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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
Commission File No. 0-18962
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CYGNUS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2978092
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
400 PENOBSCOT DRIVE, REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices and zip code)
(415) 369-4300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $
0.001 PAR VALUE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant, based upon the closing price of Common Stock on March 10, 1997 as
reported on the Nasdaq National Market was approximately $ 286,288,509.
Determination of affiliate status for this purpose is not a determination of
affiliate status for any other purpose.
18,773,017
(Number of shares of common stock outstanding as of March 10, 1997)
Documents Incorporated by Reference
Items 5, 6, 7 and 8 of Part II incorporate information by reference from
certain portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1996.
Parts of the Registrant's definitive Proxy Statement filed pursuant to
Regulation 14A for its 1997 Annual Meeting of Stockholders are incorporated by
reference into Part III hereof.
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CYGNUS, INC.
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. Business....................................................................................... 3
ITEM 2. Properties..................................................................................... 20
ITEM 3. Legal Proceedings.............................................................................. 20
ITEM 4. Submission of Matters to a Vote of Security Holders............................................ 21
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.......................... 24
ITEM 6. Selected Financial Data........................................................................ 24
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 24
ITEM 8. Financial Statements and Supplementary Data.................................................... 24
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... 24
PART III
ITEM 10. Directors and Executive Officers of the Registrant............................................. 25
ITEM 11. Executive Compensation......................................................................... 25
ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................. 25
ITEM 13. Certain Relationships and Related Transactions................................................. 25
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 26
SIGNATURES................................................................................................. 30
2
PART I
ITEM 1. BUSINESS
OVERVIEW
This Report on Form 10-K contains projections and forward looking statements
regarding future events and the future financial performance of the Company. We
wish to caution you that these statements are only our predictions and
objectives. Actual events or results may differ materially. Please note in
particular throughout this document where we have highlighted specific risks
associated with the Company and its activities. We also refer you to documents
the Company files from time to time, such as its Form 10-Q and Form 8-K reports.
This document, as well as the Company's Form 10-Q and Form 8-K reports, contain
important factors that could cause our actual results to differ from our current
expectations and the forward-looking statements contained in this Report on Form
10-K.
Cygnus, Inc. ("Cygnus" or the "Company") is engaged in the development of
diagnostic and drug delivery systems, with its current efforts primarily focused
on three core areas: a painless, automatic glucose monitoring device,
transdermal drug delivery systems and mucosal drug delivery systems. The three
core areas of the Company's business are as follows:
PAINLESS, AUTOMATIC GLUCOSE MONITORING. Worldwide sales of products for the
self-monitoring of blood glucose levels by people with diabetes exceeded $1.9
billion in 1995. Currently, people with diabetes test their blood glucose levels
on average less than half as often as recommended, largely due to the pain and
disruption of daily life associated with the prevailing "finger stab" method.
Clinical studies sponsored by the NIH indicate that more frequent testing should
enable people with diabetes to reduce or significantly delay many serious
diabetes-related complications. As a result, the Company believes that there is
a significant unmet demand for painless, automatic glucose monitoring.
The Company is addressing this unmet demand by developing a monitoring
device called the GlucoWatch-TM-, which is worn like a wristwatch. The
GlucoWatch is designed to extract and measure glucose automatically and
frequently through intact skin, and to display and store blood glucose levels
and trends. The extracted glucose is collected in a transdermal patch that is
changed daily. The GlucoWatch is expected to eliminate significant drawbacks of
the finger stab technique, such as the pain of repetitive stabbing and the
disruption of normal activities caused by cumbersome, time-consuming testing
procedures. It is designed to offer a combination of features not available in
currently marketed devices such as automatic data collection, an electronic
memory, personal computer downloading, and alarms indicating hypo- and
hyper-glycemic conditions. The Company believes these features can lead to
improved disease management enabling people with diabetes to prevent or delay
the severe complications associated with diabetes.
The Company has conducted early stage clinical studies using an initial
GlucoWatch prototype. The Company believes the results of these studies support
the technical feasibility of the product by indicating a level of accuracy and
reproducibility comparable to those associated with finger stab blood glucose
measurement devices now commercially available. The Company is currently
optimizing, miniaturizing and integrating certain components of the GlucoWatch.
In November 1996, the Company identified a short circuit in the application
specific integrated circuit (ASIC) which resulted in a delay in the receipt of
the latest prototype of these devices. The ASIC problem has been rectified and
the prototypes have been received. The Company believes that the submission will
be in the form of a 510(k) notification, although the final determination of the
type of submission cannot be made until discussions are held with the FDA.
In February 1996, the Company entered into an agreement with Becton
Dickinson for the marketing and distribution of the GlucoWatch. Under the terms
of the agreement, Becton Dickinson has exclusive worldwide marketing and
distribution rights, with the exception of Japan and Korea. Cygnus will have
primary responsibility for completing product development, obtaining regulatory
approvals, manufacturing, and customer service and support for the product. In
July 1996, the Company entered into an
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agreement with Tokyo-based Yamanouchi Pharmaceutical Co., Ltd. for the marketing
and distribution of the GlucoWatch in Japan and Korea. Cygnus will have primary
responsibility for completing product development and for manufacturing. Cygnus
will be eligible to receive up-front and milestone payments as well as a
percentage of the product's future commercial success from both Becton Dickinson
and Yamanouchi.
TRANSDERMAL DRUG DELIVERY SYSTEMS. Transdermal drug delivery systems
provide for the controlled release of drugs directly into the bloodstream
through intact skin. The Company's transdermal drug delivery products are thin
multilayer systems, in the form of small adhesive patches. Transdermal delivery
can provide a number of advantages over conventional methods of drug
administration, including enhanced efficacy, increased safety, greater
convenience and improved patient compliance. By delivering a steady flow of
drugs into the bloodstream over an extended period of time, transdermal systems
can avoid the "peak and valley" effect of oral or injectable therapy and can
enable more controlled, effective treatment. By avoiding first pass metabolism
through the gastrointestinal tract and the liver, the therapeutically equivalent
dosage for the transdermal delivery of certain compounds can be significantly
less than the corresponding oral dosage, potentially reducing dosage-related
side-effects.
The Company's transdermal product line is currently focused on smoking
cessation, hormone replacement therapy and contraception. The Company's two most
commercially advanced products are the currently marketed
Nicotrol-Registered Trademark- nicotine patch and the
FemPatch-Registered Trademark- estrogen replacement patch. FemPatch was approved
by the FDA in December 1996. The Company has strategic collaborations for its
transdermal products with American Home Products Corporation (hormone
replacement therapy), Ortho Pharmaceutical Corporation, a subsidiary of Johnson
& Johnson (contraception), Sanofi/Warner-Lambert (hormone replacement) and
Pharmacia & Upjohn, Inc. ("Pharmacia") (smoking cessation).
MUCOSAL DRUG DELIVERY. Mucosal drug delivery is the controlled release of
compounds through mucous membranes, typically using a disc, spray, lozenge or
other system. Drugs delivered through mucous membranes have the potential to
provide a faster onset and longer duration of action than certain products
currently on the market. Cygnus is pursuing potential collaborative partners for
mucosal delivery products in both the prescription and non-prescription
pharmaceutical markets.
STRATEGY
The Company's objective is to become a leader in the development and
commercialization of advanced drug delivery and diagnostic products for a wide
variety of applications utilizing a broad array of technologies. The Company
develops differentiated products based on proprietary technologies which have
the potential to provide significant value to patients. The Company's strategy
adheres to the following general principles:
- APPLY AND EXPAND ITS PROPRIETARY TECHNOLOGIES. Cygnus develops a broad
array of products by applying its expertise in skin biology, polymer chemistry,
drug diffusion, microparticles and adhesive technology. Cygnus devotes
significant resources to continued development of new drug delivery and
diagnostic technologies as well as additional products based on its existing
technologies. The Company also maintains an active technology in-licensing and
acquisition program. The Company's strategy is to maintain ownership of its drug
delivery technology, to out-license only specific product applications and to
aggressively protect its proprietary technology.
- DEVELOP A BROAD PORTFOLIO OF DIFFERENTIATED PRODUCTS. The Company's
broad range of proprietary technology has enabled it to develop a wide variety
of differentiated products. A diversity of products targeted to multiple markets
increases potential business opportunities, can provide a stream of new product
introductions over time and reduces the risks of reliance on a single product or
technology. The Company intends to expand its product line by continuing to
apply its technologies to new drug delivery and diagnostic systems.
4
- ADDRESS LARGE MARKET OPPORTUNITIES. The Company's product development
efforts focus on large existing markets with unmet needs. The Company's target
markets (and industry estimates of their 1995 sales) include: glucose monitoring
(over $1.9 billion worldwide), hormone replacement (over $2.6 billion worldwide)
smoking cessation ($300 million in the U.S.) and contraception ($2.5 billion
worldwide).
- CONTROL PRODUCT MANUFACTURING. The Company's products are manufactured
using several proprietary materials and complex production technologies. The
Company's strategy is, where appropriate, to retain manufacturing rights to its
products. By retaining manufacturing rights, the Company can exercise control
over the quality of its products and capture a larger portion of the product
revenue stream. Cygnus has manufactured its transdermal patches for both
clinical trials and commercial sale for several years in its existing production
facility, and believes that this facility will have sufficient capacity to
support the planned market introduction of its current products.
- COLLABORATE WITH MARKET LEADERS. Cygnus seeks to establish strategic
relationships with leading companies in each of its target markets. These
companies typically have significant resources and strong franchises that, when
coupled with the Company's technology, increase the likelihood of commercial
success. The Company currently has strategic collaborations with American Home
Products, a leader in hormone replacement, Johnson & Johnson, a leader in
contraception, Warner-Lambert, a company with a leading female health care
franchise, and Pharmacia, a leader in smoking cessation. The Company is
increasingly taking a more active role with its collaborative partners in the
clinical trials, regulatory processes and marketing of its products.
PORTFOLIO OF PRODUCTS
The data in the following table summarize Cygnus' current product portfolio,
the potential indications, development status and licensees of marketing and
distribution rights. The data in the table are qualified by reference to the
more detailed descriptions set forth herein. Development of the various products
listed is being funded by the designated licensee, the Company, or both. The
Company has additional products in early development, which are not listed
below, and is conducting a number of new product feasibility studies.
