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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, 2001
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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: $102,771,570 at March 15, 2002 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, 2002:
Class Number of Shares
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Common Stock, $0.01 par value 11,110,019
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 2002 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
TABLE OF CONTENTS
Item Page
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PART I 1. Business................................................ 1
2. Properties.............................................. 31
3. Legal Proceedings....................................... 31
4. Submission of Matters to a Vote of Security Holders..... 31
PART II 5. Market for the Company's Common Equity and Related
Stockholder Matters.................................. 32
6. Selected Consolidated Financial Data.................... 32
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 35
7A. Quantitative and Qualitative Disclosures about
Market Risk.......................................... 51
8. Financial Statements and Supplementary Data............. 51
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 52
PART III 10. Directors and Executive Officers of the Registrant...... 53
11. Executive Compensation.................................. 53
12. Security Ownership of Certain Beneficial Owners and
Management........................................... 53
13. Certain Relationships and Related Transactions.......... 53
PART IV 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................... 54
SIGNATURES............................................................... 55
EXHIBIT INDEX............................................................ 57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE..................................................... F-1
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PART I
ITEM 1 BUSINESS.
GENERAL
CollaGenex Pharmaceuticals, Inc. and subsidiaries is a specialty
pharmaceutical company currently focused on providing innovative medical
therapies to the dental and dermatology markets. Our first product,
Periostat(R), is an orally administered, prescription pharmaceutical product
that was approved by the United States Food and Drug Administration in September
1998 and is the first and only pharmaceutical to treat adult periodontitis by
inhibiting the enzymes that destroy periodontal support tissues. Periostat is
indicated as an adjunct to scaling and root planing, 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."
We market Periostat to the professional dental community in the United
States through our professional pharmaceutical sales force comprised of
approximately 120 sales representatives and managers. Our sales force also
markets Vioxx(R), a prescription non-steroidal anti-inflammatory drug (NSAID)
developed by Merck & Co., Inc. In October 2001, pursuant to an exclusive License
and Marketing Agreement with Atrix Laboratories, Inc., we also began to market
and sell Atridox(R), Atrisorb(R) FreeFlow and Atrisorb(R)-D, Atrix's products
for the treatment of adult periodontitis, to the United States dental market.
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. We are
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), our lead compound for the treatment of
metastatic cancer, were initiated in January 1998 under the sponsorship of the
National Cancer Institute. In Phase I clinical trials, Metastat demonstrated an
overall tumor response rate of 44% in patients with Kaposi's sarcoma, and the
National Cancer Institute has opened enrollment for a Phase II clinical trial to
continue to evaluate the safety and efficacy of Metastat in HIV-related Kaposi's
sarcoma.
In January 2002, we announced our plans to expand into the dermatology
market. In September 2001, we announced the results of a 59-patient,
double-blinded, placebo-controlled clinical trial designed to evaluate the
efficacy of Periostat to treat adult patients with acne. The results from this
trial revealed that the patients who were administered Periostat experienced a
greater than 50% reduction in the number of comedones, inflammatory lesions and
total lesions relative to baseline lesion counts, a statistically greater number
than in the placebo group. During 2002 we intend to continue the clinical
development of Periostat for the treatment of inflammatory acne and to initiate
a pilot clinical trial to evaluate the use of Periostat to treat rosacea, a
related dermatological condition that affects approximately 15 to 20 million
patients in the United States. We are actively seeking product licensing
opportunities to enhance our near-term offerings to the dermatology market and
in February 2002 we announced that we had
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licensed a new dermal and transdermal drug delivery technology called
Restoraderm(TM), which we intend to develop for dermatological applications.
Our core technology is licensed on an exclusive basis from the Research
Foundation of the State University of New York at Stony Brook, or SUNY. SUNY
also conducts research and development on other potential applications of the
core technology on a project basis.
The Company was incorporated in Delaware in January 1992 under the name
CollaGenex, Inc. We changed our name to CollaGenex Pharmaceuticals, Inc. in
April 1996. Our executive offices are located at 41 University Drive, Suite 200,
Newtown, Pennsylvania 18940, and our telephone number is (215) 579-7388.
Periostat(R), Metastat(R), Dermostat(R), Nephrostat(R), Osteostat(R),
Arthrostat(R), Rheumastat(R), Corneostat(R), Gingistat(R), IMPACS(TM), PS20(TM),
The Whole Mouth Treatment(TM), Restoraderm(TM) and Dentaplex(TM) are United
States trademarks of CollaGenex Pharmaceuticals, Inc. Periostat(R),
Nephrostat(R), Optistat(R), and Xerostat(R) are European Community trademarks of
CollaGenex Pharmaceuticals, Inc. Periostat(R), Nephrostat(R), Optistat(R),
Xerostat(R), IMPACS(R) and Dentaplex(R) are United Kingdom trademarks of our
wholly-owned subsidiary, CollaGenex International Limited. CollaGenex(R) and
PS20(R) are both European Community and United Kingdom trademarks of CollaGenex
International Limited. 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 CollaGenex Pharmaceuticals, Inc. or
any of our subsidiaries.
PRODUCTS
Periostat
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 scaling and root
planing, a mechanical procedure that removes 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 scaling and root planing 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
is
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intended to be taken orally by the patient between dental visits. Periostat's
mechanism of action is believed in part to be through the down-regulation of the
activity of collagenases, enzymes that belong to a broad class of enzymes known
as matrix metalloproteinases. Collagenase is excessively produced as a result of
inflammation resulting from bacterial infection in the gums. In September 1998,
the FDA granted United States marketing approval for Periostat as an adjunct to
scaling and root planing 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 1.5 million Periostat prescriptions have
been filled and over 35,000 dentists have written a Periostat prescription.
In December 2000 and February 2001, the United Kingdom Medicines Control
Agency and the FDA, respectively, granted marketing approval for our tablet
formulation of Periostat. In July 2001, we launched a new tablet formulation of
Periostat. The Periostat tablet formulation is easier to swallow and offers
manufacturing cost advantages over our capsule formulation of Periostat, which
has been discontinued. In August 2001, we were advised by the Department of
Health in the United Kingdom that Periostat tablets were placed on the Dental
Practitioners Formulary under the National Health Service, allowing patients in
the United Kingdom to receive Periostat via prescription by contributing only a
modest co-payment, or no co-payment at all.
We have applied for the registration of Periostat tablets with the European
Union Member States and Norway under the Mutual Recognition Procedure, with the
United Kingdom Medicines Control Agency acting as our Reference Member State.
Under the Mutual Recognition Procedure, once marketing approval for a
pharmaceutical is granted by one European Member State, such state then acts as
a Reference Member State and assists in expediting the review and approval of
the pharmaceutical in other European Member States.
In February 2002, we received provisional approval for the marketing of
Periostat from seven European Member States including Austria, Finland, Ireland,
Italy, Luxembourg, the Netherlands and Portugal. We expect to receive final
approval to market Periostat in these countries following our submission of
local language labeling based on the text approved under the Mutual Recognition
Procedure.
Submissions for approval of Periostat have also been made in Switzerland
and Israel. The regulatory authorities in Switzerland have requested additional
information. The regulatory authorities in Israel have approved Periostat for
sale in Israel as of March 2002. A submission was also made in 2001 to the
regulatory authorities in Oman.
Periostat tablets are manufactured for us by Pharmaceutical Manufacturing
Research Services, Inc., a contract manufacturing company. We intend to supply
Periostat tablets to our foreign marketing partners upon receipt of requisite
regulatory approvals, if at all, for distribution in countries other than the
United States and the United Kingdom.
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Vioxx
Pursuant to a Co-Promotion Agreement we executed with Merck in September
1999, we received the exclusive right to co-promote Vioxx to the dental
community. Vioxx is a prescription strength non-steroidal anti-inflammatory drug
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 us
upon sales of Vioxx to the dental community. The existing agreement with Merck
expires in 2002 and is renewable upon mutual agreement. We are currently
evaluating our options with respect to this agreement.
Atridox, Atrisorb FreeFlow and Atrisorb-D
Pursuant to the terms of an exclusive License and Marketing Agreement that
we executed with Atrix Laboratories, Inc. in August 2001, we obtained the right
to market, sell and distribute Atrix's proprietary dental products, Atridox,
Atrisorb FreeFlow and Atrisorb-D to the United States dental community. We
believe that these products generally complement Periostat in the treatment of
adult periodontal disease.
Pursuant to the terms of the License and Marketing Agreement, among other
things: Atrix will manufacture the products for us; we paid to Atrix a $1.0
million licensing fee to market such products; we have agreed to pay to Atrix
royalties on future net sales of the products each calendar year; we have
committed to no less than $2.0 million in advertising and selling expenses
related to the products during the fiscal year beginning January 1, 2002; we
have agreed to maintain, for a period of 24 months, a force of no fewer than
ninety (90) fulltime dental consultants, divisional and regional managers to
make sales and product recommendation calls on dental professionals; and we have
agreed that the products will be the subject of a specific number of detail
calls in the United States during 2002. We will also be required to make certain
minimum expenditures for advertising and promotional activities after 2002,
including: (i) the lesser of $4,000,000 or 30% of our contribution margin, as
defined in the agreement, relating to a specific Atrix product that we market,
and (ii) the lesser of $2,000,000 or 30% of our contribution margin, as defined
in the agreement, relating to a separate Atrix product that we market.
In addition, Atrix purchased 330,556 unregistered shares of our common
stock at a price of $9.08 per share.
The License and Marketing Agreement terminates incrementally with respect
to each Atrix product, upon each successive expiration date of the patent
protection afforded to such product. We may terminate the License and Marketing
Agreement at any time, with or without cause, upon 12 months prior written
notice to Atrix. Furthermore, either party may terminate the agreement upon the
occurrence of certain conditions, as more fully set forth in the License and
Marketing Agreement.
Atridox is a locally-applied anti-microbial therapy for the treatment of
adult periodontitis. Atridox uses Atrix's patented drug delivery technology,
Atrigel(R), for the targeted delivery of the
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antibiotic doxycycline, which has been shown to reduce the levels of bacteria in
the periodontal pocket. Atridox is a gel that is placed into affected
periodontal pockets by a dental professional and resorbs over a two week period.
In pivotal double-blinded, placebo-controlled clinical trials conducted by
Atrix, the administration of Atridox was shown to increase attachment level
between the gums and the teeth and decrease periodontal pocket depth in patients
with adult periodontitis.
Atrisorb FreeFlow is a guided tissue regeneration (GTR) barrier product
used in connection with gum surgeries. In periodontal surgery, a section of the
gums called a flap is cut away from the underlying bone structure to allow the
periodontist to repair the periodontal support structure. When the flap is
subsequently repositioned, a membrane barrier product such as Atrisorb FreeFlow
is placed between the flap and the bone to prevent the downgrowth of epithelial
tissues, which interferes with the re-attachment of the gums to the teeth.
Atrisorb-D is the first GTR barrier product to incorporate an antibiotic,
doxycycline, which has been shown to reduce the incidence of infections during
GTR procedures.
Dentaplex
In June 2001, we launched Dentaplex, a nutritional supplement specifically
formulated to help maintain optimal oral health. Based upon a review of the
market acceptance of Dentaplex, by United States retailers, we are currently
evaluating the future marketability of the product.
Denavir
Denavir is an FDA approved topical antiviral cream used for the treatment
of cold sores. We marketed Denavir to the dental community under a Co-Promotion
Agreement that we executed with SmithKline Beecham Consumer Healthcare in
October 1998, which agreement provided for certain payments by SmithKline
Beecham to us. Following the acquisition of SmithKline Beecham by Novartis,
Novartis terminated this Co-Promotion Agreement effective April 13, 2001. We no
longer co-promote Denavir.
SALES AND MARKETING
We market and sell our products in the United States through a dedicated
sales force comprised of approximately 120 sales representatives and managers.
We intend to market Periostat in foreign markets, upon receipt of all requisite
regulatory approvals, primarily through marketing and distribution partnerships
with companies in these markets. We currently have such agreements with foreign
companies, subject to requisite regulatory approvals, covering Japan, Italy,
Canada, Spain, Portugal, Greece, Israel, Austria and Switzerland, and have an
export marketing agreement for countries in the Middle East. In November 2001,
we terminated our distribution and marketing agreement for Germany with Hain
Diognostika GmbH due to Hain's failure to fulfil its obligations under the
agreement. We are seeking compensation from Hain based on the non-payment of
milestone fees due to CollaGenex according to the terms of the agreement. We
will continue to seek requisite regulatory approvals in Germany and another
marketing partner to replace Hain.
A capsule formulation of Periostat was approved by the United Kingdom
Medicines Control Agency in February 2000, and we launched a modest direct
marketing effort in the
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United Kingdom to dentists through our United Kingdom subsidiary, CollaGenex
International Limited. In December 2000 the United Kingdom Medicines Control
Agency approved a tablet formulation of Periostat and in June 2001, we applied
for the registration of Periostat tablets with the European Union Member States
and Norway under the Mutual Recognition Procedure, with the United Kingdom
Medicines Control Agency acting as our Reference Member State.
Under the Mutual Recognition Procedure, once marketing approval for a
pharmaceutical is granted by one European Member State, such state then acts as
a Reference Member State, and assists in expediting the review and approval of
the pharmaceutical in other European Member States.
In February 2002, we received provisional approval for the marketing of
Periostat from seven European Member States including Austria, Finland, Ireland,
Italy, Luxembourg, the Netherlands and Portugal. We expect to receive final
approval to market Periostat in these countries following our submission of
local language labeling based on the text approved under the Mutual Recognition
Procedure.
Submissions for approval of Periostat have also been made in Switzerland
and Israel. The regulatory authorities in Switzerland have requested additional
information. The regulatory authorities in Israel have approved Periostat for
sale in Israel as of March 2002. A submission was also made in 2001 to the
regulatory authorities in Oman.
In February 2002, we announced that we had appointed Dexcel-Dental, a
division of Dexcel-Pharma Limited, to handle the field selling of Periostat to
the dental profession in the United Kingdom and, upon receipt of final
regulatory approval, the Republic of Ireland.
Our 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.
United States
Our field sales organization is currently comprised of two regional
managers, eleven district managers and approximately 105 full-time equivalent
sales representatives. Each full-time equivalent sales representative 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 scaling and root planings performed
in their respective practices.
Our field sales organization currently details Periostat, Atridox, Atrisorb
FreeFlow, Atrisorb-D and Vioxx. Under the terms of our License and Marketing
Agreement with Atrix, we have committed to: (i) expend no less than $2.0 million
in advertising and selling expenses related to the Atrix products during the
fiscal year beginning January 1, 2002; (ii) maintain, for a period of 24 months,
a force of no less than ninety (90) full time dental consultants and divisional
and regional managers to make sales and product recommendation calls on dental
professionals; and (iii) making the Atrix products the subject of a specific
number of detail calls in the United States during 2002. We will also be
required to make certain minimum expenditures for advertising and promotional
activities after 2002, including: (i) the lesser of
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$4,000,000 or 30% of our contribution margin, as defined in the agreement,
relating to a specific Atrix product that we market, and (ii) the lesser of
$2,000,000 or 30% of our contribution margin, as defined in the agreement,
relating to a separate Atrix product that we market.
We believe that our sales effort is distinguished from other dental sales
forces by our focus on education and the clinical benefits of pharmaceutical
dentistry, a new approach to treating dental diseases. Accordingly, we produce
educational marketing materials, detail aids and product samples that are used
extensively by our representatives in their presentations to dentists. Clinical
reprints and video presentations are also provided. We believe that peer-to-peer
communications are vital to increasing the acceptance of Periostat and,
therefore, we arrange speaking engagements and teleconferences where Periostat
advocates share their experiences with other dental professionals.
Sales training is an important component of our 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 and medical product line and
leverage our sales and marketing organization, we are actively seeking to
in-license or acquire other high-quality therapeutic dental and medical
products.
United States Direct-to-Consumer Advertising Campaign
Direct-To-Consumer, or DTC, advertising 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.
When we conducted certain market research during 2000, we 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. Accordingly,
following the successful completion in January 2001 of a three-month, two-city
test to evaluate the impact of DTC advertising on the growth of Periostat
prescriptions, we expanded our DTC campaign to a number of cities across the
country. Approximately 60% of the prescribing base we had at the beginning of
2001 was exposed to between two and six months of DTC advertising during 2001.
Prescription growth in the cities exposed to DTC advertising was markedly higher
than those cities that were not exposed to DTC advertising, and we intend to
continue DTC advertising during 2002.
