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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
X Annual Report Pursuant to Section 1 or 15(d) of the Securities
- -------- Exchange Act of 1934 for the Fiscal Year Ended December 31, 1999
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- -------- Exchange Act of 1934
Commission File Number 0-21180
CELLEGY PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
California 82-0429727
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
349 Oyster Point Boulevard, Suite 200, 94080
South San Francisco, California
(Address of Principal Executive Offices) (zip code)
Registrant's telephone number, including area code: (650) 616-2200
Securities registered pursuant to Section 12(b) of the Act:
None None
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Common Stock Purchase Warrants
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--------- ---------
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.
Registrant's revenues for the year ended December 31, 1999 were $1,045,138.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 1, 2000 was $94,665,000 (based on the closing price for
the common stock on The Nasdaq Stock Market on such date). This calculation does
not include a determination that persons are affiliates or non-affiliates for
any other purpose.
The number of shares of common stock outstanding as of March 1, 2000 was
12,021,014.
Documents Incorporated By Reference
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of the Company
to be held May 31, 2000, which will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 1999.
CELLEGY PHARMACEUTICALS, INC. 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Page
----
Part I
Item 1. BUSINESS ......................................................... 1
Item 2. PROPERTIES ....................................................... 12
Item 3. LEGAL PROCEEDINGS ................................................ 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............. 12
Item 4a. EXECUTIVE OFFICERS OF THE REGISTRANT ............................. 12
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS ...................................................... 15
Item 6. SELECTED FINANCIAL DATA .......................................... 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ........................................ 17
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ...... 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 25
PART I
ITEM 1: BUSINESS
Overview
Cellegy Pharmaceuticals, Inc. ("Cellegy" or the "Company"), incorporated in
California in 1989, is a specialty biopharmaceutical company engaged in the
development of prescription drugs and high performance skin care products. Our
current products are all designed for topical application addressing systemic
(blood born) medical conditions and localized skin diseases and conditions.
Cellegy's most advanced prescription product candidates include
Anogesic(R), (nitroglycerin ointment) for the treatment of anal fissures and
hemorrhoids, and a transdermal testosterone gel product, Tostrex(TM), for the
treatment of male hypogonadism, a condition that frequently results in lethargy
and reduced libido in men above the age of 40. Anogesic is undergoing a
multi-center Phase III clinical trial and Tostrex will enter a Phase III trial
in the near term. Cellegy's other prescription products include a testosterone
gel, Tostrelle(TM), for the treatment of declining sexual energy in menopausal
women and Glylorin(TM) (monolaurin), a topical treatment for ichthyosis vulgaris
and other severe dry skin conditions.
In addition to our prescription product candidates, we have developed a
line of non-prescription cosmeceutical products which we believe will help
reverse the signs of photodamaged and aging, wrinkled skin. Our cosmeceutical
products are expected to be endorsed by professionals including dermatologists
and cosmetic surgeons. We plan to commercialize our products through partners or
a separate subsidiary company targeting selected channels of distribution,
including e-commerce. In a program related to our cosmeceutical products, we
have been selling our C79 Intensive Moisturizer formulation, since its
introduction in 1998, for inclusion in a finished product marketed by a major
specialty retailer. There is, of course, no certainty that C79 sales will
continue or that Cellegy's other skin care and prescription products will be
commercialized.
Cellegy also conducts research on the anti-inflammatory properties of
CELLEDIRM (Cellegy's dermal inflammatory response modulators), a group of
compounds identified by our scientists and found in preclinical evaluations to
reduce or eliminate inflammation and irritation caused by many substances that
come into contact with the skin. We believe that our CELLEDIRM technology and
substances can be used to develop improved prescription and non-prescription
products for the treatment of a wide range of inflammatory disorders, and can
improve the performance of skin care products. CELLEDIRM technology is also
currently being developed as an adjunct to our PERMEATE technology, a patented
topical drug delivery system which demonstrated in preclinical evaluations
transdermal delivery of larger molecular weight or insoluble drugs through the
skin and into the blood stream.
This Annual Report includes forward-looking statements. Words such as
"believes," "anticipates," "expects," "intends" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. These statements concern matters that involve
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. For further information regarding
factors that may affect our future operating results, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Factors That May Affect Future Operating Results."
Marketing and Commercialization Strategy
Cellegy intends to become a leader in the development and marketing of
selected specialty pharmaceutical products. Key elements of our business and
commercialization strategy include the following:
Lower Risk Strategy for Selecting Product Candidates. We do not intend to
focus near-term product development efforts on new chemical entities. Instead,
we will apply our proprietary technologies and expertise in the development and
commercialization of new or improved formulations containing Food and Drug
Administration ("FDA") approved or monographed pharmaceutical compounds. Cellegy
will attempt to achieve marketing exclusivity or patent protection for such
products.
