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights. The Company anticipates that it may be required to
raise additional capital in order to conduct its operations. Additional funding,
if necessary, may not be available on favorable terms, if at all. If adequate
funds are not available, the Company may be required to curtail operations
significantly or to obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates, products or potential markets. At
December 31, 2000, the Company had cash, cash equivalents and short-term
investments of approximately $5.4 million. In March 2001, the Company raised
approximately $6.9 million, net of offering costs, through the sale of its
Common Stock and Warrants to purchase shares of its Common Stock in the future.
The Company anticipates that its existing working capital, including such
additional $6.9 million raised by the Company will be sufficient to fund its
operations through at least the middle of 2002.
DELAWARE LAW, THE COMPANY'S CERTIFICATE OF INCORPORATION AND THE COMPANY'S
BY-LAWS CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER OF THE COMPANY.
Anti-takeover provisions of Delaware law, the Company's Certificate of
Incorporation and the Company's By-Laws could make it more difficult for a third
party to acquire control of the Company, even if such change would be beneficial
to the Company's stockholders. The Company's Certificate of Incorporation
provides that the Company's board of directors may issue preferred stock with
superior rights and preferences without common stockholder approval. The
issuance of preferred stock could have the effect of delaying, deterring or
preventing a change in control. The Company's board of directors has also
adopted a "poison pill" rights plan that may further discourage a third party
from making a proposal to acquire the Company. In addition, in connection with
the issuance of the Company's preferred stock, the rights of the Company's
common stockholders may be limited in certain instances with respect to divided
rights, rights on liquidation, winding up and dissolution and certain other
matters submitted to a vote of the Company's common stockholders.
BECAUSE THE COMPANY'S EXECUTIVE OFFICERS, DIRECTORS AND AFFILIATED
ENTITIES OWN APPROXIMATELY 43.1% OF THE COMPANY'S CAPITAL STOCK, SUCH PERSONS
COULD CONTROL THE COMPANY'S ACTIONS IN A MANNER THAT CONFLICTS WITH THE
COMPANY'S INTERESTS AND THE INTERESTS OF THE COMPANY'S OTHER STOCKHOLDERS.
Currently, the Company's executive officers, directors and affiliated
entities together beneficially own approximately 43.1% of the outstanding shares
of common stock or equity securities convertible into common stock. As a result,
these stockholders, acting together, or in the case of the Company's preferred
stockholders, in certain instances, as a class, will be able to exercise control
over corporate actions requiring stockholder approval, including the election of
directors. This concentration of ownership may have the effect of delaying or
preventing a change in control, including transactions in which the Company's
stockholders might otherwise receive a premium for their shares over then
current market prices.
22
THE COMPANY'S STOCK PRICE IS HIGHLY VOLATILE, AND THEREFORE THE VALUE OF
AN INVESTMENT IN THE COMPANY MAY FLUCTUATE SIGNIFICANTLY.
The market price of the Company's common stock has fluctuated and will
continue to fluctuate as a result of variations in the Company's quarterly
operating results. These fluctuations may be exaggerated if the trading volume
of the Company's common stock is low. In addition, the stock market in general
has experienced dramatic price and volume fluctuations from time to time. These
fluctuations may or may not be based upon any business or operating results. The
Company's common stock may experience similar or even more dramatic price and
volume fluctuations which may continue indefinitely.
23
ITEM 2. PROPERTIES.
The Company owns no real property. From January 1995 to May 1999, the
Company leased 3,500 square feet of office space at 301 South State Street,
Newtown, Pennsylvania under two leases. In May 1999, the Company moved its
principal executive offices to 41 University Drive, Newtown, Pennsylvania. The
newly leased premises consist of approximately 14,204 square feet and the term
of the lease is one hundred and twenty-two (122) months.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
24
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to June 1996, there was no established market for the Company's
common stock. Since June 20, 1996, the common stock has traded on the Nasdaq
National Market (the "NNM") under the symbol "CGPI."
The following table sets forth the high and low bid information for the
common stock for each of the quarters in the period beginning January 1, 1999
through December 31, 2000 as reported on the NNM. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
Quarter Ended High Low
------------------------ ------ ------
March 31, 1999.......... $12.44 $8.00
June 30, 1999........... $11.25 $7.50
September 30, 1999...... $23.94 $9.13
December 31, 1999....... $24.56 $16.19
March 31, 2000.......... $30.38 $11.88
June 30, 2000........... $16.06 $7.50
September 30, 2000...... $9.91 $6.44
December 31, 2000....... $8.00 $2.75
As of March 15, 2001, the approximate number of holders of record of the
common stock was 119 and the approximate number of beneficial holders of the
common stock was 3,800.
The Company has never declared or paid any cash dividends on its common
stock. Except as set forth below, the Company intends to retain earnings, if
any, to fund future growth and the operation of its business. On May 12, 1999,
the Company consummated a $20.0 million financing through the issuance of its
Series D Cumulative Convertible Preferred Stock. As a result of such financing,
the Company has cumulative cash and common stock dividend obligations to the
holders of the Series D Cumulative Convertible Preferred Stock. Such financing
arrangement also limits the Company's ability to generally declare dividends to
its common stockholders. In addition, the Company's ability to generally declare
dividends to its common stockholders is further limited by the terms of its
credit facility with Silicon Valley Bank. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data set forth below with respect to
the Company's statement of operations data for each of the years in the
three-year period ended December 31, 2000, and with respect to the consolidated
balance sheet data at December 31, 1999 and 2000 are derived from and are
qualified by reference to the audited consolidated financial statements and the
related notes thereto of the Company found at "Item 14. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K" herein. The consolidated statement
of operations data for
25
the years ended December 31, 1996 and 1997 and with respect to the consolidated
balance sheet data as of December 31, 1996, 1997 and 1998 are derived from
consolidated audited financial statements not included in this Annual Report on
Form 10-K. The selected consolidated financial data set forth below should be
read in conjunction with and is qualified in its entirety by, the Company's
audited consolidated financial statements and related notes thereto found at
"Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" which are included elsewhere in this Annual Report on Form 10-K.
Years Ended December 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Consolidated Statement (in thousands except for per share data)
of Operations Data: --------------------------------------------------------
Revenues:
Product sales ........................... $ -- $ -- $ 3,053 $ 15,211 $ 20,501
License revenues ........................ 400 325 400 100 530
Contract revenues ....................... -- 9 8 770 3,240
-------- -------- -------- -------- --------
Total revenues ............................. 400 334 3,461 16,081 24,271
Operating expenses:
Cost of product sales ................... -- -- 745 3,139 4,070
Research and development ................ 4,436 4,200 4,670 5,005 3,128
Selling, general and administrative ..... 2,527 6,096 10,600 23,180 25,746
-------- -------- -------- -------- --------
Operating loss ............................. (6,563) (9,962) (12,554) (15,243) (8,673)
Interest income ............................ 645 1,338 988 851 613
Interest expense ........................... -- -- -- (197) (15)
Other income (expense) ..................... -- -- -- (2) 9
-------- -------- -------- -------- --------
Loss before cumulative effect of
change in accounting principle .......... (5,918) (8,624) (11,566) (14,591) (8,066)
Cumulative effect of change in
accounting principle(1) ................. -- -- -- -- (764)
Net loss ................................... (5,918) (8,624) (11,566) (14,591) (8,830)
Net loss allocable to common
stockholders ............................ $ (6,638) $ (8,624) $(11,566) $(15,683) $(10,519)
Netloss per share allocable to common
stockholders before cumulative effect
of change in accounting principle:
Basic ................................... $ (1.74) $ (1.04) $ (1.35) $ (1.82) $ (1.12)
Diluted ................................. (1.72) (1.04) (1.35) (1.82) (1.12)
Net loss per share allocable to common
stockholders(2):
Basic ................................... $ (1.74) $ (1.04) $ (1.35) $ (1.82) $ (1.21)
Diluted ................................. (1.72) (1.04) (1.35) (1.82) (1.21)
Shares used in computing per share
amounts(2):
Basic ................................... 3,809 8,291 8,579 8,598 8,712
Diluted ................................. 3,864 8,291 8,579 8,598 8,712
- --------------------------------------------------------------------------------------------------------
26
As of December 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Balance Sheet Data: (in thousands)
--------------------------------------------------------
Cash, cash equivalents and short-term
investments ............................ $ 18,215 $ 22,771 $ 10,250 $ 14,367 $ 5,448
Total assets .............................. 18,437 23,165 14,740 18,563 10,431
Note payable, less current portion ........ -- -- -- 116 47
Accumulated deficit ....................... (17,739) (26,362) (37,928) (53,611) (64,130)
Total stockholders' equity ................ 17,592 20,708 9,281 13,607 5,264
(1) See Note 7 of Notes to Consolidated Financial Statements for information
concerning the cumulative effect of change in accounting principle.
(2) See Note 2 of Notes to Consolidated Financial Statements for information
concerning computation of net loss per share.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
- --------
The Company is a specialty pharmaceutical company focused on providing
innovative medical therapies to the dental market. The Company's first product,
Periostat, is a prescription pharmaceutical capsule that was approved by the FDA
in September 1998 as an adjunct to scaling and root planing, the most prevalent
therapy for periodontitis, to promote attachment level gain and to reduce pocket
depth in patients with adult periodontitis. The Company is marketing Periostat
to the dental community through its own professional dental pharmaceutical sales
force of approximately 120 sales representatives and managers. This sales force
also co-promotes Vioxx, a prescription non-sterodial anti-inflammatory drug
developed by Merck and Denavir, a prescription cold sore medication owned by
Novartis, although Novartis has terminated its co-promotion agreement with the
Company effective in April 2001, and the Company is actively seeking other
products to market to the dental community or directly to consumers.
The Company began operations in January 1992 and functioned primarily as a
research and development company until 1998. During this period, the Company
operated with a minimal number of employees, and substantially all
pharmaceutical development activities were contracted to independent contract
research and other organizations. Following FDA approval of Periostat in
September 1998, the Company significantly increased its number of employees,
primarily in the areas of sales and marketing. The Company continues to
outsource its research and development activities as well as its manufacturing
and distribution functions.