5
PRODUCT PORTFOLIO
PRODUCT INDICATIONS STATUS(1) MARKETING RIGHTS
- -------------------------------------- -------------------- ------------------------- ------------------------
DIAGNOSTIC SYSTEMS:
PAINLESS, AUTOMATIC GLUCOSE MONITORING:
GlucoWatch Diabetes Early stage clinicals(2) Becton Dickinson
Yamanouchi
DRUG DELIVERY SYSTEMS:
TRANSDERMAL DRUG DELIVERY:
SMOKING CESSATION:
Nicotrol Smoking cessation Commercialized in North Pharmacia & Upjohn,
America and certain Inc.: Johnson &
European countries Johnson(3)
Nicotine Patch Smoking cessation Phase 2 clinicals Cygnus
HORMONE REPLACEMENT:
ESTROGEN 7-DAY:
FemPatch Menopausal symptoms FDA approved Sanofi: Warner-
Lambert(4)
E2III Menopausal symptoms Phase 3 clinicals American Home Products
ESTROGEN/PROGESTIN:
Combination 3.5-Day Menopausal symptoms Phase 3 clinicals American Home Products
CONTRACEPTION:
Estrogen/Progestin:
Combination 7-Day Contraception Phase 2 clinicals Johnson & Johnson(5)
MUCOSAL DRUG DELIVERY:
Consumer Product Undisclosed Preclinical Cygnus
Consumer Product Undisclosed Development Cygnus
Consumer Product Undisclosed Development Cygnus
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(1) The Company's products are generally developed in the following stages:
development, prototype, pre-clinical studies (preparing to file an
Investigational New Drug Application ("IND")), clinical trials, and
regulatory submission.
(2) The Company has conducted early stage clinical studies using a research
prototype. Future trials will be conducted using a commercial version of the
product.
(3) Pharmacia has worldwide rights, and has sublicensed rights in North America
to Johnson & Johnson.
(4) Worldwide rights granted to Sanofi under its agreement with Cygnus are the
subject of an arbitration proceeding. Sanofi has granted a sublicense of
such rights with respect to North America to Warner-Lambert.
(5) The Company's agreement with Johnson & Johnson grants Johnson & Johnson
exclusive rights to the estrogen/progestin combination 7-day contraception
product.
6
PAINLESS, AUTOMATIC GLUCOSE MONITORING
MARKET OPPORTUNITY
According to the American Diabetes Association (the "ADA"), approximately
seven million Americans have been diagnosed as having diabetes. Diabetes can
lead to severe complications over time, including blindness, loss of kidney
function and peripheral neuropathy, causing pain to the arms and legs and
potentially requiring amputation. The ADA estimated that the complications
arising from diabetes cost the U.S. healthcare system in excess of $45 billion
in 1992. These complications are largely a consequence of years of poor
management of glucose levels by people with diabetes. Results of the Diabetes
Control and Complication Trial, a major clinical trial sponsored by the NIH and
published in 1993, showed that more frequently monitored blood glucose levels
and rigid adherence to a program of diet, exercise and insulin injections could
prevent or significantly delay the onset of many of the long-term complications
of diabetes.
People with diabetes measure blood glucose levels to enable them to adjust
their diet and use of insulin to prevent these complications. Currently, people
with diabetes are required to stab their fingers with a lancet, draw blood,
place a drop of blood on a glucose reagent strip, then place the strip in an
instrument which provides a blood glucose reading. Each day of testing can
involve numerous stabs and the complete procedure is not only painful but
disruptive of daily life. As a result of this pain and disruption, people with
diabetes monitor their blood glucose levels on average less than twice per day,
instead of the recommended four to seven times per day. Even at this level of
testing, the market for products for self-monitoring of glucose levels by
diabetic patients is quite substantial. The worldwide market for these products
exceeded $1.9 billion in 1995. The Company believes that approximately 90% of
the sales were related to disposable glucose reagent strips for finger stab
monitoring, and believes that the successful development of a painless,
bloodless glucose monitoring device can significantly expand this market by
meeting needs not served by the finger stab technology.
THE GLUCOWATCH
The Company is addressing this unmet demand by developing a monitoring
device called the GlucoWatch, which is worn like a wristwatch. The GlucoWatch is
designed to extract and measure glucose automatically and frequently through
intact skin, and to display and store blood glucose levels and trends. The
extracted glucose is collected in a transdermal patch that is changed daily. The
GlucoWatch is expected to eliminate significant drawbacks of the finger stab
technique, such as the pain of repetitive stabbing and the disruption of normal
activities caused by cumbersome, time-consuming testing procedures. It is
designed to offer a combination of features not available in currently marketed
devices such as automatic data collection, an electronic memory, personal
computer downloading, and alarms to indicate hypo- and hyper-glycemic
conditions. The Company believes these features can lead to improved disease
management enabling people with diabetes to prevent or delay the severe
complications associated with diabetes.
The Company has conducted early stage clinical studies using an initial
GlucoWatch prototype. The Company believes the results of these studies support
the technical feasibility of the product by indicating a level of accuracy and
reproducibility comparable to those associated with finger stab blood glucose
measurement devices now commercially available. The Company is currently
optimizing, miniaturizing and integrating certain components of the GlucoWatch.
The Company believes that the submission will be in the form of a 510(k)
notification, although the final determination of the type of submission cannot
be made until discussions are held with the FDA.
The GlucoWatch extracts glucose molecules through intact skin utilizing a
proprietary process called electroosmosis, which uses low levels of electric
current. Glucose molecules are collected in a small, daily disposable pad, which
adheres to the skin and is connected to a biosensor and covered by the
GlucoWatch. The collected glucose triggers an electro-chemical reaction with a
reagent in the pad, causing an emission
7
of electrons. The biosensor measures the electrons and a custom application
specific integrated circuit ("ASIC") in the GlucoWatch equates the level of
electron emission to a concentration of glucose in the patient's blood. The
GlucoWatch measures glucose levels at frequent intervals, providing readings
throughout the day and night. The GlucoWatch displays the most recent readings
and trends at the push of a button. Its electronic memory capabilities permit
the retrieval and downloading of data, allowing longer-term trend analysis for
better disease management.
The Company developed the basic GlucoWatch technology from 1988 to 1994,
resulting in the creation of an initial prototype. Using this prototype, the
Company has conducted two separate early stage clinical studies on diabetic and
non-diabetic subjects. The objective of these clinical studies was to
demonstrate the capability of the device to (i) painlessly extract glucose, (ii)
track high and low levels of blood glucose, and (iii) achieve levels of clinical
accuracy and reproducibility which are substantially equivalent to FDA-approved
finger stab devices. The studies included 21 clinical evaluations which
generated 315 data points. Subjects measured their glucose levels three times
each hour for at least five hours using both the finger stab method and the
Company's painless extraction method, and were administered glucose to elevate
their blood glucose levels. Diabetic subjects were also administered intravenous
insulin. The Company believes the results of these trials support the technical
feasibility of the product by achieving a level of clinical accuracy and
reproducibility comparable to those achieved with FDA-approved finger stab
glucose monitoring devices.
The Company has developed a second stage prototype and is currently working
to optimize the pad and the biosensor, to miniaturize certain electronic
components, and to integrate each component into a compact device. In November
1996, the Company identified a short circuit in the application specific
integrated circuit (ASIC) which resulted in a delay in the receipt of the latest
prototype of these devices. The ASIC problem has been rectified and the
prototypes have been received. Additional clinical studies will be conducted
with these new prototypes, and after confirming that the miniaturized device can
achieve a level of clinical accuracy and reproducibility comparable to those
achieved with commercially available products, Cygnus intends to conduct larger
scale clinical trials to support a medical device submission to the FDA. These
clinical trials would be conducted using early production lots of the GlucoWatch
designed for commercial sale. Certain components of this device will vary in a
number of respects from the initial prototype with which the Company has
conducted its early stage clinical studies and no assurance can be given that
the clinical trials will produce results that are consistent with the early
stage clinical studies or that the data generated will support the necessary
regulatory filings and approvals. The Company believes that the submission to
the FDA for the GlucoWatch will be in the form of a 510(k) notification,
although the final determination of the type of submission cannot be made until
discussions are held with the FDA. See "Need to Develop New Products:
Development Stage of Current Products."
In February 1996, the Company entered into an agreement with Becton
Dickinson for the marketing and distribution of the GlucoWatch. Under the terms
of the agreement, Becton Dickinson has exclusive worldwide marketing and
distribution rights, with the exception of Japan and Korea. Cygnus has primary
responsibility for completing product development, obtaining regulatory
approvals, manufacturing, and customer service and support for the product. In
July 1996, the Company entered into an agreement with Tokyo-based Yamanouchi
Pharmaceutical Co., Ltd. for the marketing and distribution of the GlucoWatch in
Japan and Korea. Cygnus will have primary responsibility for completing product
development and for manufacturing. Cygnus will be eligible to receive up-front
and milestone payments as well as a percentage of the product's future
commercial success from both Becton Dickinson and Yamanouchi.
TRANSDERMAL SYSTEMS
Transdermal drug delivery systems provide for the controlled release of
drugs directly into the bloodstream through intact skin. The Company's
transdermal drug delivery products are thin, multilayer systems, in the form of
small adhesive patches. Transdermal delivery can provide a number of advantages
over conventional methods of drug administration, such as oral administration,
bolus injection and
8
continuous infusion. These advantages include enhanced efficacy, increased
safety, greater convenience and improved patient compliance. By delivering a
steady flow of drugs into the bloodstream over an extended period of time,
transdermal systems can avoid the "peak and valley" effect of oral or injectable
therapy and can provide a more controlled, effective treatment. By avoiding
first pass metabolism through the gastrointestinal tract and the liver, the
therapeutically equivalent dosage for the transdermal delivery of certain
compounds can be significantly less than the corresponding oral dosage,
potentially reducing dosage-related side-effects. By improving patient
compliance, transdermal delivery can also reduce the need for more costly
therapies in the future. As a result, transdermal systems can improve products
already on the market, and can enable the development of new therapies.