International
We are establishing relationships with key partners to market and sell
Periostat internationally, upon receipt of the requisite foreign regulatory
approvals. In 1996, we 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, we 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 withdrawn the Marketing Authorization for
Approval in Italy, and Italy was included under the
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pan-European Mutual Recognition Procedure, which we filed in June 2001. In
February 2002, we received provisional approval to market Periostat in Italy. As
with our other marketing and distribution agreements with European partners, it
is our intent to supply Roche with finished product and our existing agreement
with Roche will be modified accordingly.
In July 1998, we executed a licensing agreement with Laboratoires
Pharmascience S.A. 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 we received notice from Laboratories
Pharmascience terminating the 1998 license agreement. After negotiation, the
parties mutually agreed to discontinue their relationship. We are actively
seeking a partner to market and distribute Periostat in France, upon receipt of
requisite regulatory approvals in such region.
In October 1998, we announced that a Marketing Authorization Application
had been filed with the United Kingdom Medicines Control Agency with respect to
Periostat. In February 2000, the United Kingdom Medicines Control Agency granted
marketing approval for Periostat for the adjunctive treatment of chronic adult
periodontitis. On May 2, 2000, we announced that we had filed another Marketing
Authorization Application with the United Kingdom Medicines Control Agency
seeking marketing approval of our 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 Marketing Authorization
Applications was filed with the United Kingdom Medicines Control Agency in
February 2001 and formed the basis for our application for approval of Periostat
under the European Mutual Recognition Procedure, which we filed in June 2001.
In February 2002, we received provisional approval for the marketing of
Periostat from seven European Member States including Austria, Finland, Ireland,
Italy, Luxembourg, the Netherlands and Portugal. We expect to receive final
approval to market Periostat in these countries following our submission of
local language labeling based on the text approved under the Mutual Recognition
Procedure.
We cannot be certain that we will achieve other foreign regulatory
approvals or will be successful in marketing Periostat in the United Kingdom or
other European countries.
We executed a licensing agreement with Pharmascience Inc. 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 active review by the Canadian authorities.
On May 2, 2000, we announced that we 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
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Greece, pending requisite regulatory approval. Following the provisional
approval of Periostat in Portugal, ISDIN S.A. continues to work with the
Portuguese authorities to complete the requisite final regulatory approvals to
launch Periostat during 2002. ISDIN S.A. is also providing assistance in
connection with the refiling of our regulatory submission in Spain.
On June 9, 2000, we announced that we 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. Periostat has
received provisional approval under the Mutual Recognition Procedure for
marketing in Austria, and Willvonseder & Marchesani is working to launch
Periostat in 2002, subject to the receipt of final regulatory approval. In
addition, we are working with Karr Dental to provide additional requested
information to regulatory authorities in Switzerland in connection with our
submission for regulatory approval in Switzerland.
On August 9, 2000, we announced that we 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. Showa continues to work with the regulatory
authorities in Japan to establish the appropriate clinical development program
in order to gain regulatory approval for Periostat in Japan. In connection
therewith, Showa intends to conduct a study during 2002 to establish that the
pharmacokinetics of Periostat are similar in Japanese and Caucasian populations.
On August 24, 2000, we announced that we had executed an agreement for the
marketing and distribution of Periostat in Israel with Taro International Ltd.,
a wholly-owned subsidiary of Taro Pharmaceutical Industries Limited, an Israeli
company, pending requisite regulatory approval. Such agreement provides for the
payment of milestone fees to us associated with the regulatory approvals of
Periostat, if any. In February 2002, the Israeli authorities notified Taro with
respect to the provisional approval of Periostat in Israel. Final confirmation
of approval was obtained in March 2002.
On January 30, 2001, we announced that we had signed an exclusive Middle
East Export Marketing Agreement with Pharma Med Inc. 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. A regulatory
filing has been made with the authorities in Oman.
On February 11, 2002, we announced that we have appointed Dexcel-Dental, a
division of Dexcel-Parma Limited, to handle the field selling of Periostat
tablets to the professional dental market in the United Kingdom and, upon
receipt of final regulatory approval, the Republic of Ireland.
MANUFACTURING, DISTRIBUTION AND SUPPLIERS
In 1995, we entered into a supply agreement with Hovione International
Limited pursuant to which the active ingredient in Periostat, doxycycline, is
supplied to us by Hovione from its offshore facilities. Hovione supplies a
substantial portion of the doxycycline used in the United
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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,
pursuant to an addendum to that agreement, the term was extended to May 14, 2006
and thereafter automatically renews 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. We rely on Hovione as
our sole supplier of doxycycline, and have no back-up supplier at this time.
We historically relied on a single third-party contract manufacturer,
Applied Analytical Industries, Inc., to produce Periostat in a capsule
formulation. AAI served notice of its intent to terminate its agreement to
supply Periostat capsules to us as of November 2001. In an effort to capitalize
on certain manufacturing cost advantages, in July 2001, we launched our new
tablet formulation of Periostat, which has now replaced our capsule formulation
of Periostat.
On September 26, 2000, we entered into a Service and Supply Agreement with
a contract manufacturer, Pharmaceutical Manufacturing Research Services, Inc.,
for such tablet formulation for Periostat, and we are, therefore, no longer
dependent upon, nor do we utilize, AAI. Our agreement with Pharmaceutical
Manufacturing Research Services has an initial term of three years, during which
time we have committed to certain minimum needs, and Pharmaceutical
Manufacturing Research Services 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. We have
fulfilled our initial purchase orders with Pharmaceutical Manufacturing Research
Services and expect to make certain purchases through 2002 to take advantage of
volume price discounts. Pharmaceutical Manufacturing Research Services is
required to comply with good manufacturing practices, or GMP requirements.
In November 1998, we executed a Distribution Services Agreement with Cord
Logistics, Inc., pursuant to which Cord acts as our 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 our sales force and various customer
and financial support services to us, 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. We negotiated a three-year extension of such agreement having
similar terms to the original agreement with an effective date of March 1, 2002.
In February 2002, we executed a Wholesale Service Agreement effective
November 2001 with National Specialty Services, Inc., pursuant to which National
Specialty Services acts as our non-exclusive authorized distributor of Atridox,
Atrisorb FreeFlow and Atrisorb-D. Under this
10
agreement, National Specialty Services will also provide certain additional
services, including marketing, sales detail report production, contract
administration and chargeback processing. The Wholesale Service Agreement has an
initial term of three years and shall renew automatically for successive
one-year periods unless notice of termination is provided by either party ninety
(90) days prior to expiration.
We cannot be certain that we 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 we are unable to obtain sufficient
quantities of doxycycline or Periostat on commercially reasonable terms, or in a
timely manner, or if our suppliers fail to comply with good manufacturing
practices, or GMP, or if our distributors are unable to ship or support our
products, our business, financial condition and results of operations may be
materially adversely affected. See "--Government Regulation."
CUSTOMERS
During 2001, net product sales to each of the McKesson Drug Company, Bergen
Brunswig Drug Company, Cardinal Health, Inc. and Walgreens, Inc. accounted for
28%, 15%, 13% and 10%, respectively, of our aggregate net product sales.
RESEARCH AND DEVELOPMENT
Our research and development activities are conducted primarily by third
parties, such as contract research organizations and 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, our lead compound for treating metastatic
cancer.
On October 18, 2000, we announced that we had received a Phase I Small
Business Technology Transfer 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 our compounds known as IMPACS
(Inhibitors of Multiple Proteases and Cytokines) for the prevention and
treatment of acute lung injury.
Major research programs currently being conducted at CollaGenex include:
(i) the clinical development of the sub-antimicrobial dose of doxycycline
commercialized as Periostat for the treatment of inflammatory acne, rosacea and
ocular rosacea (blepharitis); (ii) the development of a "once-a-day" formulation
of Periostat; and (iii) limited support for the conduct of exploratory studies
in the utility of Metastat (COL-3) as a treatment for soft tissue sarcoma and
periodontitis.
The clinical development of Periostat in acne, rosacea and blepharitis
remains exploratory and programs will be developed during 2002 following
discussions with the FDA regarding the requirements to be fulfilled for the
submission of a supplemental new drug application for any or all of the
potential clinical indications. No trials are presently underway; however,
during 2002, we anticipate that the following activities will be initiated: (i)
a pilot study in rosacea, utilizing approximately 120 patients; (ii) a Phase III
study in inflammatory acne, utilizing approximately 200 patients; and (iii) an
exploratory study in blepharitis, utilizing
11
approximately 60 patients. It is unlikely that these studies will yield
meaningful results until 2003, however, based on anecdotal reports and the
results from the preliminary clinical study in inflammatory acne carried out in
2000 and 2001, we anticipate that Periostat will demonstrate clinical efficacy
for all three indications. It is premature to determine whether such efficacy
will be sufficient to achieve statistical significance or to provide the basis
for a regulatory filing.
The development of the once-a-day formulation of Periostat is being
conducted through a development agreement with an external contractor. We
anticipate that the first formulations arising from this research will be
administered to human volunteers during 2002; however, because little is known
about the absorption of doxycycline from the gastro-intestinal tract, these
studies will be experimental in nature and the results of these studies will
define the next phase of the development program. We do not anticipate that a
final formulation will be available for clinical testing until 2003 or beyond,
if ever.
Metastat, our antiangiogenesis drug, continues development under the
auspices of a cooperative research and development agreement, or CRADA, with the
National Cancer Institute, which was extended in February 2002 for an additional
two years. We are responsible for providing a formulated, encapsulated version
of Metastat to support this clinical study. A sufficient quantity of Metastat
was produced in 2001 to support the National Cancer Institute's development
program as it is currently proposed. Two studies are actively recruiting
patients. A Phase I/II study in astrocytoma and glioblastoma (both brain
cancers) is currently recruiting patients. Such early studies are carried out in
patient populations with severe refractory disease and rarely provide evidence
of efficacy. Based on the positive results from the Phase I study carried out in
Kaposi's sarcoma, the AIDS Malignancy Consortium of the National Cancer
Institute is sponsoring a randomized, two-dose Phase II study in Kaposi's
sarcoma. This study has currently recruited approximately 50% of the
approximately 70 planned patients. Initial indications suggest that the drug is
affording disease modifying efficacy in some patients, with early reports of
both partial and complete responses. However, the study is blinded and it is not
yet possible to determine whether there is a dose response and/or the drug has
sufficient efficacy to justify the conduct of a Phase III clinical study.
During 2001, we submitted two investigational new drug applications to the
FDA for the conduct of exploratory clinical studies with COL-3 (the active
ingredient in Metastat) in the treatment of cardiopulmonary bypass patients and
the treatment of adult periodontitis. Both are on clinical hold pending the
submission to the FDA of additional information. In order to help provide the
requested information, we conducted a Phase I, ascending dose trial with COL-3
in normal human volunteers in order to establish the maximum tolerated dose
which could be supported in the investigational new drug application-based
exploratory studies. While the National Cancer Institute is carrying out studies
with 50 mg and 100 mg of COL-3 per day as the proposed efficacious dose, our
Phase I study suggested that the maximum tolerated dose may be as low as 20 mg
per day. We anticipate that the clinical hold will be released during 2002 and
exploratory clinical studies will be carried out by us with respect to
periodontitis, soft-tissue sarcoma and possibly cardiopulmonary bypass patients.
We do not know whether the drug will exhibit significant efficacy in these
indications to justify further clinical investigation, particularly if the dose
is significantly limited.
12
We have not developed forecasts for the sale of products arising from the
commercialization of COL-3, nor do we anticipate spending significant resources
on the development of COL-3 until it is clear from the studies being carried out
with National Cancer Institute or other sources of external funding that the
drug has a tolerable safety profile and a high likelihood of clinical and
commercial success.
As of December 31, 2001, we had two products or product candidates in
various stages of clinical trials. Completion of clinical trials may take
several years or more, but the length of time can vary substantially according
to the type, complexity, novelty and intended use of a product candidate. In
2001, we completed a pilot trial of Periostat in inflammatory acne, and obtained
significant results, encouraging us to work towards the development of a
definitive clinical trial plan for an indication for Periostat for this
application. We are planning to initiate additional clinical trials for
Periostat in acne patients during 2002, pending FDA review and agreement
regarding protocols and end-points. We also initiated and completed several
Phase IV studies of Periostat in dental applications. Phase IV studies are
designed to help support product marketing and are not typically designed to
provide data suitable for submission to the FDA for a new indication for the
product. We intend to continue the Phase IV development of Periostat in 2002.
Also in 2001, the National Cancer Institute initiated Phase I/II trials of
COL-3 (Metastat) in patients with astrocytoma and glioblastoma and a Phase II
study in patients with HIV-related Kaposi's sarcoma. These studies remain
ongoing in 2002. The clinical component of these studies is completely funded by
National Cancer Institute funds, except for a nominal payment to the
investigators from us to encourage enrollment. The time to completion of these
studies will depend on the rate of patient enrollment, which is difficult to
predict with any certainty. However, it is unlikely that either of these studies
will be completed during 2002.
CMR International estimates that clinical trials in our franchise areas are
typically completed over the following timelines:
ESTIMATED
COMPLETION
CLINICAL PHASE PERIOD
-------------- ------
Phase I 1 - 2 years
Phase II 2 - 3 years
Phase III 2 - 3 years
Upon successful completion of the pilot and Phase II trials we will assess
the data obtained and make a decision on whether to pursue Phase III trials for
any indication studied in Phase II or pilot studies. Upon successful completion
of Phase III trials, we intend to submit the results to the FDA to support
regulatory approval of COL-3. However, we cannot be certain that any of our
products will prove to be safe or effective, will receive regulatory approvals,
or will be successfully commercialized.
The duration and the cost relating to preclinical testing and clinical
trials may vary significantly over the life of a project. Our joint development
arrangement for COL-3 with the
13
National Cancer Institute may also result in variability in our development
costs. We closely monitor our research and development costs in order to ensure
that our investment is consistent with the return we predict from each project.
Technology
Our 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 us to pharmaceutically modulate the activity of matrix
metalloproteinases. Matrix metalloproteinases 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
matrix metalloproteinases and a group of naturally occurring biomolecules called
tissue inhibitors of metalloproteinases, which modulate the level of matrix
metalloproteinase 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.
Our 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 matrix metalloproteinase 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. Our 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. We have conducted, and are currently conducting, Phase IV clinical
studies to support future marketing activities of Periostat.
14
Our 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 potential in a number of pre-clinical models
of excessive connective tissue breakdown. Our 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
We are 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 scaling and root planing in institutionalized geriatric patients, the
evaluation of Periostat as an adjunct to scaling and root planing in patients
with Type I and Type II diabetes and the use of Periostat in a population of
smokers. To extend the possible therapeutic use of Periostat beyond the oral
cavity, we and our 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. Of these studies only the posterior
blepharitis study is being funded by us.
A Phase IV clinical trial conducted at the University of Pittsburgh Dental
School, the results of which were announced by us in October 2000, demonstrated
significant clinical benefit in patients with severe generalized periodontitis
who were administered Periostat in conjunction with a course of repeated dental
cleaning, above and below the gum-line compared to the same therapy plus a
placebo.
In January 2002, we announced plans for expansion into the dermatology
market. On October 1, 2001, we announced the clinically and statistically
significant results of a six-month, 59-patient clinical trial designed to
evaluate the efficacy of Periostat for the treatment of patients with moderate
acne.
The results showed that the patients receiving Periostat experienced more
than a 50% mean reduction in comedones and inflammatory lesions from baseline
levels. Patent applications for Periostat to treat acne have been filed with the
U.S. Patent and Trademark Office.
The Periostat acne clinical trial was a multi-center, placebo-controlled,
double-blind study chaired by Dr. Robert Skidmore, Chief of Dermatology at the
University of Florida
15
Medical Center, and was also conducted by Dr. Rodney Kovach, Chief of
Dermatology at West Virginia University Health Sciences Center. The results
revealed statistically and clinically significant benefits to patients receiving
Periostat for all three of the pre-established primary endpoints: change in
total comedones, total inflammatory lesions and total lesion counts.
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 us at two major universities
suggest that several of our 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 matrix
metalloproteinases 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 us exhibited an ability to inhibit
metastasis.
In October 1996, we executed a letter of intent with the National Cancer
Institute to formalize a collaborative research and development agreement
pursuant to which the National Cancer Institute agreed to perform pharmacology,
toxicology and Phase I clinical trials using our lead compound for the
prevention of cancer metastasis, Metastat.
In June 1997, we announced that we had formally extended our Collaboration
Agreement with the National Cancer Institute with respect to the development of
Metastat. On December 5, 1997, we announced that the National Cancer Institute
had filed an investigational new drug application for Metastat. In January 1998,
we initiated Phase I clinical trials with respect to Metastat. Such studies were
sponsored by the National Cancer Institute pursuant to our Collaboration
Agreement with the National Cancer Institute. In February 1999, we 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,
we 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 National Cancer Institute advised us that
it believed that the level of photosensitivity, although manageable, could limit
the commercial viability of Metastat. However, the National Cancer Institute
also advised us 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 was initiated in the first half of 2001. Results from
the two initial Phase I studies of Metastat in refractory solid tumors and
refractory metastatic cancer demonstrated
16
limited disease stabilization, with one patient, suffering from an
hemangioendothelioma (an unusual type of lung tumor), remaining on Metastat for
over two years without progressive disease. The studies established a maximum
tolerated dose, with phototoxicity proving to be the dose-limiting toxicity.
