Back to GetFilings.com
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 June 30, 2003
Commission File Number
0-28308
CollaGenex Pharmaceuticals, Inc.
-------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1758016
- -------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
41 University Drive, Newtown, PA 18940
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(215) 579-7388
--------------------------------
(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:
------ -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes: No: X
------ -----
Indicate the number of shares outstanding of each of the Registrant's
classes of Common Stock as of July 25, 2003:
Class Number of Shares
------------------------------- -----------------------------
Common Stock $.01 par value 11,498,960
COLLAGENEX PHARMACEUTICALS, INC.
TABLE OF CONTENTS
-----------------
Page
-----
PART I. FINANCIAL INFORMATION.......................................... 1
Item 1. Financial Statements (unaudited)............................ 1
Condensed Consolidated Balance Sheets as of June 30, 2003
(unaudited) and December 31, 2002......................... 2
Condensed Consolidated Statements of Operations for the Three
Months Ended June 30, 2003 and 2002 (unaudited)........... 3
Condensed Consolidated Statements of Operations for the Six
Months Ended June 30, 2003 and 2002 (unaudited)........... 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2003 and 2002....................... 5
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Results of Operations.................................... 14
Liquidity and Capital Resources.......................... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures..................................... 27
PART II. OTHER INFORMATION.............................................. 29
Item 1. Legal Proceedings........................................... 29
Item 2. Changes in Securities and Use of Proceeds................... 31
Item 4. Submission of Matters to a Vote of Security Holders......... 32
Item 5. Other Information........................................... 32
Item 6. Exhibits and Reports on Form 8-K............................ 35
SIGNATURES.............................................................. 36
-i-
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
-1-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2003 and December 31, 2002
(dollars in thousands, except per share data)
(unaudited)
JUNE 30, DECEMBER 31,
ASSETS 2003 2002
----------- ------------
Current assets:
Cash and cash equivalents....................................... $ 11,455 $ 10,112
Accounts receivable, net of allowance of $1,700 and $1,412 at
at June 30, 2003 and December 31, 2002, respectively........... 1,741 2,142
Inventories..................................................... 1,689 1,415
Prepaid expenses and other current assets....................... 1,995 1,630
--------- ---------
Total current assets........................................ 16,880 15,299
Equipment and leasehold improvements, net......................... 631 559
Deferred license fees............................................. 1,456 1,749
Other assets...................................................... 27 27
--------- ---------
Total assets................................................ $ 18,994 $ 17,634
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 3,309 $ 3,616
Accrued expenses................................................ 3,209 4,305
Preferred dividends payable..................................... -- 800
--------- ---------
Total current liabilities................................... 6,518 8,721
--------- ---------
Deferred revenue.................................................. 342 561
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 June 30, 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 June 30,
2003 and December 31, 2002..................................... 2 2
Common stock, $0.01 par value; 25,000,000 shares authorized,
11,495,837 and 11,377,631 shares issued and outstanding at
June 30, 2003 and December 31, 2002, respectively.............. 115 114
Additional paid in capital...................................... 83,872 82,917
Accumulated deficit............................................. (71,855) (74,681)
--------- ---------
Total stockholders' equity.................................. 12,134 8,352
--------- ---------
Total liabilities and stockholders' equity.................. $ 18,994 $ 17,634
========= ========
See accompanying notes to unaudited condensed consolidated financial statements.
-2-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended June 30, 2003 and 2002
(dollars in thousands, except per share data)
(unaudited)
Three Months Ended June 30,
-------------------------------
2003 2002
----------- -----------
Revenues:
Net product sales............................................... $ 11,750 $ 10,377
Contract revenues............................................... 503 555
License revenues................................................ 433 35
-------- --------
Total revenues.............................................. 12,686 10,967
-------- --------
Operating expenses:
Cost of product sales........................................... 1,738 1,598
Research and development........................................ 1,654 771
Selling, general and administrative............................. 7,718 8,998
-------- --------
Total operating expenses.................................... 11,110 11,367
Other income (expense):
Interest income................................................. 25 15
Interest expense................................................ -- (1)
Other (expense) income.......................................... (4) 1
-------- --------
Net income (loss)........................................... 1,597 (385)
Preferred stock dividend.......................................... 400 409
-------- --------
Net income (loss) allocable to common stockholders................ $ 1,197 $ (794)
======== =========
Net income (loss) per basic share allocable to common
stockholders.................................................... $ 0.10 $ (0.07)
======== =========
Weighted average shares used in computing net income (loss) per
basic share allocable to common stockholders.................... 11,427,420 11,163,585
=========== ============
Net income (loss) per diluted share allocable to common
stockholders.................................................... $ 0.10 $ (0.07)
=========== ============
Weighted average shares used in computing net income (loss) per
diluted share allocable to common stockholders.................. 12,369,971 11,163,585
=========== ============
See accompanying notes to unaudited condensed consolidated financial statements
-3-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Six Months Ended June 30, 2003 and 2002
(dollars in thousands, except per share data)
(unaudited)
Six Months Ended June 30,
-------------------------
2003 2002
----------- ----------
Revenues:
Net product sales.................................................... $ 23,120 $ 20,258
Contract revenues.................................................... 1,053 1,347
License revenues..................................................... 670 122
-------- -------
Total revenues................................................... 24,843 21,727
-------- -------
Operating expenses:
Cost of product sales................................................ 3,652 3,178
Research and development............................................. 2,621 1,580
Selling, general and administrative - other.......................... 15,540 17,946
Selling, general and administrative -
stock compensation charge........................................... 251 --
-------- -------
Total operating expenses......................................... 22,064 22,704
-------- -------
Other (expense) income:
Interest income...................................................... 56 37
Interest expense..................................................... -- (2)
Other expense........................................................ (10) --
-------- -------
Net income (loss)................................................ 2,825 (942)
Preferred stock dividend............................................... 800 829
-------- -------
Net income (loss) allocable to common stockholders..................... $ 2,025 $ (1,771)