Transdermal delivery systems can also offer certain advantages to
pharmaceutical companies, such as brand extension, further product
differentiation and additional patent protection. Patented methods of
transdermal drug delivery may extend the product life of a drug for which the
patent is expiring and provide the pharmaceutical company with a competitive
advantage over generic products delivered by conventional means. The controlled
delivery of certain drugs can also result in the approval of new therapeutic
indications, thereby expanding the market for those drugs.
Cygnus has established a comprehensive, integrated approach to the
development of transdermal delivery systems. Cygnus develops a unique product
profile for each transdermal product based on an evaluation of several key
variables that change with each drug and therapeutic indication. Based on its
assessment of the product profile and the interrelationship between the drug and
the physical and biological characteristics of the skin, Cygnus formulates the
appropriate materials and designs the structure of the transdermal system to
achieve desired product characteristics such as comfort, extended wear, delayed
or enhanced onset and controlled release.
SMOKING CESSATION
MARKET OPPORTUNITY. According to the Center for Disease Control, cigarette
smoking kills nearly 420,000 Americans per year, most from heart and lung
disease, and cancer. Despite increased legislative and social pressures to stop
smoking, approximately 50 million U.S. adults continue to smoke. Smokers are
physiologically addicted to the drug nicotine, which is present in tobacco.
However, the primary health risk of smoking is caused by cigarette tars and
other components of tobacco smoke rather than nicotine. Smokers who attempt to
quit typically experience cravings, headaches, irritability and nausea when the
body stops receiving nicotine.
Nicotine replacement systems using transdermal patches or chewing gum have
been approved as safe and effective aids to relieve nicotine withdrawal
symptoms. Over the course of several months of therapy, nicotine addiction can
generally be attenuated or eliminated by gradually reducing the level of
nicotine delivered in the therapy. Transdermal nicotine patches were first
commercially available in the U.S. in 1991. The market for nicotine transdermal
systems experienced strong initial sales in 1992 as a result of initial stock
requirements of distributors and pharmacies, strong initial patient demand and
market promotion; since 1992 demand has contracted. However, according to
industry sources, smoking cessation is estimated to be a $450 million market
worldwide in 1996.
In July 1996, Cygnus' smoking cessation transdermal patch was the first
nicotine patch to be approved by the FDA for over-the-counter status in the U.S.
The Company's Nicotrol product had previously been approved for non-prescription
sale in the United Kingdom, Italy, and certain other European countries. The
Company believes the switch to over-the-counter status will positively affect
the smoking cessation category.
NICOTROL. Nicotrol, Cygnus' nicotine transdermal system, was introduced in
the U.S. as a prescription product in August 1992. In contrast to 24-hour
nicotine transdermal systems, Nicotrol's 16-hour delivery more closely parallels
the nicotine intake of a smoker. Nicotrol is designed to deliver nicotine only
while the patient is awake. This allows drug levels to be significantly reduced
in the bloodstream during sleep.
9
Although controlled scientific studies comparing Nicotrol to competing products
have not yet been performed, the Company believes that nicotine delivery during
waking hours reduces the potential side effects of insomnia, nightmares and
headaches associated with competing 24-hour delivery systems. Another advantage
of Nicotrol is the solid state technology used in the drug matrix construction,
which slows the rate of delivery of the drug and minimizes skin irritation.
Pharmacia funded a portion of the development of Nicotrol, and has exclusive
worldwide rights to market the product. Pharmacia has sublicensed to Johnson &
Johnson the marketing rights to Nicotrol in North America. Cygnus was required,
per the amended November 1993 agreement, to manufacture and supply Pharmacia
with Nicotrol in North America until December 31, 1995. In February of 1996, the
Company and Pharmacia further amended the 1993 agreement, whereby Cygnus would
continue to manufacture and supply Nicotrol for the United States market through
1999. In addition to product revenues, the Company will also earn royalties on
sales within the United States. Pharmacia has the option to terminate this
agreement and purchase the U.S. manufacturing rights for Nicotrol upon the
payment of certain amounts to the Company. Pharmacia has exercised this option
to purchase the U.S. manufacturing rights for Nicotrol and the Company is
presently in negotiations with Pharmacia as to various transition matters
including Pharmacia's obligations for certain purchase order commitments and
existing inventory costs.
The Company currently relies on sales of Nicotrol for all of its product
sales revenues. A reduction in demand for Nicotrol would have an adverse effect
on the Company's results of operations. Although Nicotrol has been approved by
the regulatory authorities in the U.S., Canada, the United Kingdom, Italy and
several other European countries, no assurance can be given that further
regulatory approvals will be obtained. Currently, in addition to Nicotrol, there
is one other nicotine transdermal systems approved for over-the-counter sale in
the U.S The market for prescription nicotine transdermal systems experienced
strong initial sales in 1992 as a result of filling initial stocking
requirements of distributors and pharmacies, strong initial patient demand and
market promotion. However, demand for these systems has contracted since 1992.
The short- and long-term demand for Nicotrol is uncertain in both existing and
in potential markets. Furthermore, there can be no assurance that the market
demand for nicotine replacement products will be sustained or grow in the future
or that Nicotrol will maintain or increase its market share. In addition, there
can be no assurance that the Company can maintain or increase its Nicotrol sales
levels or that it will be able to sell its products profitably.
SECOND GENERATION NICOTINE TRANSDERMAL SYSTEM. The Company is developing a
portfolio of smoking cessation products designed to address currently
unsatisfied patient needs. These products are being developed to match the
nicotine dosing level with the patient's level of addiction. The first product
has completed Phase 2 clinical trials.
HORMONE REPLACEMENT
MARKET OPPORTUNITY. Recent demographic shifts towards an aging population
have resulted in an increase in the number of women entering and living many
years past menopause. The U.S. Census Bureau projects that the number of women
aged 45 to 54, the key menopausal group, is expected to grow 73% between 1990
and 2010. Menopause involves a decrease in the naturally occurring hormone
estrogen. In addition to the common menopausal symptoms, this decrease causes
osteoporosis, a progressive deterioration of the skeletal system through loss of
bone mass, which leads to increased susceptibility to bone fractures. The
decline in estrogen levels may also lead to increased risk of cardiovascular
disease. In response to these conditions, physicians often prescribe hormone
replacement therapy using either estrogen or a combination of estrogen and
progestin. However, industry estimates indicate that only 15% of the women in
the U.S. experiencing menopause now seek medical attention. According to
industry sources, 1995 worldwide sales of hormone replacement products exceeded
$2.6 billion. The Company expects this market to expand as an increasing number
of women are exposed to menopause-related health risks for a longer period of
time. In addition, the Company believes that heightened awareness of hormone
10
replacement therapy can potentially expand this market by increasing the
percentage of affected women who seek treatment.
Estrogens and progestins are primarily administered orally. The Company
believes that transdermal delivery offers a number of advantages over oral
delivery. Clinical studies suggest that the high doses of orally administered
estrogen are associated with an increase in adverse side effects, including the
risk of endometrial cancer. Transdermal delivery avoids first pass metabolism
through the gastrointestinal tract and the liver, and as a result requires a
substantially lower dosage than oral delivery and may accordingly significantly
reduce dosage-related side-effects. In addition, it has been estimated that over
50% of women on replacement oral estrogen do not comply with their prescribed
dosing regimen. The convenience of transdermal patches lasting up to a week can
significantly improve patient compliance.
The Company believes that its transdermal hormone replacement products have
a competitive advantage over certain transdermal hormone replacement products as
a result of their seven-day extended delivery systems and superior patient
comfort profile. Many hormone replacement products under development by
competitors last for only 3.5 days. The Company believes, based in part on its
market research, that patients and physicians prefer 7-day systems to 3.5-day
systems because of increased convenience and the potential for improved
compliance. In addition, the Company believes its products will result in less
irritation and greater patient comfort than certain currently marketed
transdermal products, which could also lead to improved compliance.
ESTROGEN AND ESTROGEN/PROGESTIN TRANSDERMAL SYSTEMS. In designing its
hormone replacement patches, Cygnus identified certain product features that it
believes will give its product significant competitive advantages as compared to
the leading product, a 3.5-day estrogen patch: extended wear time, improved
adhesion, good skin tolerance, and greater comfort. The Company believes that
the solid drug matrix design of its 7-day patch enhances drug permeation while
providing improved skin tolerance, adhesion and appearance.
The first Cygnus estrogen transdermal system, FemPatch, was developed under
an agreement with Sanofi, a French pharmaceutical company. Warner-Lambert, which
is Sanofi's North American sublicensee, will market the product upon receipt of
regulatory approval. In May 1995, after Warner-Lambert had completed the
originally designed Phase 3 clinical studies for this product, the FDA requested
limited additional clinical data due to an improvement by Cygnus in the
quality-control specifications for one of the raw materials used in the patch.
Because the Company made this change after the Phase 3 studies, the FDA
requested the additional data to show that the patches currently produced are
equivalent to those used in the clinical trials. Warner-Lambert conducted a
bioequivalency study to meet the FDA request. The FDA approved FemPatch in
December 1996.
In December 1993, Cygnus and American Home Products entered into a multiple
product agreement for the development, manufacturing and marketing of
transdermal patches for hormone replacement and possibly other markets. Under
the terms of the agreement, American Home Products has worldwide marketing
rights with respect to the products resulting from the collaboration. Cygnus
received up-front fees and is entitled to receive milestone payments as well as
a percentage of net sales on all products to be manufactured by Cygnus for the
worldwide market. In addition, American Home Products will pay for all clinical
trial expenses. Cygnus is otherwise responsible for financing the development
and manufacture of the products.
Cygnus is developing two products that are covered by the American Home
Products agreement. The first is a new 7-day estrogen system for which Phase 3
clinical trials have begun. Cygnus is also developing a 3.5-day transdermal
product that is designed to deliver estrogen and progestin simultaneously from a
single drug matrix at different rates. This product is in Phase 3 clinical
trials.