1
Self - Marketing to Specialty Physician Markets in United States. Cellegy
plans to market Anogesic, Tostrelle and related products to a targeted audience
of key physician specialists, principally Gastroenterologists ("GI's") and
Obstetrician-Gynecologists ("OB-GYN's"), through the establishment of our own
sales force. We plan to seek larger pharmaceutical partners to assist in the
promotion of these products to broader physician audiences. We plan to partner
Tostrex and our dermatology and skin care products while retaining co-promotion
rights in the United States to these and other products we develop.
Outlicensing of Overseas Rights. We intend to outlicense the overseas
rights for products we develop in exchange for upfront and milestone payments as
well as royalties on sales.
Acquisition of Complementary Products. Although we are focusing primarily
on the development of our own products and technologies, we may strategically
acquire products, technologies or companies with products and distribution
capabilities consistent with our commercial objectives.
Marketed Skin Care Products
Cellegy has completed development of certain consumer skin care and
cosmeceutical products, including skin barrier repairing/fortifying
moisturizers, skin protectants and anti-aging lotions and creams. We are
continuing to develop formulations in other related skin care consumer product
categories. These products utilize certain of our proprietary technologies and
formulations.
We are currently marketing our C79 Intensive Moisturizer formulation to a
major specialty retailer, which incorporates C79 into their hand cream products.
Our revenues from sales of these products totaled $898,000 in 1999, and about
$1.4 million since product introduction late in 1998.
Cellegy intends to expand the sale of skin care formulations to this and to
other traditional specialty retailers which will market them under their own
brand names. We plan to commercialize our products through partners or a
separate subsidiary company targeting selected channels of distribution,
including e-commerce.
Products Under Development
Prescription Products
Anogesic (nitroglycerin ointment)
Cellegy's leading product candidate is Anogesic, a topical,
nitroglycerin-based prescription product for the treatment of anal fissures and
hemorrhoids. Prior to Cellegy's recently completed clinical trial, several
previously published clinical trial results in over 400 patients showed that
nitroglycerin healed anal fissures and demonstrated dramatic pain reduction in
most patients. In a clinical study published in The Lancet, nitroglycerin
promoted healing in over two-thirds of patients who would have required rectal
surgery.
We completed our own Phase III clinical trial using Anogesic for treatment
of anal fissures and announced the results in November 1999. This trial did not
demonstrate a statistically significant heal rate in comparison to placebo, but
did show rapid and significant pain reduction. Based on this outcome, we have
initiated a second Phase III trial to confirm the drug's ability to reduce
fissure pain, the primary trial endpoint. In addition, as a secondary endpoint,
we will also examine the product's ability to heal chronic anal fissures. If we
are successful in achieving the primary endpoint, we plan to file a New Drug
Application ("NDA") for the pain reduction indication in the United States and
to pursue regulatory submissions for this indication in Europe and other major
foreign markets.
The second confirmatory Phase III clinical trial will include about 165
patients in several study centers in the United States and overseas. Patients
will receive either of two strengths of Anogesic or placebo. The product will be
administered on a daily basis over an eight-week treatment period. The patient's
pain scores will be tabulated and the patient will be examined to determine
whether the fissure has healed.
Anal fissures are painful tears in the tissue of the anal mucosa and are
common conditions affecting men and women of all age groups. Of the
approximately 600,000 new cases of anal fissures each year in the United States,
Europe and Japan, about half require painful and expensive surgery, a procedure
that sometimes leaves patients
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incontinent. Hemorrhoids are dilated, swollen veins and tissue located either in
the anal canal or at the margin of the anus. In the United States alone, there
are approximately nine million people who suffer from hemorrhoids each year.
Both conditions are characterized by an increase in intra anal pressure, which
has been shown to be effectively reduced by the application of Anogesic.
Current drug therapies include anesthetics and anti-inflammatory agents
that only partially relieve the symptoms of these conditions. Even though
current treatments are only partially effective, prescription product sales
currently used to treat anal fissures and hemorrhoids have been estimated to be
approximately $500 million annually in the United States, Europe and Japan.
Surgical procedures and hospitalization stays related to these conditions
represent a substantial additional cost to the healthcare systems.
Anogesic is a proprietary formulation that includes nitroglycerin, a drug
that has been used for many years in the treatment of angina pectoris and
certain other heart diseases. Once administered to the anal canal, nitroglycerin
causes relaxation of the sphincter muscle, relieving pain and promoting healing
of the anal fissure or hemorrhoid. In addition to the above mentioned trial,
Cellegy has two clinical trials underway for various complications of
hemorrhoids. Anogesic is protected by two broad domestic patents, both of which
have been issued, the most recent in December 1997. In addition, numerous patent
applications have been filed in all major overseas markets.
Tostrex(TM)(testosterone gel for male hormone replacement therapy)
Cellegy is currently developing a transdermal testosterone gel to address
male hypogonadism, a condition which results from a decline in the body's
production of the sex hormone, testosterone. Low levels of testosterone can
result in lethargy, depression and a decline in libido. In severely deficient
cases, loss of muscle mass and bone density can occur. Approximately 5 million
men in the United States, primarily in the aging (over 40) male population
group, have lower than normal levels of testosterone. Hypogonadism is the first
indication for which we will seek regulatory approval in the United States,
assuming successful trial results. Subsequently, we plan to demonstrate efficacy
for "male andropause," a potentially greater market.