On May 18, 2000, we announced positive findings from an 18-patient,
National Cancer Institute 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 National
Cancer Institute has elected to continue testing Metastat in Phase II clinical
trials. This trial is an open-label, two-dose study to establish clinical
efficacy in patients with HIV-related Kaposi's sarcoma. The trial began
recruitment in summer 2001 and presently is approximately 50% recruited.
Preclinical and Other Research and Development Activities
We have 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, we have 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
concluded in May 2001.
We receive certain proprietary rights to inventions or discoveries that
arise as a result of this research. Our current research and development
objective is to develop additional products utilizing our IMPACS technology,
preferably in conjunction with development partners.
In February 2002 we announced that we had licensed a dermal and transdermal
drug delivery technology, named Restoraderm(TM), from its inventor. Restoraderm
is designed to enhance the dermal delivery of a variety of active ingredients
and we intend that it will form the basis for a portfolio of topical
dermatological pharmaceuticals.
The Restoraderm technology is based on the ability of certain lipid
compositions to enhance the natural skin barrier and facilitate the dermal and
transdermal delivery of known active ingredients. The Restoraderm technology is
currently still under development, and we anticipate that the first products to
be developed using the technology will be available in late 2002. In exchange
for the rights to the technology, we will pay the inventor milestone fees upon
the achievement of certain objectives as well as royalties on future sales of
products based on the technology.
Our research and development expenditures were approximately $5.0 million,
$3.1 million and $3.8 million in 1999, 2000 and 2001, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations."
17
PATENTS, TRADE SECRETS AND LICENSES
Our success will depend in part on patent and trade secret protection for
our technologies, products and processes, and on our 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.
We depend on our license from the Research Foundation of the State of New
York at Stony Brook for all of our core technology. The SUNY License grants us
an exclusive worldwide license to make and sell products employing tetracyclines
that are designed or utilized to alter a biological process. Thirty (30) United
States patents and three (3) United States patent applications held by SUNY are
licensed to us under the SUNY License. Three (3) of the thirty (30) 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-eight (28) other United States patents relate to chemically modified
tetracyclines, or CMTs, and compositions of certain CMTs with anti-proteinase
properties, including anti-gelatinase, anti-membrane-type metalloproteinase,
anti-collagenase, and anti-elastase properties and methods of use of
tetracyclines to reduce bone loss and skeletal muscle wasting; and methods of
use of tetracyclines to enhance bone growth and promote synthesis in skeletal
muscle, inhibit protein glycosylation, inhibit excess phospholipase A2
activity/production, inhibit endogenous production of nitric oxide (NO), enhance
endogenous production of interleukin 10, reduce dental plaque adhesion, and
inhibit or reduce pulmonary neutrophil infiltration (or accumulation). 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. Seventy six (76) patents
have been issued in foreign countries. All of SUNY's United States and foreign
patents expire between 2004 and 2018. Our 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 we 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 our failure to make timely payments,
reimbursements or reports, if the failure is not cured by us within 90 days. The
termination of the SUNY License, or the failure to obtain and maintain patent
protection for our technologies, would have a material adverse effect on our
business, financial condition and results of operations.
18
One of the United States patents and a corresponding Japanese patent
application licensed to us 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 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 our Periostat product
but could, in the future, prove to be important for one or more of our other
potential applications of its technology. If we 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 us, we: (i) issued to SUNY
78,948 shares of common stock; and (ii) have 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 we have a fully paid, non-exclusive license.
In addition to the patents and patent applications licensed from SUNY which
represent the core technology, we own additional technology for which
applications for United States patents have been filed and have been issued. In
this regard, we report the existence of an issued patent for a
toothpaste/mouthwash formulation for the amelioration of dentin
hypersensitivity. Furthermore, we report pending applications covering: (i) new
tetracycline derivatives having increased lipophilicity; and (ii) methods of
treating acne.
We intend to enforce our patent rights against third-party infringers. Due
to the general availability of generic tetracyclines for use as antibiotics, we
could become involved in infringement actions, which could entail substantial
costs to us. 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 our other activities.
Our patent positions, like those of other pharmaceutical firms, are
generally uncertain and involve complex legal and factual questions.
Consequently, as to the patent applications licensed to us, even though we
currently prosecute such patent applications with United States and foreign
patent offices, we do 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 published or until patents issue, and since
publication of discoveries in the scientific and patent literature tends to lag
behind actual discoveries by several months, we cannot be certain that we were
the first creator of inventions covered by pending patent applications or that
we were the first to file patent applications for such inventions.
There can be no assurance that patent applications to which we hold rights
will result in the issuance of patents, that any patents issued or licensed to
us will not be challenged and held to be invalid, or that any such patents will
provide commercially significant protection to our technology, products and
processes. In addition, there can be no assurance that others will not
19
independently develop substantially equivalent proprietary information not
covered by patents to which we own rights or obtain access to our know-how, or
that others will not be issued patents which may prevent the sale of one or more
of our products, or require licensing and the payment of significant fees or
royalties by us to third parties in order to enable us to conduct our business.
In the event that any relevant claims of third-party patents are upheld as valid
and enforceable, we could be prevented from selling our 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 us. Our failure to obtain these licenses would have a
material adverse effect on our business, financial condition and results of
operations.
Our success is also dependent upon know-how, trade secrets, and the skills,
knowledge and experience of our scientific and technical personnel. We require
all employees to enter into confidentiality agreements that prohibit the
disclosure of confidential information to anyone outside the Company. In
addition, we seek to obtain such agreements from our consultants, advisors and
research collaborators. There can be no assurance that adequate protection will
be provided for our trade secrets, know-how or other proprietary information in
the event of any unauthorized use or disclosure. We occasionally provide
information and chemical compounds to research collaborators in academic
institutions, and request 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 us 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 us could have a material
adverse effect on our 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 products we
develop and market. In the United States, the FDA regulates Periostat and our
products in development as drugs under the Federal Food, Drug, and Cosmetic Act
and implementing regulations. The FDA regulates Atrisorb FreeFlow and Atrisorb-D
as medical devices under the Food, Drug and Cosmetic Act and implementing
regulations. Failure to comply with FDA requirements may subject us 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.
Our products in development are drugs. The steps required before a drug may
be marketed in the United States include:
o pre-clinical laboratory tests, animal studies, and formulation
studies;
20
o submission to the FDA of an investigational new drug exemption for
human clinical testing, which must become effective before human
clinical trials may begin;
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 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; and
o FDA review and approval of the new drug application.
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 investigational new drug exemption, which must become effective before
human clinical trials may begin. An investigational new drug exemption
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 investigational new drug exemption. In that case,
the investigational new drug exemption sponsor and the FDA must resolve any
outstanding FDA concerns or questions before clinical trials can proceed.
Submission of an investigational new drug exemption 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 investigational new drug
exemption 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. We cannot
guarantee that Phase 1, Phase 2, or Phase 3 testing for our 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, we, 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.
21
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 a new drug
application 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 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 FDA approved our new drug application
for Periostat in 1998; we 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 we can market Periostat for additional indications now being
evaluated, we will be required to obtain an additional FDA approval.
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 new drug application for Periostat, the FDA has requested a
postmarket animal study related to long-term dosing and carcogenicity, which was
completed in 2000.
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.
Approved and cleared drugs and medical devices remain subject to
comprehensive regulation by the FDA while they are being marketed. The drug and
medical device regulatory schemes differ in detail, but they are essentially
similar. For example, marketers of approved and cleared drugs and medical
devices 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. Also, the FDA does not
permit a manufacturer to market or promote an approved or cleared drug product
or medical device for an unapproved or uncleared use. Also, quality control and
manufacturing procedures must continue to conform to the FDA's requirements for
Good Manufacturing Practices (for drugs) or Quality Systems Regulation (for
medical devices) after approval. Accordingly, manufacturers must continue to
expend time, money, and effort in the area of production and quality control to
maintain compliance with these and other aspects of regulatory compliance. The
FDA periodically inspects manufacturers to assess compliance with manufacturing
and other requirements. We buy bulk active ingredient for Periostat and our
products in development from third party suppliers and finish the products in
third party manufacturing facilities. The other products we market, Vioxx,
Atridox, Atrisorb FreeFlow, and Atrisorb-D, are provided by suppliers. Our
failure, or the failure of our suppliers, to comply with FDA requirements could
disrupt production and subject us to administrative or judicial sanctions.
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In addition to the applicable FDA requirements, we are 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. We have filed for and subsequently
received approval from the United Kingdom Medicines Control Agency for the
marketing of Periostat tablets in the United Kingdom. Such application was filed
with the United Kingdom acting as a Reference Member State. In June 2001, our
wholly-owned subsidiary, CollaGenex International Limited, completed the
official filings for the registration of Periostat tablets with the European
Union Member States and Norway. Under the Mutual Recognition Procedure, once
marketing approval for a pharmaceutical is granted by one European Member State,
such state then acts as a Reference Member State, and assists in expediting the
review and approval of the pharmaceutical in other European Member States.
In February 2002, we received provisional approval for the marketing of
Periostat from seven European Member States including Austria, Finland, Ireland,
Italy, Luxembourg, the Netherlands and Portugal. We expect to receive final
approval to market Periostat in these countries following our submission of
local language labeling based on the text approved under the Mutual Recognition
Procedure.
Dentaplex, our nutritional supplement, is specifically formulated to help
maintain oral health, as a dietary supplement. Dietary supplements are regulated
by the FDA under the Food, Drug, and Cosmetic Act and implementing regulations.
Although dietary supplements generally do not require the FDA approval prior to
marketing, the FDA regulates the safety, promotion, and labeling of dietary
supplements. To qualify as a dietary supplement, a product must meet a number of
requirements, e.g., it must contain a dietary ingredient, it must be labeled as
a dietary supplement, and it must meet requirements for safety. Dietary
supplements may be marketed with claims that they are intended to affect the
structure or function of the body, but, with narrow exceptions, they may not be
marketed with claims that they will diagnose, treat, prevent, cure, or mitigate
a disease. The distinction between claims that a product affects the structure
and function of the body and claims that a product diagnoses, treats, cures,
mitigates, or prevents disease can be difficult to apply in practice, and the
FDA has been active in notifying companies that because their claims are not
acceptable, their products are drugs rather than dietary supplement. We can not
be sure that the FDA will not assert that Dentaplex does not meet the
requirements for dietary supplement status, which could result in FDA
enforcement action or in our having to make changes to the product or its
promotion or labeling, or withdraw it from the market.
COMPETITION
The pharmaceutical industry is subject to intense competition as well as
rapid and significant technological change. We expect 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.
23
We believe 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. We believe
that all other therapies focus on temporarily removing the bacteria associated
with periodontitis. Periostat is a prescription pharmaceutical tablet indicated
as an adjunct to scaling and root planing to promote attachment level gain and
to reduce pocket depth in patients with adult periodontitis that is taken by the
patient between dental visits. We believe that the following chart summarizes
the available forms of periodontitis treatment, other than scaling and root
planing and resective surgery:
Product Product Dental Delivery Patient Treatment
Name Manufacturer/Marketer Procedure Route Administered Focus
- ----------- --------------------- --------- ----- ------------ ---------
Periostat CollaGenex No Systemic Yes Tissue
Pharmaceuticals, Inc. degradation
*Atridox Atrix Laboratories/ Yes Local No Bacteria
CollaGenex
Pharmaceuticals, Inc.
Periochip Dexxon Ltd. Yes Local No Bacteria
Arestin Orapharma, Inc. Yes Local No Bacteria
* In August 2001, we entered into a License and Marketing Agreement with
Atrix Laboratories, Inc. pursuant to which we market Atridox, Atrisorb FreeFlow
and Atrisorb-D to the United States dental community. See -- "Item 1. Business"
Many of the companies participating in the periodontal area have
substantially greater financial, technical and human resources than we do, 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 ours.
EMPLOYEES
We have historically outsourced our manufacturing, clinical trials, new
drug application preparation, warehousing, distribution and other activities. We
intend to continue to outsource many of the activities which we have
historically outsourced. As of December 31, 2001, we employed 155 persons. Each
of our management personnel has had extensive prior experience with
pharmaceutical, biotechnology or medical products companies. We cannot be
certain that we will be able to recruit and retain qualified inside sales and
marketing personnel, additional foreign sub-licensees or distributors or
marketing partners or that our marketing and sales efforts will be successful.
Currently, none of our employees are covered by collective bargaining
agreements. In general, our employees are covered by confidentiality agreements.
We consider relations with our employees to be excellent.
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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, OUR SALES GROWTH WILL
SUFFER.
Our growth and success depends in large part on our 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, our sales efforts are largely focused on
educating dental professionals about an entirely new approach to treating
periodontitis. Although over 35,000 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 we are unable to initiate
and/or expand usage of Periostat by dentists, our 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. Our 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.
WE RELY ON PERIOSTAT FOR MOST OF OUR REVENUE.
During 1999, Periostat accounted for 95% of our total net revenues. During
2000, Periostat accounted for 84% of our total net revenues. During 2001,
Periostat accounted for approximately 87% of our total net revenues. Although we
currently derive additional revenue from marketing and/or selling other products
(Vioxx(R), Atridox, Atrisorb FreeFlow and Atrisorb-D) and from licensing fees
from foreign marketing partners, our revenue and profitability in the near
future will depend on our ability to successfully market and sell Periostat.
WE ANTICIPATE FUTURE LOSSES.
From our founding in 1992 through the commercial launch of Periostat in
November, 1998, we had no revenue from sales of our own products. During the
year ended December 31, 2000, we experienced a net loss of approximately $8.8
million. During the year ended December 31, 2001, we experienced a net loss of
approximately $8.1 million. From inception through December 31, 2001, we have
experienced an aggregate net loss of $69.5 million. Our historical losses have
resulted primarily from the expenses associated with our pharmaceutical
development program, clinical trials, the regulatory approval process associated
with Periostat and sales and marketing activities relating to Periostat. We
expect to incur significant future expenses, particularly with respect to the
sales and marketing of Periostat. As a result, we anticipate losses at least
through the second quarter of 2002.
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WE HAVE A LIMITED MARKETING AND SALES HISTORY AND MAY NOT BE ABLE TO
SUCCESSFULLY MARKET OUR PRODUCT CANDIDATES.
We have a limited history of marketing, distributing and selling
pharmaceutical products in the dental market. In January 1999, we first trained
a sales force of sales representatives and managers and began to promote
Periostat to the dental community. We market and sell our products in the United
States through this direct sales force. Furthermore, we have entered into
agreements to market Periostat, upon receipt of the necessary foreign regulatory
approvals, in certain countries in Europe, Israel, Japan, Canada and the Middle
East, and we continue to evaluate partnering arrangements in other countries
outside the United States. If we are unable to continue to recruit, train and
retain sales and marketing personnel, we will be unable to successfully expand
our sales and marketing efforts. Furthermore, if our foreign partners do not
devote sufficient resources to perform their contractual obligations with us, we
may not achieve our foreign sales goals. Pursuant to an exclusive Licensing and
Marketing Agreement with Atrix Laboratories, Inc., we began marketing Atrix's
proprietary dental products, Atridox(R), Atrisorb(R) FreeFlow and Atrisorb(R)-D,
to the United States dental market in October 2001. It is too early to determine
whether there will be sufficient acceptance of these products to achieve or
maintain profitability.
OUR COMPETITIVE POSITION IN THE MARKETPLACE DEPENDS ON ENFORCING AND
SUCCESSFULLY DEFENDING OUR 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 our established and new technologies. We must also avoid
liability from infringing the proprietary rights of others.
Our core technology is licensed from The Research Foundation of the State
University of New York ("SUNY"), and other academic and research institutions
collaborating with SUNY. Under the license agreement with SUNY (the "SUNY
License") we have 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 us and our failure to comply with
these requirements permits SUNY to terminate the SUNY License. If the SUNY
License is terminated, we would lose our right to exclude competitors from
commercializing similar products, and we could be excluded from marketing the
same products if SUNY licensed the underlying technology to a competitor after
terminating the SUNY License.