The Company and Sanofi are currently engaged in an arbitration proceeding
relating to the agreements under which Sanofi was granted the marketing rights
to the FemPatch product. As part of this
11
arbitration proceeding, Sanofi has asserted that the Company breached its
contractual obligations to Sanofi by pursuing the commercialization of
transdermal hormone replacement products with Warner-Lambert and American Home
Products. See Item 3--"Legal Proceedings."
CONTRACEPTION
Industry sources estimate the 1995 worldwide market for contraception to be
approximately $2.5 billion. The predominant method of birth control is the oral
contraceptive pill. The pill contains an estrogen and a progestin, and suffers
similar limitations as oral estrogen-based hormone therapy for menopausal
symptoms. In addition, the daily requirement of oral contraceptives occasionally
results in missed days of therapy and potentially unwanted pregnancy.
Cygnus is developing a 7-day contraceptive patch which could lead to
improved dosing compliance. In June 1994, Cygnus signed an agreement with
Johnson & Johnson for the development of a 7-day contraceptive transdermal
product. Johnson & Johnson has exclusive worldwide marketing rights to the
product; Cygnus received up-front payments and will receive milestone payments
as well as a percentage of net sales, and is responsible for the development and
manufacture of the products. This product is in Phase 2 clinical trials.
MUCOSAL PRODUCTS
Cygnus' expertise in transdermal drug delivery has led to a natural
extension of the Company's business into the development of mucosal drug
delivery products. Mucosal products are designed to provide the controlled
release of compounds through mucous membranes using a disc, spray, lozenge or
other system. Drugs delivered through mucous membranes have the potential to
provide a faster onset and longer duration of action than certain products
currently on the market. Mucosal delivery systems can act either locally (such
as in the throat) or systemically (through the bloodstream). A number of
consumer tests have demonstrated the capability of this delivery technology to
achieve a longer duration of action than currently marketed products in certain
markets. Cygnus is pursuing potential collaborative partners for mucosal
delivery products in both prescription and non-prescription markets.
NEED TO DEVELOP NEW PRODUCTS; DEVELOPMENT STAGE OF CURRENT PRODUCTS.
For the Company to be successful, it will need to develop and commercialize
new drug delivery and diagnostic products. Several products based on the
Company's technologies are currently under development by Cygnus and its
licensees. These products will require significant additional development and
investment, including preclinical and clinical testing, prior to their
commercialization and are not expected to be commercially available for several
years, if at all. There can be no assurance that such products or future
products can or will be successfully developed, prove to be safe and effective
in clinical trials, meet applicable regulatory standards, be capable of being
manufactured in commercial quantities at reasonable cost or be marketed
successfully. During 1994 and early 1995, the Company ceased certain of its
previous development efforts. For example, the Company has suspended the
development of transdermal systems for the delivery of alprazolam and prazosin,
primarily due to the systems' failure to meet financial/market goals. As
illustrated by the product development efforts recently terminated by the
Company, there can be no assurance that initial product development efforts or
third party collaborations will be successful.
Before the Company can market its GlucoWatch device, it must first complete
the development of a version of the product designed for commercial sale, then
conduct large scale clinical trials, prepare a submission to the FDA and obtain
clearance or approval from the FDA. Each of these stages will involve certain
risks and challenges. To date, the Company has only developed and tested a
research prototype of the GlucoWatch. Large scale clinical trials must be
conducted using a version of this device designed for commercial production and
sale. In order to develop a commercial version of the GlucoWatch, the
12
Company must successfully complete certain additional development milestones,
including the optimization and miniaturization of certain components and
integration of each component into a compact and operative device. There can be
no assurances that the Company will succeed in these further developments. The
components of the commercial version of the GlucoWatch will vary in a number of
respects from those used in the earlier prototype with which the Company has
conducted its early stage clinical studies, and no assurance can be given that
clinical trials using the commercial prototype will produce results that are
consistent with the early stage clinical studies or that will support the
necessary regulatory filings and approvals. See Item 7--"Management's Discussion
and Analysis of Financial Condition and Results of Operations."
GOVERNMENT REGULATION
The development, manufacture and marketing of drug delivery systems and
diagnostic devices are subject to regulation by the FDA and other federal, state
and local entities. These entities regulate, among other things, research and
development activities and the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, approval, advertising and promotion of the
Company's products. Sales of the Company's products outside the U.S. are subject
to comparable regulatory requirements. These requirements vary widely from
country to country.
FDA permission to market and distribute a new device can be obtained in one
of two ways. If a new or significantly modified device is "substantially
equivalent" to an existing legally marketed device, the new device can be
commercially introduced after submission of a 510(k) notification to the FDA,
and after the subsequent clearance or approval by the FDA. Changes to existing
devices that do not significantly affect safety or effectiveness can be made by
the Company without a 510(k) notification.
The second, more comprehensive approval process applies to a new device that
is not substantially equivalent to an existing product. First, the Company must
conduct clinical trials in compliance with testing protocols approved by an
Institutional Review Board ("IRB") for the participating research institution.
Second, the Company must submit a Pre-Market Approval ("PMA") application that
contains, among other things, the results of the clinical trials. The PMA
application also contains other information required under the Federal Food,
Drug, and Cosmetic Act, such as a full description of the device and its
components, a full description of the methods, facilities and controls used for
manufacturing and proposed labeling. Finally, the manufacturing site for the
product subject to the PMA must operate using current good manufacturing
practices ("cGMP") and pass an FDA Pre-Approval Inspection ("PAI") before
product commercialization.
The Company believes that the submission to the FDA for the GlucoWatch will
be in the form of a 510(k) notification, although the final determination of the
type of submission cannot be made until discussions are held with the FDA. For
the glucose monitoring device being developed by Cygnus, both the 510(k) and PMA
processes would include: (i) pre-clinical tests, (ii) receipt of Non-Significant
Risk ("NSR") device investigation status by an IRB or filing of an
Investigational Device Exemption ("IDE") application, (iii) adequate and
controlled human clinical trials to establish the safety and efficacy of the
diagnostic device in its intended application, and (iv) FDA clearance or
approval. Delays or failures to receive clearance following a 510(k)
notification or approval of a PMA application could have a significant adverse
effect on the Company's business, financial condition and results of operations.
The process required by the FDA before a drug delivery system may be
marketed in the U.S. depends on whether the compound has existing approval for
use in other dosage forms. If the drug is a new chemical entity that has not
been approved, then the process includes (i) pre-clinical laboratory and animal
tests, (ii) the filing of an IND application, (iii) adequate and controlled
human clinical trials to establish the safety and efficacy of the drug in its
intended indication and (iv) FDA approval of an NDA. If the drug has been
previously approved, then the approval process is similar, except that certain
toxicity tests
13
normally required for the IND and NDA applications may not be necessary. In
addition to the foregoing, the FDA requires proof that the drug delivery system
delivers sufficient quantities of the drug to the bloodstream to produce the
desired therapeutic result.
The results of preclinical studies and clinical studies are submitted to the
FDA in a submission for approval or clearance of the marketing and commercial
shipment of a drug delivery or diagnostic system. The FDA may deny a clearance
or approval if applicable regulatory criteria are not satisfied, or may require
additional clinical testing. Even if such data are submitted, the FDA may
ultimately decide that the submission does not satisfy the criteria for
clearance or approval. Product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur after the product
reaches the market. The FDA may require testing in addition to surveillance
programs to monitor the effect of products that have been commercialized, and it
has the power to prevent or limit further marketing of the product based on the
results of these post-marketing programs.
Cygnus' licensees historically have been responsible for the clinical and
regulatory approval procedures. Cygnus has participated in this process by
submitting to the licensee portions of the Drug or Master File maintained by
Cygnus and data concerning the manufacturing process for the drug delivery
system. Cygnus' ability to manufacture and sell products developed under
contract depends upon the licensee's completing satisfactory clinical trials and
obtaining the foregoing approvals or clearances. Cygnus may prepare and submit
an IND or IDE application, or obtain NSR device investigation status from an
IRB, and perform initial clinical studies before licensing the product for
marketing. The Company is increasingly taking a more active role with its
collaborative partners in the clinical trials and regulatory processes of its
products.
There can be no assurance that problems will not arise that could delay or
prevent the commercialization of the Company's products, or that the FDA, state
and foreign regulatory agencies will be satisfied with the results of the
clinical trials and approve the marketing of any products.
REGULATORY APPROVALS UNCERTAIN.
The Company's products require the approval of the FDA before they can be
marketed in the U.S. In addition, approvals are required from regulatory
agencies in most foreign countries before the Company's product can be marketed
in such countries. To date, the Company has two products which have received FDA
approval, Nicotrol and FemPatch. Before a regulatory submission can be filed
with the FDA, a product must undergo extensive clinical trials. The Company's
drug delivery systems require the filing of a New Drug Application ("NDA") with
the FDA, and the FDA's approval of the NDA. Devices such as the glucose
monitoring system under development by the Company will require the filing and
FDA clearance or approval of a medical device submission. The time required for
regulatory approval of the Company's products after a filing is uncertain. There
can be no assurance that problems will not arise that could delay or prevent the
commercialization of the Company's products or that the FDA and foreign
regulatory agencies will be satisfied with the results of clinical trials or
approve the marketing of any products. Moreover, even if regulatory approval is
granted, such approval may include significant limitations on indicated uses for
which any such products could be marketed.
The Company believes that the submission to the FDA for the GlucoWatch will
be in the form of a premarket notification (a "510(k) notification"), although
the final determination of the type of submission cannot be made until
discussions are held with the FDA. In the event that a 510(k) notification is
not accepted by the FDA, the Company will be required to submit a pre-market
approval application ("PMA") for this product, rather than a 510(k)
notification. The FDA approval process for a PMA is typically more involved and
requires more time than a 510(k) submission.
A drug or medical device and its manufacturer are subject to continual
review after approval, and later discovery of previously unknown problems with a
product or the manufacturing process may result in restrictions on such product
or the manufacturer, including withdrawal of the product or products from the
14
market. Failure to comply with applicable regulatory requirements may, among
other things, result in fines, suspensions of regulatory approvals, product
recalls, operating restrictions and criminal prosecution. In addition, new
government regulations may be established that could delay or prevent regulatory
approval of the Company's potential products. Cygnus is also subject to
regulation under federal, state and local regulations regarding work place
safety, environmental protection and hazardous and controlled substance
controls, among others.