There are a number of companies currently marketing testosterone in several
different product forms in domestic and certain international markets. Cellegy
believes that a major market opportunity exists for an improved product, as the
side effects and patient inconveniences associated with the currently marketed
products have limited their use to less than 5% of potential patients. Current
product forms include orals, injectables and transdermal patches. The leading
patch products are sold at prices which average about $800 per year per patient
Cellegy's proprietary patchless testosterone gel product is expected to
permit a once-a-day application of a metered dose to a small area of the skin
without causing the irritation associated with current patch products. The gel
is transparent, rapid drying and non-staining. Based on Phase II dose ranging
clinical studies to date, we believe our proprietary transdermal gel formulation
is capable of delivering therapeutic levels of testosterone with reduced side
effects and in a more convenient dosage form compared with other currently
marketed products. These human studies demonstrated Tostrex's ability to deliver
testosterone into the bloodstream at levels that were consistently higher than a
leading patch product.
Based on the outcome of these studies, we will begin, in the near term, a
pivotal Phase III clinical trial enrolling about 65 patients in the United
States. Cellegy believes that due to well-documented toxicology and efficacy
data regarding the use of testosterone, regulatory approval of our transdermal
testosterone gel may be achieved more quickly than would normally be the case
with other new chemical entities.
Tostrelle(TM)(testosterone gel for female hormone replacement therapy)
Normal blood concentrations of testosterone in women range from 10 to 20
times less than that of men. Nevertheless, in both sexes, testosterone plays a
key role in building muscle tissue or bone, and in the maintenance of sexual
drive. In women, the ovaries and adrenal glands continue to synthesize
testosterone after menopause, although the rate of production may diminish by as
much as 50%.
Based on the results of pharmacokinetic studies in men receiving Tostrex,
Cellegy's scientists have been able to estimate the proper dosage of
testosterone that would be required to achieve normal premenopausal hormone
levels in postmenopausal women. The result is Cellegy's Tostrelle, a product
designed to restore normal testosterone
3
levels in hormone deficient women. A Phase I/II dose ranging clinical study for
this indication commenced in January 2000.
Approximately 15 million women in the United States suffer from symptoms of
testosterone deficiency. At the present time there are no approved products for
the treatment of this condition, and besides Tostrelle, we are not aware of any
other testosterone gel product in domestic clinical trials for the restoration
of sexual energy to menopausal women.
Estrogen-Testosterone Gel (female hormone replacement therapy)
Cellegy's third planned product in the area of hormone replacement therapy
is a combination estrogen-testosterone gel which utilizes our proprietary drug
delivery technologies to restore the natural levels of both hormones in elderly
or menopausal women. We believe that this product may offer significant
advantages over the patches in terms of reduced side effects and patient
convenience. The combination formulation is in the research stage with clinical
trials planned following development of the mono-therapy testosterone products.
Glylorin (glyceryl monolaurate)
Glylorin is a dermatology product developed for skin conditions which range
from mild to severe ichthyosis vulgaris and other severe dry skin conditions. In
November 1996, Cellegy licensed Glylorin to Glaxo. In October 1999, after Glaxo
completed significant clinical development, Cellegy and Glaxo terminated the
license agreement, with the return of Glylorin product rights to us.
During the license period, Glaxo completed a Phase II clinical trial for
the treatment of Ichthyosis Vulgaris, a severe dry skin which afflicts
approximately one million people in the United States and a similar number in
Europe. The disease is characterized by severe dry skin and scaling over large
areas of the body. The only currently approved prescription product for the
treatment of Ichthyosis Vulgaris is Lac-Hydrin, which has certain side effects,
including irritation and stinging on thinner skin areas such as the face. In
addition, the product is not indicated for pediatric use. Results of the
Cellegy/Glaxo Phase II study showed that Glylorin was able to completely clear
56% of the lesions treated, whereas only 33% of the lesions treated with the
placebo were cleared. Based on these results, Cellegy and Glaxo prepared a Phase
III clinical trial protocol which was reviewed with the FDA. Cellegy is
currently seeking another partner to complete clinical development and
regulatory approval of Glylorin in return for milestones and royalties payments.
Cosmeceutical Products
Cosmeceuticals (a hybrid of the words cosmetics and pharmaceuticals) are
products that contain active ingredients which, when applied to the skin, will
enhance appearance. Cosmeceuticals that satisfy the legal definition of a
cosmetic under the Food Drug & Cosmetic Act, and are not considered drugs under
that statute, are not subject to the same FDA regulations as drug products.
Cosmeceuticals may be marketed to consumers without prior approval by the FDA
and without requiring a prescription from a physician.
Cellegy's core cosmeceutical program includes anti-wrinkling products*
which, based on human studies to date, appear to mitigate the visible effects of
photoaging and skin wrinkling. We believe our anti-wrinkling products have a
different mechanism of action, producing greater improvement to the skin's
appearance and causing less irritation than current market leading products.