SUNY owns thirty (30) United States patents and three (3) United States
patent applications that are licensed to us. The patents licensed from SUNY
expire between 2004 and 2018. Two 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 our patent rights cover new treatments using tetracyclines,
which are generally available for their known use as antibiotics, we may be
required to bring expensive infringement actions to enforce our patents and
protect our technology. Although federal law prohibits making and selling
pharmaceuticals for infringing use, competitors and/or practitioners
26
may provide generic forms of tetracycline for treatment(s) which infringe our
patents, rather than prescribe our Periostat product. Enforcement of patents can
be expensive and time consuming.
Our success also depends upon know-how, trade secrets, and the skills,
knowledge and experience of our scientific and technical personnel. To that end,
we require all of our 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 we provide for testing to collaborators in academic institutions, we
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 our commercial position and, consequently, our
financial condition.
IF WE LOSE OUR SOLE SUPPLIER OF DOXYCYCLINE OR OUR CURRENT MANUFACTURER OF
PERIOSTAT, OUR COMMERCIALIZATION OF PERIOSTAT WILL BE INTERRUPTED OR LESS
PROFITABLE.
We rely on a single supplier, Hovione International Limited ("Hovione"),
for doxycycline, the active ingredient in Periostat. There are relatively few
alternative suppliers of doxycycline and Hovione produces the majority of the
doxycycline used in the United States. Our current supply agreement with Hovione
expires on May 14, 2006 and thereafter automatically renews for successive
two-year periods unless, ninety (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 ninety (90) days, the
non-defaulting party can terminate the supply agreement effective immediately at
the end of such 90-day period. We rely on Hovione as our sole supplier of
doxycycline and have no back-up supplier at this time. If we are unable to
procure a commercial quantity of doxycycline from Hovione on an ongoing basis at
a competitive price, or if we cannot find a replacement supplier in a timely
manner or with favorable pricing terms, our costs may increase significantly and
we may experience delays in the supply of Periostat.
We historically relied on a single third-party contract manufacturer,
Applied Analytical Industries, Inc., ("AAI") to produce Periostat in a capsule
formulation. AAI served notice of its intent to terminate its agreement to
supply Periostat capsules to us as of November 2001. The agreement with AAI
provided for AAI to commit to an additional twelve (12) months supply of product
at a price premium, should we be unable to qualify an alternative manufacturing
source subsequent to the termination of the AAI agreement. As an alternative,
and in an effort to capitalize on certain manufacturing cost advantages, in July
2001, we launched our new tablet formulation of Periostat which has now replaced
our capsule formulation of Periostat. We believe that the change to a tablet
formulation will positively impact our results of operations by improving our
gross margin on Periostat sales from approximately 79% to approximately 88% of
Periostat net sales. We have entered into an agreement with a contract
manufacturer, Pharmaceutical Manufacturing Research Services, Inc. ("PMRS"), for
such tablet formulation for Periostat, and we are, therefore, no longer
dependent upon, nor do we utilize, AAI. We have fulfilled our initial purchase
orders with PMRS and expect to make certain purchases from PMRS through 2002.
Currently, PMRS is the sole third-party contract manufacturer to supply a tablet
formulation of Periostat to us. Any inability of PMRS to produce and supply
product on agreed upon terms could result in delays in the supply of Periostat.
We also intend to contract
27
with additional manufacturers for the commercial manufacture of Periostat
tablets. We believe, however, that it could take up to one (1) year to
successfully transition from PMRS to a new manufacturer.
OUR PRODUCTS ARE SUBJECT TO EXTENSIVE REGULATION BY THE FDA.
Drugs and medical devices generally require approval or clearance from the
FDA before they can be marketed in the United States. Periostat, Vioxx(R), and
Atridox(R) have been approved by the FDA as drugs. Atrisorb(R) FreeFlow and
Atrisorb(R)-D have been cleared by the FDA as medical devices. Our drug products
under development, however, will have to be approved by the FDA before they can
be marketed in the United States. If the FDA does not approve our products in a
timely fashion, or does not approve them at all, our financial condition may be
adversely affected.
In addition, drug and medical device products remain subject to
comprehensive regulation by the FDA while they are being marketed. The drug and
medical device regulatory schemes differ in detail, but they are essentially
similar. The FDA regulates, for example, the safety, manufacturing, labeling,
and promotion of both drug and medical device products. Although Dentaplex, a
dietary supplement, did not require FDA approval prior to marketing, it is also
subject to regulation while it is being marketed. If we or our partners who
manufacture our products fail to comply with regulatory requirements, various
adverse consequences can result, including recalls, civil penalties, withdrawal
of the product from the market and/or the imposition of civil or criminal
sanctions.
We are, and will increasingly be, subject to a variety of foreign
regulatory regimes governing clinical trials and sales of our products. Other
than Periostat, which has been approved by the Medicines Control Agency for
marketing in the United Kingdom, our products in development have not been
approved in any foreign country. Whether or not FDA approval has been obtained,
approval of drug products by the comparable regulatory authorities of foreign
countries must be obtained prior to the commencement of marketing of those
products in those countries. The approval process varies from country to country
and other countries may also impose post-approval requirements. Other countries
may also impose regulatory requirements on dietary supplements.
IF OUR PRODUCTS CAUSE INJURIES, WE MAY INCUR SIGNIFICANT EXPENSE AND
LIABILITY.
Our 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 or for which we have licensing or co-promotion
rights. We have $10.0 million in product liability insurance for Periostat. This
level of insurance may not adequately protect us 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 our business, financial
condition and results of operations to decline.
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IF WE NEED ADDITIONAL FINANCING, AND FINANCING IS UNAVAILABLE, OUR ABILITY
TO DEVELOP AND COMMERCIALIZE PRODUCTS AND OUR OPERATIONS WILL BE ADVERSELY
AFFECTED.
We have historically financed our operations through public and private
equity financings. Our capital requirements depend on numerous factors,
including our ability to successfully commercialize Periostat, competing
technological and market developments, our ability to enter into collaborative
arrangements for the development, regulatory approval and commercialization of
other products, and the cost of filing, prosecuting, defending and enforcing
patent claims and other intellectual property rights. We anticipate that we may
be required to raise additional capital in order to conduct our operations.
Additional funding, if necessary, may not be available on favorable terms, if at
all. If adequate funds are not available, we may be required to curtail
operations significantly or to obtain funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of our technologies, product candidates, products or potential markets.
At December 31, 2001 we had cash, cash equivalents and short-term investments of
approximately $6.2 million. In March 2001, we raised approximately $6.8 million,
net of offering costs, through the sale of our common stock and warrants to
purchase shares of our common stock. In August 2001, we raised approximately
$3.0 million through the sale of unregistered shares of our common stock to
Atrix Laboratories, Inc. in connection with our entering into certain licensing
arrangements with Atrix. We anticipate that our existing working capital will be
sufficient to fund our current operations through at least the end of 2002.
However, we may seek additional funding to expand our current operations through
the acquisition of additional products or by investing in the development of our
research and development pipeline.
BECAUSE OUR EXECUTIVE OFFICERS, DIRECTORS AND AFFILIATED ENTITIES OWN
APPROXIMATELY 34.5% OF OUR CAPITAL STOCK, THEY COULD CONTROL OUR ACTIONS IN A
MANNER THAT CONFLICTS WITH OUR INTERESTS AND THE INTERESTS OF OUR OTHER
STOCKHOLDERS.
Currently, our executive officers, directors and affiliated entities
together beneficially own approximately 34.5% of the outstanding shares of our
common stock or equity securities convertible into common stock. As a result,
these stockholders, acting together, or in the case of our 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 our stockholders
might otherwise receive a premium for their shares over then current market
prices.
WE EXPECT TO SELL SHARES OF OUR COMMON STOCK IN THE FUTURE, INCLUDING
SHARES ISSUED UNDER OUR EQUITY LINE WITH KINGSBRIDGE CAPITAL LIMITED AND THESE
SALES WILL DILUTE THE INTERESTS OF SECURITY HOLDERS AND DEPRESS THE PRICE OF OUR
COMMON STOCK.
As of December 31, 2001, there were 10,999,573 shares of our common stock
outstanding, options to purchase approximately 2,452,609 shares of our common
stock outstanding, and there were outstanding warrants to purchase approximately
550,000 shares of our common stock outstanding. There are also 924,880 shares of
common stock which, upon effectiveness of our shelf registration statement, are
issuable under the equity line with Kingsbridge and 40,000 shares issuable under
the warrants which we granted to Kingsbridge in
29
connection with the equity line arrangement. We may also issue additional shares
in acquisitions, financings or in connection with the grant of additional stock
options to our employees, officers, directors or consultants under our stock
option plans.
The issuance or even the potential issuance of shares under the equity
line, in connection with any other additional financing, and upon exercise of
warrants, options or rights will have a dilutive impact on other stockholders
and could have a negative effect on the market price of our common stock. In
addition, if we draw down under the equity line, we will issue shares to
Kingsbridge at a discount to the daily volume weighted average prices of our
common stock during the fifteen (15) trading days after notification of a
drawdown. This will further dilute the interests of the other stockholders.
If we draw down on the equity line when share prices are decreasing, we
will need to issue more shares, which will lead to dilution and potentially
further price decrease.
As we sell shares of our common stock to Kingsbridge under the equity line
and then Kingsbridge sells the common stock to third parties, our common stock
price may decrease due to the additional shares in the market. If we decide to
draw down on the equity line as the price of our common stock decreases, we will
need to issue more shares of our common stock for any given dollar amount that
Kingsbridge invests, subject to the minimum selling price we specify. The
perceived risk of dilution from sales of stock to Kingsbridge may cause holders
of our common stock to sell their shares, or it may encourage short sales. This
could contribute to a decline in our share price. Kingsbridge has covenanted in
the equity line arrangement that neither Kingsbridge nor any of its affiliates
nor any entity managed by Kingsbridge will ever be in a net short position with
respect to shares of our common stock in any accounts directly or indirectly
managed by any such person or entity. The more shares that we issue under the
equity line of credit, the more diluted our shares will be and the more our
stock price may decrease. This may encourage short sales, which could place
further downward pressure on the price of our common stock.
OUR STOCK PRICE IS HIGHLY VOLATILE, AND THEREFORE THE VALUE OF YOUR
INVESTMENT MAY FLUCTUATE SIGNIFICANTLY.
The market price of our common stock has fluctuated and may continue to
fluctuate as a result of variations in our quarterly operating results. These
fluctuations may be exaggerated if the trading volume of our 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. Our common stock may experience
similar or even more dramatic price and volume fluctuations which may continue
indefinitely.
30
The following table sets forth the high and low closing market price for
our common stock for each of the quarters in the period beginning January 1,
1999 through December 31, 2001 as reported on the Nasdaq National Market:
QUARTER ENDED HIGH LOW
March 31, 1999............... $12.19 $8.25
June 30, 1999................ $11.25 $8.25
September 30, 1999........... $22.38 $9.50
December 31, 1999............ $25.00 $15.75
March 31, 2000............... $27.13 $12.63
June 30, 2000................ $15.50 $8.25
September 30, 2000........... $9.88 $8.06
December 31, 2000............ $7.88 $3.13
March 31, 2001............... $6.00 $4.47
June 30, 2001................ $8.80 $5.06
September 30, 2001........... $10.00 $7.25
December 31, 2001............ $9.50 $7.50
ITEM 2. PROPERTIES.
We own no real property. Our principal executive offices, located at 41
University Drive, Suite 200, Newtown, Pennsylvania, consist of approximately
14,204 square feet. Our lease for such premises continues through April 2009.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
31
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 our common stock.
Since June 20, 1996, our common stock has traded on the Nasdaq National Market
under the symbol "CGPI."
The following table sets forth the high and low bid information for our
common stock for each of the quarters in the period beginning January 1, 2000
through December 31, 2001 as reported on the Nasdaq National Market. 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, 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
March 31, 2001............... $5.99 $4.00
June 30, 2001................ $9.00 $4.88
September 30, 2001........... $10.40 $6.49
December 31, 2001............ $9.49 $7.26
As of March 15, 2002, the approximate number of holders of record of our
common stock was 116 and the approximate number of beneficial holders of our
common stock was 3,466.
We have never declared or paid any cash dividends on our common stock.
Except as set forth below, we intend to retain earnings, if any, to fund future
growth and the operation of our business. On May 12, 1999, we consummated a
$20.0 million financing through the issuance of our Series D cumulative
convertible preferred stock. As a result of such financing, we have cumulative
cash and common stock dividend obligations to the holders of the Series D
preferred stock. Such financing arrangement also limits our ability to generally
declare dividends to our common stockholders. In addition, our ability to
generally declare dividends to our common stockholders is further limited by the
terms of our 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
our consolidated statement of operations data for each of the years in the
three-year period ended December 31, 2001, and with respect to the consolidated
balance sheet data at December 31, 2000 and 2001 are derived from and are
qualified by reference to our audited consolidated financial statements and the
related notes thereto found at "Item 14. Exhibits, Financial Statement
Schedules, and
32
Reports on Form 8-K" herein. The consolidated statement of operations data for
the years ended December 31, 1997 and 1998 and with respect to the consolidated
balance sheet data as of December 31, 1997, 1998 and 1999 are derived from
audited consolidated 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 our 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,
----------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ---------- ---------- ---------- ----------
CONSOLIDATED STATEMENT OF (IN THOUSANDS EXCEPT FOR PER SHARE DATA)
OPERATIONS DATA:
Revenues:
Product sales................ $ -- $ 3,053 $ 15,211 $ 20,501 $ 31,358
License revenues............. 325 400 100 530 488
Contract revenues............ 9 8 770 3,240 3,386
----- -------- -------- -------- --------
Total revenues................. 334 3,461 16,081 24,271 35,232
Operating expenses:
Cost of product sales........ -- 745 3,139 4,070 5,825
Research and development..... 4,200 4,670 5,005 3,128 3,764
Selling, general and
administrative............. 6,096 10,600 23,180 25,746 34,010
----- -------- -------- -------- --------
Operating loss........... (9,962) (12,554) (15,243) (8,673) (8,367)
Interest income................ 1,338 988 851 613 232
Interest expense............... -- -- (197) (15) (17)
Other income (expense)......... -- -- (2) 9 8
----- -------- -------- -------- --------
Loss before cumulative
effect of change in
accounting principle......... (8,624) (11,566) (14,591) (8,066) (8,144)
Cumulative effect of change
in accounting principle(1)... -- -- -- (764) --
----- -------- -------- -------- --------
Net loss....................... (8,624) (11,566) (14,591) (8,830) (8,144)
Net loss allocable to common
stockholders................. $ (8,624) $ (11,566) $ (15,683) $ (10,519) $ (9,824)
Basic and diluted net loss
per share allocable to
common stockholders before
cumulative effect of
change in accounting
principle.................... $ (1.04) $ (1.35) $ (1.82) $ (1.12) $ (0.94)
Basic and diluted net loss
per share allocable to
common stockholders(2)....... $ (1.04) $ (1.35) $ (1.82) $ (1.21) $ (0.94)
Shares used in computing
basic and diluted per
share amounts(2)............. 8,291 8,579 8,598 8,712 10,414
33
AS OF DECEMBER 31,
----------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ---------- ---------- ---------- ----------
CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
DATA: ----------------------------------------------------------------
Cash, cash equivalents and
short-term investments....... $ 22,771 $ 10,250 $ 14,367 $ 5,448 $ 6,171
Total assets................... 23,165 14,740 18,563 10,431 14,698
Note payable, less current
portion...................... -- -- 116 47 --
Accumulated deficit............ (26,362) (37,928) (53,611) (64,130) (73,954)
Total stockholders' equity..... 20,708 9,281 13,607 5,264 7,127
(1) See Note 9 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.
34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
CollaGenex Pharmaceuticals, Inc. and subsidiaries is a specialty
pharmaceutical company currently focused on providing innovative medical
therapies to the dental and dermatology markets. Our first product, Periostat,
is an orally administered, prescription pharmaceutical product that was approved
by the United States Food and Drug Administration in September 1998 and is the
first and only pharmaceutical to treat adult periodontitis by inhibiting the
enzymes that destroy periodontal support tissues. We are marketing Periostat to
the dental community through our own professional dental pharmaceutical sales
force of approximately 120 sales representatives and managers. Pursuant to an
exclusive License and Marketing Agreement with Atrix Laboratories, Inc., we
began, in October 2001, to actively market Atrix's proprietary dental products,
Atridox, Atrisorb FreeFlow and Atrisorb-D, to the United States dental market.
We distribute Periostat through drug wholesalers and large retail chains in the
United States and the United Kingdom. The Atrix dental products are distributed
through a specialty distributor who sells these products directly to dental
practitioners in the United States. Our sales force also co-promotes Vioxx, a
prescription non-steroidal, anti-inflammatory drug developed by Merck & Co.,
Inc., in the United States.
