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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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
Incorporation or Organization) Identification No.)
41 University Drive, Newtown, PA 18940
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(Address of Principal Executive Offices) (Zip Code)
(215) 579-7388
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(Registrant's Telephone Number,
Including Area Code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes: No: X
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Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock as of May 1, 2003:
Class Number of Shares
- -------------------------- ----------------------
Common Stock $.01 par value 11,409,641
COLLAGENEX PHARMACEUTICALS, INC.
TABLE OF CONTENTS
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Page
PART I. FINANCIAL INFORMATION.................................................................. 1
Item 1. Financial Statements........................................................... 1
Condensed Consolidated Balance Sheets as of March 31, 2003
(unaudited) and December 31, 2002......................................... 2
Condensed Consolidated Statements of Operations for the Three Months Ended
March 31, 2003 and 2002 (unaudited)...................................... 3
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2003 and 2002 (unaudited)...................................... 4
Notes to Condensed Consolidated Financial Statements (unaudited)............... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 10
Results of Operations.......................................................... 12
Liquidity and Capital Resources................................................ 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 21
Item 4. Controls and Procedures........................................................ 21
PART II. OTHER INFORMATION...................................................................... 22
Item 2. Changes in Securities and Use of Proceeds...................................... 22
Item 5. Other Information.............................................................. 22
Item 6. Exhibits and Reports on Form 8-K............................................... 24
SIGNATURES........................................................................................... 25
CERTIFICATIONS....................................................................................... 26
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2003 and December 31, 2002
(dollars in thousands, except per share data)
March 31, December 31,
Assets 2003 2002
-------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents........................................... $ 10,129 $ 10,112
Accounts receivable, net of allowance of $1,587 and $1,412 at March
31, 2003 and December 31, 2002, respectively...................... 1,352 2,142
Inventories......................................................... 1,511 1,415
Prepaid expenses and other current assets........................... 2,159 1,630
------------- ----------------
Total current assets.......................................... 15,151 15,299
Equipment and leasehold improvements, net.............................. 619 559
Deferred license fees.................................................. 1,603 1,749
Other assets........................................................... 27 27
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Total assets.................................................. $ 17,400 $ 17,634
============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................................... $ 3,385 $ 3,616
Accrued expenses.................................................... 3,670 4,305
Preferred dividends payable......................................... -- 800
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Total current liabilities..................................... 7,055 8,721
------------- ----------------
Deferred revenue....................................................... 351 561
Commitments and Contingencies
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 at March 31, 2003 and December 31, 2002
(liquidation value of $20,000); 150,000 shares of Series A
participating preferred stock, $0.01 par value, designated and no
shares issued and outstanding at March 31, 2003 and December 31,
2002.............................................................. 2 2
Common stock, $0.01 par value; 25,000,000 shares authorized,
11,406,204 and 11,377,631 shares issued and outstanding at March
31, 2003 and December 31, 2002, respectively...................... 114 114
Additional paid in capital.......................................... 83,331 82,917
Accumulated deficit................................................. (73,453) (74,681)
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Total stockholders' equity.................................... 9,994 8,352
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Total liabilities and stockholders' equity.................... $ 17,400 $ 17,634
============= ================
See accompanying notes to unaudited condensed consolidated financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended March 31, 2003 and 2002
(dollars in thousands, except per share data)
(unaudited)
Three Months Ended March 31,
------------------------------
2003 2002
Revenues:
Net product sales................................................... $ 11,370 $ 9,881
Contract revenues................................................... 550 792
License revenues.................................................... 237 87
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Total revenues................................................. 12,157 10,760
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Operating expenses:
Cost of product sales............................................... 1,914 1,580
Research and development............................................ 1,023 829
Selling, general and administrative - other......................... 7,766 8,928
Selling, general and administrative -
stock compensation charge......................................... 251 --
----------- -----------
Total operating expenses...................................... 10,954 11,337
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Other income (expense):
Interest income..................................................... 31 22
Interest expense.................................................... -- (1)
Other expense....................................................... (6) (1)
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Net income (loss)............................................. 1,228 (557)
Preferred stock dividend............................................... 400 420
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Net income (loss) allocable to common stockholders..................... $ 828 $ (977)
============ ============
Net income (loss) per basic share allocable to common stockholders..... $ 0.07 $ (0.09)
============ ============
Weighted average shares used in computing net income (loss) per basic
share allocable to common stockholders.............................. 11,394,226 11,078,258
============ ============
Net income (loss) per diluted share allocable to common stockholders... $ 0.07 $ (0.09)
============ ============
Weighted average shares used in computing net income (loss) per diluted
share allocable to common stockholders.............................. 12,181,045 11,078,258
============ ============
See accompanying notes to unaudited condensed consolidated financial statements.