The Company has incurred losses each year since inception and had an
accumulated deficit of $64.1 million at December 31, 2000. The Company expects
to continue to incur losses in the foreseeable future from expenditures on drug
development, marketing, manufacturing and administrative activities.
Statements contained or incorporated by reference in this Annual Report on
Form 10-K that are not based on historical fact are "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "continue," or similar terms, variations of such terms or the
negative of those terms. This Form 10-K contains forward-looking statements that
involve risks and uncertainties. The Company's business of selling, marketing
and developing pharmaceutical products is subject to a number of significant
risks, including risks relating to the implementation of the Company's sales and
marketing plans for Periostat, risks inherent in research and development
activities, risks associated with conducting business in a highly regulated
environment and uncertainty relating to clinical trials of products under
development. The success of the Company depends to a large degree upon the
market acceptance of Periostat by periodontists, dental practitioners, other
health care providers, patients and insurance companies. Other than Periostat,
which has been FDA approved for marketing in the United States and approved by
the Medicines Control Agency for marketing in the United Kingdom, there can be
no assurance that any of the Company's other product candidates will be approved
by any
28
regulatory authority for marketing in any jurisdiction or, if approved, that any
such products or Vioxx will be successfully commercialized by the Company. As a
result of these risks, and others expressed from time to time in CollaGenex's
filings with the Securities and Exchange Commission, the Company's actual
results may differ materially from the results discussed in or implied by the
forward-looking statements contained herein.
Results of Operations
- ---------------------
From its founding through the quarter ended September 30, 1998, the
Company had no revenues from sales of its own products. During the fourth
quarter of 1998, the Company achieved net product sales of $3.1 million
following the commercial launch of Periostat in November 1998. Most of the 1998
sales represented initial wholesale and retail stocking. During the year ended
December 31, 1999, the Company achieved net product sales of $15.2 million from
sales of Periostat. In addition, the Company generated $770,000 in contract
revenues from its two (2) co-promotion agreements (one (1) of which shall
terminate in April 2001) and $100,000 in license fees relating to the signing of
a distribution agreement for Periostat in Canada. During the year ended December
31, 2000, the Company achieved net product sales of $20.5 million from sales of
Periostat. In addition, in 2000 the Company generated $3.2 million in contract
revenues from its two (2) co-promotion agreements (one (1) of which shall
terminate in April 2001) and $530,000 in license and milestone fees from various
foreign distribution and marketing agreements for Periostat. This amount
included $397,000 of license revenues that were deferred upon the implementation
of Staff Accounting Bulletin ("SAB") 101, effective January 1, 2000. These
amounts were previously recognized as license revenues in prior years under the
historical revenue recognition policy prior to the adoption of SAB 101.
The Company realized a net loss in 2000 resulting primarily from higher
revenue offset by higher planned sales, marketing and administrative expenses
incurred during such period. Total operating expenses consist of the cost of
product sales, research and development expenses and selling, general and
administrative expenses. Cost of product sales consists primarily of direct
manufacturing expenses and royalties. Research and development expenses consist
primarily of funds paid to contract research organizations for the provision of
services and materials for drug development, ongoing manufacturing and
formulation enhancements and clinical trials. Selling, general and
administrative expenses consist primarily of personnel salaries and benefits,
direct marketing costs, professional and consulting fees, insurance and general
office expenses.
Years Ended December 31, 2000 and December 31, 1999
---------------------------------------------------
Revenues. The Company realized $24.3 million in net revenues during 2000
compared to $16.1 million during 1999. Revenues in 2000 included $20.5 million
in net sales of Periostat, $3.2 million in contract revenues, which were derived
from the Company's co-promotion of Vioxx and Denavir, and $530,000 in foreign
license and milestone revenues for Periostat. Revenues from Denavir accounted
for approximately $700,000 of such contract revenues. The Company has received a
thirty (30) day termination notice by letter dated March 14, 2001 from Novartis
Pharmaceuticals Corporation, the owner of Denavir, with respect to the Company's
co-promotion agreement with Novartis for Denavir. In accordance with SAB 101,
which was adopted in 2000, the 2000 licensing revenues of $530,000 were
attributable, in part, to the
29
recognition of up-front license fees received for various agreements which are
being recognized over the expected term of these agreements. License revenues in
2000 also included $397,000 that were recorded in earlier years prior to the
adoption of SAB 101 which were deferred as a result of the cumulative effect of
a change in accounting principle as of January 1, 2000. Licensing revenues in
1999 included $100,000 in connection with an agreement with Pharmascience, Inc.
pursuant to which Pharmascience Inc. will market Periostat in Canada pending
requisite regulatory approval. However, under SAB 101, licensing revenues
recognized in 1999 would have been $58,000.
Cost of product sales. Cost of product sales were $4.1 million, or 19.9%
of net product sales in 2000 compared to $3.1 million, or 20.6% of net product
sales in 1999. This decrease in costs of product sales as a percentage of net
product sales resulted primarily from the absence of trade allowances and price
increases for Periostat during 2000.
Research and development expenses. Research and development expenses
decreased to $3.1 million in 2000 from $5.0 million in 1999. This decrease
resulted primarily from fewer expenses related to Phase 3b clinical studies to
support future marketing activities for Periostat, decreased manufacturing and
formulation development work for Periostat tablets and reduced research and
development activities. Such decreases were partially offset by a $324,000
non-cash compensation charge incurred during the year ended December 31, 2000
related to accelerating the vesting on stock options granted to certain
non-employees in 1999. In 2000, the Company's expenditures for research and
development included, among other things, regulatory and consulting fees
associated with the Company's NDA for Periostat tablets submitted to the FDA as
well as applications submitted to the UK MCA for marketing approval of the
tablet formulation of Periostat in the United Kingdom, expenditures relating to
the ongoing Phase IV marketing studies of Periostat, as well as expenditures
incurred relating to a Phase I study of Metastat. Research and development
expenses for 1999 were primarily for Phase IV clinical studies to support the
future marketing activities of Periostat, ongoing manufacturing and formulation
development work for Periostat and research and development activities funded by
the Company at SUNY.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $25.7 million in 2000 from $23.2 million in
1999. This increase was mainly due to higher advertising and promotional
expenses for Vioxx pursuant to the Company's co-promotion agreement with Merck
and the initiation of a direct-to-consumer advertising test campaign for
Periostat which commenced in October 2000.
Other income/expenses. Interest income decreased from $851,000 for the
year ended December 31, 1999 compared to $613,000 for the year ended December
31, 2000. This decrease was due to lower balances in cash and short-term
investments during the year December 31, 2000. Interest expense for the year
ended December 31, 2000 was $15,000, compared to $197,000 for the year ended
December 31, 1999. This decrease was primarily due to the repayment of a $10.0
million short term note executed in connection with the Company's Financing (as
hereinafter defined) in May 1999. Such decrease for 2000 was offset by interest
expense related to the $219,000 note payable executed by the Company in April
1999.
30
Change in accounting principle. The Company recognized a $764,000 charge
during the year ended December 31, 2000 from the cumulative effect of a change
in accounting principle, effective as of January 1, 2000, upon the adoption of
SAB 101. This change in accounting principle primarily reflected the deferral of
up-front licensing revenues recognized in prior years. Under SAB 101, up-front
licensing fees must be recognized over the expected performance period of the
relevant agreements. Accordingly, at December 31, 2000, the Company has recorded
approximately $739,000 in deferred revenue which will recognized over the
expected performance period of each respective agreement.
Preferred stock dividend. Preferred stock dividends increased from $1.1
million during the year ended December 31, 1999 to $1.7 million during the year
ended December 31, 2000. Such preferred stock dividends, paid in shares of the
Company's Common Stock, were the result of the Company's obligations in
connection with the issuance of its Series D Stock (as hereinafter defined) in
May 1999.
Years Ended December 31, 1999 and December 31, 1998
---------------------------------------------------
Revenues. The Company realized $16.1 million in net revenues during 1999
compared to $3.5 million during 1998. Revenues in 1999 included $15.2 million in
net sales of Periostat and $870,000 in licensing and contract revenues. Revenues
from Denavir accounted for approximately $511,000 of such contract revenues. The
Company has received a thirty (30) day termination notice by letter dated March
14, 2001 from Novartis with respect to the Company's co-promotion agreement with
Novartis for Denavir. The 1999 licensing revenues of $100,000 were attributable
to a licensing agreement with Pharmascience, Inc. pursuant to which
Pharmascience, Inc., will market Periostat in Canada pending requisite
regulatory approval. Revenues in 1998 included a non-refundable $400,000
licensing fee from Laboratories Pharmascience under a licensing agreement
pursuant to which Laboratories Pharmascience was to market Periostat in France
pending requisite regulatory approval. Such agreement was subsequently
terminated.
Cost of product sales. Cost of product sales were $3.1 million or 20.6% of
net product sales in 1999, compared to $745,000 or 24.4% of net product sales in
1998. This improvement in gross margin resulted from the absence of launch trade
allowances in 1999 and lower royalty rates applicable to the higher sales
achieved in 1999 compared to 1998.
Research and development expenses. Research and development expenses
increased to $5.0 million in 1999 from $4.7 million in 1998. In 1999, research
and development expenses were primarily for Phase IV clinical studies to support
the future marketing activities of Periostat, ongoing manufacturing and
formulation development work for Periostat and research and development
activities funded by the Company at SUNY. Research and development expenses for
1998 consisted primarily of costs associated with the Company's amendment to its
NDA for Periostat, a Phase III clinical trial intended to support future
marketing activities for Periostat and certain pre-clinical studies for other
potential compounds under development.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $23.2 million in 1999 from $10.6 million in
1998. This increase was due primarily to higher selling and marketing expenses
for a full year of commercial activities in
31
Periostat in 1999 and the hiring of additional sales personnel as Periostat
sales commenced in the fourth quarter of 1998.