We began operations in January 1992 and functioned primarily as a research
and development company until 1998. During this period, we operated with a
minimal number of employees, and substantially all of our pharmaceutical
development activities were contracted to independent contract research and
other organizations. Following FDA approval of Periostat in September 1998, we
significantly increased our number of employees, primarily in the areas of sales
and marketing. We continue to contract our research and development activities
as well as manufacturing, warehousing and distribution functions.
We have incurred losses each year since inception and have an accumulated
deficit of $74.0 million at December 31, 2001.
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. Our business of selling, marketing and
developing pharmaceutical products is subject to a number of significant risks,
including risks relating to the implementation of our sales and marketing plans
for Periostat and other products that we market, 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. Our success depends to a large degree upon the market
acceptance of Periostat by periodontists, dental practitioners, other health
care providers, patients and insurance companies. Periostat has been approved by
the FDA 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
35
our other product candidates will be approved by any regulatory authority for
marketing in any jurisdiction or, if approved, that any such products will be
successfully commercialized by us. In addition, there can be no assurance that
we will successfully commercialize Vioxx, Atridox, Atrisorb FreeFlow and
Atrisorb-D. As a result of these risks, and others expressed from time to time
in our filings with the Securities and Exchange Commission, our actual results
may differ materially from the results discussed in the forward-looking
statements contained herein.
RESULTS OF OPERATIONS
From our founding through the quarter ended September 30, 1998, we had no
revenues from sales of our own products. During the fourth quarter of 1998, we
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, we achieved net
product sales of $15.2 million from sales of Periostat, contract revenues of
$770,000 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, we achieved net product sales of
$20.5 million from sales of Periostat, contract revenues of $3.2 million and
license and milestone fees of $530,000 from various foreign distribution and
marketing agreements for Periostat. Included in this $530,000 was $397,000 in
license revenues that were deferred upon the implementation of Staff Accounting
Bulletin SAB 101 ("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.
During the year ended December 31, 2001, we achieved net product sales of
$31.4 million, including $30.6 million from the sale of Periostat and $732,000
from the sale of Atridox and Atrisorb FreeFlow. In addition, during the year
ended December 31, 2001, we generated $3.4 million in contract revenues and
$488,000 in licensing revenue, which included $63,000 in previously recognized
up-front license fees that were deferred upon the adoption of SAB 101.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of its financial position and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. Management believes the critical accounting policies and
areas that require the most significant judgments and estimates to be used in
the preparation of the consolidated financial statements pertain to revenue
recognition.
We recognize sales revenue upon shipment, net of estimated returns,
provided that collection is determined to be probable and no significant
obligations remain. Sales revenue from our customers is subject to agreements
allowing limited rights of return, rebates and price protection. Accordingly, we
reduce revenue recognized for estimated future returns, rebates and price
protection at the time the related revenue is recorded. The estimates for
returns are
36
adjusted periodically based upon historical rates of returns, inventory levels
in the distribution channel, and other related factors. While management
believes it can make reliable estimates for these matters, unsold products in
these distribution channels may be exposed to expiration. Accordingly, it is
possible that these estimates will change in the future or that the actual
amounts could vary materially from our estimates and that the amounts of such
changes could impact our results of operations, financial condition and our
business.
Since our inception, a portion of our revenue has been generated from
license and distribution agreements for our products. We recognize nonrefundable
signing or license fees that are not dependent on future performance under these
agreements as revenue when received and over the term of the arrangement if we
have continuing performance obligations. Any amounts deferred are amortized to
revenue over the expected performance period of each underlying agreement.
Deferred revenue represents the portion of up front license payments received
that has not been earned. Milestone revenue from licensing arrangements is
recognized upon completion of the milestone event or requirement if it
represents the achievement of a significant step in the research, development or
regulatory process.
YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000
REVENUES
- --------------------------------------------------------------------------------
Revenues
(dollars in thousands) 2001 CHANGE 2000
---- ------ ----
- --------------------------------------------------------------------------------
Product Sales $ 31,358 53% $ 20,501
- --------------------------------------------------------------------------------
Contract Revenues 3,386 5 3,240
- --------------------------------------------------------------------------------
License Revenues 488 (8) 530
----------- ------------
- --------------------------------------------------------------------------------
Total $ 35,232 45% $ 24,271
- --------------------------------------------------------------------------------
Revenues in 2001 included $30.6 million in net sales of Periostat, $732,000
in net sales of Atridox and Atrisorb FreeFlow, $3.4 million in contract revenue,
which were derived from our co-promotion of Vioxx and Denavir, and $488,000 in
foreign license and milestone revenues for Periostat. Product sales increased
$10.9 million, or 53%, in 2001 mainly as a result of the DTC advertising
campaign for Periostat that we launched in the United States in January 2001.
The increase in product sales also included $732,000 in product sales of Atridox
and Atrisorb FreeFlow, which were launched in October 2001. Revenues from
Denavir accounted for approximately $297,000 of 2001 contract revenues.
Novartis, which acquired Denavir from SmithKline Beecham Consumer Healthcare in
early 2001, terminated our Co-Promotion Agreement with respect to Denavir
effective April 13, 2001. We have not recognized any revenue with respect to
sales of Denavir since April 2001.
Revenues in 2000 included $20.5 million in net sales of Periostat, $3.2
million in contract revenues, which were derived from our 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. There were no sales of Atridox or Atrisorb FreeFlow in 2000.
37
In accordance with SAB 101, which we adopted in 2000, $63,000 of our 2001
licensing revenues of $488,000 were attributable to our recognition of
previously recognized up-front license fees received for various agreements that
were deferred upon the adoption of SAB 101 and are being recognized as income
over the expected performance period of these agreements. License revenues in
2001 also included $425,000 in milestone fees associated with obtaining
regulatory approval in certain countries. Our 2000 licensing revenues of
$530,000 included $410,000 of up-front license fees received for various
agreements which are being recognized as revenue over the expected performance
period of these agreements in accordance with SAB 101. We also recorded another
$120,000 in milestone fees associated with obtaining regulatory approval in
certain countries.
COST OF PRODUCT SALES
- --------------------------------------------------------------------------------
Cost of Product Sales
(dollars in thousands) 2001 CHANGE 2000
---- ------ ----
- --------------------------------------------------------------------------------
Cost of Product Sales $ 5,825 43% $ 4,070
- --------------------------------------------------------------------------------
Percent of Product Sales 18.6% 19.9%
- --------------------------------------------------------------------------------
Cost of product sales includes product packaging, third-party royalties,
obsolete inventory provisions, amortization of new product licensing fees, and
the costs associated with the manufacturing, storage and stability of our
products and the Atrix products.
Cost of product sales were $5.8 million, or 18.6% of product sales in 2001,
compared to $4.1 million, or 19.9% of product sales in 2000. Cost of product
sales increased in absolute dollars but decreased as a percentage of product
sales in 2001 compared to 2000, primarily due to the manufacturing cost savings
for Periostat tablets, which we launched in July 2001. For Periostat, cost of
product sales as a percent of sales, declined to 16.1% in 2001 from 19.9% in
2000. The cost of product sales for Atridox and Atrisorb FreeFlow were 38.0% for
the two months of sales recorded during 2001. In 2001, we also recorded a
provision for obsolete inventory of $602,000; there was no such provision in
2000.
RESEARCH AND DEVELOPMENT
- --------------------------------------------------------------------------------
Research and Development
(dollars in thousands) 2001 CHANGE 2000
---- ------ ----
- --------------------------------------------------------------------------------
Research and Development $ 3,764 20% $ 3,128
- --------------------------------------------------------------------------------
Percentage of Total Revenue 10.7% 12.9%
- --------------------------------------------------------------------------------
Research and development expenses consist primarily of funds paid to third
parties for the provision of services and materials for drug development,
manufacturing and formulation enhancements, clinical trials, statistical
analysis and report writing and regulatory compliance costs.
Research and development expenses increased to $3.8 million in 2001 from
$3.1 million in 2000. Research and development expenses incurred in 2001
included $535,000 in direct salaries and benefits, $164,000 in noncash
compensation expense relating to the extension of the exercisability of certain
stock options for one of our ex-board members, $210,000 in research
38
grants to various academic institutions for conducting research related to our
core technology and $765,000 in contracted clinical and development expenses
related to a completed safety and pharmacokinetic study for Metastat and other
IMPACs compounds that we are currently developing. During 2001, our three-year
evaluation testing agreement for such compounds with SUNY expired and was not
renewed. The amount paid to SUNY in 2001 under this agreement was $168,000. The
total cumulative costs incurred to date under this agreement were approximately
$1.4 million.
Development projects contracted in 2001 include an initial feasibility
study and formulation development work for a once-a-day formulation of
Periostat, which totaled $455,000 in 2001. Future development of this technology
will be contingent on the outcome of the initial phase of the project, which is
expected to be determined by mid 2002. Additional expenses ranging from
approximately $1.0 million in 2002 to as much as $6.0 million at completion
could be incurred if the project is successful.
Clinical projects conducted during 2001 included the completion of several
Phase 3b studies for Periostat in various dental indications and the initiation
of clinical trials for Periostat in dermatological indications. Clinical project
costs incurred in 2001 were $230,000. We are currently in discussions with the
FDA regarding protocols for additional trials with Periostat for acne and
rosacea. Until these discussions are finalized, it is premature to estimate the
future costs associated with the continued development of Periostat for
dermatological indications.
Other expenses incurred in 2001 included $400,000 in regulatory consulting
and filing fees under the Mutual Recognition Procedure in Europe and $535,000
for various regulatory costs, including annual FDA filing fees, legal, and
regulatory expenses in the United States related to obtaining FDA approval for
Periostat tablets. Additionally, we incurred $110,000 in ongoing manufacturing
support relating to our existing products and $194,000 in travel and other
office expenses.
Research and development expenses incurred in 2000 consisted of $375,000 in
direct salaries and benefits, $324,000 in noncash compensation expense related
to the acceleration of the vesting of stock options for certain research and
development consultants, $255,000 in research grants to various academic
institutions for conducting research related to our core technology and $356,000
to SUNY under an agreement we executed in 1998 relating to the development of
our IMPACS technology. We also incurred $263,000 in contracted clinical and
development expenses related to Metastat and other IMPACs compounds.
Development projects contracted in 2000 also included $113,000 for
formulation development relating to Dentaplex.
Clinical projects conducted during 2000 included the initiation of several
Phase 3b studies for Periostat in various dental indications. Clinical project
costs incurred in 2000 were $250,000. These projects were completed in 2001.
Other research and development expenses incurred in 2000 include $600,000
for FDA filing fees, legal, and regulatory expenses in the United States
relating to Periostat capsules and our New Drug Application for Periostat
tablets. We also incurred $237,000 in regulatory
39
consulting and filing fees related to obtaining marketing approval for Periostat
tablets in the United Kingdom. Additionally, during 2000, we incurred $188,000
in ongoing manufacturing support for Periostat capsules, stability studies and
manufacturing validation costs for Periostat tablets and $167,000 in travel and
other office expenses.
SELLING, GENERAL AND ADMINISTRATIVE
- --------------------------------------------------------------------------------
Selling, General and Administrative
(dollars in thousands) 2001 CHANGE 2000
---- ------ ----
- --------------------------------------------------------------------------------
Selling, General and Administrative $ 34,010 32% $ 25,746
- --------------------------------------------------------------------------------
Percentage of Total Revenue 96.5% 106.1%
- --------------------------------------------------------------------------------
Selling, general and administrative expenses consist primarily of personnel
salaries and benefits, direct marketing costs, professional, legal and
consulting fees, insurance and general office expenses.
Selling, general and administrative expenses increased to $34.0 million in
2001 from $25.7 million in 2000. Significant components of selling, general and
administrative expenses incurred in 2001 included $13.9 million in direct
selling and sales training expenses, $14.9 million in marketing expenses
(including Periostat DTC advertising expenditures, Atridox and Atrisorb Free
Flow launch expenditures and co-promotion expenses relating to Vioxx) and $5.2
million in general and administrative expenses, which include business
development, finance and corporate activities. The increase in selling, general
and administrative expenses during 2001 was mainly due to the launch of our DTC
advertising campaign for Periostat; during 2001 we incurred $6.8 million on DTC
advertising compared to $1.2 million in 2000. Additionally, direct selling
expenses increased $1.3 million as a result of salary increases and higher
incentive compensation and sales training costs for our 120-person field sales
force. Corporate administration expenses also increased $1.4 million during
2001, as we began to develop our dermatological business, and our corporate and
financial infrastructure both domestically and abroad.
During 2000, we incurred $12.9 million in direct selling and sales training
expenses, $9.0 million in marketing expenses for Periostat and Vioxx, and $3.8
million in general and administrative expenses.
OTHER INCOME/EXPENSE
- --------------------------------------------------------------------------------
Other Income / Expense 2001 CHANGE 2000
---- ------ ----
- --------------------------------------------------------------------------------
Interest Income $ 232,000 (62%) $ 613,000
- --------------------------------------------------------------------------------
Interest Expense $ 17,000 13% $ 15,000
- --------------------------------------------------------------------------------
Other Income $ 8,000 (11%) $ 9,000
- --------------------------------------------------------------------------------
Interest income decreased to $232,000 for the year ended December 31, 2001
compared to $613,000 for the year ended December 31, 2000. This decrease was due
to lower average balances in cash and short-term investments and lower
investment yields during the year
40
December 31, 2001. Interest expense for the year ended December 31, 2001 was
$17,000,compared to $15,000 for the year ended December 31, 2000.
CHANGE IN ACCOUNTING PRINCIPLE
We 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, we had recorded approximately $739,000 in
deferred revenue which will be recognized over the expected performance period
of each respective agreement. During 2001, we recognized $63,000 in revenue
previously recognized up-front license fees that were deferred upon the adoption
of SAB 101, and accordingly, at December 31, 2001 have approximately $677,000 in
deferred revenue which will be recognized over the expected performance period
of each respective agreement.
PREFERRED STOCK DIVIDEND
Preferred stock dividends were $1.7 million during each of the years ended
December 31, 2001 and December 31, 2000. Such preferred stock dividends, paid in
shares of our common stock, were the result of our obligations in connection
with the issuance of our Series D preferred stock in May 1999. Beginning in
mid-2002, as more fully set forth in the Amended Certificate of Designation,
Preferences and Rights of the Series D Cumulative Convertible Preferred Stock,
we will no longer pay dividends on the Series D preferred stock in shares of our
common stock, and will become obligated to pay such dividends in cash, at a rate
equal to 8% per annum.
YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
REVENUES
- --------------------------------------------------------------------------------
Revenues
(dollars in thousands) 2000 CHANGE 1999
---- ------ ----
- --------------------------------------------------------------------------------
Product Sales $ 20,501 35% $ 15,211
- --------------------------------------------------------------------------------
Contract Revenues 3,240 321 770
- --------------------------------------------------------------------------------
License Revenues 530 430 100
--------- ---------
- --------------------------------------------------------------------------------
Total $ 24,271 51% $ 16,081
- --------------------------------------------------------------------------------
We recognized $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 our
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. In accordance with SAB 101, which we adopted
in 2000, our 2000 licensing revenues of $530,000 were attributable, in part, to
our recognition of up-front license fees received for various agreements which
are being recognized over the expected performance period of these agreements.
License revenues in 2000
41
also included $397,000 that we recorded in earlier years prior to the adoption
of SAB 101 which we deferred as a result of our change in revenue recognition
policy.
Revenues in 1999 included $15.2 million in net sales of Periostat, $770,000
in contract revenues from our co-promotion of Vioxx and Denavir, and $100,000 in
foreign license revenues for Periostat. Revenues from Denavir accounted for
$511,000 of such contract revenues. 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
(dollars in thousands) 2000 CHANGE 1999
---- ------ ----
- --------------------------------------------------------------------------------
Cost of Product Sales $ 4,070 30% $ 3,139
- --------------------------------------------------------------------------------
Percent of Product Sales 19.9% 20.6%
- --------------------------------------------------------------------------------
Cost of product sales includes product packaging, third-party royalties and
the costs associated with the manufacturing, storage and stability of Periostat
capsules.
Cost of product sales were $4.1 million, or 19.9% of product sales in 2000
compared to $3.1 million, or 20.6% of product sales in 1999. This decrease in
cost of product sales as a percentage of product sales was primarily due to the
absence of trade allowances in 2000 and the increase in the selling price per
unit for Periostat in 2000, which resulted in a lower cost of product sales
percentage.
RESEARCH AND DEVELOPMENT
- --------------------------------------------------------------------------------
Research and Development
(dollars in thousands) 2000 CHANGE 1999
---- ------ ----
- --------------------------------------------------------------------------------
Research and Development $ 3,128 (38%) $ 5,005
- --------------------------------------------------------------------------------
Percentage of Total Revenue 12.9% 31.1%
- --------------------------------------------------------------------------------
Research and development expenses consist primarily of funds paid to third
parties for the provision of services and materials for drug development,
manufacturing and formulation enhancements, clinical trials, statistical
analysis and report writing and regulatory compliance costs.