-3-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2003 and 2002
(dollars in thousands)
(unaudited)
Three Months Ended March 31,
--------------------------------
2003 2002
--------------------------------
Cash flows from operating activities:
Net income (loss)..................................................... $ 1,228 $ (557)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Non-cash compensation expense................................... 251 --
Depreciation and amortization expense........................... 222 90
Accounts receivable provisions.................................. 175 156
Changes in operating assets and liabilities:
Accounts receivable............................................. 615 (1,376)
Inventories..................................................... (96) (81)
Prepaid expenses and other assets............................... (529) (86)
Accounts payable................................................ (231) 667
Accrued expenses................................................ (635) (591)
Deferred revenue................................................ (210) (62)
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Net cash provided by (used in) operating activities......... 790 (1,840)
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Cash flows from investing activities:
Capital expenditures.................................................. (136) (167)
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Net cash used in investing activities....................... (136) (167)
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Cash flows from financing activities:
Net proceeds from issuance of common stock............................ 163 51
Payment of preferred dividends........................................ (800) --
Repayment of long-term debt........................................... -- (20)
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Net cash provided by (used in) financing activities......... (637) 31
------------- ------------
Net increase (decrease) in cash and cash equivalents........ 17 (1,976)
Cash and cash equivalents at beginning of period......................... 10,112 6,171
------------- ------------
Cash and cash equivalents at end of period............................... $ 10,129 $ 4,195
============= ============
Supplemental schedule of noncash investing and financing
activities:
Common stock dividends issued or issuable on preferred stock...... $ -- $ 420
============= ============
Issuance of warrants to purchase common stock in connection with
equity line..................................................... $ -- $ 248
============= ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............................ $ -- $ 1
============= ============
See accompanying notes to unaudited condensed consolidated financial statements.
-4-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 and 2002
(dollars in thousands)
(Unaudited)
Note 1 -- Basis of Presentation
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with accounting principles
generally accepted in the United States of America. Certain information and
footnote disclosures normally included in the annual consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's 2002 audited
consolidated financial statements and footnotes included in its Annual Report on
Form 10-K for the year ended December 31, 2002.
The accompanying unaudited condensed consolidated financial statements
include the results of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements have been prepared on a basis
substantially consistent with the audited consolidated financial statements and
contain adjustments, all of which are of a normal recurring nature, necessary to
present fairly the Company's consolidated financial position as of March 31,
2003, their results of operations for the three months ended March 31, 2003 and
2002, and their cash flows for the three months ended March 31, 2003 and 2002.
Interim results are not necessarily indicative of results anticipated for the
full fiscal year.
Statement of Financial Accounting Standards (SFAS) 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. 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.
The Company has elected to account for stock-based compensation under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." As set forth below,
the pro forma disclosures of net loss allocable to common stockholders and loss
per share allocable to common stockholders are as if the Company had adopted the
fair value based method of accounting in
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accordance with SFAS No. 123, as amended by SFAS No. 148, which assumes the fair
value based method of accounting had been adopted:
Three Months Ended
March 31,
---------------------
2003 2002
---------------------
Net income (loss) allocable to common stockholders:
As reported.............................. $ 828 $ (977)
Add: Stock-based employee
compensation expenses included in
net loss allocable to common
stockholders reported.................... -- --
Less: Stock-based employee
compensation under fair value based method (1,194) (934)
--------- ---------
Pro forma................................ $ (366) $(1,911)
Basic and diluted net loss per
share allocable to common
stockholders:
As reported.............................. $ 0.07 $ (0.09)
========== =========
Pro forma................................ $(0.03) $ (0.17)
========== =========
Note 2 -- Inventories
Inventories at March 31, 2003 and December 31, 2002 consist of the
following:
2003 2002
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Raw materials................. $ 119 $ 233
Work-in-process............... 56 56
Finished goods................ 1,336 1,126
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$ 1,511 $ 1,415
================= =================
Note 3 - Line of Credit
The Company has a revolving credit facility with Silicon Valley Bank, which
expires on March 15, 2004. The Company may borrow up to the lesser of $4,000 or
80% of eligible accounts receivable, as defined under the credit facility. The
amount available to the Company is also reduced by outstanding letters of credit
which may be issued under the credit facility in amounts totaling up to $1,500.
On March 26, 2002, the Company initially secured its expected purchase order
commitments for Periostat from Pharmaceutical Manufacturing Research
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Services, Inc., a contract manufacturing company, with a letter of credit under
the credit facility for approximately $1,343. This purchase order commitment was
fulfilled at March 31, 2003. On April 1, 2003, the Company secured its expected
purchase order commitments for the next twelve months with a letter of credit
for approximately $1,061. As the Company continues to pay down amounts under the
letter of credit, the amount available to it under the Facility will increase.
The Company is 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. Without the consent of
Silicon Valley 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 of $5,000,
subject to certain upward adjustments, as defined in the amendment, as a result
of profitable operations or additional debt or equity financings and a minimum
of $2,000 in cash at Silicon Valley Bank, net of borrowings under the credit
facility. In addition, the Company has secured its obligations under the credit
facility through the granting of a security interest in favor of the bank with
respect to all of its assets, including intellectual property. As of March 31,
2003, the Company had no borrowings outstanding against the credit facility.
Note 4 -- Commitments and Contingencies
During 1999, the Company entered into a three-year co-promotion agreement
with Merck & Co., Inc. for Vioxx under which the Company is committed to spend
up to $1,000 annually for promotional expenses. In September 2002, the parties
amended this agreement and extended the term thereof to December 31, 2003 and
will be required to make certain annual expenditures.
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 market. Pursuant to the terms of the Atrix License Agreement, the
Company will be required to make certain annual minimum expenditures for 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 through August 2003.