DEPENDENCE ON LICENSEES AND COLLABORATIVE ARRANGEMENTS.
Cygnus depends on its licensees to fund a significant portion of product
development costs, to conduct clinical testing, to obtain regulatory approvals
and to market products. The Company is dependent on Pharmacia & Upjohn (formerly
Kabi Pharmacia Therapeutics AB), a subsidiary of Procordia AB ("Pharmacia") and
its sublicensee Johnson & Johnson for the marketing of Nicotrol. In February
1996, the Company entered into an agreement with Becton Dickinson for the
marketing and distribution of the GlucoWatch. Under the terms of the agreement,
Becton Dickinson has exclusive worldwide marketing and distribution rights, with
the exception of Japan and Korea. Cygnus will have primary responsibility for
completing product development, obtaining regulatory approvals, manufacturing,
and customer service and support for the product. In July 1996, the Company
entered into an agreement with Tokyo-based Yamanouchi Pharmaceutical Co., Ltd.
for the marketing and distribution of the GlucoWatch in Japan and Korea. Cygnus
will have primary responsibility for completing product development and for
manufacturing. Cygnus will be eligible to receive up-front and milestone
payments as well as a percentage of the product's future commercial success from
both Becton Dickinson and Yamanouchi. The Company's licensees generally have the
right to terminate the development funding for a product at any time for any
reason without significant penalty. Licensees have exercised this right in the
past, and there can be no assurance that current and future licensees will not
also exercise this right in the future.
Additionally, the resources and attention a licensee devotes to a product
are not within the Company's control. As a result, there may be delays in
clinical testing, the preparation and processing of regulatory filings and
commercialization efforts conducted by the Company's licensees. Certain of the
Company's licensees may also be permitted to offer products that are competitive
with those of the Company, which could interfere with their efforts on behalf of
the Company. The Company's ability to develop and commercialize products in the
future will also depend on its ability to enter into collaborative arrangements.
There can be no assurance that the Company will be able to enter into new
collaborative arrangements or renew existing collaborative arrangements.
Additionally, there can be no assurance that existing or future collaborative
arrangements will be successful. See Item 7--"Management's Discussion and
Analysis of Financial Condition and Results of Operations."
COMPETING PRODUCTS AND CHANGES IN TECHNOLOGY.
A large number of pharmaceutical companies are involved or are becoming
involved in the development and commercialization of products incorporating
advanced or novel drug delivery and diagnostic systems. This field is highly
competitive, and Cygnus believes that competition will substantially increase in
the future. A number of pharmaceutical companies have invested, and are
continuing to invest, significant resources in the development of their own drug
delivery and diagnostic systems. In addition, a number of companies have been
formed to develop specific advanced drug delivery and diagnostic systems. Many
of these pharmaceutical and other companies have greater financial, research and
development and other resources than Cygnus, as well as more experience than
Cygnus in commercializing pharmaceutical, drug delivery and diagnostic products.
Such companies may improve existing drug formulations and products more
efficiently than Cygnus and thus may represent significant potential
competitors. Other companies, which have substantially greater financial and
research and development resources than Cygnus, may acquire the skills required
to design and develop transdermal drug delivery and diagnostic systems and thus
may represent significant potential for future competition.
15
The blood glucose monitoring industry is characterized by frequent new
product introductions and changes in technology. The Company's primary
competitors in the glucose monitoring industry are expected to include companies
that currently market finger stab method products. These companies have
significantly greater resources than Cygnus and could use these resources to
hinder the market penetration of the Company's product. In addition, a number of
companies are engaged in the development of products using technology which is
different than that under development by Cygnus, but also intended to permit
painless glucose monitoring. For example, a number of competitors are developing
non-invasive glucose monitoring devices based on infrared spectroscopy. These
devices would illuminate body tissue with radiation and measure the rate at
which the radiation is absorbed. There can be no assurance that these products
will not render the Company's glucose monitor uncompetitive or obsolete. In
addition, a number of companies are seeking to develop new drugs to treat
diabetes, and if any such development is successful it could reduce demand for
glucose monitoring systems.
The drug delivery industry is a rapidly evolving field. A number of other
companies, including major pharmaceutical companies, are also developing and
marketing transdermal, mucosal and similar systems for the controlled delivery
of drugs. Products currently on the market or under development by competitors
deliver the same drugs, or other drugs to treat the same indications as many of
the products under development by the Company. The first pharmaceutical product
to reach the market in a therapeutic area often obtains and maintains
significant market share relative to later entrants to the market. The Company's
transdermal and mucosal drug delivery products will also compete with drugs
marketed not only in similar drug delivery systems but also in traditional
dosage forms such as oral administration, bolus injection and continuous
infusion. New drugs, new therapeutic approaches or future developments in
alternative drug delivery technologies, such as time-release capsules, liposomes
and implants, may provide therapeutic or cost advantages over the drug delivery
systems being developed by the Company.
Changes in drug delivery and diagnostic technology will require substantial
investments by companies to maintain their competitive position and may provide
opportunities for new competitors to enter the industry. There can be no
assurance that developments by others will not render the Company's drug
delivery or diagnostic products or other technologies uncompetitive or obsolete.
Cygnus generally seeks to retain rights to manufacture the transdermal
products developed for its licensees. To date, Cygnus has manufactured only
Nicotrol in commercial quantities on a continuous basis. No assurance can be
given that manufacturing or control problems will not arise as the Company
increases production of its products or as additional facilities are required in
the future. Cygnus must continue to develop, adapt or acquire the production
technology, facilities and technical and managerial personnel to manufacture
each of its planned products in commercial quantities or find alternative means,
if available, to manufacture such products. No assurance can be given that
Cygnus will be able to successfully increase its manufacturing capabilities at a
reasonable cost. The production of the GlucoWatch will involve the manufacture
and assembly of electronic and other components that require manufacturing and
sourcing capabilities with which the Company has little experience. No assurance
can be given that the Company will be able to develop these manufacturing
capabilities or arrange for qualified sources of those components that it is not
able to manufacture.
Furthermore, the manufacture of the Company's products is subject to current
good manufacturing practices requirements prescribed by the FDA or other
standards prescribed by the appropriate regulatory agency in the country of use.
Additionally, the Company's agreements with licensees either specify pricing
formulas for products manufactured and sold by Cygnus to its licensees or
specify that prices will be negotiated in the future. There can be no assurance
that prices for the Company's products will cover the manufacturing costs for
these products in light of the Company's limited manufacturing experience and
general supply and demand conditions in the marketplace.
The Company expects to market and sell certain of its products directly or
through co-promotion with third parties. The Company has limited experience in
sales, marketing or distribution. If the Company
16
wishes to market a product directly, the Company must develop a substantial
marketing staff and sales force with technical expertise. There can be no
assurance that the Company will be able to build such a marketing staff or sales
force, that the cost of establishing such a marketing staff or sales force will
not exceed any product revenues, or that the Company's direct sales and
marketing efforts will be successful. In addition, the Company may have to
compete with other companies that currently have extensive and well-funded
marketing and sales operations.
THIRD-PARTY REIMBURSEMENT.
Successful commercialization of certain of the Company's products may depend
in part on the availability of reimbursement from third-party health care
payors, such as private insurance plans and the government. There can be no
assurance that such reimbursement will be available. Third-party payors are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement for new therapeutic and diagnostic products. This
could potentially have an adverse effect on the Company.
PATENTS AND PROPRIETARY RIGHTS
The Company's policy is to file patent applications in appropriate
situations to protect and preserve, for its own use, technology, inventions and
improvements that it considers important to the development of its business. The
Company seeks patent protection for its proprietary technologies and products in
the U.S., Canada, Australia and key European and Asian countries. The Company
also relies on trade secrets, know-how, continuing technological innovations and
licensing opportunities to develop and maintain its competitive position.
The GlucoWatch incorporates technology developed by Cygnus as well as
technology licensed exclusively to the Company by the University of California
at San Francisco ("UCSF"). UCSF holds two U.S. patents covering technology for
extraction of glucose and other analytes through the intact skin, and has a
pending U.S. patent application containing further claims. Corresponding foreign
applications are also pending. The Company has an exclusive license worldwide
under these patents and patent applications. Certain of the Company's glucose
monitoring technology had been developed under research and development
agreements between Cygnus and PaineWebber R&D Partners II, L.P. In December
1994, Cygnus acquired all of this entity's rights to this technology in exchange
for 1,529,941 shares of Cygnus' common stock. The Company has filed ten
applications for U.S. patents covering aspects of glucose monitoring technology.
Cygnus has filed patent applications in the U.S. and elsewhere covering
aspects of the composition and manufacture of its transdermal drug delivery
systems which it considers patentable. As of December 31, 1996, the Company had
a total of 31 U.S. patents issued or allowed, covering compounds that alter the
skin's permeation properties, the composition of elastomeric transdermal
products, a process for fabricating volatile and heat sensitive drugs into a
solid matrix transdermal patch, and ultrasound enhanced drug delivery. The
Company has issued United States and foreign patents relating to its transdermal
hormone delivery systems and additional applications directed to alternative
delivery systems useful for hormone replacement therapy. The Company has
numerous additional patent applications worldwide, covering transdermal patch
composition, usage, application and chemical enhancers.
The Company's success depends in large part on its ability to obtain patent
protection for its products, preserve its trade secrets and operate without
infringing the proprietary rights of others, both in the U.S. and in other
countries. Patent applications in the U.S. are maintained in secrecy until
patents issue, and since publication of discoveries in the scientific or patent
literature tends to lag behind actual discovery by several months, Cygnus cannot
be certain that it was the first to file patent applications on such inventions.
No assurance can be made that patents will issue with respect to any of the
Company's patent applications or that any patents will provide competitive
advantages for its products or will not be challenged or
17
circumvented by competitors. Cygnus also relies on trade secrets and proprietary
know-how that it seeks to protect, in part, by confidentiality agreements with
its licensees, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company would have adequate remedies
for any breach or that the Company's trade secrets will not otherwise become
known or be independently developed by its competitors.