Signs of aging and photoaging usually become visible when people reach
their early thirties, with fine lines and roughness, loss of suppleness and
elasticity of the skin becoming apparent. In subsequent decades, there may be
further deterioration marked by coarse wrinkles, spotty irregular pigmentation,
leathery texture or thinning of the skin. Many of these skin changes associated
with aging are due to ultraviolet light exposure, referred to as "photoaging."
At the retail level, the non-prescription market for products which are used to
mitigate the effects of aging and photodamage upon the skin is estimated to be
in excess of $1 billion in annual sales in the United States and growing
rapidly. The current high performance cosmeceutical anti-wrinkling market in the
United States consists of a few broad categories of products, generally
utilizing the following active ingredients: alpha and beta hydroxy acids,
retinols and anti-oxidants.
4
Many of these currently marketed department and specialty retail store
cosmeceutical products contain low concentrations of one or more of the above
mentioned active ingredients. Low concentrations of the active ingredients are
frequently employed in order to avoid side effects which can include stinging,
redness and skin irritation. However, the low concentrations of the active
ingredient generally limit the efficacy of the products. Most of the
cosmeceutical lines marketed to physicians contain higher concentrations of
actives, but are known to cause significant irritation.
Cellegy's high performance anti-wrinkling products incorporate CELLEDIRM
and a multi-action ingredient exhibiting many of the attributes of the active
cosmeceutical ingredients listed above. Certain human studies were successfully
completed and others have been designed to provide stronger data regarding the
effectiveness of Cellegy's cosmeceuticals. If business development discussions
with potential partners are successful, the product line may be available for
launch in 2000.
* References in this Report to "anti-wrinkling," "anti-wrinkling products" or
the "anti-wrinkling market" are intended to refer to a product category that
Cellegy believes is generally understood in the marketplace or to products in
that category, and are not intended to describe any claims that our
cosmeceutical products act in any way other than as cosmetics as defined under
applicable laws. The term "cosmeceuticals" refers to products that, if they
satisfy the definition of a cosmetic under applicable federal laws and if they
are not also drugs under those laws, are not subject to the same requirements as
drug products. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Factors That May Affect Future Operating Results"
and "Government Regulation."
Technology
Background in Skin Biology
Many of Cellegy's technologies and products were developed using our
research in skin biology and knowledge of the physical functions of the skin,
particularly the epidermis. The epidermis is comprised mainly of cells known as
keratinocytes that are continually regenerated and move toward the skin surface
where they flatten, lose their nucleus, and become the outermost layer of the
epidermis, the stratum corneum. The stratum corneum acts as a protective barrier
against physical injuries and disease, and regulates the loss of moisture from
the body. It consists of an array of flattened cells suspended in highly
organized lipid structures, similar conceptually to a brick and mortar
arrangement. Most importantly, these lipids regulate the permeability properties
of the skin and, therefore, the movement of topically applied drugs into the
body.
Cellegy's focus on the biological functioning of the skin has permitted
development of two novel technologies:
o CELLEDIRM: which appears to be capable of mitigating the
irritation and inflammation caused when drugs, solvents and other
substances come into contact with the skin, and
o PERMEATE: capable of enhancing the delivery of drugs applied to
the skin for systemic delivery or for the treatment of local skin
conditions.
CELLEDIRM Technology
CELLEDIRM (Cellegy's Dermal Inflammatory Response Modulators) is a group of
compounds identified by Cellegy's scientists that have demonstrated in
pre-clinical test a reduction of the inflammation associated with the topical
application of drugs, solvents or other physiologically active substances. These
compounds consist of specially processed or purified excipients that have been
shown in preclinical studies to significantly reduce skin inflammation following
challenge with a number of irritating or allergenic substances.
Cellegy has conducted a number of research studies investigating the
utility of CELLEDIRM in mitigating the symptoms of skin inflammation. These
compounds have been shown to reduce inflammation by up to 40% in animal models
challenged with either a potent irritant or an allergen. These effects are
comparable to those achieved with topical corticosteroids.
5
We expect our proprietary CELLEDIRM technology to complement our
PERMEATE drug delivery system and to provide a unique platform for the
development of novel topical products which could benefit from the
anti-inflammatory or anti-allergic activities of CELLEDIRM. Since the active
ingredients within CELLEDIRM are either GRAS (generally regarded as safe) or
used as excipients in various pharmaceutical or cosmetic products, we believe
the use of these compounds will not lengthen United States FDA review time of
therapeutic drug products formulated with CELLEDIRM. Accordingly, we plan to
utilize these compounds in the development of our testosterone products and
certain other prescription and cosmeceutical products.