On February 11, 2002, the Company executed a Co-operation, Development and
Licensing Agreement pursuant to which the Company was granted an exclusive,
sublicenseable, transferable license with respect to the Restoraderm(TM) topical
drug delivery system which the Company intends to develop for dermatological
applications. Pursuant to the terms of such agreement, upon the occurrence of
certain events, the Company will be required to pay certain future consulting,
royalty and milestone payments in the aggregate amount of up to $3,700, and no
more than $2,650 and $1,037 of which shall be payable prior to January 1, 2004
and January 1, 2005, respectively. The Company paid $38 under this Agreement in
the three months ended March 31, 2003. The term of such agreement is for the
life of any patent that may be
-7-
issued to the Company for the first product the Company develops utilizing such
technology, or, if the Company does not acquire any patentable products, seven
years.
On June 10, 2002, we executed a Development and Licensing Agreement with
Shire Laboratories, Inc. pursuant to which the Company was granted an exclusive
worldwide license (including the right to sublicense) to develop, make, have
made, use, supply, export, import, register and sell products for the treatment
of various inflammatory disorders. In addition, under the agreement, certain
product development functions shall be performed for the Company. Also under the
agreement, the Company has committed to payments, in cash or at the Company's
option, a combination of cash and the Company's common stock, upon the
achievement of certain clinical and regulatory milestones in the event the
Company pursues certain applications of the technology which could total up to
$8,200 in the aggregate. Pursuant to the terms of such agreement, the Company
shall also pay a percentage of certain net sales of products, if any, utilizing
any part of the technology. The Company may terminate the agreement upon sixty
days notice.
On November 18, 2002, the Company filed a complaint and on February 13,
2003, the Company filed a preliminary injunction in the United States District
Court for the Eastern District of New York seeking to prevent West-ward
Pharmaceutical Corporation from selling 20 mg. capsules of doxycycline hyclate
to treat periodontal disease, which the Company believes infringe patents
covering the Company's Periostat product.
The Company's suit alleges infringement on patents to which it is the
exclusive licensee. The Company anticipates that its future legal costs in this
matter will be reimbursed by SUNY pursuant to a Technology License Agreement
with the University. During the three months ended March 31, 2003, the Company
incurred $198 in legal defense costs, all of which were deducted from royalties
payable to SUNY.
Note 5 -- Succession Plan for Chief Executive Officer
On March 19, 2003, the Company announced that Brian M. Gallagher, Ph.D.,
the Company's chairman, chief executive officer and president, will be leaving
the Company to pursue other interests. Dr. Gallagher has agreed to remain in his
current position until a successor is appointed, and will work as a consultant
for a period of time thereafter to ensure a smooth transition.
The Company has executed an agreement with Dr. Gallagher, pursuant to which
Dr. Gallagher will be compensated for, among other things, his services during
the transition period and to recognize his historical contributions to the
Company. As a result of this agreement, the Company has recognized a non-cash
compensation charge relating to certain modifications of Dr. Gallagher's stock
option agreements of approximately $251 during the three months ended March 31,
2003. The Company has also entered into a consulting agreement with Dr.
Gallagher pursuant to which he will provide consulting services to CollaGenex
for a period of 24 months following the employment of a new chief executive
officer.
-8-
Note 6 -- Termination of License Agreement
On March 14, 2003, the Company terminated its license agreement with Roche
S.P.A. As a result of the termination of the agreement, during the first quarter
of 2003, the Company accelerated the recognition of the remaining $222 of
unamortized deferred revenue related to the $400 up-front payment received in
1996.
-9-
Item 2. 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(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.
We are marketing Periostat and other pharmaceutical products to the dental
and dermatology communities through our own professional pharmaceutical sales
force of approximately 115 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(R) and Atrisorb FreeFlow(R), and, in February 2002, Atrisorb-D(R), to
the United States dental market. In May 2002, we executed a sublicense agreement
with Altana Inc. to, among other things, market and distribute, in the United
States and Puerto Rico, Pandel(R), a mid-potency topical corticosteroid product
developed by Altana Inc. In March 2003, we executed a co-promotion agreement
with Sirius Laboratories, Inc. pursuant to which we have begun to jointly market
Sirius' AVAR(TM) product line and Pandel to dermatologists in the United States.
We distribute Periostat and Pandel through drug wholesalers and large retail
chains in the United States. Periostat is also sold through wholesalers and
direct to dentists in the United Kingdom through our wholly-owned subsidiary,
CollaGenex International Ltd., and by distributors and licensees in certain
other overseas markets. The Atrix dental products are distributed through
specialty distributors who sell these products directly to dental practitioners
in the United States and Puerto Rico. Our sales force also co-promotes Vioxx(R),
a prescription non-steroidal, anti-inflammatory drug developed by Merck & Co.,
Inc., in the United States, and, effective October 1, 2002, Denavir(R), a
topically applied prescription medication for the treatment of recurrent cold
sores in adults, for Novartis Consumer Health, Inc.
With the exception of the year ended December 31, 2002 and the three months
ended March 31, 2003, during which year and quarter we achieved net income of
approximately $900,000 and $828,000, respectively, we have incurred losses each
year since inception and have an accumulated deficit of $73.5 million at March
31, 2003.
Statements contained or incorporated by reference in this Quarterly Report
on Form 10-Q 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-Q 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 CollaGenex's sales and
marketing plans for Periostat and other products that we market, risks inherent
in research and development activities, risks associated with enforcement of our
-10-
intellectual property rights, including risks relating to the outcome and
consequences of our patent litigation against West-ward Pharmaceutical
Corporation, risks that the FDA will approve products, such as West-ward's
product, that will compete with and limit the market for Periostat, risks
associated with conducting business in a highly regulated environment and
uncertainty relating to clinical trials of products under development.