The design, development, manufacture and use of the Company's products
involve an inherent risk of product liability claims and associated adverse
publicity. The Company currently maintains liability insurance; however, there
can be no assurance that its insurance will be adequate to cover claims made
against the Company. Such insurance is expensive, difficult to obtain and may
not be available in the future on acceptable terms or at all. A successful claim
brought against the Company in excess of the Company's insurance coverage could
have a material adverse effect upon the Company and its financial condition.
Any litigation, in the U.S. or abroad, as well as any interference
proceedings that may be declared by the United States Patent and Trademark
Office (the "Patent Office") to determine the priority of inventions, could
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. Litigation may be necessary
to enforce patents issued to the Company or to protect trade secrets or know-how
owned by the Company. A negative determination in litigation or interference
proceedings in which the Company is a party could subject the Company to
significant liabilities to third parties or require the Company to seek licenses
from third parties. Although patent and intellectual property disputes in the
pharmaceutical product area have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. Furthermore, there can be no assurance that
necessary licenses would be available to the Company on satisfactory terms if at
all. Accordingly, an adverse determination in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent the Company
from manufacturing and selling certain of its products which would have a
material adverse effect on the Company.
Alza Corporation ("Alza") owns a patent that was issued on May 13, 1986 and
contains claims for the transdermal delivery of fentanyl. The Alza fentanyl
patent claims were reviewed by the Patent Office during two re-examination
procedures, one of which was instituted by Cygnus, but were nevertheless
confirmed in January 1989. In January 1994, Cygnus filed a complaint in the U.S.
District Court in San Francisco, California against Alza for violation of the
antitrust laws and for declaration of unenforceability and invalidity of the
Alza patent on fentanyl transdermal systems. In April 1995, motions by Alza to
dismiss the suit were granted primarily on the basis that Alza had made
insufficient threat of enforcement. The Company appealed this ruling in May
1995. The United States Court of Appeals for the Federal Circuit upheld a 1995
decision of the United States District Court for the Northern District of
California which dismissed Cygnus' action seeking a declatory judgment of
invalidity and/or unenforceability of Alza Corporation's United States patent
relating to the transdermal administration of fentanyl. In dismissing the
action, the court did not consider the merits of Cygnus' arguments relating to
invalidity/unenforceability of the Alza Corporation patent nor associated
antitrust claims, but rather dismissed the action on jurisdictional grounds as
failing to establish the presence of an actual controversy between the parties.
The Company has effectively suspended its development efforts for the
transdermal administration of fentanyl.
On June 30, 1994, Sanofi, S.A. ("Sanofi") filed a request for arbitration
against Cygnus with the International Court of Arbitration. In its request for
arbitration, Sanofi has alleged that Cygnus breached its existing contract with
Sanofi by, among other things, entering into a product development agreement
with another company for the development of transdermal systems in the field of
hormone replacement therapy (which agreements pertain to each of the Company's
hormone replacement products other than FemPatch). Sanofi claims it has a
proprietary interest in certain Cygnus technologies and that it has incurred
substantial damages as a result of the alleged breach. Sanofi is seeking to
recover from Cygnus approximately $60.0 million for damages attributable to the
alleged breach. Cygnus has answered Sanofi's request for arbitration by
maintaining that Sanofi's claims are inconsistent with its contractual
relationship
18
and that such claims are otherwise without merit. Cygnus plans to continue
aggressively defending against this arbitration and has asserted certain
counterclaims exceeding the amount being sought by Sanofi. A hearing was held in
May 1996 with respect to the liability aspects of Sanofi's claims against
Cygnus, and the Tribunal of International Chambers of Commerce (the "Tribunal")
announced an interim award in the arbitration proceedings in October 1996. The
Tribunal found that two transdermal products for hormone replacement therapy
licensed by Cygnus to another company fall within the scope of exclusive license
previously granted to Sanofi. Remaining to be heard are Cygnus' liability claims
against Sanofi and a determination as to the amount of damages to be awarded to
either party. The first of these further hearings is scheduled to take place in
March 1997. Should all or part of the claims as sought for by Sanofi, and in the
amounts asserted be successful, and should Cygnus' counter claims and defenses
not be allowed, the Company could be materially and adversely affected.
MANUFACTURING
Cygnus generally retains manufacturing rights for its products. The
Company's transdermal patches are manufactured using several proprietary
materials and production technologies developed by Cygnus in conjunction with
equipment and material suppliers. Production of advanced transdermal drug
delivery and diagnostic systems requires specialized skills in several areas,
such a polymer chemistry and adhesive technology. Since the Company designs a
unique transdermal system for each drug, Cygnus' process development engineers
become involved early in the product design process. The Company believes that
close interaction at the design stage permits development of efficient
manufacturing techniques. In addition, Cygnus performs analytical testing
in-house for each aspect of the manufacturing process, from raw material studies
to final product characterization. The Company has developed proprietary assays
to measure patch characteristics such as drug release rate, drug and solvent
residues, and product stability. The Company has patented certain aspects of its
manufacturing processes.
Several materials used in the Company's products are currently obtained from
single sources. Although the Company has not experienced difficulty acquiring
these materials for the manufacture of its products for sale or clinical trials,
there can be no assurance that supply interruptions will not occur or that the
Company will not have to obtain substitute vendors, if such vendors are
available, which would require additional regulatory submissions and approvals.
Any such interruption of supplies could have a material adverse effect on the
Company's ability to develop, manufacture and sell its products.
The Company has a 21,000 square foot manufacturing facility and a 22,000
square foot warehouse used in the commercial production of Nicotrol and
FemPatch, and the clinical supply of other products. The Company believes the
facility will have sufficient capacity to support the planned market
introduction of its current products. The facility complies with applicable
regulatory requirements. In December 1996, the FDA approved the FemPatch NDA.
See "Government Regulation."
EMPLOYEES
As of February 10, 1997, the Company had 180 employees. Of this total number
of employees, 74 were engaged in research and development, including process
development, 31 in scientific/regulatory affairs and quality assurance, 21 in
general administration, finance, information technology and business
development, and 54 in operations and human resources. None of the Company's
employees is represented by a labor union. Cygnus has experienced no work
stoppages and it believes its employee relations are good.
19
The Company's success will depend in large part on the continued services of
its scientific, managerial and manufacturing personnel. The loss of a
significant group of key personnel could have a material adverse effect on the
Company. The Company's success also depends upon its ability to continue to
attract and retain other highly qualified scientific, managerial and
manufacturing personnel. Competition for such personnel is intense. In this
respect, the Company competes with numerous pharmaceutical and health care
companies, as well as universities and nonprofit research organizations. There
can be no assurance that the Company will continue to be able to attract and
retain sufficient qualified personnel.
ITEM 2. PROPERTIES
Cygnus leases approximately 92,000 square feet in four buildings. Three are
located in Redwood City, California and the fourth is located in Menlo Park,
California. The headquarters building, approximately 38,000 square feet, is used
for laboratories and administrative offices. The manufacturing building,
approximately 21,000 square feet, is wholly dedicated to manufacturing and
support. The third facility, also in Redwood City, California, has approximately
11,000 square feet of which approximately 8,000 square feet are utilized for
additional administrative offices and the remainder is reserved for expansion
purposes. The fourth facility, which is located in Menlo Park, has approximately
22,000 square feet, and is used for storage of manufacturing materials and final
products.
The three facilities in Redwood City are leased through 1998 with an option
to renew at the then fair market value through 2003. The facility in Menlo Park
is leased over a three period ending in 1999.
The manufacturing facility was designed and constructed to comply with cGMP
standards. Cygnus has received licenses from the California Department of Health
Services and the DEA for the manufacture of drug products in this facility, and
has filed a Drug Master File for the facility with the FDA. The Company believes
that this manufacturing facility has sufficient capacity to meet current
operating requirements and satisfy foreseeable future demands for its commercial
products Nicotrol and FemPatch. To the extent that the manufacturing facility is
not used for commercial production, the Company intends to maintain a minimum
level of staffing and utilize the excess capacity for producing clinical
supplies and process improvement.
As the Company completes the development of its hormone replacement
products, it will begin the evaluating its existing manufacturing plans under
which a new manufacturing site may become necessary.
ITEM 3. LEGAL PROCEEDINGS
The United States Court of Appeals for the Federal Circuit upheld a 1995
decision of the United States District Court for the Northern District of
California which dismissed Cygnus' action seeking a declatory judgment of
invalidity and/or unenforceability of Alza Corporation's United States patent
relating to the transdermal administration of fentanyl. In dismissing the
action, the court did not consider the merits of Cygnus' arguments relating to
invalidity/unenforceability of the Alza Corporation patent nor associated
antitrust claims, but rather dismissed the action on jurisdictional grounds as
failing to establish the presence of an actual controversy between the parties.
The Company has effectively suspended its development efforts for the
transdermal administration of fentanyl.
On June 30, 1994, Sanofi, S.A. ("Sanofi") filed a request for arbitration
against Cygnus with the International Court of Arbitration. In its request for
arbitration, Sanofi has alleged that Cygnus breached its existing contract with
Sanofi by, among other things, entering into a product development agreement
with another company for the development of transdermal systems in the field of
hormone replacement therapy (which agreements pertain to each of the Company's
hormone replacement products other than FemPatch). Sanofi claims it has a
proprietary interest in certain Cygnus technologies and that it has incurred
substantial damages as a result of the alleged breach. Sanofi is seeking to
recover from Cygnus approximately $60.0 million for damages attributable to the
alleged breach. Cygnus has answered Sanofi's request for arbitration by
maintaining that Sanofi's claims are inconsistent with its contractual
relationship
20
and that such claims are otherwise without merit. Cygnus plans to continue
aggressively defending against this arbitration and has asserted certain
counterclaims exceeding the amount being sought by Sanofi. A hearing was held in
May 1996 with respect to the liability aspects of Sanofi's claims against
Cygnus, and the Tribunal of International Chambers of Commerce (the "Tribunal")
announced an interim award in the arbitration proceedings in October 1996. The
Tribunal found that two transdermal products for hormone replacement therapy
licensed by Cygnus to another company fall within the scope of exclusive license
previously granted to Sanofi. Remaining to be heard are Cygnus' liability claims
against Sanofi and a determination as to the amount of damages to be awarded to
either party. The first of these hearings is scheduled to take place in March
1997. Should all or part of the claims as sought for by Sanofi, and in the
amounts asserted be successful, and should Cygnus' counter claims and defenses
not be allowed, the Company could be materially and adversely affected.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of the Company's Stockholders in the
quarter ended December 31, 1996.