========= ========
Net income (loss) per basic share allocable to
common stockholders.................................................. $ 0.18 $ (0.16)
========= ========
Weighted average shares used in computing net income (loss)
per basic share allocable to common stockholders..................... 11,410,914 11,122,041
========== ==========
Net income (loss) per diluted share allocable to common
stockholders......................................................... $ 0.17 $ (0.16)
========= ========
Weighted average shares used in computing net income (loss) per
diluted share allocable to common stockholders....................... 12,252,893 11,122,041
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
-4-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2003 and 2002
(dollars in thousands)
(unaudited)
Six Months Ended June 30,
-------------------------
2003 2002
------- --------
Cash flows from operating activities:
Net income (loss)...................................................... $ 2,825 $ (942)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Non-cash compensation expense...................................... 251 --
Depreciation and amortization expense.............................. 445 129
Accounts receivable provisions..................................... 288
Changes in operating assets and liabilities:
Accounts receivable................................................ 113 (165)
Inventories........................................................ (274) (120)
Prepaid expenses and other assets.................................. (365) (1,942)
Accounts payable................................................... (307) (85)
Accrued expenses................................................... (196) 1,640
Deferred revenue................................................... (219) (77)
-------- ---------
Net cash provided by (used in) operating activities............. 2,561 (1,562)
-------- ---------
Cash flows from investing activities:
Capital expenditures................................................... (224) (262)
Payment for Altana license............................................. (900) --
-------- ---------
Net cash used in investing activities........................... (1,124) (262)
-------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock............................. 704 1,293
Payment of preferred dividends......................................... (800) --
Repayment of long-term debt............................................ -- (35)
-------- ---------
Net cash provided by (used in) financing activities............. (94) 1,258
-------- ---------
Net increase (decrease) in cash and cash equivalents............ 1,343 (566)
Cash and cash equivalents at beginning of period......................... 10,112 6,171
-------- ---------
Cash and cash equivalents at end of period............................... $ 11,455 $ 5,605
======== ========
Supplemental schedule of noncash investing and financing
activities:
Common stock dividends issued or issuable on preferred stock.......... $ -- $ 611
======== ========
Cash dividends declared............................................... $ -- $ 218
======== ========
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.............................. $ -- $ 2
======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
-5-
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.
Certain amounts in the 2002 consolidated financial statements have been
reclassified to conform to the 2003 presentation.
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 June 30,
2003, their results of operations for the three and six months ended June 30,
2003 and 2002, and their cash flows for the six months ended June 30, 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, the Company has elected to account for
stock-based compensation under APB Opinion No. 25, "Accounting for Stock Issued
to Employees" and 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.
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
-6-
adopted the fair value based method of accounting in 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 Six Months Ended
June 30, June 30
------------------ -----------------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss)
allocable to common
stockholders:
As reported......... $1,197 $ (794) $ 2,025 $(1,771)
Add: Stock-based
employee
compensation
expenses included
in net loss
allocable to
common stockholders. -- -- -- --
Less: Stock-based
employee compensation
under fair value based
method.............. (1,343) (934) (2,537) (1,868)
------ ------ ------ ------
Pro forma........... $ (146) $(1,728) $ (512) $(3,639)
====== ======= ======= =======
Basic net income (loss)
per share allocable to
common stockholders:
As reported......... $ 0.10 $ (0.07) $ 0.18 $ (0.16)
====== ======= ======= =======
Pro forma........... $(0.01) $ (0.15) $ (0.04) $ (0.33)
====== ======= ======= =======
Diluted net income (loss)
per share allocable to
common stockholders:
As reported......... $ 0.10 $ (0.07) $ 0.17 $ (0.16)
====== ======= ======= =======
Pro forma........... $(0.01) $ (0.15) $ (0.04) $ (0.33)
====== ======= ======= =======
-7-
NOTE 2 -- INVENTORIES
Inventories at June 30, 2003 and December 31, 2002 consist of the
following:
2003 2002
-------------- ------------
Raw materials....... $ 16 $ 233
Work-in-process..... 658 56
Finished goods...... 1,015 1,126
-------- --------
$ 1,689 $ 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 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
of June 30, 2003, the letter of credit had been reduced to $761. 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 June 30, 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, or lesser amount as will be
determined by mutual agreement of the parties. In September 2002, the parties
amended this agreement and extended the term thereof to December 31, 2003.
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
-8-
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 approximately
$3,300, of which no more than $2,225 shall be payable prior to January 1, 2004
and of which no more than an additional $1,037 shall be payable prior to January
1, 2005. The Company paid $526 under this Agreement in the six months ended June
30, 2003. The term of such agreement is for the life of any patent that may be
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, the Company 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 ("West-ward") from selling 20 mg. capsules of
doxycycline hyclate to treat periodontal disease, which the Company believes
would infringe patents covering the Company's Periostat product. The Company's
suit alleges infringement on patents to which it is the exclusive licensee.
On July 8, 2003, the Company filed a complaint against United Research
Laboratories/Mutual Pharmaceutical Company ("Mutual") in the United States
District Court for the Eastern District of New York seeking to prevent Mutual
from introducing 20 mg. tablets of doxycycline hyclate into the market in the
United States. The Company's suit alleges infringement on patents to which it is
the exclusive licensee. The complaint was served on Mutual on July 11, 2003.
-9-
On July 9, 2003, Mutual filed a complaint against the Company in the United
States District Court for the Eastern District of Pennsylvania. The complaint
was served on the Company on July 10, 2003. Mutual alleges that the Company has
engaged in an overall scheme to monopolize the market for low-dose doxycycline
products. In addition, the suit alleges that the Company has engaged in an
exclusionary, unfair, anticompetitive manner. The remedies that Mutual is
seeking include an award of treble damages, injunctive relief, compensatory,
punitive and exemplary damages and reasonable attorneys' fees.
On July 15, 2003, the Company filed and served a motion for preliminary
injunction in the United States District Court for the Eastern District of New
York in connection with the Company's patent infringement litigation against
Mutual. As discussed below, as a result of the ruling of the United States
District Court for the District of Columbia, the Company withdrew its motion for
a temporary restraining order and preliminary injunction in its patent
infringement suit against Mutual, although its complaint remains outstanding.