CollaGenex's success depends to a large degree upon the market acceptance of
Periostat by periodontists, dental practitioners, other health care providers,
patients and insurance companies. There can be no assurance that CollaGenex's
product candidates (other than the FDA's approval of Periostat for marketing in
the United States, the United Kingdom Medicines Control Agency's approval of
Periostat for marketing in the United Kingdom and Periostat's marketing approval
in Austria, Finland, Switzerland, Ireland, Israel, Italy, the Netherlands,
Portugal and Canada) will be approved by any regulatory authority for marketing
in any jurisdiction or, if approved, that any such products will be successfully
commercialized by CollaGenex. In addition, there can be no assurance that
CollaGenex will successfully promote Vioxx, Denavir, Pandel, Atridox,
Atrisorb-FreeFlow, Atrisorb-D or the AVAR product line. As a result of such
risks and others expressed from time to time in CollaGenex's filings with the
Securities and Exchange Commission, CollaGenex's actual results may differ
materially from the results discussed in or implied by the forward-looking
statements contained herein.
Periostat(R), Metastat(R), Dermostat(R), Nephrostat(R), Osteostat(R),
Arthrostat(R), Rheumastat(R), Corneostat(R), Gingistat(R), IMPACS(TM), PS20(R),
The Whole Mouth Treatment(R), Restoraderm(TM) and Dentaplex(R) are United States
trademarks of CollaGenex Pharmaceuticals, Inc. Periostat(R), Nephrostat(R),
Optistat(R), Xerostat(R) and IMPACS(TM) are European Community trademarks of
CollaGenex Pharmaceuticals, Inc. Periostat(R), Nephrostat(R), Optistat(R),
Xerostat(R), IMPACS(R), Dentaplex(R), Restoraderm(R), Dermastat(R) ,
Periocycline(R), Periostatus(R) and Periostan(R) are United Kingdom trademarks
of our wholly-owned subsidiary, CollaGenex International Ltd. CollaGenex(R),
PS20(R), "C" Logo(R) and The Whole Mouth Treatment(R) are European Community and
United Kingdom trademarks of CollaGenex International Ltd. Periocycline(TM) and
Periostan(TM) are European Community Trademarks of CollaGenex International Ltd.
All other trade names, trademarks or service marks appearing in this Quarterly
Report are the property of their respective owners and are not property of
CollaGenex Pharmaceuticals, Inc. or any of our subsidiaries.
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. The preparation of these financial statements requires management
to make judgments and estimates 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 product 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
-11-
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 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. Our contract revenues are fee-based
arrangements where revenue is earned as prescriptions are written. Accordingly,
since we never take title to the product being promoted, no significant
obligations exist beyond the point that the fee is earned and is recognized as
revenue.
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. The
expected performance period is based on management's best estimate and is
subject to change based on current market conditions. 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.
Results of Operations
During the three months ended March 31, 2003, we achieved net product sales
of $11.4 million from the sale of Periostat, Atridox, Atrisorb FreeFlow,
Atrisorb-D and Pandel. In addition, during the three months ended March 31,
2003, we generated $550,000 in contract revenues mainly from our co-promotion
activities with respect to Vioxx and Denavir and $237,000 in international
licensing revenues.
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Revenues
- -------------------------------------------------------------------------------
Revenues
(dollars in thousands) 2003 Change 2002
- -------------------------------------------------------------------------------
Net Product Sales........ $ 11,370 15.1% $ 9,881
- -------------------------------------------------------------------------------
Contract Revenues........ 550 (30.6%) 792
- -------------------------------------------------------------------------------
License Revenues......... 237 172.4% 87
------------- -------------
- -------------------------------------------------------------------------------
Total............... $ 12,157 13.0% $ 10,760
- -------------------------------------------------------------------------------
Total revenues during the three months ended March 31, 2003 were $12.2
million, representing a 13.0% increase over total revenues of $10.8 million
during the three months ended March 31, 2002. Such 2003 revenues included
approximately $11.4 million in net product sales of Periostat, Atridox, Atrisorb
FreeFlow, Atrisorb-D and Pandel, $550,000 in contract revenues,
-12-
which were derived from our co-promotion of Vioxx and Denavir, and $237,000 of
international licensing revenues for Periostat. Net product sales increased $1.5
million, or 15.1% to $11.4 million during the three months ended March 31, 2003
compared to $9.9 million during the three months ended March 31, 2002 due to
higher sales of Periostat and the addition of Pandel, which we launched on July
1, 2002.
Contract revenues for the three months ended March 31, 2003 declined 30.6%
to $550,000 from $792,000 during the three months ended March 31, 2002,
primarily due to the absence of Pandel contract revenues during 2003 and
slightly lower Vioxx-related revenues, which were partially offset by the
addition of Denavir contract revenues in 2003.
We recorded $15,000 and $16,000 in licensing revenues for the three months
ended March 31, 2003 and March 31, 2002, respectively. This revenue was
attributable to our recognition of previously recognized up-front license fees
received for various agreements that were deferred and are being recognized as
licensing revenue over the expected performance period of the agreements. We
also recorded licensing revenues of $222,000 and $46,000 during the three months
ended March 31, 2003 and 2002, respectfully, that represent previously deferred
foreign up-front licensing fees where the recognition of revenue was accelerated
in connection with certain licensing agreements that were mutually terminated
during the respective quarters. Additionally, during the three months ended
March 31, 2002, we recognized $25,000 in license milestone fees received from a
foreign licensing partner.