21
EXECUTIVE OFFICERS
As of February 1, 1997, the executive officers of the Company, who serve at
the discretion of the Board of Directors, are as follows:
NAME AGE TITLE
- ----------------------------------------------------- --- -----------------------------------------------------
Gary W. Cleary, Ph.D................................. 54 Chairman of the Board of Directors and Chief
Technical Officer
Gregory B. Lawless, Ph.D............................. 57 President, Chief Executive Officer and Director
Neil R. Ackerman, Ph.D............................... 53 Senior Vice President, Research & Development
Craig W. Carlson..................................... 48 Vice President, Corporate Marketing and Strategic
Planning
James F. Grady, Jr., Ph.D............................ 48 Vice President, Operations and Human Resources
John C. Hodgman...................................... 42 Vice President, Finance and Chief Financial Officer;
President, Cygnus Diagnostics
Stephen N. Kirnon.................................... 34 Vice President, Business Development
Alan F. Russell, Ph.D................................ 55 Senior Vice President, Scientific Affairs
Dr. Cleary, the Company's founder and Chairman of the Board of Directors,
also served as the Company's President and Chief Executive Officer from its
inception until July 1986. Since 1986, Dr. Cleary has served as Chief Technical
Officer of the Company. During his professional career, Dr. Cleary served as an
investigator with the U.S. Food and Drug Administration and held research and
management positions at Cutter Labs, Alza Corporation, Key Pharmaceuticals, Inc.
and Genentech Inc. Dr. Cleary holds an M.B.A. in Health Sciences from the
University of Miami, a Ph.D. in Pharmaceutical Sciences from Rutgers University
and a Pharm.D. in Pharmacy from the University of California, San Francisco.
Dr. Lawless joined Cygnus in January 1992 as President, Chief Executive
Officer and Director. From March 1989 to January 1992, Dr. Lawless was President
and Chief Operating Officer of Chiron Corporation, a biopharmaceutical company.
Prior to joining Chiron he held various positions with the DuPont Co. from May
1969 to March 1989, including serving as Chief Operating Officer of its
pharmaceutical subsidiary and as Director of DuPont Specialty Diagnostic
Division. He holds a Ph.D. in Pharmaceutical Chemistry from Temple University.
Dr. Ackerman joined Cygnus in May of 1994 as Vice President of Research and
Development. In January 1997 Dr. Ackerman was promoted to Senior Vice President
of Research and Development. Since 1990, Dr. Ackerman served as Vice President
of Research and Development for Glycomed, leading their discovery efforts
focused on cardiovascular and inflammatory diseases. From 1982 to 1990, he was
Research Director, Cancer and Inflammatory Diseases, with DuPont
Pharmaceuticals, responsible for leading a 100-person staff that had the
objective of discovering therapeutics for cancer, inflammatory and immune-based
diseases. Prior to that he was employed by Syntex and Pfizer in research and
management capacities. Dr. Ackerman received a B.S. and Ph.D. from the
University of Maryland and completed a post-doctoral fellowship at Stanford
University.
Mr. Carlson joined the Company in July 1993 as Vice President, Corporate
Communications, after 15 years in the advertising and marketing industry. In
January 1997, Mr. Carlson was given additional responsibilities for strategic
planning. His current title is Vice President, Corporate Marketing and Strategic
Planning. From 1988 to July 1993, he was Vice President and Group Director at
Young &
22
Rubicam Advertising in San Francisco. Prior to that, Mr. Carlson was Vice
President of Campbell-Mithun Advertising. He holds a B.A. from Union College and
an M.B.A. from Stanford University.
Dr. Grady joined the Company in May 1993 as Vice President, Human Resources.
In June 1995, Dr. Grady was additionally appointed Vice President, Operations
and Human Resources. From January 1989 to May 1993, Dr. Grady led the human
resources function for a division of Beckman Instruments. From 1986 to January
1989, Dr. Grady held various positions with SmithKline Beckman (now SmithKline
Beechman) including Director of Compensation & Organizational Development for
their worldwide research and development business unit. He holds a B.S. in
Psychology and a Ph.D. in Education from the University of Pittsburgh.
Mr. Hodgman joined Cygnus in August 1994 as Vice President, Finance and
Chief Financial Officer. In June 1995, Mr. Hodgman was additionally appointed
President of Cygnus Diagnostics. Prior to joining Cygnus, Mr. Hodgman served as
Vice President of Operations and Finance and Chief Financial Officer for Central
Point Software, a PC and networking software company. Prior to that, he was the
Vice President of Finance and Administration and Chief Financial Officer of Ateq
Corporation. Mr. Hodgman holds a B.S. degree from Brigham Young University and
an M.B.A. from the University of Utah.
Mr. Kirnon joined Cygnus in April 1993 as Director, Business Development. In
January 1997, Mr. Kirnon was promoted to Vice President, Business Development.
Prior to joining Cygnus, Mr. Kirnon served as the National Sales & Marketing
Manager for BioGenex, Inc. Prior to that, he worked at SmithKline Beecham
Corporation. Mr. Kirnon holds a B.A. in Biochemical Sciences from Harvard
University and an MBA from Pepperdine University in General Management.
Dr. Russell joined the Company in May 1992 as Vice President, Scientific
Affairs, and was promoted to Senior Vice President in November, 1994. Dr.
Russell was Vice President for Scientific Affairs at Chiron Corporation from
1987 to April 1992. He held the same position at Beecham Laboratories from 1983
to 1987, prior to which he held various positions at Syntex Corporation from
1971 to 1983, including Director of Regulatory Affairs for Investigational
Drugs. He holds a Ph.D. in Organic Chemistry from the University of New South
Wales and an M.B.A. and J.D. from the University of Santa Clara.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The market price for shares of the Company's Common Stock has been highly
volatile. Factors such as the results of preclinical studies and clinical trials
for Cygnus' products or products of its competitors, announcements of
technological innovations, strategic relationships, new product introductions by
the Company or its competitors, governmental regulation, regulatory approvals or
delays or developments relating to patent or proprietary rights, as well as
period-to-period fluctuations in financial results, may have a significant
impact on the market price of the Common Stock. Additionally, in recent years,
the stock market has experienced extreme price and volume fluctuations.
The section entitled "Market Price of and Dividends on Common Stock and
Related Shareholder Matters" on page 25 of the Company's Consolidated Financial
Statements section of the Annual Report to Stockholders for the year ended
December 31, 1996 is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The section entitled "Selected Financial Data" on page 1 of the Company's
Consolidated Financial Statements section of the 1996 Annual Report is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 2 through 8 of the Company's
Consolidated Financial Statements section of the 1996 Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and footnotes thereto, together with
the report thereon of Ernst & Young LLP dated January 20, 1997 on pages 9
through 24 of the Company's Consolidated Financial Statements section of the
1996 Annual Report is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Cygnus incorporates by reference the information concerning its directors
set forth under the heading "Proposal One--Re-Election of Directors" in Cygnus'
definitive Proxy Statement filed for its 1997 Annual Meeting of Stockholders.
Information concerning Cygnus' executive officers appears at the end of Part
I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Cygnus incorporates by reference the information set forth under the heading
"Executive Compensation and Other Information" in the Cygnus' definitive Proxy
Statement filed pursuant to Regulation 14A for its 1997 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Cygnus incorporates by reference the information set forth under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the Cygnus'
definitive Proxy Statement filed pursuant to Regulation 14A for its 1997 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Cygnus incorporates by reference the information set forth under the
headings "Proposal One--Re-Election of Directors" and "Executive Compensation
and Other Information" in the Cygnus' definitive Proxy Statement filed pursuant
to Regulation 14A for its 1997 Annual Meeting of Stockholders.
25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a.1) FINANCIAL STATEMENTS AND REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The following Consolidated Financial Statements included in the Annual
Report to Stockholders are incorporated by reference in Item 8.
PAGE REFERENCE IN
ANNUAL REPORT TO
STOCKHOLDERS
-----------------
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and
1994................................................................................... 8
Consolidated Balance Sheets as of December 31, 1996 and 1995............................. 9
Consolidated Statement of Stockholders' Equity for the years ended December 31, 1996,
1995 and 1994.......................................................................... 10
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994................................................................................... 11
Notes to Consolidated Financial Statements............................................... 12
a.2) FINANCIAL STATEMENT SCHEDULE
II. Valuation and Qualifying Accounts.................................. S-1
All other financial statement schedules are omitted because they are not
required or the information is disclosed in the financial statements listed
in item 14a.1).
b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the fourth quarter of 1996.
c) EXHIBITS
The following exhibits are filed herewith or incorporated by reference:
3.1 Bylaws of the Registrant, as amended, incorporated by reference to Exhibit
3.3 of the Registrant's Registration Statement Form S-1 No. 33-38363.
3.2 Restated Articles of Incorporation of the Registrant, as amended to date,
incorporated by reference to Exhibit 3.4 of the Registrant's Registration
Statement Form S-1 No. 33-38363.
4.1 Specimen of Common Stock certificate of the Registrant, incorporated by
reference to Exhibit 4.1 of the Registrant's Registration Statement Form
S-1 No. 33-38363.
4.2 Rights Agreement dated September 21, 1993 between the Company and Chemical
Trust Bank of California (the "Transfer Agent"), which includes the
Certificate of Determination for the Series A Junior Participating
Preferred Stock as Exhibit A, the form of Right Certificate as Exhibit B
and the Summary of Rights to purchase Preferred Shares as Exhibit C,
incorporated by reference to Exhibit I of the Registrant's Form 8-A filed
on October 21, 1993, Registration No. 0-18962.