On June 26, 2003, the Company filed a complaint, and on June 30, 2003,
filed a motion for a preliminary injunction, in the Unites States District Court
for the District of Columbia seeking to prevent the FDA from approving any
application, from West-ward, Mutual or any other marketers of generic drugs, to
introduce 20 mg. tablets or capsules of doxycycline hyclate into the market
until the expiration of the period of market exclusivity and up to a 30 month
stay of approvals that attaches while patent infringement litigation is pending,
to which the Company claims entitlement under the Hatch Waxman Act. On July 22,
2003, the Court granted a preliminary injunction temporarily restraining the FDA
from approving any Abbreviated New Drug Applications ("ANDA") submitted for a
generic version of Periostat (doxycycline hyclate) 20 mg.
Until the Court has made a final ruling on the regulatory status of
Periostat, the FDA cannot approve the ANDAs on file for West-ward's 20 mg.
doxycycline hyclate capsule, Mutual's 20 mg. doxycycline hyclate tablet or any
other ANDA for a generic version of Periostat.
As a result of the ruling in the United States District Court for the
District of Columbia, the Company withdrew its motion for a temporary
restraining order and preliminary injunction in its patent infringement suit
against Mutual, which was previously filed in the United States District Court
for the Eastern District of New York, although its complaint remains
outstanding. In addition, the Company is considering its alternatives with
respect to its motion for preliminary injunction against West-ward filed in the
same jurisdiction.
The Company anticipates that its future legal costs in these matters
relating to patent infringement will be reimbursed by the Research Foundation of
the State University of New York ("SUNY") pursuant to a Technology License
Agreement with SUNY. Legal costs relating to the litigation with the FDA and
anti-trust matters, however, are not eligible for reimbursement by SUNY. During
the three and six months ended June 30, 2003, the Company incurred $396 and
$594, respectively, in legal defense costs for the aforementioned law suits with
West-ward and Mutual, all of which were deducted from royalties payable to SUNY.
In the event such legal costs exceed the amount of the royalties payable to
SUNY, the Company will not be able to recover such legal costs from SUNY.
-10-
NOTE 5 -- STOCK OPTION PLANS
At the Company's 2003 Annual Meeting of Stockholders held on May 20, 2003,
the stockholders of the Company approved a proposal to amend the Company's 1996
Stock Option Plan (the "1996 Stock Option Plan") to increase the maximum number
of shares of the Company's Common Stock available for issuance thereunder from
2,500,000 to 3,000,000 shares and to reserve an additional 500,000 shares of the
Company's Common Stock for issuance in connection with such increase for awards
to be granted under the 1996 Stock Option Plan.
NOTE 6 -- 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 recognized a non-cash
compensation charge relating to certain modifications of Dr. Gallagher's stock
option agreements of approximately $251 during the six months ended June 30,
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.
NOTE 7 -- 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.
-11-
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 (the "Atrix Products"). 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, the three months
ended March 31, 2003 and the three months ended June 30, 2003, during which year
and quarters we achieved net income of approximately $902,000, $1,228,000 and
$1,597,000, respectively, we have incurred losses each year and quarterly period
since inception and have an accumulated deficit of $71.9 million at June 30,
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
-12-
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 intellectual property rights, including risks relating
to the outcome and consequences of our patent litigation against West-ward
Pharmaceutical Corporation and Mutual Pharmaceutical Company, risks that the FDA
will approve products, such as West-ward's and Mutual's product, that will
compete with and limit the market for Periostat, risks relating to our
litigation with the FDA, 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, Luxemborg, 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.
-13-
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 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 June 30, 2003, we achieved net product sales
of $11.8 million from the sale of Periostat, Atridox, Atrisorb FreeFlow,
Atrisorb-D and Pandel. In addition, during the three months ended June 30, 2003,
we generated $503,000 in contract revenues mainly from our co-promotion
activities with respect to Vioxx, Denavir and AVAR and $433,000 in international
licensing revenues.
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30,
2002
REVENUES
- -------------------------------------------------------------------------------
Revenues
(dollars in thousands) 2003 Change 2002
- -------------------------------------------------------------------------------
Net Product Sales............... $ 11,750 13.2% $ 10,377
- -------------------------------------------------------------------------------
Contract Revenues............... 503 (9.4)% 555
- -------------------------------------------------------------------------------
License Revenues................ 433 1,137.1% 35
--------- -------- ---------
- -------------------------------------------------------------------------------
Total........................ $ 12,686 15.7% $ 10,967
- -------------------------------------------------------------------------------
-14-
Total revenues during the three months ended June 30, 2003 were $12.7
million, representing a 15.7% increase over total revenues of $11.0 million
during the three months ended June 30, 2002. Such 2003 revenues included
approximately $11.8 million in net product sales of Periostat, Pandel and the
Atrix Products, $503,000 in contract revenues, which were derived from our
co-promotion of Vioxx, Denavir and AVAR, and $433,000 of international licensing
revenues for Periostat. Net product sales increased $1.4 million, or 13.2%, to
$11.8 million during the three months ended June 30, 2003 compared to $10.4
million during the three months ended June 30, 2002 primarily due to higher
Periostat sales and the addition of the Pandel product line which we began
selling direct in July 2002.
Contract revenues for the three months ended June 30, 2003 decreased 9.4%
to $503,000 from $555,000 during the three months ended June 30, 2002, primarily
due to the absence of Pandel contract revenues during 2003 and slightly lower
Vioxx contract revenues, which were partially offset by the addition of Denavir
and AVAR contract revenues in 2003.
We recorded $8,000 and $15,000 in licensing revenues for the three months
ended June 30, 2003 and June 30, 2002, respectively. This revenue was
attributable to our recognition of previously received up-front license fees
recognized 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 $425,000 and $20,000 during the three months
ended June 30, 2003 and 2002, respectfully, that represent milestone fees
received from foreign licensing partners upon the achievement of certain
milestones.