PERMEATE Technology
PERMEATE is a patented technology which employs bioactive permeation
enhancers to permit the passage of larger molecule drugs into or through the
skin. This technology consists of a variety of methods to manipulate the three
primary lipids which characterize the properties of the stratum corneum:
cholesterol, ceramides and free fatty acids. Normal barrier function requires a
specific critical ratio of these three lipids. We have shown that our newly
identified enhancers can alter these lipid ratios to increase the permeability
of the skin by inhibiting specific enzymes responsible for the synthesis of
these lipids, or by inducing defects in the rigid lipid structures of the
stratum corneum.
Cellegy's PERMEATE system has the potential of being able to open the
stratum corneum barrier wider than previously believed possible, and to keep it
open longer than conventional solvent approaches. In preclinical studies,
PERMEATE facilitated the permeation of larger or more insoluble drugs into the
skin or into the bloodstream. Our studies to date have also shown that these
enhancers can exert their effect when formulated as topical creams or gels or in
conventional transdermal patches.
Cellegy's research and development expenses were $7,965,000 in 1999,
$6,668,000 in 1998, and $3,786,000 in 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Patents and Trade Secrets
Our success depends, in part, on our ability to obtain patent protection
for our products and methods, both in the United States and in other countries.
The patent position of companies engaged in businesses such as our business
generally is uncertain and involves complex legal and factual questions. There
is a substantial backlog of patent applications at the U.S. Patent and Trademark
Office ("USPTO"). Patents in the United States are issued to the party that is
first to invent the claimed invention. Since patent applications in the United
States are maintained in secrecy until patents issue, we cannot be certain that
it was the first inventor of the invention covered by our pending patent
applications or patents or that it was the first to file patent applications for
such inventions. Further, issued patents can later be held invalid by the patent
office issuing the patent or by a court. There can be no assurance that any
patent applications relating to our products or methods will issue as patents,
or, if issued, that the patents will not be challenged, invalidated, or
circumvented or that the rights granted thereunder will provide a competitive
advantage to us.
In addition, many other entities are engaged in research and product
development efforts in fields that may overlap with our currently anticipated
and future products. A substantial number of patents have been issued to such
companies, and such companies may have filed applications for, or may have been
issued patents or may obtain additional patents and proprietary rights relating
to, products or processes competitive with those of Cellegy. Such entities may
currently have, or may obtain in the future, legally blocking proprietary
rights, including patent rights, in one or more products or methods under
development or consideration by us. These rights may prevent us from
commercializing technology, or may require us to obtain a license from the
entity to practice the technology. There can be no assurance that we will be
able to obtain any such licenses that may be required on commercially reasonable
terms, if at all, or that the patents underlying any such licenses will be valid
or enforceable.
Moreover, the laws of certain foreign countries do not protect intellectual
property rights relating to United States patents as extensively as those rights
are protected in the United States. The issuance of a patent in one country does
not assure the issuance of a patent with similar claims in another country, and
claim interpretation and infringement laws vary among countries, so the extent
of any patent protection is uncertain and may vary in different countries. As
with other companies in the pharmaceutical industry, we are subject to the risk
that persons
6
located in such countries will engage in development, marketing or sales
activities of products that would infringe our patent rights if such activities
were in the United States.
Several of Cellegy's products are based on existing compounds with a
history of use in humans but which are being developed by us for new therapeutic
use in skin diseases unrelated to the systemic diseases for which the compounds
were previously approved. We cannot obtain composition patent claims on the
compound itself, and will instead need to rely on patent claims, if any,
directed to use of the compound to treat certain conditions or to specific
formulations. Cellegy will not be able to prevent a competitor from using that
formulation or compound for a different purpose. No assurance can be given that
any additional patents will be issued to us, that the protection of any patents
that may be issued in the future will be significant, or that current or future
patents will be held valid if subsequently challenged.
Certain agreements with the University of California pursuant to which
Cellegy has exclusive license rights to certain drug delivery and other
technologies contain certain development and performance milestones which we
must satisfy in order to retain such rights. While we currently believe it will
be able to satisfy the revised milestone dates, a loss of rights to these
technologies may have an adverse effect.
Cellegy has 17 issued United States patents, more than 35 issued foreign
patents, and over 55 pending patent applications. The majority of these patents
are for the use of certain compounds to treat common or severe inflammatory
dermatologic diseases including dermatitis, psoriasis, rosacea and acne, as well
as disorders such as various ichthyoses, signs and symptoms of skin aging and
premalignant actinic keratoses. Three issued United States patents and more than
20 issued foreign patents relate to our Glylorin product for the treatment of
ichthyosis and certain other skin diseases and conditions. Two issued United
States patents and more than 10 pending patent applications relate to Cellegy's
Anogesic product for the treatment of anal fissures. Five issued United States
patents and more than 10 pending patent applications relate to Cellegy's
PERMEATE drug delivery technology. Additional patent applications are being
prepared for filing that will cover methods or products currently under
development. Corresponding patent applications for most of Cellegy's issued
United States patents have been filed in countries of importance to us located
in major world markets, including certain countries in Europe, Australia, South
Korea, Japan, Mexico and Canada.