Other income/expenses. Interest income decreased from $988,000 in 1998 to
$851,000 in 1999. This decrease was due to lower balances in cash and short-term
investments as a result of normal operating activities. Interest expense for the
year ended December 31, 1999 was $197,000. This expense was primarily due to the
interest on the $10.0 million short term note executed by the Company in March
1999 which was repaid in connection with the Company's Financing (as hereinafter
defined) in May 1999.
Preferred stock dividend. Preferred stock dividends, paid in shares of the
Company's Common Stock, increased to $1.1 million during the year ended December
31, 1999 as a result of the Company's obligations in connection with the
issuance of its Series D Stock (as hereinafter defined) in May 1999.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Since its origin in January 1992, the Company has financed its operations
through private placements of preferred stock and common stock, an initial
public offering of 2,000,000 shares of common stock, which generated net
proceeds to the Company of approximately $18.0 million after underwriting fees
and related expenses, and a subsequent public offering of 1,000,000 shares of
common stock, which generated net proceeds to the Company of approximately $11.6
million after underwriting fees and related expenses. On May 12, 1999, the
Company consummated a $20.0 million financing (the "Financing") through the
issuance of its Series D Cumulative Convertible Preferred Stock (the "Series D
Stock"), which generated net proceeds to the Company of $18.5 million. The
issuance of the Series D Stock was approved by a majority of the Company's
stockholders at the Company's Annual Meeting of Stockholders on May 11, 1999. A
portion of the proceeds of such Financing were used to repay a $10.0 million
Senior Secured Convertible Note provided by one of the investors on March 19,
1999 in connection with the Financing. The remaining proceeds have been and will
be used for general working capital purposes.
The Series D Stock is convertible at any time into shares of common stock
of the Company at a current conversion price of $9.94 per common share, which
conversion price reflects a decrease from the initial conversion price of $11.00
per share as a result of the Company's Common Stock financing consummated on
March 12, 2001. The conversion price is not subject to reset except in the event
that the Company should fail to declare and pay dividends when due or the
Company should issue new equity securities or convertible securities at a price
per share or having a conversion price per share lower than the then applicable
conversion price of the Series D Stock. During the first three years following
issuance, holders of the Series D Stock will be entitled to receive dividends
payable in shares of fully registered common stock at a rate of 8.4% per annum.
Thereafter, dividends will be payable in cash at a rate of 8.0% per annum.
All or a portion of the shares of Series D Stock shall, at the option of
the Company (as determined by the Board of Directors), automatically be
converted into fully paid, registered and non-assessable shares of common stock,
if the following two conditions are met: (i) the last sale
32
price, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices on the Nasdaq is at least 200% of the conversion
price then in effect (as of March 15, 2001, $9.94 per share) for forty
consecutive trading days; and (ii) a shelf registration is in effect for the
shares of common stock to be issued upon conversion of the Series D Stock.
Without written approval of a majority of the holders of record of the Series D
Stock, the Company, among other things, shall not: (i) declare or pay any
dividend or distribution on any shares of capital stock of the Company other
than dividends on the Series D Stock; (ii) make any loans, incur any
indebtedness or guarantee any indebtedness, advance capital contributions to, or
investments in any person, issue or sell any securities or warrants or other
rights to acquire debt securities of the Company, except that the Company may
incur such indebtedness in any amount not to exceed $10.0 million in the
aggregate outstanding at any time for working capital requirements in the
ordinary course of business; or (iii) make research and development expenditures
in excess of $7.0 million in any continuous twelve month period, unless the
Company has reported positive net income for four consecutive quarters
immediately prior to such twelve month period.
At December 31, 2000, the Company had cash, cash equivalents and
short-term investments of approximately $5.4 million, a decrease of $9.0 million
from the $14.4 million balance at December 31, 1999. This decrease was primarily
attributable to the cash used to fund operations during 2000. In accordance with
investment guidelines approved by the Company's Board of Directors, cash
balances in excess of those required to fund operations have been invested in
short-term United States Treasury securities and commercial paper with a credit
rating no lower than A1/P1. The Company's working capital at December 31, 2000
was $5.3 million, a decrease of $7.7 million from December 31, 1999. This
decrease was primarily attributable to the cash used to fund operations during
2000.
In April 1999, the Company received $219,000 in proceeds from the issuance
of a note payable. The proceeds of such note were used to fund the purchase of
equipment, fixtures and furniture for the Company's newly leased corporate
offices in Newtown, Pennsylvania. The term of the note is three years at 9.54%
per annum, with monthly minimum payments of principal and interest.
On March 12, 2001, the Company consummated a private equity offering of
1,500,000 shares of Common Stock for an aggregate purchase price of $7.5
million, which generated net proceeds to the Company of approximately $6.9
million. Such proceeds will be used primarily for the Company's
direct-to-consumer advertising campaign and for general working capital
purposes. In addition, the investors in such financing were also issued an
aggregate of 400,000 warrants which are exercisable for up to three (3) years
into 400,000 shares of the Company's Common Stock at an exercise price per share
of $6.00. The consideration received for such warrants is included in the
aggregate proceeds received in the financing. The Company also issued to its
financial advisor in such financing warrants to purchase an aggregate of 150,000
shares of the Company's Common Stock exercisable for up to three (3) years at an
exercise price of $5.70 per share, as partial consideration for services
rendered in connection with this financing. These warrants may be deemed
automatically exercised in certain circumstances based upon the Company's stock
price. The Company is obligated to file by April 11, 2001 and maintain the
effectiveness of a shelf registration statement with respect to all such shares
of Common Stock issued and shares underlying all such warrants beginning no
later than June 10,
33
2001. Should the Company fail to obtain effectiveness of such registration
statement by June 10, 2001 or to maintain the effectiveness of such registration
statement for a continuous twenty-four (24) month period, the investors and the
financial advisor shall receive an additional 27,500 shares of the Company's
Common Stock, in the aggregate, for no additional consideration.
On March 19, 2001, the Company consummated a revolving credit facility
(the "Facility") with Silicon Valley Bank (the "Bank"). The Company may borrow
up to the lesser of $3,000,000 or 80% of eligible accounts receivables, as
defined under the Facility. The amount available is also reduced by outstanding
letters of credit which may be issued under this Facility in amounts totaling up
to $1,500,000. The Company is not obligated to draw amounts under the Facility
and any such draws will bear interest, payable monthly, at the then prevailing
prime rate plus 1.5% per annum and may be used only for working capital
purposes. The Company intends to secure its purchase order commitments for
Periostat from PMRS with a letter of credit under the Facility. Without the
consent of the Bank, the Company, among other things, shall not (i) merge or
consolidate with another entity; (ii) acquire assets outside the ordinary course
of business; or (iii) pay or declare any cash dividends on the Company's Common
Stock. The Company must also maintain a certain tangible net worth and a minimum
of $2.0 million in cash, net of borrowings under the Facility, at all times
during the term of the Facility. In addition, the Company has secured its
obligations under the Facility through the granting of a security interest in
favor of the Bank with respect to all of the Company's assets, including its
intellectual property.
The Company anticipates that its existing working capital, including the
approximately $6.9 million received through the Company's Common Stock financing
consummated on March 12, 2001, will be sufficient to fund the Company's
operations through at least the middle of 2002. The Company's future capital
requirements and the adequacy of its available funds will depend on many
factors, including the size and scope of the Company's marketing effort and
sales of Periostat, the terms of agreements entered into with corporate
partners, if any, and the results of research and development and pre-clinical
and clinical studies for other applications of the Company's core technology.
Over the long-term, the Company's liquidity is dependent on market acceptance of
its products and technology.
At December 31, 2000, the Company had approximately $59.8 million of
Federal and $46.5 million of state net operating loss carryforwards available to
offset future taxable income. The Federal and state net operating loss
carryforwards will begin expiring in 2007 and 2005, respectively, if not
utilized. The Company also has research and development tax credit carryforwards
of approximately $840,000 available to reduce Federal income taxes which begin
expiring in 2007.
Section 382 of the Internal Revenue Code of 1986 subjects the future
utilization of net operating losses and certain other tax attributes, such as
research and development credits, to an annual limitation in the event of an
ownership change, as defined. Due to the Company's prior year equity
transactions, a portion of the net operating losses and tax credits of the
Company are subject to an annual limitation of approximately $3.8 million. To
the extent that any single-year limitation is not utilized to the full amount of
the limitation, such unused amounts are carried over to subsequent years until
the earlier of its utilization or the expiration of the relevant carryforward
period. At December 31, 2000, assuming there are no future ownership changes,
34
and not giving effect, if any, to the March 2001 financing, approximately $25.0
million is immediately available to offset future taxable income. In addition to
the Section 382 limitation, the state net operating loss carryforward is subject
to a $2.0 million annual limitation.
EUROPEAN MONETARY UNION
- -----------------------
On January 1, 1999, eleven of the fifteen member countries of the European
Union set fixed conversion rates between their existing legacy currencies and
the euro. At such time, these participating countries adopted the euro as their
common legal currency. The eleven participating countries will now issue
sovereign debt exclusively in euro and will redenominate outstanding sovereign
debt. The legacy currencies will continue to be used as legal tender through
January 1, 2002, at which point the legacy currencies will be canceled and euro
bills and coins will be used for cash transactions in the participating
countries.
The Company does not denominate its international licensing agreements in
foreign currencies. The Company currently does not believe that the euro
conversion will have a material impact on the Company's results of operations or
financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company believes that it is not subject to a material impact to its
financial position or results of operations relating to market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required to be filed
pursuant to this Item 8 are appended to this Annual Report on Form 10-K. A list
of the financial statements filed herewith is found at "Item 14. Exhibits,
Financial Statement Schedules, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors",
"Executive Officers" and "Compliance with Section 16(a) of the Exchange Act" in
the Company's definitive proxy statement for the 2001 Annual Meeting of
Stockholders is incorporated herein by reference to such proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 2001 Annual Meeting of Stockholders is
incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 2001
Annual Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 2001 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Consolidated Financial Statements
and Schedule on Page F-1.
(2) Financial Statement Schedule.