COST OF PRODUCT SALES
- -------------------------------------------------------------------------------
Cost of Product Sales 2003 Change 2002
(dollars in thousands)
- -------------------------------------------------------------------------------
Cost of Product Sales............ $ 1,738 8.8% $ 1,598
- -------------------------------------------------------------------------------
Percent of Net Product Sales..... 14.8% N/A 15.4%
- -------------------------------------------------------------------------------
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 $1.7 million, or 14.8% of net product sales
during the three months ended June 30, 2003, compared to $1.6 million, or 15.4%
of net product sales during the three months ended June 30, 2002. During the
three months ended June 30, 2003, cost of product sales increased in absolute
dollars as a result of increased product sales. As a percentage of net product
sales, cost of product sales decreased, compared to the three months ended June
30, 2002, primarily due to product price increases for Periostat, offset in part
by increased cost of product sales for the Pandel product line, launched in July
2002.
-15-
RESEARCH AND DEVELOPMENT
- -------------------------------------------------------------------------------
Research and Development 2003 Change 2002
(dollars in thousands)
- -------------------------------------------------------------------------------
Research and development......... $ 1,654 114.5% $ 771
- -------------------------------------------------------------------------------
Percentage of Total revenues..... 13.0% N/A 7.0%
- -------------------------------------------------------------------------------
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 $883,000, or 114.5%, to $1.7
million during the three months ended June 30, 2003 from $771,000 during the
three months ended June 30, 2002.
Development projects conducted during the three months ended June 30, 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
$462,000 and $535,000, 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 $4.1 million through 2006.
Clinical projects totaling $252,000 were conducted during the three months
ended June 30, 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 June 30, 2003 included $42,000 in regulatory consulting and legal and
filing fees under the Mutual Recognition Procedure in Europe and $137,000 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 June 30, 2003 were $131,000.
Additionally, during such period we incurred $95,000 in consulting, travel and
other office expenses.
Development projects conducted during the three months ended June 30, 2002
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
$92,000 and $140,000, respectively.
Clinical projects totaling $282,000 were conducted during the three months
ended June 30, 2002 and included several Phase IV studies for Periostat in
various dental indications, initiation of a 70-patient clinical study to
evaluate the efficacy of Periostat to treat meibomiantis
-16-
(an ocular condition) and clinical development work relating to Periostat in
dermatological indications. In August 2002, we launched a Phase III trial to
evaluate Periostat for the treatment of rosacea.
Other expenses incurred during the three months ended June 30, 2002
included $55,000 in regulatory consulting and filing fees under the Mutual
Recognition Procedure in Europe and $22,000 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 June 30, 2002 were $122,000. Additionally, during such period we
incurred $58,000 in consulting, travel and other office expenses.
SELLING, GENERAL AND ADMINISTRATIVE
- --------------------------------------------------------------------------------
Selling, General and Administrative 2003 Change 2002
(dollars in thousands)
- -------------------------------------------------------------------------------
Selling, General and Administrative... $ 7,718 (14.2)% $ 8,998
- --------------------------------------------------------------------------------
Percentage of Total Revenues.......... 60.8% N/A 82.0%
- --------------------------------------------------------------------------------
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 decreased 14.2% to $7.7
million during the three months ended June 30, 2003 from $9.0 million during the
three months ended June 30, 2002. This decrease of $1.3 million was primarily
the result of a $1.7 million reduction in selling and marketing expenditures for
Periostat and the Atrix Products, offset in part by approximately $367,000 in
additional promotional expenses for AVAR and Pandel product lines and $50,000 in
increased administrative costs.
Significant components of selling, general and administrative expenses
incurred during the three months ended June 30, 2003 included $3.8 million in
direct selling and sales training expenses, $2.0 million in marketing expenses
(including advertising and promotion expenditures for Periostat, the Atrix
Products and Pandel and co-promotion expenses relating to Vioxx and AVAR) and
$1.9 million in general and administrative expenses, which include business
development, finance, legal and corporate activities. Significant components of
selling, general and administrative expenses during the three months ended June
30, 2002 included $3.8 million in direct selling and training expenses, $3.5
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 $1.7 million in general
and administrative expenses, which included business, development, finance,
legal and corporate activities.
-17-
OTHER INCOME/EXPENSE
- --------------------------------------------------------------------------------
Other Income/Expense 2003 Change 2002
- --------------------------------------------------------------------------------
Interest income.................. $25,000 66.7% $ 15,000
- --------------------------------------------------------------------------------
Interest expense................. $ -- (100)% $ (1,000)
- --------------------------------------------------------------------------------
Other (expense) income........... $(4,000) (500)% $ 1,000
- --------------------------------------------------------------------------------
Interest income increased to $25,000 for the three months ended June 30,
2003 compared to $15,000 for the three months ended June 30, 2002. This increase
was due to higher average investment balances in 2003. There was no interest
expense for the three months ended June 30, 2003, compared to $1,000 for the
three months ended June 30, 2002. Other expenses were $4,000 for the three
months ended June 30, 2003 compared to other income of $1,000 for the three
months ended June 30, 2002. Such expenses were attributable to foreign currency
transaction losses experienced in 2003.
PREFERRED STOCK DIVIDEND
Preferred stock dividends were $400,000 and $409,000 during each of the
three months ended June 30, 2003 and June 30, 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.
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
REVENUES
Revenues 2003 Change 2002
(dollars in thousands)
- --------------------------------------------------------------------------------
Net Product Sales............... $ 23,120 14.1% $ 20,258
- --------------------------------------------------------------------------------
Contract Revenues............... 1,053 (21.8)% 1,347
- --------------------------------------------------------------------------------
License Revenues................ 670 449.2% 122
--------- ------ ---------
- --------------------------------------------------------------------------------
Total........................ $ 24,843 14.3% $ 21,727
- --------------------------------------------------------------------------------
Total revenues during the six months ended June 30, 2003 were $24.8
million, representing a 14.3% increase over total revenues of $21.7 million
during the six months ended June 30, 2002. Such 2003 revenues included
approximately $23.1 million in net product sales of Periostat, Pandel and the
Atrix Products, $1.1 million in contract revenues, which were derived from our
co-promotion of Vioxx, Denavir and AVAR, and $670,000 in international licensing
revenues for Periostat. Net product sales increased $2.9 million, or 14.1%, to
$23.1 million during the six months ended June 30, 2003 compared to $20.3
million during the six months ended June 30, 2002 primarily due to higher
Periostat sales and the addition of the Pandel product line which we began
selling direct in July 2002.