Cost of Product Sales
- -------------------------------------------------------------------------------
Cost of Product Sales 2003 Change 2002
(dollars in thousands)
- -------------------------------------------------------------------------------
Cost of Product Sales.................... $ 1,914 21.1% $ 1,580
- -------------------------------------------------------------------------------
Percent of Net Product Sales............. 16.8% N/A 16.0%
- -------------------------------------------------------------------------------
Cost of product sales includes product packaging, third-party royalties,
amortization of product licensing fees, and the costs associated with the
manufacturing, storage and stability of Periostat, Pandel and the Atrix
products.
Cost of product sales were $1.9 million, or 16.8% of product sales during
the three months ended March 31, 2003, compared to $1.6 million, or 16.0% of
product sales during the three months ended March 31, 2002. During the three
months ended March 31, 2003, cost of product sales increased in absolute dollars
as a result of sales increases and as a percentage of product sales due to
product mix, compared to the three months ended March 31, 2002, primarily due to
increased cost of sales associated with Pandel, which was launched in July 2002
and which has lower gross margins than Periostat.
Research and Development
- -------------------------------------------------------------------------------
Research and Development 2003 Change 2002
(dollars in thousands)
- -------------------------------------------------------------------------------
Research and development.................. $ 1,023 23.4% $ 829
- -------------------------------------------------------------------------------
Percentage of Total revenues.............. 8.4% N/A 7.7%
- -------------------------------------------------------------------------------
-13-
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 $194,000, or 23.4%, to $1.0
million during the three months ended March 31, 2003 from $829,000 during the
three months ended March 31, 2002.
Development projects conducted during the three months ended March 31, 2003
included our continuing formulation development work for a once-a-day
formulation of Periostat and formulation and stability testing for several
potential products utilizing our licensed Restoraderm technology, which totaled
$320,000 and $49,000, respectively. Future development of the once-a-day
technology will be contingent on the outcome of the initial phase of the
project, which should be determined by the end of 2003. If successful,
additional expenses could be as much as $4.4 million through 2006.
Clinical projects totaling $248,000 were conducted during the three months
ended March 31, 2003 and included several Phase IV studies for Periostat in
various dental indications and continued clinical development work relating to
Periostat in dermatological indications and including a Phase III trial in 150
patients to evaluate Periostat for the treatment of rosacea. Until the outcome
of these trials is determined, it is premature to estimate the future costs
associated with the development of Periostat for any indication.
Other research and development expenses incurred during the three months
ended March 31, 2003 included $11,000 in regulatory consulting and legal and
filing fees under the Mutual Recognition Procedure in Europe and $162,000 for
various regulatory costs, including annual FDA filing fees, legal and regulatory
expenses in the United States. Direct salaries and other personnel expenses
incurred during the three months ended March 31, 2003 were $140,000.
Additionally, during such period we incurred $93,000 in consulting, travel and
other office expenses.
Development projects contracted during the three months ended March 31,
2002 included our continuation of a feasibility study and formulation
development work for a once-a-day formulation of Periostat and our Restoraderm
technology, which totaled $155,000 and $70,000, respectively.
Clinical projects totaling $273,000 were conducted during the three months
ended March 31, 2002 and included several Phase IV studies for Periostat in
various dental indications and the continuation of clinical trials for Periostat
in dermatological indications.
Other research and development expenses incurred during the three months
ended March 31, 2002 included $44,000 in regulatory consulting and filing fees
under the Mutual Recognition Procedure in Europe and $61,000 for various
regulatory costs, including annual FDA filing fees and legal and regulatory
expenses in the United States. Research and development expenses incurred during
the three months ended March 31, 2002 also included
-14-
$145,000 in direct salaries and other personnel related expenses and $81,000
relating to travel and other office expenses.
Selling, General and Administrative
- --------------------------------------------------------------------------------
Selling, General and Administrative 2003 Change 2002
(dollars in thousands)
- -------------------------------------------------------------------------------
Selling, General and Administrative -
other..................................... $ 7,766 (13.0%) $ 8,928
- -------------------------------------------------------------------------------
Selling, General and Administrative -
stock compensation charge................. 251 100% --
- -------------------------------------------------------------------------------
Subtotal.................................. 8,017 (10.2%) 8,928
- -------------------------------------------------------------------------------
Percentage of Total Revenues.............. 65.9% N/A 83.0%
- -------------------------------------------------------------------------------
Selling, general and administrative, other 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 - other expenses decreased 13.0% to
$7.8 million during the three months ended March 31, 2003 from $8.9 million
during the three months ended March 31, 2002. This decrease of $1.1 million was
primarily the result of a $1.7 million reduction in selling and marketing
expenditures for Periostat, offset in part by approximately $300,000 in
additional promotional expenses for the Atrix dental products and Pandel and
$300,000 in increased administrative costs.
Significant components of selling, general and administrative - other
expenses incurred during the three months ended March 31, 2003 included $4.0
million in direct selling and sales training expenses, $2.1 million in marketing
expenses (including advertising and promotion expenditures for Periostat, the
Atrix products and co-promotion expenses relating to Vioxx and Pandel) and $1.7
million in general and administrative expenses, which include business
development, finance and corporate activities. Significant components of
selling, general and administrative expenses during the three months ended March
31, 2002 included $4.4 million in direct selling and training expenses, $3.2
million in marketing expenses (including Periostat Direct-to-Consumer
advertising expenditures, launch expenses for the Atrix products and
co-promotion expenses related to Vioxx and Pandel) and $1.4 million in general
and administrative expenses, which included business, development, finance and
corporate activities.