Reference is made to the Index to Consolidated Financial Statements
and Schedule on Page F-1.
(3) Exhibits.
Reference is made to the Index to Exhibits on Page 40.
(b) Reports on Form 8-K.
No Reports on Form 8-K have been filed during the quarter ended
December 31, 2000.
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 26th day of March,
2001.
COLLAGENEX PHARMACEUTICALS, INC.
By: /s/ Brian M. Gallagher
---------------------------------------
Brian M. Gallagher, Ph.D., Chairman,
Chief Executive Officer and President
38
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------------------------------- ------------------------- --------------
/s/ Brian M. Gallagher, Ph.D. Chairman, Chief Executive March 26, 2001
- --------------------------------- Officer, Prisident and
Brian M. Gallagher, Ph.D. Director (Principal
Executive Officer)
/s/ Nancy C. Broadbent Chief Financial Officer, March 26, 2001
- --------------------------------- Treasurer and Secretary
Nancy C. Broadbent (Principal Financial and
Accounting Officer)
/s/ Helmer P.K. Agersborg, Ph. D. Director March 23, 2001
- ---------------------------------
Helmer P.K. Agersborg, Ph.D.
/s/ Peter R. Barnett, D.M.D. Director March 26, 2001
- ---------------------------------
Peter R. Barnett, D.M.D.
/s/ Robert C. Black Director March 21, 2001
- ---------------------------------
Robert C. Black
/s/ James E. Daverman Director March 26, 2001
- ---------------------------------
James E. Daverman
Director
- ---------------------------------
Robert J. Easton
/s/ Stephen A. Kaplan Director March 26, 2001
- ---------------------------------
Stephen A. Kaplan
/s/ W. James O'Shea Director March 20, 2001
- ---------------------------------
W. James O'Shea
39
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
3.1(a) Amended and Restated Certificate of Incorporation.
3.2(a) Amended and Restated Bylaws.
4.1(a) Registration Rights Agreement dated September 29, 1995 by
and among the Company and certain investors, as
supplemented.
4.2(a)(b) Letter dated December 16, 1993 re: certain rights of the
Company with respect to certain securities of the Company
owned by Brian M. Gallagher, Ph.D.
4.3(a) Fourth Investment Agreement as of September 29, 1995 by
and among the Company and certain Investors.
4.4(d) Shareholder Protection Rights Agreement, dated as of
September 15, 1997, between the Company and American Stock
Transfer & Trust Company which includes (i) the Form of
Rights Certificate and (ii) the Certificate of Designation
of Series A Participating Preferred Stock of the Company.
4.5(f) Amendment No. 1 to Shareholder Protection Rights
Agreement, dated as of March 16, 1999, between the Company
and American Stock Transfer & Trust Company.
4.6(h) Certificate of Designation. Preferences and Rights of
Series D Cumulative Convertible Preferred Stock of
CollaGenex Pharmaceuticals, Inc.
+10.1(a) Assignment of, Amendment to and Restatement of Agreement,
with all exhibits, as amended, and schedules, dated
January 13, 1992 by and among the Company, Johnson &
Johnson Consumer Products, Inc. and Research Foundation of
State University of New York.
+10.2(a) Supply Agreement dated January 23, 1995 between the
Company and Hovione International Limited.
+10.3(a) Manufacturing Agreement as of April 12, 1996 by and
between the Company and Applied Analytical Industries, Inc.
10.4(a) Form of Non-Disclosure Agreement executed by all Employees
as employed from time to time.
40
Exhibit No. Description of Exhibit
----------- ----------------------
10.5(a)(b) Form of Non-Competition Agreement executed by each of
Brian M. Gallagher, Ph.D., Nancy C. Broadbent and Robert
A. Ashley.
10.6(a) Form of Mutual Non-Disclosure Agreement executed by
certain consultants and research collaborators as retained
from time to time.
10.7(a)(b) Form of Indemnification Agreement executed by each of the
Company's directors and officers.
10.8(a) Forms of Consulting Agreement executed by each of Lorne M.
Golub and Thomas F. McNamara.
10.9(a) Form of Material Transfer Agreement between the Company
and Researchers.
10.10(a)(b) 1992 Stock Option Plan of the Company, as amended to date.
10.11(a)(b) 1996 Stock Plan of the Company.
10.12(a)(b) 1996 Non-Employee Director Stock Option Plan of the
Company.
+10.13(c) License Agreement dated July 18, 1996 by and between the
Company and Boehringer Mannheim Italia.
+10.14(e) License Agreement dated as of June 30, 1998 by and between
the Company and Laboratories Pharmascience S.A.
+10.15(e) Exhibit A to the Manufacturing Agreement as of April 12,
1996 by and between the Company and Applied Analytical
Industries, Inc., filed with the Company's Registration
Statement on Form S-1 (File Number 333-3582) which became
effective on June 20, 1996.
+10.16(e) Co-Promotion Agreement dated October 13, 1998 between
SmithKline Beecham Consumer Healthcare, L.P. and the
Company.
+10.17(e) Distribution Services Agreement dated August 15, 1998
between Cord Logistics, Inc. and the Company.
10.18(f) Convertible Loan and Security Agreement dated as of March
19, 1999, between OCM Principal Opportunities Fund, L.P.
and the Company.
10.19(f) Convertible Note dated March 19, 1999, made by the Company
in favor of OCM Principal Opportunities Fund, L.P.
41
Exhibit No. Description of Exhibit
----------- ----------------------
10.20(f) Stock Purchase Agreement dated March 19, 1999, between the
Company, OCM Principal Opportunities Fund, L.P. and other
Purchasers set forth therein.
10.21(g) Lease Agreement dated March 15, 1999 between the Company
and Newton Venture IV Associates, effective May 15, 1999.
10.22(h) Stockholders and Registration Rights Agreement, dated
March 19, 1999, by and among CollaGenex Pharmaceuticals,
Inc., OCM Principal Opportunities Fund, L.P. and the
Purchasers set forth therein.
10.23(i) Form of Common Stock Purchase Agreement, dated March 12,
2001, between the Company and the Investors set for
therein, together with form of Registration Rights
Agreement as an exhibit thereto and form of Warrant as an
exhibit thereto.
10.24 Loan and Security Agreement dated March 19, 2001, between
the Company and Silicon Valley Bank filed herewith.
21 List of subsidiaries of the Registrant filed herewith.
23.1 Consent of KPMG LLP filed herewith.
+ Confidential treatment has been requested and granted for a portion of this
Exhibit.
(a) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File Number 333-3582) which became effective on June 20, 1996.
(b) A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(c) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 which was filed with the
Securities and Exchange Commission on October 29, 1996.
(d) Incorporated by reference to the Company's Current Report on Form 8-K,
dated September 16, 1997, which was filed with the Securities and Exchange
Commission on September 17, 1997.
(e) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, which was filed with the
Securities and Exchange Commission on November 16, 1998.
(f) Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 19, 1999 which was filed with the Securities and Exchange
Commission on March 25, 1999.
(g) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, which was filed with the Securities
and Exchange Commission on May 7, 1999.
(h) Incorporated by reference to the Company's Current Report on Form 8-K,
dated May 12, 1999, which was filed with the Securities and Exchange
Commission on May 26, 1999.
42
(i) Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 16, 2001, which was filed with the Securities and Exchange
Commission on March 16, 2001.
43
COLLAGENEX PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
----
Independent Auditors' Report.................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and
2000.......................................................... F-3
Consolidated Statements of Operations for the years
ended December 31, 1998, 1999, and 2000....................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1999 and 2000.................. F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1999 and 2000........................ F-6
Notes to Consolidated Financial Statements.................... F-7
Financial Statement Schedule - Valuation and Qualifying
Accounts...................................................... F-27
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
CollaGenex Pharmaceuticals, Inc.:
We have audited the consolidated financial statements of CollaGenex
Pharmaceuticals, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance 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 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 CollaGenex
Pharmaceuticals, Inc. and subsidiaries as of December 31, 1999 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the related financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
As discussed in Notes 2 and 7 to the consolidated financial statements, the
Company adopted the provisions of the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" in
2000.
/s/ KPMG LLP
Princeton, New Jersey
January 31, 2001, except as to the first
paragraph of note 14, which is as of
March 12, 2001 and the second paragraph
of note 14, which is as of March 19, 2001
F-2
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 2000
(dollars in thousands, except per share data)
Assets 1999 2000
-------- --------
Current assets:
Cash and cash equivalents ................................ $ 7,981 $ 3,709
Short term investments ................................... 6,386 1,739
Accounts receivable, net of allowance
of $386 and $381 in 1999 and 2000, respectively .......... 2,150 3,038
Inventories .............................................. 695 277
Prepaid expenses and other current assets ................ 615 989
-------- --------
Total current assets ................................. 17,827 9,752
Equipment and leasehold improvements, net ..................... 709 652
Other assets .................................................. 27 27
-------- --------
Total assets ......................................... $ 18,563 $ 10,431
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of note payable .......................... $ 65 $ 65
Accounts payable ......................................... 2,440 1,865
Accrued expenses ......................................... 2,335 2,514
-------- --------
Total current liabilities ................... 4,840 4,444
-------- --------
Note payable, less current portion ............................ 116 47
Deferred revenue .............................................. -- 676
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized, 200,000 shares of Series D cumulative
convertible preferred stock issued and
outstanding in 1999 and 2000, respectively
(liquidation value $20,000) .......................... 2 2
Common stock, $0.01 par value; 25,000,000 shares
authorized, 8,622,091 and 8,775,176 shares
issued and outstanding in 1999 and 2000,
respectively ......................................... 86 88
Common stock to be issued (39,188 shares and
275,462 shares in 1999 and 2000, respectively) ....... 858 872
Additional paid in capital ............................... 66,348 68,461
Deferred compensation .................................... (76) (29)
Accumulated deficit ...................................... (53,611) (64,130)
-------- --------
Stockholders' equity ........................ 13,607 5,264
-------- --------
Total liabilities and stockholders' equity .................... $ 18,563 $ 10,431
======== ========
See accompanying notes to consolidated financial statements.