-18-
Contract revenues for the six months ended June 30, 2003 decreased 21.8% to
$1.1 million from $1.3 million during the six months ended June 30, 2002,
primarily due to the absence of Pandel contract revenues during 2003 and
slightly lower Vioxx contract revenues, which were partially offset by the
addition of Denavir and AVAR contract revenues in 2003.
We recorded $23,000 and $30,000 in licensing revenues for the six months
ended June 30, 2003 and June 30, 2002, respectively. This revenue was
attributable to our recognition of previously received up-front license fees
recognized 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 $47,000 during the six months
ended June 30, 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 periods. Additionally, during the six months ended June
30, 2003 and 2002, respectively, we recognized $425,000 and $45,000 in license
milestone fees received from foreign licensing partners upon the achievement of
certain milestones.
COST OF PRODUCT SALES
- --------------------------------------------------------------------------------
Cost of Product Sales 2003 Change 2002
(dollars in thousands)
- --------------------------------------------------------------------------------
Cost of Product Sales............ $ 3,652 14.9% $ 3,178
- --------------------------------------------------------------------------------
Percent of Net Product Sales..... 15.8% N/A 15.7%
- --------------------------------------------------------------------------------
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 $3.7 million, or 15.8% of net product sales
during the six months ended June 30, 2003, compared to $3.2 million, or 15.7% of
net product sales during the six months ended June 30, 2002. During the six
months ended June 30, 2003, cost of net product sales increased in absolute
dollars as a result of increased product sales. As a percentage of net product
sales, cost of product sales increased as a result of increased costs of product
sales for the Pandel product line launched in July 2002, offset in part by
Periostat price increases.
RESEARCH AND DEVELOPMENT
- --------------------------------------------------------------------------------
Research and Development 2003 Change 2002
(dollars in thousands)
- --------------------------------------------------------------------------------
Research and development......... $ 2,621 65.9% $ 1,580
- --------------------------------------------------------------------------------
Percentage of Total revenues..... 10.6% N/A 7.3%
- --------------------------------------------------------------------------------
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.
-19-
Research and development expenses increased $1.0 million, or 65.9%, to $2.6
million during the six months ended June 30, 2003 from $1.6 million during the
six months ended June 30, 2002.
Development projects conducted during the six months ended June 30, 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
$782,000 and $584,000, 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 $4.1 million through 2006.
Clinical projects totaling $500,000 were conducted during the six months
ended June 30, 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 six months
ended June 30, 2003 included $53,000 in regulatory consulting and legal and
filing fees under the Mutual Recognition Procedure in Europe and $243,000 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 six months ended June 30, 2003 were $271,000. Additionally,
during such period we incurred $188,000 in consulting, travel and other office
expenses.
Development projects conducted during the six months ended June 30, 2002
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
$247,000 and $210,000, respectively.
Clinical projects totaling $510,000 were conducted during the six months
ended June 30, 2002 and included several Phase IV studies for Periostat in
various dental indications, initiation of a 70-patient clinical study to
evaluate the efficacy of Periostat to treat meibomiantis (an ocular condition)
and clinical development work relating to Periostat in dermatological
indications. In August 2002, we launched a Phase III trial to evaluate Periostat
for the treatment of rosacea.
Other expenses incurred during the six months ended June 30, 2002 included
$99,000 in regulatory consulting and filing fees under the Mutual Recognition
Procedure in Europe and $83,000 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 six months ended June
30, 2002 were $266,000. Additionally, during such period we incurred $165,000 in
travel and other office expenses.
-20-
SELLING, GENERAL AND ADMINISTRATIVE
- --------------------------------------------------------------------------------
Selling, General and Administrative 2003 Change 2002
(dollars in thousands)
- --------------------------------------------------------------------------------
Selling, General and Administrative $15,540 (13.4)% $ 17,946
- - other....................
- --------------------------------------------------------------------------------
Selling, General and Administrative
- - stock compensation charge... 251 100% --
- --------------------------------------------------------------------------------
Subtotal......................... $15,791 (12.0)% $ 17,946
- --------------------------------------------------------------------------------
Percentage of Total Revenues..... 63.6% N/A 82.6%
- --------------------------------------------------------------------------------
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 13.4% to
$15.5 million during the six months ended June 30, 2003 from $17.9 million
during the six months ended June 30, 2002. This decrease of $2.4 million was
primarily the result of a $3.2 million reduction in selling and marketing
expenditures for Periostat and the Atrix Products, offset in part by
approximately $643,000 in additional promotional expenses for AVAR and Pandel
and $200,000 in increased administrative costs.
Significant components of selling, general and administrative - other
expenses incurred during the six months ended June 30, 2003 included $7.9
million in direct selling and sales training expenses, $4.0 million in marketing
expenses (including advertising and promotion expenditures for Periostat, the
Atrix Products and Pandel and co-promotion expenses relating to Vioxx and AVAR)
and $3.6 million in general and administrative expenses, which include business
development, finance, legal and corporate activities. Significant components of
selling, general and administrative expenses during the six months ended June
30, 2002 included $8.2 million in direct selling and training expenses, $6.7
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 $3.0 million in general
and administrative expenses, which included business, development, finance,
legal and corporate activities.
Selling, general and administrative - stock compensation charge of $251,000
during the six months ended June 30, 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.