Selling, general and administrative - stock compensation charge of $251,000
during the three months ended March 31, 2003 resulted from certain modifications
made to stock option agreements held by Brian M. Gallagher, Ph.D., our chairman,
chief executive officer and president, in connection with a Transition Agreement
we executed with Dr. Gallagher on March 18, 2003.
-15-
Other Income/Expense
- -------------------------------------------------------------------------------
Other Income/Expense 2003 Change 2002
- -------------------------------------------------------------------------------
Interest income................... $ 31,000 40.9% $ 22,000
- -------------------------------------------------------------------------------
Interest expense.................. $ -- 100% $ 1,000
- -------------------------------------------------------------------------------
Other expense..................... $ 6,000 500% $ 1,000
- -------------------------------------------------------------------------------
Interest income increased to $31,000 for the three months ended March 31,
2003 compared to $22,000 for the three months ended March 31, 2002. This
increase was due to higher average investment balances in 2003. Interest expense
for the three months ended March 31, 2003 was zero, compared to $1,000 for the
three months ended March 31, 2002. Other expenses increased to $6,000 for the
three months ended March 31, 2003 compared to $1,000 for the three months ended
March 31, 2002. Such increase was attributable to foreign currency transaction
gains.
Preferred Stock Dividend
Preferred stock dividends were $400,000 and $420,000 during each of the
three months ended March 31, 2003 and March 31, 2002, respectively. Such
preferred stock dividends, paid in shares of our Common Stock through May 11,
2002, and thereafter in cash, are the result of our obligations in connection
with the issuance of our Series D preferred stock in May 1999. As more fully set
forth in the Amended Certificate of Designation, Preferences and Rights of the
Series D Cumulative Convertible Preferred Stock, after May 11, 2002, we no
longer pay dividends on the Series D preferred stock in shares of our Common
Stock at a rate of 8.4%, and we became obligated to pay such dividends in cash,
at a rate equal to 8% per annum.
Liquidity and Capital Resources
On May 12, 1999, we consummated a $20.0 million financing through the
issuance of our Series D 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 Series D 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 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 $9.89 per share, which conversion
price reflects a decrease from the initial conversion price of $11.00 per share
as a result of certain subsequent equity issuances by us. 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 received dividends payable in shares of fully registered common
stock at a rate of 8.4% per annum. Thereafter, and beginning on
-16-
May 12, 2002, we began paying such dividends 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 askedprices on
the Nasdaq National Market is at least 200% of the conversion price then in
effect (as of March 31, 2003, such conversion price was $9.89 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.
We have a revolving credit facility with Silicon Valley Bank which expires
on 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. On
March 26, 2002, we initially secured our expected purchase order commitments for
Periostat from Pharmaceutical Manufacturing Research Services, Inc., a contract
manufacturing company, with a letter of credit under the credit facility for
approximately $1.3 million. This purchase order commitment was fulfilled at
March 31, 2003. On April 1, 2003, we secured our expected purchase order
commitments for the next twelve months with a letter of credit for approximately
$1.1 million. As we continue to pay down amounts under the letter of credit, the
amount available to us under the Facility will increase. 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. Without the consent of 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 of $5.0 million, subject to certain upward adjustments, as defined in the
amendment, as a result of profitable operations or additional debt or equity
financings and a minimum of $2.0 million in cash at Silicon Valley Bank, net of
borrowings under the credit facility. 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 March 31, 2003, we had no 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
-17-
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 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 (which requirement we met during
2002); (iv) we have agreed to maintain, through August 2003, a force of no less
than ninety full time dental consultants and divisional and regional managers to
make sales and product recommendation calls on dental professionals; and (v) we
agreed that the Atrix products would be the subject of a specific number of
detail calls in the United States during 2002, which we achieved. We are also
required to make certain annual minimum expenditures for advertising and
promotional activities over the term of the agreement beginning January 1, 2003,
including: (i) the lesser of $4.0 million 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 $2.0 million or 30% of our contribution margin, as
defined in the agreement, relating to a separate Atrix product that we market.
At March 31, 2003 and December 31, 2002, we had cash and cash equivalents
of approximately $10.1 million. 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 March 31, 2003 was $8.1 million, an increase of $1.5 million
from $6.6 million at December 31, 2002. This increase was primarily attributable
to operating profitability. During the three months ended March 31, 2003, we
generated $790,000 in cash from our operating activities principally from net
income of $1.2 million less changes in certain assets and liabilities. We
invested $136,000 in capital expenditures and received $163,000 in proceeds from
the exercise of stock options and warrants to purchase common stock and we paid
$800,000 in cash dividends to the holders of our Series D preferred stock.
Prior to the third quarter of 2002, we had negative cash flows from
operations and have used the net proceeds of public and private placements of
our equity to fund operations. We currently believe that projected increases in
sales of our United States marketed products in combination with contract and
license revenues, working capital at March 31, 2003 and available cash inflows
from our revolving credit facility with Silicon Valley Bank will allow us to
fund our operations, capital expenditures and preferred stock dividend
requirements into 2004. At this time, however, we cannot accurately predict the
effect of certain developments on future product sales such as the degree of
market acceptance of our products and technology, competition, the effectiveness
of our sales and marketing efforts and the outcome of our research and
development to demonstrate the utility of Periostat in indications beyond those
already included in the FDA approved label. Contract and license revenues
include receipts from co-promotion agreements and performance milestones. The
continuation of any of these agreements is subject to the achievement of certain
milestones and to periodic review by the parties involved.