F-3
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
1998 1999 2000
----------- ----------- -----------
Revenues:
Product sales .................................... $ 3,053 $ 15,211 $ 20,501
License revenues ................................. 400 100 530
Contract revenues ................................ 8 770 3,240
----------- ----------- -----------
Total revenues ............................... 3,461 16,081 24,271
----------- ----------- -----------
Operating expenses:
Cost of product sales ............................ 745 3,139 4,070
Research and development ......................... 4,670 5,005 3,128
Selling, general and administrative .............. 10,600 23,180 25,746
----------- ----------- -----------
Total operating expenses ..................... 16,015 31,324 32,944
----------- ----------- -----------
Operating loss ............................... (12,554) (15,243) (8,673)
Other income (expense):
Interest income .................................. 988 851 613
Interest expense ................................. -- (197) (15)
Other income (expense) ........................... -- (2) 9
----------- ----------- -----------
Loss before cumulative effect of change in
accounting principle .................... (11,566) (14,591) (8,066)
Cumulative effect of change in accounting principle ... -- -- (764)
----------- ----------- -----------
Net loss ..................................... (11,566) (14,591) (8,830)
Preferred stock dividend .............................. -- 1,092 1,689
----------- ----------- -----------
Net loss allocable to common stockholders ............. $ (11,566) $ (15,683) $ (10,519)
=========== =========== ===========
Basic and diluted net loss per share allocable to
common stockholders before cumulative effect
of change in accounting principle ................ $ (1.35) $ (1.82) $ (1.12)
Cumulative effect of change in accounting principle ... -- -- (0.09)
----------- ----------- -----------
Basic and diluted net loss per share allocable to
common stockholders .............................. $ (1.35) $ (1.82) $ (1.21)
=========== =========== ===========
Shares used in computing per share amounts:
Basic and diluted ................................ 8,579,054 8,597,676 8,711,668
=========== =========== ===========
Pro forma net loss assuming new accounting principle
is applied retroactively ......................... $ (11,926) $ (14,633) $ (8,066)
=========== =========== ===========
Pro forma net loss allocable to common stockholders
assuming new accounting principle is applied
retroactively .................................... $ (11,926) $ (15,725) $ (9,755)
=========== =========== ===========
Pro forma basic and diluted net loss per share
allocable to common stockholders assuming new
accounting principle is applied retroactively .... $ (1.39) $ (1.83) $ (1.12)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1999 and 2000
(dollars in thousands)
Series D cumulative
convertible
preferred stock Common stock
------------------- ---------------------
Number Number Common Additional
of Par of Par Stock to paid-in
shares value shares value be issued capital
------- --------- --------- --------- --------- ---------
Balance, December 31, 1997 .................... -- $ -- 8,567,579 $ 86 $ -- $ 47,297
Exercise of common stock options .......... -- -- 19,625 -- -- 20
Amortization of deferred compensation ..... -- -- -- -- -- --
Net loss .................................. -- -- -- -- -- --
------- --------- --------- --------- --------- ---------
Balance, December 31, 1998 .................... -- $ -- 8,587,204 $ 86 -- $ 47,317
Exercise of common stock options .............. -- -- 13,575 -- -- 44
Issuance of Series D cumulative
convertible preferred stock, net of
issuance costs .......................... 200,000 2 -- -- -- 18,448
Common stock dividends on Series D
cumulative convertible preferred
stock ................................... -- -- 21,312 -- 858 234
Compensation expense resulting from
options to non-employees ................ -- -- -- -- -- 305
Amortization of deferred compensation ......... -- -- -- -- -- --
Net loss ...................................... -- -- -- -- -- --
------- --------- --------- --------- --------- ---------
Balance, December 31, 1999 .................... 200,000 $ 2 8,622,091 $ 86 858 $ 66,348
Exercise of common stock options .............. -- -- 21,325 -- 32 84
Common stock dividends on Series D
cumulative convertible preferred
stock ................................... -- -- 131,760 2 (858) 1,705
Common stock dividends declared on Series
D cumulative convertible preferred
stock ................................... -- -- -- -- 840 --
Compensation expense resulting from
options to non-employees ................ -- -- -- -- -- 324
Amortization of deferred compensation ......... -- -- -- -- -- --
Net loss ...................................... -- -- -- -- -- --
------- --------- --------- --------- --------- ---------
Balance, December 31, 2000 .................... 200,000 $ 2 8,775,176 $ 88 $ 872 $ 68,461
======= ========= ========= ========= ========= =========
Total
Deferred Accumulated stockholders'
compensation deficit equity
------------ ---------- -------------
Balance, December 31, 1997 .................... $ (313) $ (26,362) $ 20,708
Exercise of common stock options .......... -- -- 20
Amortization of deferred compensation ..... 119 -- 119
Net loss .................................. -- (11,566) (11,566)
--------- --------- ---------
Balance, December 31, 1998 .................... $ (194) $ (37,928) $ 9,281
Exercise of common stock options .............. -- -- 44
Issuance of Series D cumulative
convertible preferred stock, net of
issuance costs .......................... -- -- 18,450
Common stock dividends on Series D
cumulative convertible preferred
stock ................................... -- (1,092) --
Compensation expense resulting from
options to non-employees ................ -- -- 305
Amortization of deferred compensation ......... 118 -- 118
Net loss ...................................... -- (14,591) (14,591)
--------- --------- ---------
Balance, December 31, 1999 .................... $ (76) $ (53,611) $ 13,607
Exercise of common stock options .............. -- -- 116
Common stock dividends on Series D
cumulative convertible preferred
stock ................................... -- (849) --
Common stock dividends declared on Series
D cumulative convertible preferred
stock ................................... -- (840) --
Compensation expense resulting from
options to non-employees ................ -- -- 324
Amortization of deferred compensation ......... 47 -- 47
Net loss ...................................... -- (8,830) (8,830)
--------- --------- ---------
Balance, December 31, 2000 .................... $ (29) $ (64,130) $ 5,264
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1998, 1999 and 2000
(dollars in thousands)
1998 1999 2000
-------- -------- --------
Cash flows from operating activities:
Net loss ................................................ $(11,566) $(14,591) $ (8,830)
Adjustments to reconcile net loss to net cash used
in operating activities:
Noncash compensation expense ...................... 119 423 371
Depreciation and amortization expense ............. 66 151 226
Cumulative effect of change in
accounting principle .......................... -- -- 764
Change in assets and liabilities:
Accounts receivable ........................... (3,045) 895 (888)
Inventories ................................... (342) (353) 418
Prepaid expenses and other assets ............. (545) 194 (342)
Accounts payable .............................. 2,363 (474) (575)
Accrued expenses .............................. 639 (210) 116
Deferred revenue .............................. -- -- (25)
-------- -------- --------
Net cash used in operating activities ...... (12,311) (13,965) (8,765)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures .................................... (230) (593) (169)
Proceeds from the sale of short-term investments ........ 6,880 7,464 6,871
Purchase of short-term investments ...................... (7,452) (6,886) (2,224)
-------- -------- --------
Net cash provided by (used in)
investing activities .................... (802) (15) 4,478
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of note payable .................. -- 10,000 --
Repayment of note payable ............................... -- (10,000) --
Net proceeds from the issuance of preferred stock ....... -- 18,450 --
Proceeds from issuance of common stock .................. 20 44 84
Proceeds from issuance of long-term debt ................ -- 219 --
Repayment of long-term debt ............................. -- (38) (69)
-------- -------- --------
Net cash provided by financing activities .. 20 18,675 15
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ......... (13,093) 4,695 (4,272)
Cash and cash equivalents at beginning of year ............... 16,379 3,286 7,981
-------- -------- --------
Cash and cash equivalents at end of year ..................... $ 3,286 $ 7,981 $ 3,709
======== ======== ========
Supplemental schedule of noncash financing activities:
Common stock dividends issued or to be issued on
preferred stock ..................................... $ -- $ 1,092 $ 1,689
======== ======== ========
Common stock to be issued on exercise of common
stock options ....................................... $ -- $ -- $ 32
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest .................. $ -- $ 199 $ 6
======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
(1) BUSINESS
CollaGenex Pharmaceuticals, Inc. ("CollaGenex Pharmaceuticals" or the
"Company") was incorporated in Delaware on January 10, 1992. The Company is a
specialty pharmaceutical company focused on providing innovative medical
therapies to the dental market. The Company, through its own sales and marketing
force, is currently marketing Periostat(R) (doxycycline hyclate), the Company's
lead drug for the treatment of adult periodontal disease which received approval
from the U.S. Food & Drug Administration (the "FDA") in September 1998. The
Company is also co-marketing other pharmaceutical products on a contract basis.
The Company has other internally developed compounds in the research and
development stage.
The accompanying consolidated financial statements include the results of
operations of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All cash
and cash equivalents are invested in obligations of the U.S. Government and in
commercial paper which bears minimal risk. To date, the Company has not
experienced any significant losses on its cash equivalents.
Short-Term Investments
----------------------
Short-term investments consist of U.S. Government obligations and
corporate debt securities with original maturities greater than three months. In
accordance with Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," the Company classifies
its short-term investments as available for sale. Available for sale securities
are recorded at their fair value, which approximates cost, of the investments
based on quoted market prices at December 31, 1999 and 2000. The Company
considers all of its short-term investments to be available for sale.
Inventories
-----------
Inventories are stated at the lower cost or market. Cost is determined
using the first-in, first-out method.
F-7
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
Equipment
---------
Equipment, consisting of computer and office equipment, exhibit equipment
and leasehold improvements is recorded at cost. Depreciation and amortization is
provided using the straight-line method over the estimated useful lives of the
assets or the related lease term, whichever is shorter, generally three to ten
years. Expenditures for repairs and maintenance are expensed as incurred.
Segment Information
-------------------
The Company is managed and operated as one business. The entire business
is managed by a single management team that reports to the chief executive
officer. The Company does not operate separate lines of business or separate
business entities with respect to any of its products or product candidates.