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.
42
Research and development expenses incurred in 2000 consisted of $375,000 in
direct salaries and benefits, $324,000 in noncash compensation expense relating
to the acceleration of the vesting of stock options for certain research and
development consultants, $255,000 in research grants to various academic
institutions for conducting research related to our core technology and $356,000
to SUNY under the agreement we executed in 1998 for research relating to our
IMPACS technology. We also incurred $263,000 in contracted clinical and
development expenses related to Metastat and other IMPACS compounds.
Development projects contracted in 2000 included $113,000 for formulation
development expense for Dentaplex.
Clinical projects conducted during 2000 included the initiation of various
Phase 3b studies for Periostat in dental indications. Clinical project costs
incurred in 2000 were $250,000.
Other expenses incurred in 2000 include $600,000 in FDA filing fees, legal,
and regulatory expenses in the United States for Periostat capsules and expenses
associated with our New Drug Application for Periostat tablets. We also incurred
$237,000 in regulatory consulting and filing fees in the United Kingdom for
marketing approval for Periostat tablets, $188,000 in ongoing manufacturing
support for Periostat capsules, stability studies and manufacturing validation
costs for Periostat tablets and $167,000 in travel and other office
expenditures.
Research and development expenses incurred in 1999 included $387,000 in
direct salaries and benefits, $306,000 in noncash compensation expense relating
to stock options for certain research and development consultants, $542,000 in
non-recurring research grants and $541,000 to SUNY under our contractual
obligation entered into in 1998. We also incurred $172,000 in contracted
clinical and development expenses related to Metastat and other IMPACS
compounds.
Development projects contracted in 1999 included $975,000 for ongoing
manufacturing validation and formulation development costs for Periostat tablets
which began in 1999 and $261,000 for an initial feasibility study for a
once-a-day formulation for Periostat that failed during the year.
Clinical projects conducted during 1999 included a Phase IV study to
support the future marketing activities for Periostat. These costs incurred in
1999 were $1.1 million.
Other expenses incurred in 1999 include $464,000 in FDA filing fees, legal,
and regulatory expenses in the United States for Periostat capsules and expenses
associated with our New Drug Application for Periostat tablets. We also incurred
$65,000 in regulatory consulting and filing fees in the United Kingdom for
marketing approval for Periostat capsules and $186,000 in travel and other
office expenditures.
43
SELLING, GENERAL AND ADMINISTRATIVE
- --------------------------------------------------------------------------------
Selling, General and Administrative
(dollars in thousands) 2000 CHANGE 1999
---- ------ ----
- --------------------------------------------------------------------------------
Selling, General and Administrative $ 25,746 11% $ 23,180
- --------------------------------------------------------------------------------
Percentage of Total Revenue 106.1% 144.1%
- --------------------------------------------------------------------------------
Selling, general and administrative expenses consist primarily of personnel
salaries and benefits, direct marketing costs, professional, legal and
consulting fees, insurance and general office expenses.
Selling, general and administrative expenses increased to $25.7 million in
2000 from $23.2 million in 1999. Significant components of selling, general and
administrative expenses incurred in 2000 included $12.9 million in direct
selling and sales training expenses, $9.0 million in marketing expenses for
Periostat and Vioxx, and $3.8 million in general and administrative expenses,
which include business development, finance and corporate activities. Direct
selling expenses increased $1.8 million as a result of annual salary increases
and recruiting costs for our sales force. Other increases in selling, general
and administrative expenses during 2000 were mainly due to an incremental $1.2
million in promotional expenses for Vioxx pursuant to our co-promotion agreement
with Merck and an additional $1.2 million for the initiation of our DTC
advertising test campaign for Periostat, which commenced in October 2000. These
increases were partially offset by a $2.5 million decrease in traditional
marketing programs for Periostat.
During 1999, we incurred $10.3 million in direct selling expenses, $9.3
million in marketing expenses, primarily for Periostat, and $3.6 million in
general and administrative expenses.
OTHER INCOME/EXPENSE
- --------------------------------------------------------------------------------
Other Income /(Expense) 2000 CHANGE 1999
---- ------ ----
- --------------------------------------------------------------------------------
Interest Income $ 613,000 (28%) $ 851,000
- --------------------------------------------------------------------------------
Interest Expense $ 15,000 (92%) $ 197,000
- --------------------------------------------------------------------------------
Other Income (Expense) $ 9,000 N/A $ (2,000)
- --------------------------------------------------------------------------------
Interest income decreased from $851,000 for the year ended December 31,
1999 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 our financing consummated in May 1999. Such decrease for 2000
was partially offset by interest expense related to the $219,000 note payable
executed by us in April 1999.
44
CHANGE IN ACCOUNTING PRINCIPLE
We 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 our 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.
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 our common stock, were the result
of our obligations in connection with the issuance of our Series D preferred
stock in May 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since our origin in January 1992, we have financed our operations through
private placements of our preferred and common stock, an initial public offering
of 2,000,000 shares of common stock, which generated net proceeds to us 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 us of approximately $11.6 million after underwriting fees and
related expenses. On May 12, 1999, we consummated a $20.0 million financing
through the issuance of our Series D cumulative convertible preferred stock,
which generated net proceeds to us of $18.5 million. The issuance of the Series
D preferred stock was approved by a majority of our stockholders at our Annual
Meeting of Stockholders on May 11, 1999. A portion of the proceeds of the
preferred stock financing consummated in May 1999 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 such financing. The remaining proceeds have
been and will be used for general working capital purposes.
The Series D preferred stock is convertible at any time into shares of our
common stock at a current conversion price of $9.91 per share, which conversion
price reflects a decrease from the initial conversion price of $11.00 per share
as a result of both a common stock financing in March 2001 and the sale of
shares of our common stock to Atrix in August 2001. Such conversion price is not
subject to reset except in the event that we should fail to declare and pay
dividends when due or we 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 preferred stock.
During the first three years following issuance, holders of the Series D
preferred stock are 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 preferred stock shall, at our
option (as determined by our 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 price, or, in case no such
sale takes place on such day, the average of the closing bid and asked
45
prices on the Nasdaq National Market is at least 200% of the conversion price
then in effect (as of December 31, 2001, such conversion price was $9.91 per
share) for forty consecutive trading days; and (ii) a shelf registration
statement is in effect for the shares of common stock to be issued upon
conversion of the Series D preferred stock. Without written approval of a
majority of the holders of record of the Series D preferred stock, we, among
other things, shall not: (i) declare or pay any dividend or distribution on any
shares of our capital stock other than dividends on the Series D 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 our debt
securities, except that we 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 we have reported positive net income for four consecutive
quarters immediately prior to such twelve month period.
In April 1999, we received $219,000 in proceeds from our issuance of a note
payable. We used the proceeds of such note to fund the purchase of equipment,
fixtures and furniture for our 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, we 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 us of approximately $6.8 million. We are using such
proceeds primarily for our DTC 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
from the date of such financing into 400,000 shares of our 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 such financing. We also issued
to our financial advisor in such financing warrants to purchase an aggregate of
150,000 shares of our 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 the financing. Such warrants may be deemed
automatically exercised in certain circumstances based upon our stock price. In
connection with the March 2001 financing, we are obligated to maintain the
effectiveness of a shelf registration statement with respect to all such shares
of common stock issued and shares underlying all such warrants for a continuous
twenty-four (24) month period, or we will be required to issue to the investors
and the financial advisor an additional 27,500 shares of our common stock, in
the aggregate, for no additional consideration.
On March 19, 2001, we consummated a revolving credit facility with Silicon
Valley Bank, which was subsequently amended in March 2002. The credit facility,
as amended, extends through March 15, 2004. We may borrow up to the lesser of
$4.0 million or 80% of eligible accounts receivable, as defined under the credit
facility. The amount available to us is also reduced by outstanding letters of
credit which may be issued under the credit facility in amounts totaling up to
$1.5 million. We are not obligated to draw amounts and any such borrowings bear
interest, payable monthly, currently at the prime rate plus 1.0 to 1.5% per
annum and may be used only for working capital purposes. In 2002, we secured our
expected purchase order commitments for Periostat from Pharmaceutical
Manufacturing Research Services, Inc., a
46
contract manufacturing company, with a letter of credit under the credit
facility for approximately $1.3 million. Without the consent of the Silicon
Valley Bank, we, 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 our common stock. We must also
maintain a certain tangible net worth and a minimum of $2.0 million in cash at
Silicon Valley Bank, net of borrowings under the credit facility, at all times
during the term thereto. In addition, we have secured our obligations under the
credit facility through the granting of a security interest in favor of the bank
with respect to all of our assets, including our intellectual property. As of
December 31, 2001, we had no outstanding letters of credit issued. There are no
current borrowings outstanding against the credit facility.
On August 24, 2001, we signed a License and Marketing Agreement with Atrix
Laboratories, Inc. to market Atrix's proprietary dental products, Atridox,
Atrisorb FreeFlow and Atrisorb-D, to the United States dental market. Pursuant
to the terms of this agreement, among other things: (i) Atrix will manufacture
the dental products for us at an agreed upon transfer price and will receive
royalties on future net sales of the products each calendar year; (ii) we paid
to Atrix a $1.0 million licensing fee to market such products; (iii) we have
committed to no less than $2.0 million in advertising and selling expenses
related to the Atrix products during the fiscal year beginning January 1, 2002;
(iv) we have agreed to maintain, for a period of 24 months, a force of no less
than ninety (90) full time dental consultants and divisional and regional
managers to make sales and product recommendation calls on dental professionals;
and (v) we have agreed that the Atrix products will be the subject of a specific
number of detail calls in the United States during 2002. We will also be
required to make certain minimum expenditures for advertising and promotional
activities after 2002, including: (i) the lesser of $4,000,000 or 30% of our
contribution margin relating to a specific Atrix product that we market, and
(ii) the lesser of $2,000,000 or 30% of our contribution margin relating to a
separate Atrix product that we market.
In addition, pursuant to the terms of a Stock Purchase Agreement that we
executed with Atrix, dated August 24, 2001, Atrix purchased 330,556 unregistered
shares of our common stock for an aggregate purchase price of approximately $3.0
million. As a result of the sale of such shares to Atrix, the conversion price
of our Series D preferred stock was reduced from $9.94 to $9.91 per share.
On February 14, 2002, we entered into an equity line arrangement under the
terms of a common stock purchase agreement with Kingsbridge Capital Limited.
Pursuant to this agreement, we may, at our sole discretion and from time to time
over the next 12 months, sell shares of our common stock to Kingsbridge at a
discount to market price, as determined prior to each such sale. We have
committed to: (i) draw down on this equity line, an amount aggregating at least
$1.5 million in registered shares of common stock, prior to August 14, 2002; or
(ii) if, prior to August 14, 2002, we have not drawn down an amount aggregating
at least $1.5 million in registered shares of common stock, we will be obligated
to pay Kingsbridge, in cash, an amount equal to 10% of the amount by which $1.5
million exceeds the aggregate of all amounts drawn down by us under the equity
line up to that date. The equity line provides for the sale of up to $8.5
million in registered shares of our common stock to Kingsbridge.
47
Additionally, in connection with the consummation of the equity line and
pursuant to the terms of a warrant agreement executed by us, we issued
Kingsbridge a warrant to purchase 40,000 shares of our common stock at an
exercise price of $9.38 per share. The conversion price of our Series D
preferred stock was not reduced as a result of such issuance. Such warrant will
not become exercisable until August 14, 2002, and will thereafter expire on
August 13, 2007. We intend to register the shares of our common stock which may
be issued by us upon the sale and issuance of our common stock to Kingsbridge,
and upon any exercise of the warrant by Kingsbridge, under our recent shelf
registration statement on Form S-3, which registered an aggregate of 964,880
shares of our common stock and was declared effective by the Securities and
Exchange Commission on February 14, 2002.
At December 31, 2001, we had cash, cash equivalents and short-term
investments of approximately $6.2 million, an increase of $723,000 from the $5.4
million balance at December 31, 2000. This increase was primarily attributable
to the net proceeds of $6.8 million from the 2001 financing, and $3.0 million
from the sale of shares of the our common stock to Atrix, less cash used to fund
operating activities for the year ended December 31, 2001. In accordance with
investment guidelines approved by our 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. Our working capital at December 31, 2001 was $6.3 million, an
increase of $1.0 million from $5.3 million at December 31, 2000. This increase
was primarily attributable to the net proceeds of $6.8 million from our March
2001 financing and $3.0 million from the sale of shares of our common stock to
Atrix, less cash used to fund operations during the year ended December 31,
2001.
We anticipate that our existing working capital will be sufficient to fund
our current operations through at least the end of 2002 and that existing cash
and cash equivalents, internally generated funds from operations and the
anticipated cash inflows from both our equity line of credit with Kingsbridge
and our revolving credit facility with Silicon Valley Bank will be sufficient to
support our operations through 2003. Our actual future cash requirements,
however, will depend on many factors, including market acceptance of our
products and technology.
We believe that other key factors that could affect our internal and
external sources of cash are:
o Revenues and margins from sales of Periostat and other products and
contracted services;
o The success of our dermatology franchise;
o The success of our pre-clinical, clinical and development programs;
o The receptivity of the capital markets to future financings;
o Our ability to enter into additional strategic collaborations and to
maintain existing and new collaborations and the success of such
collaborations; and
o Our ability to meet the covenant requirements under our revolving
credit facility.
48
CONTRACTUAL OBLIGATIONS
Our major outstanding contractual obligations relate to cash dividends on
our Series D preferred stock outstanding, operating leases for our office space
and other contractual commitments with our marketing partners for certain
selling and promotional expenses associated with the products we are currently
detailing. Additionally, we also expect to make certain inventory purchases from
our contract manufacturer of Periostat, guaranteed by our irrevocable Letter of
Credit with Silicon Valley Bank.
Our Series D preferred stock currently pays dividends in common stock at a
rate of 8.4% per annum through March 19, 2002. Thereafter, the Series D
preferred stock pays dividends in cash at a rate of 8.0% per annum. The Series D
preferred stock is convertible into our common stock at a current conversion
price of $9.91 per share, subject to adjustment, at any time by the holder and
under certain conditions by us. The conversion price of the Series D preferred
stock is subject to adjustment in the event we fail to declare or pay dividends
when due or should we 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 Series D preferred stock.
In May 1999, we entered into a lease agreement relating to our office space
in Newtown, Pennsylvania. The lease has an initial term of 10 years. Rent is
expected to be approximately $318,000 per year and is subject to market
adjustments at the end of the 5th year.
In August of 1999, we entered into a three-year co-promotion agreement with
Merck for Vioxx under which we are committed to spend up to $1 million annually
for promotional expenses, unless the agreement is earlier terminated.
Pursuant to our License and Marketing Agreement with Atrix Laboratories, we
have committed to: (i) expend no less than $2.0 million in advertising and
selling expenses related to the Atrix products during the fiscal year beginning
January 1, 2002; (ii) maintain, for a period of 24 months, a force of no less
than ninety (90) full time dental consultants and divisional and regional
managers to make sales and product recommendation calls on dental professionals;
and (iii) making the Atrix products the subject of a specific number of detail
calls in the United States during 2002. We will also be required to make certain
minimum expenditures for advertising and promotional activities after 2002,
including: (i) the lesser of $4,000,000 or 30% of our contribution margin, as
defined in the agreement, relating to a specific Atrix product that we market,
and (ii) the lesser of $2,000,000 or 30% of our contribution margin, as defined
in the agreement, relating to a separate Atrix product that we market.
49
Below is a table which presents our contractual obligations and commercial
commitments as of December 31, 2001:
- ------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------------------
CONTRACTUAL LESS
OBLIGATIONS THAN 1 2 - 3 4 - 5 AFTER 5
TOTAL YEAR YEARS YEARS YEARS
- ------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT(1) $ 35,000 $ 35,000 $0 $0 $0
- ------------------------------------------------------------------------------------------------------------
OPERATING LEASES(2) $ 2,532,000 $ 335,000 $ 667,000 $ 668,000 $ 862,000
- ------------------------------------------------------------------------------------------------------------
UNCONDITIONAL $ 293,000(3)
PURCHASE $ 1,000,000(4)
OBLIGATIONS $ 3,293,000 $ 2,000,000(5) (5) (5) (5)
- ------------------------------------------------------------------------------------------------------------
CASH DIVIDEND ON
SERIES D PREFERRED
STOCK $ 7,600,000(6) $ 1,200,000(6) $ 3,200,000(6) $ 3,200,000(6) (6)
- ------------------------------------------------------------------------------------------------------------
TOTAL CONTRACTUAL
OBLIGATIONS $ 13,460,000 $ 4,863,000 $ 3,867,000 $ 3,868,000 $ 862,000
- ------------------------------------------------------------------------------------------------------------
(1) Balance payable on April 1999 $219,000 note.