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;
-18-
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.
Contractual Obligations
Our major outstanding contractual obligations relate to cash dividends on
our outstanding Series D preferred stock, operating leases for our office space
and 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.
Below is a table which presents our contractual obligations and
commercial commitments as of March 31, 2003:
Payments Due by Period
- ----------------------------------------------------------------------------------------------------------------------
Contractual Obligations Total 2003 2004 and 2006 and 2008 and
2004 2007 after
- ----------------------------------------------------------------------------------------------------------------------
Operating Leases(1)...... $2,137,000 $245,000 $678,000 $684,000 $530,000
- ----------------------------------------------------------------------------------------------------------------------
Unconditional Purchase (3) (4)
Obligations........... $1,061,000 $1,061,000(2) (4) (4) (4)
- ----------------------------------------------------------------------------------------------------------------------
Cash Dividends on
Series D Preferred
Stock................. $7,200,000(5) $800,000(5) $3,200,000(5) $3,200,000(5) (5)
- ----------------------------------------------------------------------------------------------------------------------
Consulting Payments...... $649,000(6) (6) $649,000(6) - - - -
- ----------------------------------------------------------------------------------------------------------------------
Total Contractual $11,047,000 $2,106,000 $4,527,000 $3,884,000 $530,000
Obligations...........
- ----------------------------------------------------------------------------------------------------------------------
(1) Such amounts primarily include minimum rental payments for our office
lease in Newtown, Pennsylvania.
(2) Such amount represents purchase order commitments for inventory
purchases with various suppliers.
(3) Under the terms of our Co-Promotion Agreement with Merck & Co., Inc.
for Vioxx, which expires December 31, 2003, we are obligated to spend
up to $1.0 million annually
-19-
for promotional expenses, or such lesser amount as will be determined
by mutual agreement of the parties.
(4) We will be required to make certain annual minimum expenditures for
advertising and promotional activities amounting to: (i) the lesser of
$4.0 million 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 $2.0 million or 30% of our contribution margin (as
defined in the agreement) relating to a separate Atrix product that we
market. See further information regarding the Atrix License and
Marketing Agreement under the heading "Liquidity and Capital
Resources."
(5) Pursuant to the terms of our Series D Cumulative Convertible preferred
stock and unless earlier converted pursuant to its terms, the holders
of the Series D preferred stock are entitled to dividends payable in
cash at a rate of 8.0% per annum. See further information regarding
our Series D preferred stock under the heading "Liquidity and Capital
Resources."
(6) Such amount represents consulting payments to be made to Brian M.
Gallagher, our chief executive officer and president, upon his
separation from the Company and pursuant to the terms of a consulting
agreement executed March 18, 2003.
In May 1999, we entered into a lease agreement relating to our office space
in Newtown, Pennsylvania. The lease has an initial term of ten years. Rent is
expected to be approximately $318,000 per year and is subject to market
adjustments in 2004.
On February 11, 2002, we executed a Co-operation, Development and Licensing
Agreement pursuant to which we were granted an exclusive, sublicenseable,
transferable license with respect to the Restoraderm(TM) topical drug delivery
system which we intend to develop for dermatological applications. Pursuant to
the terms of such agreement, upon the occurrence of certain events, we will be
required to pay certain future consulting, royalty and milestone payments in the
aggregate amount of up to $3.7 million, and no more than $2.7 million and $1.0
million of which shall be payable prior to January 1, 2004 and January 1, 2005,
respectively. The term of such agreement is for the life of any patent that may
be issued to us for the first product we develop utilizing such technology, or,
if we do not acquire any patentable products, seven years.
On June 10, 2002, we executed a Development and Licensing Agreement with
Shire Laboratories, Inc. pursuant to which we were granted an exclusive
worldwide license (including the right to sublicense) to develop, make, have
made, use, supply, export, import, register and sell products for the treatment
of various inflammatory disorders. In addition, under the agreement, certain
product development functions shall be performed for us. Pursuant to the terms
of such agreement, we will pay to Shire a percentage of certain net sales of
products, if any, utilizing any part of Shire's technology. Also under the
agreement, we have committed to payments, in cash or at our option, a
combination of cash and our common stock, upon the achievement of certain
clinical and regulatory milestones in the event we pursue certain applications
of the technology which could total up to $8.2 million in the aggregate.
-20-
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We had cash equivalents at March 31, 2003 which are exposed to the impact
of interest rate changes and our interest income fluctuates as our interest
rates change. Due to the short-term nature of our investments in money market
funds, the carrying values of our cash equivalents approximate their fair value
at March 31, 2003.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of our disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a date
within 90 days of the filing date of this Quarterly Report on Form 10-Q, our
chief executive officer and chief financial officer have concluded that our
disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms and are operating in an effective
manner.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their most recent evaluation.