Federal patent law provides that for any inventions that have been
developed with government funding that are the subject of a license, the
government has the right to require the assignor or the licensee to grant a
license to third parties upon the occurrence of certain events, such as if the
government determines that no effective steps have been taken to achieve
practical application of the invention, or if health or safety needs or
requirements for public use are not reasonably satisfied.
Our policy is to protect our technology by, among other things, filing
patent applications for technology that it considers important to the
development of our business. We intend to file additional patent applications,
when appropriate, relating to our technology, improvements to our technology and
to specific products that it develops. It is impossible to anticipate the
breadth or degree of protection that any such patents will afford, or whether we
can meaningfully protect our rights to our unpatented trade secrets. Cellegy
also relies upon unpatented trade secrets and know-how, and no assurance can be
given that others will not independently develop substantially equivalent
proprietary information and techniques, or otherwise gain access to our trade
secrets or disclose such technology, or that we can meaningfully protect our
rights to our unpatented trade secrets. It is our policy to require our
employees to execute an invention assignment and confidentiality agreement upon
employment. Our consultants are required to execute a confidentiality agreement
upon the commencement of their consultancy to us. Each agreement provides that
all confidential information developed or made known to the employee or
consultant during the course of employment or consultancy will be kept
confidential and not disclosed to third parties except in specific
circumstances. The invention assignment generally provides that all inventions
conceived by the employee shall be the exclusive property of Cellegy. In
addition, it is our policy to require the collaborators and potential
collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreements will provide meaningful protection for
our trade secrets.
Product Acquisitions
In December 1997, Cellegy acquired patent and related intellectual property
rights relating to Anogesic (the "Agreement"), a topical product candidate for
the treatment of anal fissures and hemorrhoids, from Neptune
7
Pharmaceutical Corporation ("Neptune"). Pursuant to a letter of intent and a
subsequent Agreement between the parties, we issued 462,809 shares of common
stock to Neptune in 1997. The Agreement calls for a series of additional
payments, payable in shares of common stock, upon successful completion of
various milestones tied to clinical trial results and commercialization of the
product in domestic and foreign markets. If achieved, milestones would occur
over the next several years. No milestone payments have been made since 1997.
Future potential milestones, payable in Cellegy common stock, could result in
the issuance of an additional 1,338,000 shares of Cellegy common stock. The
Agreement does not provide for the payment by Cellegy of any future product
royalties in connection with sales of Anogesic.
Principal License Agreements
Glaxo. In November 1996, Cellegy entered into an agreement with Glaxo for
licensing rights to Glylorin, Cellegy's lipid compound for the treatment of
ichthyosis. Under the terms of the agreement, Cellegy provided Glaxo with an
exclusive license of patent rights and know-how covering Glylorin in most of the
world's major markets. In October 1999, Cellegy and Glaxo terminated the license
agreement with the return to Cellegy of Glylorin product rights.
University of California. In October 1993, Cellegy entered into a license
agreement with the University of California (the "Licensor") providing for an
exclusive, worldwide, royalty bearing license, subject to customary government
rights, for patent rights relating to barrier repair formulations jointly held
by the Licensor and Cellegy, in consideration of the issuance to the Licensor of
certain shares of preferred stock (which subsequently converted into shares of
common stock) and the payment by Cellegy of a licensing fee. In March 1994, we
entered into a second exclusive, worldwide, royalty bearing license agreement
with the Licensor for patent rights, jointly held by the Licensor and Cellegy,
relating to drug delivery technologies, in consideration of the payment by
Cellegy of a licensing fee, and an annual maintenance fee payable each year
until Cellegy is commercially selling a licensed product. Both agreements
require us to pay the Licensor royalties based on net sales of consumer and
prescription products (with minimum annual royalty payment). Cellegy has the
right to grant sublicenses to third parties under both agreements. In May and
October 1997, the Licensor and Cellegy amended these agreements. The amendments,
among other things, modified and extended certain development and
commercialization milestones contained in the original agreements. The revised
milestones are tied to the achievement of certain clinical, regulatory or
product commercialization goals over the next several years. Although there can
be no assurance that such goals will be achieved, we believe the development
programs in place will result in the satisfaction of such milestones.
Government Regulation
FDA Requirements for Human Drugs. The research, testing, manufacturing,
labeling, distribution, and marketing of drug products are extensively regulated
by numerous governmental authorities in the United States and other countries.
In the United States, drugs are subject to rigorous FDA regulation. The Food,
Drug and Cosmetic Act (the "FD&C Act") and the regulations promulgated
thereunder, and other federal and state regulations govern, among other things,
the research, development, testing, manufacture, distribution, storage, record
keeping, labeling, advertising, promotion and marketing of pharmaceutical
products. The process of developing and obtaining approval for a new
pharmaceutical product within this regulatory framework requires a number of
years and the expenditure of substantial resources. There can be no assurance
that necessary approvals will be obtained on a timely basis, if at all.