OTHER INCOME/EXPENSE
- --------------------------------------------------------------------------------
Other Income/Expense 2003 Change 2002
- --------------------------------------------------------------------------------
Interest income.................. $56,000 51.4% $ 37,000
- --------------------------------------------------------------------------------
Interest expense................. $ -- (100)% $ (2,000)
- --------------------------------------------------------------------------------
Other expense.................... $10,000 100% $ --
- --------------------------------------------------------------------------------
-21-
Interest income increased to $56,000 for the six months ended June 30, 2003
compared to $37,000 for the six months ended June 30, 2002. This increase was
due to higher average investment balances in 2003. There was no interest expense
for the six months ended June 30, 2003, compared to $2,000 for the six months
ended June 30, 2002. Other expense was $10,000 for the six months ended June 30,
2003 compared to other expense of zero for the six months ended June 30, 2002.
Such increase was attributable to foreign currency transaction losses
experienced in 2003.
PREFERRED STOCK DIVIDEND
Preferred stock dividends were $800,000 and $829,000 during each of the six
months ended June 30, 2003 and June 30, 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 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 asked prices on
the Nasdaq National Market is at least 200% of the conversion price then in
effect (as of June 30, 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
-22-
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
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 of June
30, 2003, the letter of credit had been reduced to $761,000. 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 June 30, 2003, we
had no borrowings outstanding against the credit facility.
During 1999, we entered into a three-year co-promotion agreement with Merck
& Co., Inc. for Vioxx under which we are committed to spend up to $1.0 million
annually for promotional expenses, or lesser amount as will be determined by
mutual agreement of the parties. In September 2002, the agreement was amended
and the term was extended to December 31, 2003.
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
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
-23-
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 aspecific 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.
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 approximately $3.3 million, of which no more than $2.2
million shall be payable prior to January 1, 2004 and of which no more than an
additional $1.1 million shall be payable prior to January 1, 2005. We paid
$526,000 under this Agreement in the six months ended June 30, 2003. 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.
At June 30, 2003, we had cash and cash equivalents of approximately $11.5
million, an increase of $1.4 million from the $10.1 million balance at December
31, 2002. 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 June 30,
2003 was $10.4 million, an increase of $3.8 million from $6.6 million at
December 31, 2002. This increase was primarily attributable to the operating
profitability experienced during 2003 and the addition of $704,000 in cash
proceeds from the exercise of stock options and warrants. During the six months
ended June 30, 2003, we generated $2.6 million in cash from our operating
activities principally from net income of $2.8 million less changes in certain
assets and liabilities. During the six months ended June 30, 2003, we invested
$224,000 in capital expenditures and $900,000 in licensing payments to Altana
Inc. and received $704,000 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 June 30, 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 for at least the next twelve months. 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
-24-
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;
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;
o Our ability to meet the covenant requirements under our revolving
credit facility; and
o The outcome and consequences of our patent litigation and our
litigation with the FDA.
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.
-25-
Below is a table which presents our contractual obligations and commercial
commitments as of June 30, 2003:
Payments Due by Period
- -------------------------------------------------------------------------------------------
Six Months
ending
Contractual December 2004 and 2008 and
Obligations Total 31, 2003 2005 2006 and 2007 after
- -------------------------------------------------------------------------------------------
Operating
Leases(1)...... $2,055,000 $ 163,000 $ 678,000 $ 684,000 $530,000
- -------------------------------------------------------------------------------------------
Unconditional
Purchase (3)(4) (3)(4)
Obligations.... $ 761,000(2) $ 761,000(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
Obligations.... $10,665,000 $1,724,000 $4,527,000 $3,884,000 $530,000
- -------------------------------------------------------------------------------------------
(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 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."
-26-
(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 $3.3 million, of which no more than $2.2 million shall
be payable prior to January 1, 2004 and of which no more than an additional $1.1
million shall be payable prior to January 1, 2005. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We had cash equivalents at June 30, 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 June
30, 2003.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. Our management, with
the participation of our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30,
2003. In designing and evaluating our disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applied its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on this
evaluation, our chief executive officer and chief
-27-
financial officer concluded that, as of June 30, 2003, our disclosure controls
and procedures were (1) designed to ensure that material information relating to
us, including our consolidated subsidiaries, is made known to our chief
executive officer and chief financial officer by others within those entities,
particularly during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance that information required
to be disclosed by us in our 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.
(b) Changes in internal controls. No change in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) occurred during the fiscal quarter ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
-28-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
West-ward Pharmaceutical Corporation Litigation
On November 18, 2002, we filed a complaint and on February 13, 2003, we
filed a preliminary injunction in the District Court for the Eastern District of
New York seeking to prevent West-ward Pharmaceutical Corporation ("West-ward")
from introducing a 20 mg. capsule of doxycycline hyclate into the market in the
United States. We alleged that West-ward has infringed our Periostat patents
under the Hatch-Waxman Act by filing an Abbreviated New Drug Application
("ANDA") for a capsule formulation of Periostat. More specifically, our suit
alleges that West-ward infringes and intends to continue to infringe two patents
to which we are the exclusive licensee: U.S. Patent No. 4,666,897 and Re-Issue
Patent RE 34,656. The remedies that we are seeking include an award of treble
damages, costs and reasonable attorneys' fees.
As discussed below, as a result of the ruling of the United States District
Court for the District of Columbia, we are considering our alternatives with
respect to our motion for a preliminary injunction in our patent infringement
suit against West-ward. At the Court's request, we are continuing to conduct
settlement discussions.
To date, West-ward has not received FDA approval to market its 20 mg
doxycycline hyclate capsules.
United Research Laboratories/Mutual Pharmaceutical Company Litigation
On July 8, 2003, we filed a complaint against United Research
Laboratories/Mutual Pharmaceutical Company ("Mutual") in the United States
District Court for the Eastern District of New York seeking to prevent Mutual
from introducing 20 mg. tablets of doxycycline hyclate into the market in the
United States. The compliant was served on Mutual on July 11, 2003.
Our suit alleges that Mutual has infringed our Periostat patents under the
Hatch-Waxman Act by filing an ANDA for a tablet formulation of Periostat. In
addition, we specifically allege that Mutual infringes and intends to continue
to infringe two patents to which we are the exclusive licensee: U.S. Patent No.