(2) Such amounts primarily include minimum rental payments for our office lease
in Newtown, Pennsylvania.
(3) Such amount represents committed inventory purchases on a purchase order
under the terms of our Agreement with Pharmaceutical Research Manufacturing
Services, Inc.
(4) Such amount represents the maximum amounts payable under the terms of our
Co-Promotion Agreement with Merck & Co., Inc. for Vioxx.
(5) Such amounts are payable under the terms of our Agreement with Atrix
Pharmaceuticals. We will be required to expend $2,000,000 in advertising
and selling expenses related to the Atrix products in 2002, and to make
certain minimum expenditures for advertising and promotional activities
after 2002, including: (i) the lesser of $4,000,000 or 30% of our
contribution margin (as defined in the agreement) relating to a specific
Atrix product that we market, and (ii) the lesser of $2,000,000 or 30% of
our contribution margin (as defined in the agreement) relating to a
separate Atrix product that we market.
(6) Pursuant to the terms of our Series D Cumulative Convertible Preferred
Stock issued in May 1999, and unless earlier converted pursuant to its
terms, the holders of the Series D preferred stock are entitled to
dividends payable in our common stock at a rate of 8.4% per annum for the
first three years and dividends payable in cash at a rate of 8.0% per annum
thereafter.
50
At December 31, 2001, the Company had approximately $64.5 million of
Federal and $35.9 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 $850,000 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. As of December 31, 2001, assuming no future ownership changes,
approximately $34.0 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 $2,000,000 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 were used as legal tender through December 31, 2001.
On January 1, 2002, the legacy currencies were canceled and euro bills and coins
began to be used for cash transactions in the participating countries.
We do not denominate our international licensing agreements in foreign
currencies. The euro conversion did not have a material impact on our results of
operations or financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We believe that we are not subject to a material impact to our 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."
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to our 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
our definitive proxy statement for the 2002 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 our definitive
proxy statement for the 2002 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 our definitive proxy statement for the 2002 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 our definitive proxy statement for the 2002 Annual Meeting of
Stockholders is incorporated herein by reference to such proxy statement.
53
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 57.
(b) Reports on Form 8-K.
We filed two current reports on Form 8-K during the quarter ended
December 31, 2001.
On October 18, 2001, we filed a current report on Form 8-K with
the Securities and Exchange Commission with respect to the filing of:
(i) the Amended Certificate of Designation, Preferences and Rights of
the Series D Cumulative Convertible Preferred Stock of CollaGenex
Pharmaceuticals, Inc.; (ii) Amendment No. 1 to the 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; (iii) Amendment No. 2 to
the 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; and
(iv) Amendment No. 2 to the Shareholder Protection Rights Agreement,
dated September 15, 1997, between CollaGenex Pharmaceuticals, Inc. and
American Stock Transfer & Trust Company, as amended.
On December 10, 2001, we also filed a current report on Form 8-K
announcing the execution of an addendum to our Supply Agreement with
Hovione International Limited. Hovione is our sole supplier of
doxycycline hyclate, the active ingredient in our Periostat product.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 29th day of March,
2002.
COLLAGENEX PHARMACEUTICALS, INC.
By: /s/ Brian M. Gallagher
----------------------------------------
Brian M. Gallagher, Ph.D., Chairman
Chief Executive Officer and President
55
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 Chairman, Chief Executive March 29, 2002
- ------------------------------ Officer, President and Director
Brian M. Gallagher, Ph.D. (Principal Executive Officer)
/s/ Nancy C. Broadbent Chief Financial Officer, March 29, 2002
- ------------------------------ Treasurer and Secretary
Nancy C. Broadbent (Principal Financial and
Accounting Officer)
/s/ Peter R. Barnett Director March 29, 2002
- ------------------------------
Peter R. Barnett, D.M.D.
/s/ Robert C. Black Director March 29, 2002
- ------------------------------
Robert C. Black
/s/ James E. Daverman Director March 31, 2002
- ------------------------------
James E. Daverman
/s/ Robert J. Easton Director March 31, 2002
- ------------------------------
Robert J. Easton
/s/ Stephen A. Kaplan Director March 29, 2002
- ------------------------------
Stephen A. Kaplan
/s/ W. James O'Shea Director March 28, 2002
- ------------------------------
W. James O'Shea
56
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.
4.7(m) Amended Certificate of Designation, Preferences and Rights of the
Series D Cumulative Convertible Preferred Stock of CollaGenex
Pharmaceuticals, Inc. dated as of October 15, 2001.
4.8(m) Amendment No. 2 to Shareholder Protection Rights Agreement, dated
as of May 10, 2001, between the Company and American Stock
Transfer & Trust Company.
+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.
57
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
+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.
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.
58
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
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.
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(j) Loan and Security Agreement dated March 19, 2001, between the
Company and Silicon Valley Bank.
+10.25(k) Services and Supply Agreement dated as of September 26, 2000 as
amended by letter agreement dated as of December 1, 2000, by and
between the Company and Pharmaceutical Manufacturing Research
Services, Inc.
10.26(l) Letter Agreement dated as of June 26, 2001 by and between the
Company and Pharmaceutical Manufacturing Research Services, Inc.
10.27(m) Amendment No. 1 to 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.
10.28(m) Amendment No. 2 to 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.
+10.29(n) License Agreement dated August 24, 2001 by and between CollaGenex
Pharmaceuticals, Inc. and Atrix Laboratories, Inc.
59
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
+10.30(n) Stock Purchase Agreement dated August 24, 2001 by and between
CollaGenex Pharmaceuticals, Inc. and Atrix Laboratories, Inc.
+10.31(o) First Addendum December 10, 2001 to the Supply Agreement dated
January 23, 1995 by and between CollaGenex, Inc. and Hovione
International Limited.
10.32(p) Common Stock Purchase Agreement dated February 14, 2002 by and
between CollaGenex Pharmaceuticals, Inc. and Kingsbridge Capital
Limited.
10.33(p) Warrant dated February 14, 2002 issued to Kingsbridge Capital
Limited.
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.
60
(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.
(j) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000, which was filed with the
Securities and Exchange Commission on March 26, 2001. The Company
amended such Form 10-K by filing a Form 10-K/A on January 2, 2002.
(k) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001, which was filed with the
Securities and Exchange Commission on May 15, 2001.
(l) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001, which was filed with the Securities
and Exchange Commission on August 14, 2001.
(m) Incorporated by reference to the Company's Current Report on Form 8-K,
dated October 15, 2001, which was filed with the Securities and Exchange
Commission on October 18, 2001.
(n) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, which was filed with the
Securities and Exchange Commission on November 14, 2001. The Company
amended such Form 10-Q by filing a Form 10-Q/A on February 14, 2002.
(o) Incorporated by reference to the Company's Current Report on Form 8-K,
dated December 10, 2001, which was filed with the Securities and
Exchange Commission on December 10, 2001.
(p) Incorporated by reference to the Company's Current Report on Form 8-K,
dated February 14, 2002, which was filed with the Securities and
Exchange Commission on February 15, 2002.
61
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, 2000 and 2001........... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 2000, and 2001...................................... F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 2000 and 2001................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001....................................... 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, 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, 2000 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, 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 9 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 30, 2002, except as to the first paragraph of note 16, which is as of
February 14, 2002, the second paragraph of note 16 which is as of March 22,
2002, and the third paragraph of note 16 which is as of March 26, 2002.
F-2
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 2001
(Dollars in thousands, except per share data)
ASSETS 2000 2001
--------- ---------
Current assets:
Cash and cash equivalents................................ $ 3,709 $ 6,171
Short term investments................................... 1,739 --
Accounts receivable, net of allowance of $381 and $950
in 2000 and 2001, respectively....................... 3,038 4,478
Inventories.............................................. 277 1,402
Prepaid expenses and other current assets................ 989 1,200
--------- ---------
Total current assets................................. 9,752 13,251
Equipment and leasehold improvements, net.................... 652 537
Other assets................................................. 27 910
--------- ---------
Total assets......................................... $ 10,431 $ 14,698
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable.......................... $ 65 $ 35
Accounts payable......................................... 1,865 3,769
Accrued expenses......................................... 2,514 3,153
--------- ---------
Total current liabilities..................... 4,444 6,957
--------- ---------
Note payable, less current portion........................... 47 --
Deferred revenue............................................. 676 614
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 2000 and 2001, respectively (liquidation value
$20,000).............................................. 2 2
Common stock, $0.01 par value; 25,000,000 shares
authorized, 8,775,176 and 10,999,573 shares issued
and outstanding in 2000 and 2001, respectively........ 88 110
Common stock to be issued (275,462 shares and 103,196
shares in 2000 and 2001, respectively)................ 872 840
Additional paid in capital............................... 68,461 80,129
Deferred compensation.................................... (29) --
Accumulated deficit...................................... (64,130) (73,954)
--------- ---------
Stockholders' equity................................. 5,264 7,127
--------- ---------
Total liabilities and stockholders' equity........... $ 10,431 $ 14,698
========= =========
See accompanying notes to consolidated financial statements
F-3
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
1999 2000 2001
------------- ------------ ------------
Revenues:
Product sales.................................... $ 15,211 $ 20,501 $ 31,358
Contract revenues................................ 770 3,240 3,386
License revenues................................. 100 530 488
------------- ------------ ------------
Total revenues............................... 16,081 24,271 35,232
------------- ------------ ------------
Operating expenses:
Cost of product sales............................ 3,139 4,070 5,825
Research and development......................... 5,005 3,128 3,764
Selling, general and administrative.............. 23,180 25,746 34,010
------------- ------------ ------------
Total operating expenses..................... 31,324 32,944 43,599
------------- ------------ ------------
Operating loss............................... (15,243) (8,673) (8,367)
Other income (expense):
Interest income.................................. 851 613 232
Interest expense................................. (197) (15) (17)
Other income (expense)........................... (2) 9 8
------------- ------------ ------------
Loss before cumulative effect of
change in accounting principle.......... (14,591) (8,066) (8,144)
Cumulative effect of change in accounting principle... -- (764) --
------------- ------------ ------------
Net loss..................................... (14,591) (8,830) (8,144)
Preferred stock dividend.............................. 1,092 1,689 1,680
------------- ------------ ------------
Net loss allocable to common stockholders............. $ (15,683) $ (10,519) $ (9,824)
============= ============ ============
Basic and diluted net loss per share allocable
to common stockholders before cumulative
effect of change in accounting principle......... $ (1.82) $ (1.12) $ (0.94)
Cumulative effect of change in accounting
principle........................................ -- (0.09) --
------------- ------------ ------------
Basic and diluted net loss per share allocable
to common stockholders........................... $ (1.82) $ (1.21) $ (0.94)
============= ============ ============
Shares used in computing per share amounts:
Basic and diluted................................ 8,597,676 8,711,668 10,413,663
============= ============ ============
Pro forma net loss assuming new accounting principle is
applied retroactively............................ $ (14,633) $ (8,066)
============= ============
Pro forma net loss allocable to common stockholders
assuming new accounting principle is applied
retroactively.................................... $ (15,725) $ (9,755)
============= ============
Pro forma basic and diluted net loss per share allocable
to common stockholders assuming new accounting
principle is applied retroactively............... $ (1.83) $ (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, 1999, 2000 and 2001
(Dollars in thousands)
SERIES D CUMULATIVE
CONVERTIBLE
PREFERRED
STOCK COMMON STOCK
------------------- -------------------
COMMON STOCK ADDITIONAL
NUMBER OF PAR NUMBER OF PAR TO BE PAID-IN DEFERRED
SHARES VALUE SHARES VALUE ISSUED CAPITAL COMPENSATION
---------- --------- ---------- --------- ----------- --------- ------------
Balance, December 31, 1998 ......... -- $ -- 8,587,204 $ 86 $ -- $ 47,317 $ (194)
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 ................... -- -- -- -- -- -- 118
Net loss ......................... -- -- -- -- -- -- --
---------- --------- ---------- --------- ---------- ---------- -----------
Balance, December 31, 1999 ......... 200,000 2 8,622,091 86 858 66,348 (76)
Exercise of common stock options.. -- -- 21,325 -- 32 84 --
Common stock dividends issued 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 ................... -- -- -- -- -- -- 47
Net loss ......................... -- -- -- -- -- -- --
---------- --------- ---------- --------- ---------- ---------- -----------
Balance, December 31, 2000 ......... 200,000 2 8,775,176 88 872 68,461 (29)
Issuance of common stock for
common stock options previously
exercised ...................... -- -- 16,000 -- (32) 32 --
Issuance of common stock, net of
issuance costs ................. -- -- 1,830,556 18 -- 9,796 --
Common stock dividends issued on
Series D cumulative convertible
preferred stock ................ -- -- 377,841 4 (840) 1,676 --
Common stock dividends declared on
Series D cumulative convertible
preferred stock ................ -- -- -- -- 840 -- --
Compensation expense resulting
from modifications of options .. -- -- -- -- -- 164 --
Amortization of deferred
compensation .................. -- -- -- -- -- -- 29
Net loss ......................... -- -- -- -- -- -- --
---------- --------- ---------- --------- ---------- ---------- ----------
Balance, December 31, 2001 ......... 200,000 $ 2 10,999,573 $ 110 $ 840 $ 80,129 $
========== ========= ========== ========= ========== ========== ==========
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
----------- ---------
Balance, December 31, 1998 ......... $ (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
Net loss ......................... (14,591) (14,591)
----------- ---------
Balance, December 31, 1999 ......... (53,611) 13,607
Exercise of common stock options . -- 116
Common stock dividends issued 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
Net loss ......................... (8,830) (8,830)
---------- ---------
Balance, December 31, 2000 ......... (64,130) 5,264
Issuance of common stock for
common stock options previously
exercised ...................... -- --
Issuance of common stock, net of
issuance costs ................. -- 9,814
Common stock dividends issued on
Series D cumulative convertible
preferred stock ................ (840) --
Common stock dividends declared on
Series D cumulative convertible
preferred stock ................ (840) --
Compensation expense resulting
from modifications of options .. -- 164
Amortization of deferred
compensation .................. -- 29
Net loss ......................... (8,144) (8,144)
---------- --------
Balance, December 31, 2001 ......... $ (73,954) $ 7,127
========== =========
See accompanying notes to consolidated financial statements.
F-5
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 2000 and 2001
(Dollars in thousands)
1999 2000 2001
------------- ---------- -----------
Cash flows from operating activities:
Net loss................................................ $ (14,591) $ (8,830) $ (8,144)
Adjustments to reconcile net loss to net cash used
in operating activities:
Noncash compensation expense....................... 423 371 193
Depreciation and amortization expense.............. 151 226 246
Cumulative effect of change in accounting
principle...................................... -- 764 --
Change in assets and liabilities:
Accounts receivable............................. 895 (888) (1,440)
Inventories..................................... (353) 418 (1,125)
Prepaid expenses and other assets............... 194 (342) (1,094)
Accounts payable................................ (474) (575) 1,904
Accrued expenses................................ (210) 116 639
Deferred revenue................................ -- (25) (62)
---------- ---------- ----------
Net cash used in operating activities........ (13,965) (8,765) (8,883)
Cash flows from investing activities:
Capital expenditures.................................... (593) (169) (131)
Proceeds from the sale of short-term investments........ 7,464 6,871 2,035
Purchase of short-term investments...................... (6,886) (2,224) 296
---------- ---------- ----------
Net cash provided by (used in)
investing activities..................... (15) 4,478 1,608
---------- ---------- ----------
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.................. 44 84 9,814
Proceeds from issuance of long-term debt................ 219 -- --
Repayment of long-term debt............................. (38) (69) (77)
---------- ---------- ----------
Net cash provided by financing
activities............................... 18,675 15 9,737
---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents..................... 4,695 (4,272) 2,462
Cash and cash equivalents at beginning of year.............. 3,286 7,981 3,709
---------- ---------- ----------
Cash and cash equivalents at end of year.................... $ 7,981 $ 3,709 $ 6,171
============ =========== ==========
Supplemental schedule of noncash financing activities:
Common stock dividends issued or to be
issued on preferred stock........................... $ 1,092 $ 1,689 $ 1,680
============ =========== ==========
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 $ 17
============ =========== ==========
See accompanying notes to consolidated financial statements.