Accordingly, the Company does not prepare discrete financial information with
respect to separate product areas or by location and does not have separately
reportable segments as defined by SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information".
Financial Instruments
---------------------
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued expenses approximate fair
value because of the short maturity of these instruments. The interest rates on
the note payable approximate rates for similar types of borrowing arrangements
at December 31, 1999 and 2000, therefore the fair value of the note payable
approximates the carrying value at December 31, 1999 and 2000.
Product Sales
-------------
In September 1998, the Company received clearance from the FDA to market
Periostat. The Company has the exclusive right to market Periostat in the United
States. In November 1999, the Company began shipping Periostat to wholesalers
throughout the United States. The Company recognizes sales revenue upon
shipment. Sales are reported net of allowances for discounts, rebates,
chargebacks and product returns.
Revenue Recognition
-------------------
Milestone revenue from license arrangements is recognized upon completion
of the milestone event or requirement. Payments, if any, received in advance of
performance under a contract are deferred and recognized when earned. As
described in note 7, as of January 1, 2000, upfront license fees where the
Company has continuing involvement, (which prior to January 1, 2000 were
recorded as license revenues when received) are now deferred and recognized over
F-8
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
the estimated performance period of each individual licensing agreement in
accordance with the SEC's Staff Accounting Bulletin No. 101 ("SAB 101").
Accordingly, effective January 1, 2000, the Company has recorded a $764 charge
as a cumulative effect of change in accounting principle for certain upfront
license revenues recognized prior to January 1, 2000.
Contract Revenues
-----------------
Contract revenues are earned and recognized according to the provisions of
each collaborative agreement.
Advertising Costs
-----------------
The Company incurs advertising costs from print advertisements in various
periodicals and television advertisements. The Company records advertising
expense when incurred. Such amounts charged to the consolidated statements of
operations for 1998, 1999 and 2000 were $0.8 million, $1.6 million and $2.1
million, respectively.
Research and Development
------------------------
Research and product development costs are expensed as incurred.
Accounting for Income Taxes
---------------------------
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when such
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits which are
not expected to be realized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period that such tax rate changes
are enacted.
Management Estimates
--------------------
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amount reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Stock-Based Compensation
------------------------
As described in note 6, Statement of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation," encourages but does
not require companies
F-9
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
to record compensation cost for stock-based employee compensation plans at fair
value. The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options issued to employees is measured
as the excess, if any, of the market price of the Company's stock at the date
both the number of shares and price per share are known (measurement date) over
the exercise price. Such amounts are amortized on a straight-line basis over the
respective vesting periods of the option grants. Transactions with
non-employees, in which goods or services are the consideration received for the
issuance of equity instruments, are accounted for on a fair value basis in
accordance with SFAS 123 and related interpretations.
Concentration of Credit and Other Risks
---------------------------------------
The Company invests its excess cash in deposits with major U.S. financial
institutions, money market funds, U.S. Government obligations and corporate debt
securities. The Company has established guidelines relative to diversification
and maturities that maintain safety and liquidity. To date, the Company has not
experienced any significant losses.
The Company currently contracts with a single source for the domestic
manufacturing of Periostat capsules which are sold throughout the United States
exclusively to wholesale and retail distributors. In addition, the Company has a
supply agreement with a single company to supply the active ingredient in
Periostat. A single company also provides all warehousing and distribution
services to the Company. During 2000, four customers accounted for 31%, 17%, 14%
and 10%, of net product sales, respectively. During 1999, two customers
accounted for 30% and 14%, of net product sales, respectively. During 1998, two
customers accounted for 28% and 27% of net product sales, respectively.
The Company's business of selling, marketing and developing pharmaceutical
products is subject to a number of significant risks, including risks relating
to the implementation of the Company's sales and marketing plans, risks inherent
in research and development activities, risks associated with conducting
business in a highly regulated environment and uncertainties related to clinical
trials of products under development.
Net Loss Per Share
------------------
Basic earnings per share ("EPS") is calculated by dividing earnings (loss)
allocable to common stockholders by the weighted average shares of common stock
outstanding. Net loss allocable to common stockholders includes dividends on the
preferred stock. Diluted EPS would also include the effect of dilution to
earnings of convertible securities and stock options. As of December 31, 2000,
the Company has certain convertible preferred stock and stock options which have
not been included in the calculation of diluted net loss per share allocable to
common
F-10
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
stockholders because to do so would be anti-dilutive. As such, the numerator and
denominator used in computing both basic and diluted net loss per share
allocable to common stockholders are equal.
Reclassification
----------------
Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform to the 2000 presentation.
(3) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Inventories
-----------
Inventories at December 31, 1999 and 2000 consists of the following:
1999 2000
--------- ---------
Raw materials................ $ 254 $ 60
Finished goods............... 441 217
--------- ---------
$ 695 $ 277
========= =========
Equipment and Leasehold Improvements
------------------------------------
Equipment and leasehold improvements at December 31, 1999 and 2000
consists of the following:
1999 2000
--------- ---------
Computer and office equipment.... $ 673 $ 792
Exhibit equipment................ 259 309
Leasehold improvements........... 45 45
--------- ---------
977 1,146
Less accumulated
depreciation and
amortization................... (268) (494)
--------- ---------
$ 709 $ 652
========= =========
F-11
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
Accrued Expenses
----------------
Accrued expenses at December 31, 1999 and 2000 consists of the following:
1999 2000
--------- ---------
Contracted development and
manufacturing costs........... $ 441 $ 314
Sales and marketing costs....... 144 597
Payroll and related costs....... 1,237 1,061
Professional and consulting
fees........................... 221 204
Royalties....................... 215 201
Deferred revenue................ -- 63
Miscellaneous taxes............. 32 52
Other........................... 45 22
--------- ---------
$ 2,335 $ 2,514
========= =========
(4) NOTE PAYABLE
In April 1999, the Company received $219 in proceeds from the issuance of
a note payable. The proceeds of such note were used to fund the purchase of
equipment, fixtures and furniture for the Company's newly leased corporate
office in Newtown, Pennsylvania. The term of the note is three years with
interest at 9.54% per annum, with monthly minimum payments of principal and
interest.
(5) STOCKHOLDERS' EQUITY
The Company's Board of Directors may, without further action by the
Company's stockholders, from time to time, direct the issuance of shares of
preferred stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. The holders of preferred
stock would normally be entitled to receive a preference payment in the event of
any liquidation, dissolution or winding-up of the Company before any payment is
made to the holders of the common stock.
On May 12, 1999, the Company consummated a $20.0 million financing (the
"Financing") through the issuance of 200,000 shares of its Series D Cumulative
Convertible Preferred Stock (the "Preferred Stock"), which generated net
proceeds to the Company of approximately $18.5 million. OCM Principal
Opportunities Fund, L.P. ("OCM") led the investor group, which also included
certain current stockholders of the Company.
The issuance of the Preferred Stock was approved by a majority of the
Company's stockholders at the Company's Annual Meeting of Stockholders on May
11, 1999. A portion of
F-12
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
the proceeds of the Financing were used for the repayment of a $10.0 million
Senior Secured Convertible Note with interest at 12% per annum provided by OCM
on March 19, 1999 in connection with the financing. During the first three years
following issuance, the Preferred Stock pays dividends in common stock at a rate
of 8.4% per annum. Thereafter, the Preferred Stock pays dividends in cash at a
rate of 8.0% per annum. The Preferred Stock is convertible into common shares of
the Company at an initial conversion price of $11.00 per share, subject to
adjustment (see note 14), at any time by the holder and under certain conditions
by the Company. The conversion price is subject to adjustment in the event the
Company fails to declare or pay dividends when due or should the Company issue
new equity securities or convertible securities at a price per share or having a
conversion price per share lower than the applicable conversion price of the
Preferred Stock (see note 14). Dividends totaling $1,092 and $1,689 were
declared in 1999 and 2000, respectively. At December 31, 1999 and 2000, declared
dividends of 39,188 and 259,462 shares of common stock, respectively, have not
been issued, and have accordingly been classified as common stock to be issued
in the accompanying consolidated balance sheet.
The holders of the Preferred Stock are entitled to vote with the holders
of the Company's common stock on all matters to be voted on by the Company's
stockholders on an as converted to common stock basis, subject to adjustment.
The holders of the Preferred Stock are entitled to liquidation preferences equal
to the original purchase price plus dividends accrued and unpaid plus other
dividends in certain circumstances. In connection with the issuance of the
Preferred Stock, the rights of the holders of the Company's common stock may be
limited in certain instances with respect to dividend rights, rights on
liquidation, winding up and dissolution of the Company, and the right to vote in
connection with certain matters submitted to the Company's stockholders.
Without written approval of a majority of the holders of record of the
Preferred Stock, the Company, among other things, shall not: (i) declare or pay
any dividend or distribution on any shares of capital stock of the Company other
than dividends on the Preferred Stock; (ii) make any loans, incur any
indebtedness or guarantee any indebtedness, advance capital contributions to, or
investments in any person, issue or sell any securities or warrants or other
rights to acquire debt securities of the Company, except that the Company may
incur such indebtedness in any amount not to exceed $10.0 million in the
aggregate outstanding at any time for working capital requirements in the
ordinary course of business; or (iii) make research and development expenditures
in excess of $7.0 million in any continuous twelve month period, unless the
Company has reported positive net income for four consecutive quarters
immediately prior to such twelve month period.
The Company maintains a Shareholder Rights Plan (the "Rights Plan"). Under
the Rights Plan, each common stockholder receives one "Right" for each share of
common stock held. Each Right, once exercisable, entitles the holder to purchase
from the Company one one-
F-13
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
hundredth of a share of the Company's Series A Participating Preferred Stock at
an exercise price of $65. All Rights expire on September 26, 2007 unless earlier
redeemed. At December 31, 2000, the Rights were neither exercisable nor traded
separately from the Company's common stock, and become exercisable only if a
person or a group of affiliated or associated persons has acquired, or obtained
the right to acquire, beneficial ownership of 20% or more of the voting power of
all outstanding shares of the Company's common stock and in certain other
limited circumstances. Upon separation from the common stock, each Right will
entitle the holder, other than the acquiring person that has triggered such
separation, to effectively purchase certain shares of the Company's common stock
equal in market value to two times the then applicable exercise price of the
Right. If the Company is acquired in a merger or other business combination
transaction, or 50% or more of the Company's assets or earning power are sold in
one or more related transactions, the Rights will entitle holders, upon exercise
of the Rights, to receive shares of common stock of the acquiring or surviving
company with a market value equal to twice the exercise price of each Right. In
1999, the Company amended its Rights Plan to specifically exclude an initial
issuance of the Preferred Stock.