4,666,897 and Re-Issue Patent RE 34,656. We have also alleged that Mutual has
engaged in unfair competition and that it has tortiously interfered with our
present and prospective contractual and business relationships. The remedies
that we are seeking include an award of treble damages, costs and reasonable
attorneys' fees. To date, Mutual has not received FDA approval to market its 20
mg. doxycycline tablet.
On July 9, 2003, Mutual filed a complaint against us in the United States
District Court for the Eastern District of Pennsylvania. The complaint was
served on us on July 10, 2003. Mutual alleges that we have engaged in an overall
scheme to monopolize the market for low-dose doxycycline products. In addition,
the suit alleges that we have engaged in an exclusionary, unfair,
anticompetitive manner. The remedies that Mutual is seeking include an award of
treble damages, injunctive relief, compensatory, punitive and exemplary damages
and reasonable attorneys' fees.
-29-
On July 15, 2003, we filed and served a motion for preliminary injunction
in the United States District Court for the Eastern District of New York in
connection with our patent infringement litigation against Mutual. As discussed
below, as a result of the ruling of the United States District Court for the
District of Columbia, we withdrew our motion for a temporary restraining order
and preliminary injunction in our patent infringement suit against Mutual,
although our complaint remains outstanding.
FDA Litigation
On June 26, 2003, we filed a complaint, and on June 30, 2003, filed a
motion for a preliminary injunction, in the Unites States District Court for the
District of Columbia seeking to prevent the FDA from approving any application,
from West-ward, Mutual or any other marketers of generic drugs, to introduce 20
mg. tablets or capsules of doxycycline hyclate into the market until the
expiration of the period of market exclusivity and up to a 30 month stay of
approvals that attaches while patent infringement litigation is pending, to
which we claim entitlement under the Hatch Waxman Act. On July 22, 2003, the
United States District Court for the District of Columbia granted a preliminary
injunction temporarily restraining the FDA from approving any ANDAs submitted
for a generic version of Periostat (doxycycline hyclate) 20 mg.
Until the Court has made a final ruling on the regulatory status of
Periostat, the FDA cannot approve the ANDAs on file for West-ward's 20 mg.
doxycycline hyclate capsule, Mutual's 20 mg. doxycycline hyclate tablet or any
other ANDA for a generic version of Periostat.
As a result of the ruling in the United States District Court for the
District of Columbia, we withdrew our motion for a temporary restraining order
and preliminary injunction in our patent infringement suit against Mutual, which
was previously filed in the District Court for the Eastern District of New York,
although our complaint remains outstanding. In addition, we are considering our
alternatives with respect to our motion for preliminary injunction against
West-ward filed in the same jurisdiction.
-30-
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 second 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 Average
Number of Shares Exercise Price
---------------- -----------------
93,150 $10.79
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.
-31-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders was held on May 20, 2003.
There were present at the Annual Meeting in person or by proxy
stockholders holding an aggregate of 7,636,873 shares of Common Stock and
199,000 shares of Series D Stock, which shares of Series D Stock account for an
additional 2,011,463 shares of Common Stock on an as converted to Common Stock
basis. The results of the vote taken at such Annual Meeting with respect to the
election of the nominees to be the Common Stock directors were as follows:
Common Stock Nominees For Withheld
------------------------- ---------------- ---------------
Brian M. Gallagher, Ph.D. 7,388,713 Shares 248,160 Shares
Peter R. Barnett, D.M.D. 7,388,713 Shares 248,160 Shares
Robert C. Black 6,879,586 Shares 757,287 Shares
James E. Daverman 7,181,563 Shares 455,310 Shares
Robert J. Easton 6,672,436 Shares 964,437 Shares
W. James O'Shea 6,879,586 Shares 757,287 Shares
The results of the vote taken at such Annual Meeting with respect to the
election of the nominee to be the Series D Director, Stephen A. Kaplan, were as
follows: 2,011,463 shares of Series D Stock (on an as converted to Common Stock
basis) were voted for the Series D Stock nominee, with no shares voting against
or abstaining.
A vote of the stockholders was taken at such Annual Meeting with respect to
the proposal to amend the Company's 1996 Stock Option Plan to increase the
maximum aggregate number of shares of Common Stock available for issuance
thereunder from 2,500,000 to 3,000,000 shares and to reserve an additional
500,000 shares of Common Stock of the Company for issuance in connection with
such increase for awards to be granted under the 1996 Stock Option Plan. For the
purposes of such vote, the holders of shares of Common Stock and the holders of
Series D Stock (on an as converted to Common Stock basis) voted together as a
single class. Of such shares, 6,198,864 shares voted in favor of such proposal,
1,435,284 shares were voted against such proposal and 2,725 shares abstained
from voting.
In addition, a vote of the stockholders was taken at the Annual Meeting on
the proposal to ratify the appointment of KPMG LLP as the independent auditors
of the Company for the fiscal year ending December 31, 2003. For the purpose of
such vote, the holders of shares of Common Stock and the holders of Series D
Stock (on an as converted to Common Stock basis) voted together as a single
class. Of such shares, 7,626,348 shares voted in favor of such proposal, 9,075
shares were voted against such proposal and 1,450 shares abstained from voting.
ITEM 5. OTHER INFORMATION.
Collaboration Agreement
On May 20, 2003, we announced that we had entered into a strategic
collaborative agreement with EpiTan Limited and Thomas Skold of Norrtalje,
Sweden, to develop a topical formulation for EpiTan's lead drug candidate,
Melanotan(R), based on the Restoraderm(TM) topical
-32-
drug delivery technology. The Restoraderm technology is exclusively licensed to
us and has been sublicensed to EpiTan. Mr. Skold, the inventor of Restoraderm,
will be working directly with EpiTan on the development of the topical delivery
of Melanotan.