F-6
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(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 and dermatology markets. The Company, through its
own sales and marketing group, is currently marketing Periostat(R), the
Company's lead drug for the treatment of adult periodontal disease, and
Atridox, Atrisorb and Atrisorb-D under an exclusive licensing and
marketing agreement with Atrix Laboratories, Inc. ("Atrix"). The Company
also co-promotes VIOXX(R) to dental professionals on a contract basis with
Merck and Co. The Company has other internally developed proprietary
compounds for cancer metasteses and a broad range of inflammatory diseases
that are currently 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, 2000. The Company considers all of its short-term investments
to be available for sale.
INVENTORIES
Inventories are stated at the lower of 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, 1999, 2000 and 2001
(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, 2000 and 2001, therefore the fair
value of the note payable approximates the carrying value at December 31,
2000 and 2001.
PRODUCT SALES
The Company received clearance from the FDA to market Periostat in the
capsule and tablet forms in September 1998 and February 2001,
respectively. In 2001, the Company entered into an exclusive licensing and
marketing agreement with Atrix Laboratories, Inc. "Atrix" for Atridox,
Atrisorb, and Atrisorb D. The Company recognizes sales revenue for
Periostat and its licensed Atrix products upon shipment. Sales are
reported net of allowances for discounts, rebates, wholesaler and
distributor chargebacks and product returns.
REVENUE RECOGNITION
Milestone revenue from license arrangements is recognized upon completion
of the milestone event or requirement if it represents the achievement of
a significant step in the research and development or regulatory process.
Payments, if any, received in advance of performance under a contract are
deferred and recognized when earned. As described in note 9, as of January
1, 2000, upfront license fees where the Company has continuing
F-8
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
involvement, (which prior to January 1, 2000 were recorded as license
revenues when received) are now deferred and recognized over 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 1999, 2000 and 2001 were $1,598, $2,089 and $6,190,
respectively.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of funds paid to third
parties for the provision of services and materials for drug development,
manufacturing and formulation enhancements, clinical trials, statistical
analysis and report writing and regulatory compliance costs. 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
accounting principles generally accepted in the United States of America
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.
F-9
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
STOCK-BASED COMPENSATION
As described in note 8, Statement of Financial Accounting Standards No.
123 (SFAS 123), "Accounting for Stock-Based Compensation," encourages but
does not require companies 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 nonemployees, 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(R). A single company also provides all warehousing
and distribution services to the Company. During 2001, four customers
accounted for 28%, 15%, 13% and 10%, of net product sales, respectively.
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. Substantially all product
sales are in the United States.
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
F-10
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
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, 2001, the
Company has certain convertible preferred stock, stock options and stock
warrants which have not been included in the calculation of diluted net
loss per share allocable to common 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.
(3) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
INVENTORIES
Inventories at December 31, 2000 and 2001 consists of the following:
2000 2001
---------- -----------
Raw Materials $ 60 $ 174
Work-in-process -- 66
Finished goods 217 1,162
---------- -----------
$ 277 $ 1,402
========== ===========
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at December 31, 2000 and 2001
consists of the following:
2000 2001
----------- -----------
Computer and office equipment $ 792 $ 923
Exhibit equipment 309 309
Leasehold improvements 45 45
------------ ----------
1,146 1,277
Less accumulated depreciation
and amortization (494) (740)
----------- -----------
$ 652 $ 537
=========== ===========
F-11
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
ACCRUED EXPENSES
Accrued expenses at December 31, 2000 and 2001 consists of the following:
2000 2001
------------- -----------
Contracted development
and manufacturing costs $ 314 $ 398
Sales and marketing costs 597 210
Payroll and related costs 1,061 1,563
Professional and consulting fees 204 291
Royalties 201 434
Deferred revenue 63 63
Miscellaneous taxes 52 122
Other 22 72
------------- ------------
$ 2,514 $ 3,153
============= ============
(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 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
F-12
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
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 below and note 6),
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 below and note 6). Dividends totaling $1,689 and
$1,680 were declared in 2000 and 2001, respectively. At December 31, 2000
and 2001, declared dividends of 259,462 and 103,196 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 sheets.
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.
F-13
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
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
$6,800. 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 for a continuous 24-month period. Should the
Company fail to maintain the effectiveness of such registration statement,
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. Such conversion
price was further reduced to $9.91 per share in connection with the sale
of shares of the Company's common stock to Atrix (see note 6).
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-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, 2001, 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.
F-14
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
(6) LICENSING AND MARKETING AGREEMENT
On August 24, 2001, the Company signed an exclusive License Agreement (the
"Atrix License Agreement") with Atrix to market Atrix's proprietary dental
products, Atridox(R), Atrisorb(R) FreeFlow and Atrisorb(R)-D, to the
United States dental markets. Pursuant to the terms of the Atrix License
Agreement, among other things, Atrix will manufacture the dental products
for the Company at an agreed upon transfer price and will receive
royalties on future net sales of the products each calendar year. The
Company paid a $1,000 licensing fee to Atrix to market such products in
the United States. The Company has also committed to no less than $2,000
in advertising and selling expenses related to the licensed products
during 2002, and the lesser of $4,000 or 30% of the Company's contribution
margin, as defined in the agreement, relating to a specific Atrix product
that the Company markets and the lesser of $2,000 or 30% of the Company's
contribution margin, as defined in the agreement, relating to a separate
Atrix product that the Company markets commencing with fiscal year 2003.
Additionally, the Company must maintain a minimum amount of full time
sales professionals and make a specific amount of sales presentations over
the first 24 months of the agreement. The $1,000 license fee payment has
been capitalized and is being amortized to cost of product sales over the
ten year estimated term of the license on a straight-line basis.
In addition, pursuant to the terms of a Stock Purchase Agreement dated
August 24, 2001 by and between the Company and Atrix, Atrix purchased
330,556 unregistered shares of the Company's common stock for an aggregate
purchase price of approximately $3,000. As a result of the sale of such
shares to Atrix, the conversion price of the Company's Series D Preferred
Stock was reduced $9.91 per share.
(7) LINE OF CREDIT
On March 19, 2001, the Company consummated a one-year revolving credit
facility (the Facility) with Silicon Valley Bank (the Bank) which was
amended subsequent to December 31, 2001 (See Note 16). 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
F-15
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
Bank with respect to all of the Company's assets, including its
intellectual property. At December 31, 2001 there were no borrowings
against the Facility or outstanding letters of credit (see note 16).
(8) 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 2,000,000 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.
In March 1996, the board of directors approved a nonqualified plan for the
issuance of stock options to nonemployee directors under the Nonemployee
Director Stock Option Plan (the Nonemployee 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. During 2001, 360,000 options were granted to
employees at fair market value with an exercise price of $5.19 per share.
These grants were not issued under the terms of any of the above Plans.
F-16
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
At December 31, 2001, there were 679,820 shares available for grant under
the 1996 Plan and 100,000 under the Nonemployee 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
has been amortized to compensation expense in the accompanying
consolidated statement of operations over the respective vesting periods
of such grants ($118, $47 and $29 in 1999, 2000 and 2001, respectively).
In 2001, the Company extended through the remaining contractual life the
exercisability of certain vested options for an ex-board member of the
Company. Accordingly, $164 was recognized as compensation expense in 2001,
based on the fair value of the options on the date the extension was
granted as determined using a Black-Scholes pricing model.
In 1999, the Company granted options to certain nonemployees 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
nonemployee 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-17
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
The following table summarizes stock option activity for 1999 through
2001:
WEIGHTED AVERAGE
EXERCISE PRICE
SHARES PER SHARE
--------- ----------------
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
Granted 570,100 5.85
Cancelled (140,500) 10.87
--------------- -------------
Balance, December 31, 2001 2,452,609 $ 9.15
=============== =============
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.
As of December 31, 2001, 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 CONTRACTUAL PRICE NUMBER PRICE
PRICES OF SHARES LIFE PER SHARE OF SHARES PER SHARE
------------ --------- -------------- --------- ---------- ---------
$ 0.20 - 2.00 189,954 3.7 years $ 0.95 189,954 $ 0.95
4.50 - 10.00 1,250,475 7.7 years 6.62 527,735 7.45
10.06 - 12.00 412,900 6.1 years 10.28 270,950 10.40
12.19 - 13.56 193,950 7.0 years 12.42 149,600 12.46
14.06 - 22.63 405,330 7.9 years 18.07 108,964 18.03
---------- --------- --------- --------- ---------
2,452,609 7.1 years $ 9.15 1,247,203 $ 8.63
========== ========= ========= ========= =========
F-18
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
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:
1999 2000 2001
---------- ---------- ----------
Net loss allocable to
common stockholders:
As reported $ 15,683 $ 10,519 $ 9,824
Pro forma 17,338 13,802 13,693
Basic and diluted net loss
per share allocable to
common stockholders:
As reported $ 1.82 $ 1.21 $ 0.94
Pro forma 2.02 1.58 1.31
The weighted average fair values of stock options granted to employees
during 1999, 2000 and 2001 were $7.81, $10.72 and $4.57 per share,
respectively, on the date of grant. The weighted average fair values of
stock options granted to nonemployees during 2000 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:
1999 2000 2001
---------- ---------- ----------
Expected life in years 5 7 7
Risk-free interest rate 6.25 % 6.20 % 4.88 %
Volatility 80 % 90 % 95 %
Expected dividend yield -- % -- % -- %
(9) 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(R). 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
F-19
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
its historical revenue recognition policy prior to the adoption of SAB 101.
In addition, during 2001 and 2000, respectively, the Company recorded $63
and $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
amount for 1999 as if the new accounting principle had been applied
retroactively is 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 approximately
$739 recorded as deferred revenue 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. As of
December 31, 2001, the Company has approximately $677 recorded as deferred
revenue, $63 of which has been classified as a current liability in the
accompanying consolidated balance sheet as of December 31, 2001.
(10) 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.
F-20
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at December
31, 2000 and 2001 are presented below:
2000 2001
--------- ---------
Deferred tax assets:
Capitalized start up costs....... $ 170 $ --
Net operating loss carryforwards........ 23,530 24,765
Tax credit carryforward................. 840 850
Accrued expenses........................ 58 800
Deferred revenue........................ 251 275
---------- ---------
Total gross deferred tax assets..... 24,849 26,690
Less valuation allowance................ (24,830) (26,681)
---------- ---------
Total deferred tax assets........... 19 9
Deferred tax liability:
Depreciation............................ (19) (9)
---------- ---------
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, 2000 and 2001.
The net change in the valuation allowance for the years ended December 31,
2000 and 2001 were increases of approximately $3,761 and $1,851,
respectively, related primarily to additional net operating losses
incurred by the Company.
At December 31, 2001, the Company had approximately $64,500 of Federal and
$35,900 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 $850 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,
F-21
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
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, 2001, assuming no future ownership changes, approximately
$34,000 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.
(11) 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 Periostat 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 for this technology of $711, $940 and
$1,348 in 1999, 2000 and 2001, respectively.
In addition, the Company is required to reimburse SUNY for certain patent
related costs, as well as to support certain additional research efforts.
(12) COMMITMENTS
The Company maintains various operating leases, primarily for office
space. As of December 31, 2001, future minimum rent payments under
noncancellable operation leases are as follows:
2002............... $ 335
2003............... 335
2004............... 332
2005............... 334
2006............... 334
Thereafter......... 862
-----------
Total........ $ 2,532
===========
Rent expense for the years ended December 31, 1999, 2000 and 2001 totaled
$204, $326 and $337, respectively.
F-22
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
During 1999, the Company entered into a three-year co-promotion agreement
under which the Company is committed to spend up to $1,000 annually for
promotional expenses, unless the agreement is earlier terminated per the
terms of the agreement.
Pursuant to the terms of the Atrix License Agreement (see note 6), the
Company has committed to spend no less than $2,000 in advertising and
selling expenses related to the licensed products during 2002, and the
lesser of $4,000 or 30% of the Company's contribution margin, as defined
in the agreement, relating to a specific Atrix product that the Company
markets and the lesser of $2,000 or 30% of the Company's contribution
margin, as defined in the agreement, relating to a separate Atrix product
that the Company markets commencing with fiscal year 2003. Additionally,
the Company must maintain a minimum amount of full time sales
professionals and make a specific amount of sales presentations over the
first 24 months of the agreement.
During 2001, the Company entered into and fulfilled an obligation to
purchase approximately $1,500 of inventory from a supplier.
(13) 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 1999, 2000 or 2001 in accordance with the
terms of the 401(k) Plan.
(14) 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 would pay SUNY up to
$1,570. In May 2001, the agreement expired. Costs incurred during 1999,
2000 and 2001 were $541, $356 and $168, respectively.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables below summarize the Company's unaudited quarterly operating
results for 2000 and 2001. 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 9.
F-23
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(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-24
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
THREE MONTHS ENDED
--------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
2001 2001 2001 2001
----------- ------------- ----------- -----------
Total revenues..................... $ 7,024 $ 8,711 $ 9,249 $ 10,248
Gross margin on product sales...... 4,747 5,751 7,046 7,989
Net loss........................... (2,691) (2,681) (1,546) (1,226)
Net loss allocable to common
stockholders..................... (3,111) (3,101) (1,966) (1,646)
Basic and diluted net loss per
share allocable to common
stockholders..................... (0.33) (0.29) (0.18) (0.15)
The table below reflects the effect of the change in accounting principle
on net loss 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
---------- ---------- ---------- ---------
New 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)
========= ========== ========= =========
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 recognition policy... $ (0.33) $ (0.27) $ (0.26) $ (0.27)
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)
========= ========= ========= ==========
F-25
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 2000 and 2001
(Dollars in thousands, except per share data)
(16) SUBSEQUENT EVENT
On February 14, 2002, the Company entered into an equity line (the Equity
Line) arrangement under the terms of a Common Stock Purchase Agreement
(the Agreement) with Kingsbridge Capital Limited (Kingsbridge). Under the
terms of the Agreement, the Company may, at its sole discretion and from
time to time over the next 12 months, sell shares of its common stock to
Kingsbridge at a discount to market price of up to 10%, as determined
prior to each such sale. The maximum amounts of individual draws is based
on the Company's market capitalization and may not exceed $3,000 and
availability is subject to certain representations, warranties and
covenants of the Company. The Company has committed to: (i) draw down on
the Equity Line an amount aggregating at least $1.5 million in registered
shares of common stock, prior to August 14, 2002 (the Minimum Commitment
Amount); or (ii) if the Company has not satisfied such Minimum Commitment
Amount, pay to Kingsbridge an amount equal to 10% of the amount by which
the Minimum Commitment Amount exceeds the aggregate of all amounts drawn
down under the Equity Line in respect of the shares of common stock issued
and sold thereunder, except if the price of the Company's common stock is
below certain levels during this period. The Equity Line provides for the
sale of up to an aggregate $8.5 million in registered shares of common
stock. In connection with the consummation of the Equity Line, the Company
issued to Kingsbridge, a warrant to purchase 40,000 shares of common stock
at an exercise price of $9.38 per share. The conversion price of the
Series D preferred stock was not reduced as a result of such issuance.
Such warrant will not become exercisable until August 14, 2002, and will
expire on August 13, 2007.
On March 22, 2002, the Company amended its Facility with Silicon Valley
Bank (see note 7). Accordingly the amount the Company may borrow under the
Facility was increased to the lesser of $4,000 or 80% of eligible accounts
receivable, as defined in the amendment. Any such draws under the Facility
will bear interest at the then prevailing prime rate plus 1.0 to 1.5% per
annum, dependent upon achieving two consecutive fiscal quarters of
profitability, as defined. The Company must also maintain (i) a tangible
net worth of $5,000, subject to certain upward adjustments as defined in
the amendment, as a result of profitable operation or additional debt or
equity financings and (ii) a minimum of $2,000 in cash, net of borrowings
under the facility, at all times during the term of the Facility, which
expires March 15, 2004.
On March 26, 2002, the Company issued an irrevocable letter of credit
under the Facility for $1,343. This letter of credit will be used to
secure future purchases of inventory that the Company expects to make from
a supplier.
F-26
COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENT SCHEDULE
Valuation and Qualifying Accounts
Years Ended December 31, 1999, 2000 and 2001
(in thousands)
- --------------------------------------------------------------------------------------------------------------------
COL A COL B COL C COL D COL E
- --------------------------------------------------------------------------------------------------------------------
Description Balance at the Additions Deductions Balance at the
Beginning of End of Period
Period
- --------------------------------------------------------------------------------------------------------------------
Accounts Receivable Charged to Other
Allowance: Statement of
Operations
- --------------------------------------------------------------------------------------------------------------------
1999 $ 293 $ 554 $ -- $ 461 $ 386
2000 $ 386 $ 824 $ -- $ 829 $ 381
2001 $ 381 $1,906 $ -- $1,337 $ 950
- --------------------------------------------------------------------------------------------------------------------
F-27