(6) STOCK OPTION PLANS
The Company has three stock-based compensation plans (the "Plans") and has
adopted the disclosure-only provisions of SFAS 123. The Company continues to
apply APB Opinion No. 25 in accounting for its stock option plans and,
accordingly, no compensation expense has been recognized in the consolidated
financial statements for stock options issued to employees at exercise prices
equal to the market value on the measurement date.
The 1992 Stock Option Plan, as amended, (the "1992 Plan") provided for the
granting of incentive and nonstatutory options to directors, employees and
consultants to purchase up to 291,000 shares of the Company's common stock at a
price, for the incentive options, not less than the fair market value on the
measurement date. Such options are exercisable for a period of 10 years from the
grant date and generally vest over a four year period. All such 291,000 options
available under the 1992 Plan were granted by March 31, 1996.
The 1996 Stock Option Plan (the "1996 Plan") provides for the granting of
incentive and nonstatutory options to employees and consultants to purchase up
to 1,500,000 shares of the Company's common stock at a price, for the incentive
options, not less than the fair market value on the measurement date. Incentive
and nonstatutory options granted to individuals owning more than 10% of the
voting power of all classes of stock at the time of grant must have an exercise
price no less than 110% of the fair market value on the date of grant. Such
options are exercisable for a period of 10 years from the grant date and
generally vest over a two to five year period, and may be accelerated for
certain grants in certain circumstances.
F-14
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
In March 1996, the Board of Directors approved a nonqualified plan for the
issuance of stock options to non-employee directors under the Non-Employee
Director Stock Option Plan (the "Non-Employee Director Plan"). Under this plan,
300,000 shares of common stock are reserved for issuance at an exercise price
equal to the fair market value on the date of grant. Such options vest 20% per
annum commencing one year from the grant date.
During 1999, 192,500 options were granted to employees at fair market
value with an exercise price of $10.06 per share. During 2000, 237,750 options
were granted to employees at fair market value with an exercise price of $5.00
per share. These grants were not issued under the terms of any of the above
Plans.
At December 31, 2000, there were 278,670 shares available for grant under
the 1996 Plan and 105,000 under the Non-Employee Director Plan.
Deferred compensation had been recorded in years prior to 1998 for options
granted where the fair value of the Company's stock on the measurement date
exceeded the exercise price of such options. Deferred compensation is being
amortized to compensation expense in the accompanying consolidated statement of
operations over the respective vesting periods of such grants ($119, $118 and
$47 in 1998, 1999 and 2000, respectively).
In 1999, the Company granted options to certain non-employees to purchase
60,000 shares of common stock. Such options were originally scheduled to vest
over a four year period based upon future service requirements. In accordance
with EITF Issue 96-18, the amount of compensation expense to be recorded in
periods following the grant are subject to change each reporting period based
upon changes in the market value of the Company's common stock, estimated
volatility and risk free interest rates until the non-employee completed
performance under the option agreement and the options vest. The Company
recorded total compensation expense of $305 in 1999, based on the market value
of the options at the grant date and at December 31, 1999 as determined using a
Black-Scholes option pricing model. In 2000, the Company elected to accelerate
the vesting on the remaining unvested options. Accordingly, the Company recorded
total compensation expense, including that related to the accelerated vesting,
of $324 in 2000, based on the market value of the options at the grant date and
at the vesting dates in 2000 as determined using the Black-Scholes option
pricing model. No future compensation expense will be recorded on these 60,000
options.
F-15
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
The following table summarizes stock option activity for 1998 through
2000:
Weighted average
exercise price
Shares per share
--------- ----------------
Balance December 31, 1997.... 725,954 $ 7.06
Granted.................... 315,000 8.08
Exercised.................. (19,625) 1.00
Cancelled.................. (3,000) 6.75
--------- -------
Balance December 31, 1998.... 1,018,329 7.49
Granted.................... 475,150 11.36
Exercised.................. (13,575) 3.24
Cancelled.................. (42,000) 10.72
--------- -------
Balance December 31, 1999.... 1,437,904 8.72
Granted.................... 721,880 13.17
Exercised.................. (37,325) 3.11
Cancelled.................. (99,450) 12.97
--------- -------
Balance December 31, 2000.... 2,023,009 10.20
Amounts exercised in 2000 include 16,000 options to purchase common stock
at $2.00 per share which were not issued until January 2001, and accordingly are
classified as common stock to be issued in the accompanying balance sheet at
December 31, 2000.
F-16
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
As of December 31, 2000, the following options were outstanding and
exercisable by price range as follows:
Outstanding Exercisable
------------------------------------- ----------------------
Weighted Weighted Weighted
average average average
Range of remaining exercise exercise
exercise Number of contractual price per Number of price per
prices shares life share shares share
- ------------ --------- ----------- --------- --------- ----------
$0.20- 2.00 189,954 4.7 years $ 0.95 189,954 $ 0.95
4.50-10.00 739,050 7.3 years 7.18 278,025 8.61
10.06-12.00 444,275 7.4 years 10.29 201,624 10.46
12.19-13.56 198,950 8.0 years 12.42 124,287 12.44
14.06-22.88 450,780 8.5 years 17.96 18,925 17.12
2,023,009 7.4 years $ 10.20 812,815 $ 8.06
Had the Company elected to recognize compensation cost for options as
prescribed by the fair value method under SFAS 123, the Company's net loss
allocable to common stockholders and basic and diluted loss per share allocable
to common stockholders would have been reflected as set forth below:
1998 1999 2000
-------- -------- --------
Net loss allocable to
common stockholders:
As reported........... $ 11,566 $ 15,683 $ 10,519
Pro forma............. 12,487 17,338 13,802
Basic and diluted net loss
per share allocable to
common stockholders::
As reported........... $ 1.35 $ 1.82 $ 1.21
Pro forma............. 1.46 2.02 1.58
Pro forma net loss allocable to common stockholders reflects only options
granted in 1995 through 2000. Consequently, the full impact of calculating
compensation cost for stock options under SFAS 123 is not reflected in the pro
forma net loss allocable to common stockholders amounts presented above because
compensation cost is incurred under SFAS 123 over the respective vesting period
of such options, and options granted by the Company prior to January 1, 1995 are
not reflected in the pro forma net loss allocable to common stockholders figures
above.
F-17
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
The weighted average fair values of stock options granted to employees
during 1998, 1999 and 2000 were $4.64, $7.81 and $10.72 per share, respectively,
on the date of grant. The weighted average fair values of stock options granted
to nonemployees during 1999 were $9.21 per share on the date of grant. Such fair
values were determined using the Black-Scholes option pricing model and are
based on the following assumptions:
1998 1999 2000
-------- -------- --------
Expected life in years.... 5 5 7
Risk-free interest rate... 6.25% 6.25% 6.20%
Volatility................ 60% 80% 90%
Expected dividend yield... --% --% --%
(7) CHANGE IN ACCOUNTING PRINCIPLE
In the fourth quarter of 2000, the Company adopted SAB 101, "Revenue
Recognition in Financial Statements", implementing a change in revenue
recognition policy for certain upfront payments received in international
licensing arrangements for Periostat. Effective January 1, 2000, upfront
payments received from licensees, where the Company has continuing involvement,
are now being deferred and recognized as license revenue over the estimated
performance period of the individual license agreements. In previous years,
prior to the Company's adoption of SAB 101, the Company recognized revenue when
the upfront payments were received, generally upon the execution of each
agreement. During 2000, the Company would have recognized approximately $505 in
license revenues under its historical revenue recognition policy prior to the
adoption of SAB 101. In addition, during 2000, the Company recorded $397 in
license revenues which were deferred upon the implementation of SAB 101 as of
January 1, 2000 and which were previously recognized as license revenues under
the historical revenue recognition policy prior to the adoption of SAB 101.
The consolidated statement of operations in 2000 has been presented in the
accompanying financial statements based on this newly adopted revenue
recognition policy. The change increased revenue and decreased net loss by $25
during 2000, excluding the cumulative effect of the change. The pro forma net
loss allocable to common stockholders and the related per share amounts for 1998
and 1999 as if the new accounting principle had been applied retroactively are
also presented in the accompanying consolidated statements of operations. During
2000, the Company recorded a $764 charge as a result of the cumulative effect of
the change in accounting principle for revenue recognized prior to January 1,
2000 and, accordingly, has recorded approximately $739 in deferred revenues from
upfront license payments received from licensees, of which $63 has been
classified as a current liability in the accompanying consolidated balance sheet
at December 31, 2000.
F-18
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
(8) INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes".
Under the asset and liability method, deferred taxes are determined based on the
differences between the financial statement and tax bases of assets and
liabilities using currently enacted tax rates.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at December 31,
1999 and 2000 are presented below:
1999 2000
--------- ---------
Deferred tax assets:
Capitalized start up costs........... $ 423 $ 170
Net operating loss carryforwards..... 19,543 23,530
Tax credit carryforward.............. 790 840
Accrued expenses..................... 348 58
Deferred revenue..................... -- 251
--------- ---------
Total gross deferred tax assets... 21,104 24,849
Less valuation allowance............. (21,069) (24,830)
--------- ---------
Total deferred tax assets......... 35 19
Deferred tax liability:
Depreciation......................... (35) (19)
--------- ---------
Net deferred taxes................ $ -- $ --
========= =========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences are deductible and carryforwards are available. Due to the
uncertainty of the Company's ability to realize the benefit of the deferred tax
assets, the net deferred tax assets are fully offset by a valuation allowance at
December 31, 1999 and 2000.