-21-
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
Changes in Securities
The following information relates to all securities of the Company sold by
the Company within the past quarter which were not registered under the
securities laws at the time of grant, issuance and/or sale:
Option Grants
During the first quarter of 2003, we granted stock options pursuant to our
1996 Stock Plan which were not registered under the Securities Act of 1933, as
amended (the "Securities Act"). All of such option grants were granted at the
then current fair market value of the Common Stock. The following table sets
forth certain information regarding such grants during the quarter:
Weighted
Number Average
of Shares Exercise Price
--------- --------------
432,400 $10.0421
We did not employ an underwriter in connection with the issuance of the
securities described above. We believe that the issuance of the foregoing
securities was exempt from registration under either (i) Section 4(2) of the
Securities Act as transactions not involving any public offering and such
securities having been acquired for investment and not with a view to
distribution, or (ii) Rule 701 under the Securities Act as transactions made
pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation. All recipients had adequate access to
information about the Company.
Item 5. Other Information.
Data Evaluating Periostat Presented
On March 13, 2003, we announced that data from four studies evaluating the
use of Periostat to treat patients with dental and medical disorders would be
presented at the American Association for Dental Research (AADR) annual meeting
in San Antonio, Texas, March 12-15, 2003. Two independent studies document the
adjunctive use of Periostat in the treatment of periodontitis patients with
diabetes, a third abstract describes the impact of Periostat on biomarkers of
systemic inflammation in patients with acute coronary syndromes and a fourth
paper describes the use of Periostat to modulate wound healing in patients
undergoing a form of periodontal surgery called Access Flap Surgery.
-22-
Succession Plan for Chief Executive Officer
On March 19, 2003, we announced that Brian M. Gallagher, Ph.D., chairman of
the board, chief executive officer and president of the Company will be leaving
the Company to pursue other interests. Dr. Gallagher has agreed to remain in his
current position until a successor is appointed, and he will work closely with
the Company as a consultant for a period of time thereafter to ensure a smooth
transition.
We have executed an agreement with Dr. Gallagher pursuant to which we will
compensate Dr. Gallagher for, among other things, his services during the
transition period and to recognize his historical contributions to the Company.
As a result of this agreement, we recognized a non-cash compensation charge
relating to certain modifications of Dr. Gallagher's stock option agreements of
approximately $251,000 in the first quarter of 2003. We also entered into a
consulting agreement with Dr. Gallagher pursuant to which he will provide
consulting services to the Company for a period of 24 months following the
appointment of a new chief executive officer.
Co-Promotion Agreement
On March 20, 2003, we announced that we had entered into a Co-Promotion
Agreement with Sirius Laboratories, Inc., pursuant to which we will jointly
market Sirius' AVAR(TM) product line and Pandel to dermatologists in the United
States.
Phase II Metastat Clinical Trial Enrollment
On March 28, 2003, we announced that the AIDS Malignancy Consortium (AMC)
had completed enrollment in and closed to accrual a Phase II study evaluating
the efficacy of Metastat, an orally-active angiogenesis inhibitor developed by
the Company in treating HIV-related Kaposi's sarcoma. This study is being
sponsored by the National Cancer Institute (NCI) pursuant to our Cooperative
Research and Development Agreement with the NCI for Metastat.
Marketing Authorizations
On April 1, 2003, we announced that we had received marketing authority for
Periostat from the Swiss regulatory authority, SwissMedic. As previously
announced, we executed an exclusive marketing and distribution agreement with
Karr Dental Ltd., a Zurich-based company, with respect to the marketing and
distribution of Periostat tablets in Switzerland. It is anticipated that
Periostat will be introduced in Switzerland in approximately 6 months, following
completion of product labeling in the German, Italian and French languages.
On April 3, 2003, we announced that our Canadian licensing partner,
Pharmascience Inc., had received marketing authorization for Periostat from the
Canadian Therapeutic Products Program of Health Canada. Pharmascience Inc. will
be responsible for all sales activity for Periostat in the Canadian market. We
will receive royalties on sales of Periostat in Canada, along with milestones
associated with the achievement of certain specific commercial objectives.
-23-
Publication of Periostat Acne Data in Archives of Dermatology
On April 22, 2003, we announced that the April issue of the peer-reviewed
journal, Archives of Dermatology, features a report describing the outcome of a
multi-center, randomized, placebo-controlled Phase II clinical trial of
Periostat in the treatment of moderate facial acne. The study was designed to
determine whether Periostat improved clinical outcome in patients with moderate
acne compared to placebo, without causing negative effects on the skin flora or
significant side effects.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
99.1 Certification Pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K.
On February 14, 2003, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission relating to our patent litigation
against West-ward Pharmaceutical Corporation.
On March 19, 2003, we filed a Current Report on Form 8-K with the
Securities and Exchange Commission relating to the succession plan for
our chief executive officer and president, Brian M. Gallagher, Ph.D.
-24-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CollaGenex Pharmaceuticals, Inc.
Date: May 15, 2003 By: /s/ Brian M. Gallagher, Ph.D.
-------------------------------------
Brian M. Gallagher, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 2003 By:/s/ Nancy C. Broadbent
--------------------------------------
Nancy C. Broadbent
Chief Financial Officer (Principal
Financial and Accounting Officer)
CERTIFICATION
I, Brian M. Gallagher, Ph.D., Chief Executive Officer of CollaGenex
Pharmaceuticals, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of CollaGenex
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Brian M. Gallagher, Ph.D.
------------------------------------
Dated: May 15, 2003 Brian M. Gallagher, Ph.D.
Chief Executive Officer
CERTIFICATION
I, Nancy C. Broadbent, Chief Financial Officer of CollaGenex Pharmaceuticals,
Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of CollaGenex
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Nancy C. Broadbent
----------------------------------
Dated: May 15, 2003 Nancy C. Broadbent
Chief Financial Officer