Moreover, additional government regulations may be established that could
prevent or delay regulatory approval of our products. Delays in obtaining
regulatory approvals could have a material adverse effect on us. If we fail to
comply with applicable regulatory requirements for marketing drugs, or if our
cosmeceutical products are deemed to be drugs by the FDA, the Company could be
subject to administrative or judicially imposed sanctions such as warning
letters, fines, products recalls or seizures, injunctions against production,
distribution, sales, or marketing, delays in obtaining marketing authorizations
or the refusal of the government to grant such approvals, suspensions and
withdrawals of previously granted approvals, civil penalties and criminal
prosecution of Cellegy, our officers or our employees.
The steps ordinarily required before a new pharmaceutical product may be
marketed in the United States include: (i) preclinical laboratory tests, animal
studies and formulation studies; (ii) the submission to the FDA of an
Investigational New Drug Application ("IND"), which must become effective before
clinical testing may commence; (iii) adequate and well-controlled clinical
trials to establish the safety and efficacy of the product for its proposed
indication; (iv) the submission of a New Drug Application ("NDA") to the FDA;
and (v) FDA review and
8
approval of the NDA prior to any commercial sale or shipment of the drug.
Compounds must be produced according to the FDA's current Good Manufacturing
Practice ("GMP") requirements, and preclinical tests must be conducted in
compliance with the FDA's Good Laboratory Practice regulations. The results of
preclinical testing are submitted to the FDA as part of an IND. The FDA may, at
any time, impose a clinical hold on ongoing clinical trials. If the FDA imposes
a clinical hold, clinical trials may not commence or recommence without FDA
authorization and then only under terms authorized by the FDA. In some
instances, the IND application process can result in substantial delay and
expense.
Clinical trials involve the administration of the investigational product
to healthy volunteers or patients under the supervision of a qualified
investigator. Clinical trials to support NDAs are typically conducted in three
sequential phases, which may overlap. In Phase I, the initial introduction of
the drug into healthy human subjects or patients, the drug generally is tested
to assess metabolism, pharmacokinetics, pharmacological action and safety,
including side effects associated with increasing doses, and if possible, to
gain early evidence on effectiveness. Phase II usually involves studies in a
limited patient population to (i) determine the efficacy of the drug for a
specific indication, (ii) determine dosage tolerance and optimal dosage and
(iii) identify possible short-term adverse effects and safety risks. If a
compound is found to be effective and to have an acceptable safety profile in
Phase II evaluations, Phase III trials are undertaken to further evaluate
clinical efficacy and to further test for safety within an expanded patient
population at geographically dispersed clinical study sites. A clinical trial
may combine the elements of more than one phase, and typically two or more Phase
III studies are required. There can be no assurance that Phase I, Phase II or
Phase III testing will be completed within any specific time period, if at all.
New and Abbreviated New Drug Applications. After completion of the required
clinical testing, generally an NDA is submitted. FDA approval of the NDA (or, in
the alternative, an Abbreviated New Drug Application ("ANDA"), as described
below) is required before marketing may begin in the United States. The NDA must
include the results of extensive clinical and other testing and the compilation
of data relating to the product's chemistry, pharmacology and manufacture, the
cost of all of which is substantial. The FDA reviews all NDAs submitted before
it accepts them for filing and may request additional information rather than
filing an NDA. The review process is often extended significantly by FDA
requests for additional information or clarification. The FDA may refer the
application to the appropriate advisory committee, typically a panel of
clinicians, for review, evaluation and a recommendation as to whether the
application should be approved. The FDA is not bound by the recommendation of an
advisory committee. During the review process, the FDA generally will conduct an
inspection of the relevant drug manufacturing facilities and clinical sites to
ensure that the facilities are in compliance with applicable Good Manufacturing
Practices ("GMP") requirements. If FDA evaluations of the NDA application,
manufacturing facilities, and clinical sites are favorable, the FDA may issue
either an approval letter or an approvable letter, which contains a number of
conditions that must be met in order to secure approval of the NDA. When and if
those conditions have been met to the FDA's satisfaction, the FDA will issue an
approval letter, authorizing commercial marketing of the drug for certain
specific indications. If the FDA's evaluation of the NDA submission or
manufacturing facilities is not favorable, the FDA may refuse to approve the NDA
or issue a not approvable letter, outlining the deficiencies in the submission
and often requiring additional testing or information. Notwithstanding the
submission of any requested additional data or information in response to an
approvable or not approvable letter, the FDA ultimately may decide that the
application does not satisfy the regulatory criteria for approval. Even if FDA
approval is obtained, a marketed drug product and its manufacturer are subject
to continual review and inspection, and later discovery of previously unknown
problems with the product or manufacturer may result in restrictions or
sanctions on such product or manufacturer, including withdrawal of the product
from the market.