The net change in the valuation allowance for the years ended December 31,
1999 and 2000 were increases of approximately $5,619 and $3,761, respectively,
related primarily to additional net operating losses incurred by the Company.
F-19
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
At December 31, 2000, the Company had approximately $59,800 of Federal and
$46,500 of state net operating loss carryforwards available to offset future
taxable income. The Federal and state net operating loss carryforwards will
begin expiring in 2007 and 2005, respectively, if not utilized. The Company also
has research and development tax credit carryforwards of approximately $840
available to reduce Federal income taxes which begin expiring in 2007.
Section 382 of the Internal Revenue Code of 1986 subjects the future
utilization of net operating losses and certain other tax attributes, such as
research and development credits, to an annual limitation in the event of an
ownership change, as defined. Due to the Company's prior year equity
transactions, a portion of the net operating losses and tax credits of the
Company are subject to an annual limitation of approximately $3,800. To the
extent that any single-year limitation is not utilized to the full amount of the
limitation, such unused amounts are carried over to subsequent years until the
earlier of its utilization or the expiration of the relevant carryforward
period. As of December 31, 2000, assuming no future ownership changes (including
the financing in March 2001 - see note 14), approximately $25 million is
immediately available to offset future taxable income. In addition to the
Section 382 limitation, the state net operating loss carryforward is subject to
a $2,000 annual limitation.
(9) TECHNOLOGY LICENSE
At the time of its formation in 1992, the Company entered into an
agreement with SUNY whereby the Company received an option to acquire a certain
technology license. The Company's option to acquire the license was exercised in
1995 and remains in effect for a period not to exceed 20 years from the date of
the first sale of product incorporating the technology under license or the last
to expire of the licensed patents in each country. The Company is liable to SUNY
for annual royalty fees based on net sales, if any, as defined in the agreement.
A minimum annual royalty is required for the duration of the technology license.
The Company incurred royalty expense of $200, $711 and $940 in 1998, 1999 and
2000, respectively.
In addition, the Company is required to reimburse SUNY for certain patent
related costs, as well as to support certain additional research efforts.
F-20
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
(10) COMMITMENTS
The Company maintains various operating leases, primarily for office
space. As of December 31, 2000, future minimum rent payments under
noncancellable operation leases are as follows:
2001............ $ 337
2002............ 335
2003............ 335
2004............ 332
2005............ 334
Thereafter...... 1,195
------
Total...... $2,868
======
Rent expense for the years ended December 31, 1998, 1999 and 2000 totaled
$86, $204 and $326, respectively.
During 1999, the Company entered into a three-year co-promotion agreement
under which the Company is committed to spend up to $1 million annually for
promotional expenses, unless the agreement is earlier terminated per the terms
of the agreement.
Subsequent to December 31, 2000, the Company entered into an agreement to
purchase approximately $1,500 of inventory from its supplier.
(11) 401(k) SALARY REDUCTION PLAN
In January 1995, the Company adopted a 401(k) Salary Reduction Plan (the
"401(k) Plan") available to all employees meeting certain eligibility
requirements. The 401(k) Plan permits participants to contribute up to 15% of
their annual salary not to exceed the limits established by the Internal Revenue
Code. All contributions made by participants vest immediately in the
participant's account. The Company did not make any "matching contributions" in
1998, 1999 or 2000 in accordance with the terms of the 401(k) Plan.
(12) CONTRACT RESEARCH AGREEMENT
In May 1998, the Company entered into a three year evaluation testing
agreement with SUNY pursuant to which SUNY will evaluate certain compounds
supplied by the Company under which the Company will pay SUNY up to $1,570.
Either party may terminate the agreement at any time. Costs incurred during
1998, 1999 and 2000 were $333, $541 and $356, respectively.
F-21
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables below summarize the Company's unaudited quarterly operating
results for 1999 and 2000. The first three quarters of 2000 have been restated
pursuant to the adoption of SAB 101 in the fourth quarter of 2000, as described
in note 7.
Three months ended
------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
--------- --------- ---------- --------
Total revenues ........... $ 2,418 $ 3,438 $ 4,345 $ 5,880
Gross margin on product
sales .................. 1,867 2,500 3,359 4,346
Net loss ................. (5,089) (4,142) (3,286) (2,074)
Net loss allocable to
common stockholders .... (5,089) (4,377) (3,715) (2,502)
Basic and diluted net
loss per share
allocable to common
stockholders ........... (0.59) (0.51) (0.43) (0.29)
F-22
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
Three months ended
------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
2000 2000 2000 2000
--------- --------- ---------- --------
Total revenues............ $ 6,530 $ 6,612 $ 5,259 $ 5,870
Gross margin on product
sales................... 4,340 4,596 3,436 4,059
Net loss.................. (2,837) (1,990) (2,052) (1,951)
Net loss allocable to
common stockholders
before cumulative
effect of change in
accounting principle.... (2,496) (2,416) (2,481) (2,362)
Net loss allocable to
common stockholders..... (3,260) (2,416) (2,481) (2,362)
Basic and diluted net
loss per share
allocable to common
stockholders before
cumulative effect of
change in accounting
principle............... (0.29) (0.28) (0.28) (0.27)
Basic and diluted net
loss per share
allocable to common
stockholders............ (0.38) (0.28) (0.28) (0.27)
F-23
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
The table below reflects the effect of the change in accounting principle
on net loss allocable to common stockholders and basic and diluted net loss per
share allocable to common stockholders under the Company's historical revenue
recognition policy as a result of the adoption of SAB 101 in the fourth quarter
of 2000.
Three months ended
------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
2000 2000 2000 2000
--------- --------- ---------- --------
Net loss allocable to
common stockholders
under historical
revenue recognition
policy................... (2,866) (2,327) (2,276) (2,311)
Effect of change in
accounting principle..... 370 (89) (205) (51)
Cumulative effect of
change in accounting
principle................ (764) -- -- --
------- ------- ------- -------
Net loss allocable to
common stockholders
after effect of
change in accounting
principle, as restated .. $(3,260) $(2,416) $(2,481) $(2,362)
======== ======= ======= =======
F-24
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
Three months ended
------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
2000 2000 2000 2000
--------- --------- ---------- --------
Basic and diluted net
loss per share
allocable to common
stockholders under
historical revenue $ (0.33) $ (0.27) $ (0.26) $ (0.27)
recognition policy......
Effect of change in
accounting principle.... 0.04 (0.01) (0.02) --
Cumulative effect of
change in accounting
principle............... (0.09) -- -- --
-------- ------- ------- ------
Basic and diluted net
loss per share
allocable to common
stockholders after
effect of change in
accounting principle,
as restated............. $ (0.38) $ (0.28) $ (0.28) $ (0.27)
======== ======== ======== ========
(14) SUBSEQUENT EVENTS
On March 12, 2001, the Company consummated a private equity offering of
1,500,000 shares of Common Stock for an aggregate purchase price of $7,500,
which generated net proceeds to the Company of approximately $6,900. In
addition, the investors in this financing were also issued an aggregate of
400,000 warrants which are exercisable for up to three (3) years into 400,000
shares of the Company's Common Stock at an exercise price per share of $6.00.
The consideration received for such warrants is included in the aggregate
proceeds received in the financing. The Company also issued to its financial
advisor in this financing, warrants to purchase an aggregate of 150,000 shares
of the Company's Common Stock, exercisable for up to three (3) years, at an
exercise price of $5.70 per share. These warrants may be deemed automatically
exercised in certain circumstances based on the Company's stock price. The
Company is obligated to file and maintain the effectiveness of a shelf
registration statement with respect to all such shares of Common Stock issued
and shares underlying all such warrants beginning no later than June 10, 2001.
Should the Company fail to obtain effectiveness of such registration statement
by June 10, 2001, or to maintain the effectiveness of such registration
statement for a continuous twenty-four (24) month period, the investors and the
financial advisor shall receive an additional 27,500 shares of the Company's
Common Stock, in the aggregate, for no additional consideration. As a result of
this financing, the conversion price paid on the Preferred Stock has been
reduced to $9.94 per share.
F-25
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1999 and 2000
(dollars in thousands, except per share data)
On March 19, 2001, the Company consummated a revolving credit facility
(the "Facility") with Silicon Valley Bank (the "Bank"). The Company may borrow
up to the lesser of $3,000 or 80% of eligible accounts receivable, as defined.
The amount available is also reduced by outstanding letters of credit which may
be issued under this agreement in amounts totaling up to $1,500. The Company is
not obligated to draw amounts under the Facility and any such draws will bear
interest, payable monthly, at the then prevailing prime rate plus 1.5% per annum
and may be used only for working capital purposes. Without the consent of the
Bank, the Company, among other things, shall not (i) merge or consolidate with
another entity; (ii) acquire assets outside the ordinary course of business; or
(iii) pay or declare any cash dividends on the Company's Common Stock. The
Company must also maintain a certain tangible net worth and a minimum of $2,000
in cash, net of borrowings under the Facility, at all times during the term of
the Facility. In addition, the Company has secured its obligations under the
Facility through the granting of a security interest in favor of the Bank with
respect to all of the Company's assets, including its intellectual property.
F-26
SCHEDULE II
COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARY
FINANCIAL STATEMENT SCHEDULE
Valuation and Qualifying Accounts
Years Ended December 31, 1998 1999 and 2000
(in thousands)
- --------------------------------------------------------------------------------
Col A Col B Col C Col D Col E
- --------------------------------------------------------------------------------
Description Balance at Additions Deductions Balance at
the the End of
Beginning of Period
Period
- --------------------------------------------------------------------------------
Accounts Charged to Other
Receivable Statement
Allowance: of
Operations
- --------------------------------------------------------------------------------
1998 $ -- $ 293 $-- $ -- $ 293
1999 $ 293 $ 554 $-- $ 461 $ 386
2000 $ 386 $ 824 $-- $ 829 $ 381
- --------------------------------------------------------------------------------
F-27