Results of Phase II Clinical Study For Rosacea Treatment
On June 24, 2003, we announced the results of a double-blind,
placebo-controlled clinical study designed to evaluate the efficacy of Periostat
combined with MetroLotion(R) (metronidazole) Topical Lotion, 0.75%, for the
treatment of rosacea. Forty patients were randomized to receive either
MetroLotion and Periostat tablets or MetroLotion and placebo tablets for 12
weeks. After week 12, patients discontinued the use of MetroLotion and were
maintained on either Periostat or placebo for an additional 4 weeks. Lesion
counts, along with an assessment of erythema (redness) and overall clinical
disease severity were obtained at baseline, 4, 8, 12 and 16 weeks. Patients who
were maintained on Periostat for an additional 4 weeks retained the improvements
observed at 12 weeks, whereas those on placebo began to deteriorate.
Publication of an Independent Experience Trial of Periostat in the Treatment
of Rosacea
On July 14, 2003, we announced that the July/August issue of the
peer-reviewed dermatology journal Skin Med features an article about the use of
subantimicrobial dose doxycycline in acne and rosacea. The article includes a
report describing the outcome of a physician-sponsored clinical study of
Periostat in the treatment of rosacea.
United Research Laboratories/Mutual Pharmaceutical Company Litigation
On July 14, 2003, we announced that we filed and served a complaint on
United Research Laboratories/Mutual Pharmaceutical Company in the United States
District Court for the Eastern District of New York seeking to prevent Mutual
from introducing 20 mg. capsules of doxycycline hyclate into the market in the
United States.
Our suit alleges that Mutual has infringed our Periostat patents under the
Hatch-Waxman Act by filing an ANDA for a tablet formulation of Periostat. In
addition, we specifically allege that Mutual infringes and intends to continue
to infringe two patents to which we are the exclusive licensee: U.S. Patent No.
4,666,897 and Re-Issue Patent RE 34,656. We have also alleged that Mutual has
engaged in unfair competition and that it has tortuously interfered with our
present and prospective contractual and business relationships. The remedies
that we are seeking include an award of treble damages, costs and reasonable
attorneys' fees. To date, Mutual has not received FDA approval to market its 20
mg doxycycline tablet.
On July 14, 2003, we announced that we were served with a complaint by
Mutual, filed in the United States District Court for the Eastern District of
Pennsylvania. Mutual alleges that we have engaged in an overall scheme to
monopolize the market for low-dose doxycycline products. In addition, the suit
alleges that we have engaged in an exclusionary, unfair, anticompetitive manner.
The remedies that Mutual is seeking include an award of treble damages,
injunctive relief, compensatory, punitive and exemplary damages and reasonable
attorneys' fees.
-33-
Service of Preliminary Injunction in Suit with Mutual
On July 16, 2003, we announced that we filed and served a motion for
preliminary injunction in the United States District Court for the Eastern
District of New York in connection with our patent infringement litigation
against Mutual.
FDA Litigation
On July 23, 2003, we announced that the United States District Court for
the District of Columbia had granted a preliminary injunction temporarily
restraining the FDA from approving any ANDAs submitted for a generic version of
Periostat (doxycycline hyclate) 20 mg.
Until the Court has made a final ruling on the regulatory status of
Periostat, the FDA cannot approve the ANDAs on file for West-ward Pharmaceutical
Corporation's 20 mg doxycycline hyclate capsule, Mutual's 20 mg. doxycycline
hyclate tablet or any other ANDA for a generic version of Periostat.
As a result of the ruling in the United States District Court for the
District of Columbia, we withdrew our motion for a temporary restraining order
and preliminary injunction in our patent infringement suit against Mutual, which
was previously filed in the District Court for the Eastern District of New York,
although our complaint remains outstanding. In addition, we are considering our
alternatives with respect to our motion for preliminary injunction against
West-ward Pharmaceutical Corporation filed in the same jurisdiction.
Initiation of Phase II Clinical Study to Evaluate COL-3 as a Treatment for
Rosacea
On July 24, 2003, we announced that we have initiated a double-blinded,
placebo-controlled Phase II clinical study to evaluate the safety and efficacy
of our novel, non-antimicrobial tetracycline derivative COL-3 for the treatment
of rosacea.
This study, which will enroll 30 patients, is being conducted by Guy
Webster, MD, Ph.D., Professor of Dermatology at Thomas Jefferson University. The
study design calls for 28 days of oral administration of either 10 mg of COL-3
or an identical placebo, with a 21-day, post-dosing follow-up period.
Report Progress with Development of Sustained Release Once-Daily Periostat
Formulation
On July 25, 2003, we announced that we have successfully completed initial
Phase I clinical studies to establish the pharmacokinetics of our lead
formulation of a sustained release ("SR"), once-daily version of our lead
product, Periostat. These single-dose pharmacokinetic studies have confirmed
that the formulation falls within our pre-defined criteria for maximum serum
concentration and total dose delivered, which will enable development to
progress to the next stage.
The development of Periostat SR was conducted in conjunction with Shire
Laboratories Inc., a subsidiary of Shire Pharmaceuticals Group plc, and utilizes
Shire's proprietary controlled release delivery technology.
-34-
Certain novel features of the lead Periostat SR formulation have led to the
filing of specific intellectual property protection for this particular
formulation of the drug. Manufacturing development is currently underway and,
following confirmative steady-state pharmacokinetic studies, which will be
conducted in the third quarter of 2003, it is anticipated that definitive
clinical studies will begin before the end of 2003.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
31.1 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certification Pursuant to 18 U.S.C. Section 1350.
(b) Reports on Form 8-K.
On April 22, 2003, we furnished a Current Report on Form 8-K under
Item 9, containing a copy of our earnings release for the period ended
March 31, 2003 (including financial information) pursuant to Item 12
(Results of Operations and Financial Condition).
-35-
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: August 14, 2003 By: /s/ Brian M. Gallagher, Ph.D.
---------------------------------
Brian M. Gallagher, Ph.D.
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2003 By: /s/ Nancy C. Broadbent
---------------------------------
Nancy C. Broadbent
Chief Financial Officer (Principal
Financial and Accounting Officer)
-36-