10.1 Warrant dated September 28, 1990 issued by the Registrant to Paine Webber
R&D Partners II, L.P., incorporated by reference to Exhibit 10.5 of the
Registrant's Registration Statement Form S-1 No. 33-38363.
26
10.2 Agreement dated October 1, 1992 between the Registrant and Kabi Pharmacia,
incorporated by reference to Exhibit 19.1 of the Registrant's Form 10-Q
for the quarter ended September 30, 1992, Registration No. 0-18962.
10.3 Amended August 29, 1986 Agreement dated as of May 30, 1988 between the
Registrant and Sanofi S.A. ("Sanofi"), incorporated by reference to
Exhibit 10.9A of the Registrant's Registration Statement Form S-1 No.
33-38363.
10.4 Amendment No. 1 made as of May 4, 1990 to the Amended August 29, 1986
Agreement between the Registrant and Sanofi, incorporated by reference to
Exhibit 10.9B of the Registrant's Form S-1 Registration Statement No.
33-38363.
10.5 Amendment No. 2 made as of August 31, 1990 to the Amended August 29, 1986
Agreement between the Registrant and Sanofi, incorporated by reference to
Exhibit 10.9C of the Registrant's Form S-1 Registration Statement No.
33-38363.
10.6 Supply Agreement dated September 28, 1990 between the Registrant and Warner-
Lambert Company, incorporated by reference to Exhibit 10.12 of the
Registrant's Form S-1 Registration Statement No. 33-38363.
10.7 Agreement dated November 29, 1990 between the Registrant and Warner-Lambert
Company, incorporated by reference to Exhibit 10.13 of the Registrant's
Form S-1 Registration Statement No. 33-38363.
10.8 Ten-year Industrial Net Lease Agreement (Building No. 2) dated September 27,
1988 between the Registrant and Seaport Centre Venture Phase I,
incorporated by reference to Exhibit 10.26 of the Registrant's Form S-1
Registration Statement No. 33-38363.
10.9 Ten-year Industrial Net Lease Agreement (Building No. 8) dated September 27,
1988 between the Registrant and Seaport Centre Venture Phase I,
incorporated by reference to Exhibit 10.27 of the Registrant's Form S-1
Registration Statement No. 33-38363.
10.10 Sublease Agreement dated June 12, 1990 between the Registrant and M&T
Publishing, Inc., incorporated by reference to Exhibit 10.28 of the
Registrant's Form S-1 Registration Statement No. 33-38363.
10.11 Letter Agreement dated December 18, 1991 between the Registrant and Menlo
Capital Corporation, incorporated by reference to Exhibit 10.33 of the
Registrant's Form S-1 Registration Statement No. 33-45180.
10.12 Lease Agreement dated as of October 15, 1991 between the Registrant and
Lincoln Menlo Associates Limited, a California Limited Partnership,
incorporated by reference to Exhibit 10.34 of the Registrant's Form S-1
Registration Statement No. 33-45180.
10.13 Services Agreement made as of April 6, 1990 between the Registrant and
DepoMed Systems, Inc., incorporated by reference to Exhibit 10.35 of the
Registrant's Form S-1 Registration Statement No. 33-45180.
10.14 Loan and Security Agreement dated June 26, 1992 between the Registrant and
AT&T Commercial Finance Corporation. Incorporated by reference to Exhibit
10.30 of the Registrant's Form 10-K for the fiscal year ended December 31,
1993.
*10.15 Distributorship Agreement dated as of February 9, 1996 between the
Registrant and Becton Dickinson. Incorporated by reference to exhibit 10.1
of the Company's Form 10-Q for the quarter ended March 31, 1996.
27
*10.16 Agreement dated November 11, 1993 between the Registrant and Kabi Pharmacia
(the "Kabi Agreement") Incorporated in reference to exhibit 10.33 of the
Company's Form 10-K for the fiscal year ended December 31, 1993.
*10.17 Development, Supply and License Agreement dated December 28, 1993 between
the Registrant and Wyeth-Ayerst, a division of American Home Products (the
"U.S. Agreement") Incorporated by reference to exhibit 10.34 of the
Company's Form 10-K for the fiscal year ended December 31, 1993.
*10.18 Development, Supply and License Agreement dated December 28, 1993 between
the Registrant and Wyeth-Ayerst, a division of American Home Products (the
"International Agreement") Incorporated by reference to exhibit 10.35 of
the Company's Form 10-K for the fiscal year ended December 31, 1993.
*10.19 Loan and Security Agreement between the Registrant and Silicon Valley Bank
entered into as of June 24, 1996. Incorporated by reference to exhibit
10.1 of the Company's Form 10-Q for the quarter ended June 30, 1996.
10.20 Product Development, Supply and License Agreement dated June 8, 1994 between
the Registrant and Ortho Pharmaceutical Corporation, a division of Johnson
& Johnson. Incorporated by reference to exhibit 10.35 of the Company's
Form 10-Q for the quarter ended June 30, 1994.
10.21 Agreement dated November 22, 1994, between the Registrant and Kabi Pharmacia
(the "Kabi" Agreement). Incorporated by reference to exhibit 10.39 of the
Company's Form 10-K for the fiscal year ended December 31, 1994.
10.22 Loan and Security Agreement between Silicon Valley Bank and Registrant
entered into as of December 21, 1994. Incorporated by reference to exhibit
10.40 of the Company's Form 10-K for the fiscal year ended December 31,
1994.
10.23 GMS Technology Purchase Agreement dated December 30, 1994, between the
Registrant and PaineWebber. Incorporated by reference to exhibit 10.41 of
the Company's Form 10-K for the fiscal year ended December 31, 1994.
10.24 Lease Agreement dated January 18, 1995, between the Registrant and Comdisco
for $4.5 million. Incorporated by reference to exhibit 10.42 of the
Company's Form 10-K for the fiscal year ended December 31, 1994.
*10.25 Product Supply and Distribution Agreement between the Registrant and
Yamanouchi Pharmaceutical Co., LTD. dated as of July 14, 1996.
Incorporated by reference to exhibit 10.1 of the Company's Form 10-Q for
the quarter ended June 30, 1996.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.26 1994 Stock Option / Award Plan, incorporated by reference to Exhibit 99.1 of
the Registrant's Form S-8 Registration Statement No. 333-18357.
10.27 Amended 1991 Employee Stock Purchase Plan incorporated by reference to
Exhibit 99.2 of the Registrant's Form S-8 Registration Statement No.
333-18357.
10.28 Form of Indemnification Agreement for Directors and Officers, incorporated
by reference to Exhibit 10.29 of the Registrant's Form S-1 Registration
Statement No. 33-38363.
10.29 1991 Bonus Plan for Director-Level Employees and Officers, incorporated by
reference to Exhibit 10.36 of the Registrant's Form S-1 Registration
Statement No. 33-45180.
28
10.30 Amended and Restated Employment Agreement dated January 29, 1996 between the
Registrant and Gregory B. Lawless.
10.31 Form of Agreement with Executive Officers relating to change in control .
- ------------------------
11.1 Statement regarding Computation of Loss per Share
13.0 Company's Consolidated Financial Statements section of the 1996 Annual
Report
23.1 Consent of Ernst & Young LLP, Independent Auditors
25.1 Power of Attorney (see page 31)
27.0 Financial Data Schedule
- ------------------------
* A confidential treatment request has been applied for or granted with
respect to a portion of this document.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 21st day of March,
1997.
CYGNUS, INC.
By: /s/ JOHN C. HODGMAN
------------------------------------------
John C. Hodgman
VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER
(AND PRINCIPAL ACCOUNTING OFFICER);
PRESIDENT, CYGNUS DIAGNOSTICS
30
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, Gregory B. Lawless and
John C. Hodgman, and each one of them, attorneys-in-fact for the undersigned,
each with the power of substitution, for the undersigned in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his/her name.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------------------ ----------------------------------------- -----------------
/s/ GARY W. CLEARY, PH.D. Chairman of the Board of Directors and March 21, 1997
------------------------------------------- Chief Technical Officer
Gary W. Cleary, Ph.D.
/s/ GREGORY B. LAWLESS, PH.D. President, Chief Executive Officer March 21, 1997
------------------------------------------- (Principal Executive Officer) and
Gregory B. Lawless, Ph.D. Director
/s/ JOHN C. HODGMAN Vice President, Finance and Chief March 21, 1997
------------------------------------------- Financial Officer (and Principal
John C. Hodgman Accounting Officer); President, Cygnus
Diagnostics
/s/ JAMES GRADY, JR., PH.D. Vice President, Operations and Human March 21, 1997
------------------------------------------- Resources (and Secretary)
James Grady, Jr., Ph.D.
/s/ FRANK T. CARY Director March 21, 1997
-------------------------------------------
Frank T. Cary
/s/ ANDRE F. MARION Director March 21, 1997
-------------------------------------------
Andre F. Marion
/s/ RICHARD G. ROGERS Director March 21, 1997
-------------------------------------------
Richard G. Rogers
/s/ WALTER B. WRISTON Director March 21, 1997
-------------------------------------------
Walter B. Wriston
31
SCHEDULE II
CYGNUS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
------------- ------------- ------------- ------------- -----------
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts.............. $ 1,137 $ -- $ -- $ -- $ 1,137
Warranty reserve............................. 435 -- -- -- 435
------ ----- ----- ----- -----------
$ 1,572 $ -- $ -- $ -- $ 1,572
------ ----- ----- ----- -----------
------ ----- ----- ----- -----------
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts.............. $ 1,028 $ 109 $ -- $ -- $ 1,137
Warranty reserve............................. 435 -- -- -- 435
------ ----- ----- ----- -----------
$ 1,463 $ 109 $ -- $ -- $ 1,572
------ ----- ----- ----- -----------
------ ----- ----- ----- -----------
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts.............. $ 1,014 $ 14 $ -- $ -- $ 1,028
Warranty reserve............................. 435 -- -- -- 435
------ ----- ----- ----- -----------
$ 1,449 $ 14 $ -- $ -- $ 1,463
------ ----- ----- ----- -----------
------ ----- ----- ----- -----------
S-1