Possible Regulation of Cosmeceutical Products as Drugs. "Cosmeceuticals"
are not defined in the FD&C Act. The FDA has not defined the term by regulation
and may consider use of the term to imply drug- like qualities. The FDA will
regulate a particular cosmeceutical product as a drug or a cosmetic (or both a
drug and a cosmetic) depending primarily upon the manufacturer's intended use
for such product. Such intent may be determined from labeling, advertising,
promotional and marketing materials, and any other source attributable to the
manufacturer or its employees, representatives or agents. Under the FD&C Act,
drugs are articles intended for use in the diagnosis, cure, mitigation,
treatment or prevention of disease or to affect the structure or function of the
body. By comparison, cosmetic products are defined as articles intended to be
rubbed, poured, sprinkled or sprayed on, introduced into or otherwise applied to
the body for cleansing, beautifying, promoting attractiveness or altering its
appearance. Some products, however, may satisfy the definition of a drug and a
cosmetic, and the FDA has generally regulated as drugs products that are
intended to have a physiological effect on the body, for example, to alter the
skin in more
9
than a temporary way. Unlike drugs, products that constitute cosmetics (but not
drugs as well) under the FD&C Act do not require premarket review or approval of
the FDA, but cosmetics must be safe under normal conditions of use, and comply
with FDA labeling and manufacturing requirements. Furthermore, the Federal Trade
Commission ("FTC"), as well as state and local authorities, oversees the
advertising of cosmetic products and prohibits false, misleading, deceptive or
unsubstantiated advertising. The FTC has the authority to seek a number of
remedies against a company that it believes fails to comply with its
requirements, including, but not limited to, preliminary injunctive relief.
We plan to label, market, promote, advertise and distribute our
cosmeceutical products with claims intended to be within the statutory
definition of cosmetic. There can be no assurance, however, that the FDA will
not determine that some or all of our cosmeceutical products are drugs, and are
therefore subject to more stringent regulatory oversight, including premarket
approval, based on their intended use or ingredients.
The FDA has at times in the past contended, and may in the future contend,
that one or more cosmeceutical products, including Cellegy's or competitors'
anti-wrinkling or skin rejuvenating products that are currently marketed or may
in the future be marketed, are not cosmetics but instead are subject to
regulation as drugs. Even if the FDA were not ultimately to prevail with regard
to such a contention, such a claim by the FDA could have a material adverse
effect on our ability to market our proposed cosmeceutical products and could
significantly delay or prohibit marketing of such products.
OTC Monograph. Most over the counter ("OTC") drug products marketed in the
United States are not subjected to the FD&C Act's pre-market approval
requirements. In 1972, the FDA instituted the ongoing OTC Drug Review to
evaluate the safety and effectiveness of OTC drugs then on the market. Through
this process, the FDA issues monographs that set forth the specific active
ingredients, dosages, indications and labeling statements for OTC drugs that the
FDA will consider generally recognized as safe and effective and therefore not
subject to pre-market approval. For certain categories of OTC drugs not yet
subject to a final monograph, the FDA usually will not take regulatory action
against such a product unless failure to do so poses a potential health hazard
to consumers. OTC drugs not covered by pending or final OTC monographs, however,
are subject to pre-market review and approval by the FDA through the NDA/ANDA
mechanism. Even if Cellegy seeks FDA approval of a product for OTC consumer
sales, the FDA could instead require that the product be distributed by
prescription only. Such a requirement could delay for several years, or
indefinitely, distribution of our products directly to consumers.
Manufacturing. Each domestic drug manufacturing facility must be registered
with the FDA. Domestic drug and, to a lesser extent, cosmetic manufacturing
establishments are subject to routine inspection by the FDA and other regulatory
authorities and must comply with GMP requirements (albeit less extensive ones
for cosmetics than for drugs), and any applicable state or local regulatory
requirements. We intend to use contract manufacturers that operate in
conformance with these requirements to produce our compounds and finished
products in commercial quantities. There can be no assurance that manufacturing
or quality control problems will not arise at the manufacturing plants of our
contract manufacturers or that such manufacturers will be able to maintain the
compliance with the FDA's GMP requirements necessary to continue manufacturing
our products.
Foreign Regulation of Drugs. Whether or not FDA approval has been obtained,
approval of a product by comparable regulatory authorities may be necessary in
foreign countries before the commencement of marketing of the product in such
countries. The approval procedures vary among countries, can involve additional
testing, and the time required may differ from that required for FDA approval.
Although there are some procedures for unified filings for certain European
countries, in general each country has its own procedures and requirements, many
of which are time consuming and expensive. Thus, there can be substantial delays
in obtaining required approvals from both the FDA and foreign regulatory
authorities after the relevant applications are filed. We expect to rely
principally on corporate partners, licensees and contract research
organizations, along with our expertise, to obtain foreign governmental approval
in foreign countries of drug formulations utilizing its compounds.
Other Government Regulation. In addition to regulations enforced by the
FDA, Cellegy is also subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control Act,
the Resource Conservation and Recovery Act and other similar federal and state
laws regarding, among other things, occupational safety, the use and handling of
radioisotopes, environmental protection and hazardous substance control.
Although we believe that we have complied with these laws and regulations in all
material respects and have not been required to take any action to correct any
noncompliance, there can be no
10
assurance that Cellegy will not be required to incur significant costs to comply
with environmental and health and safety regulations in the future. Our research
and development involves the controlled use of hazardous materials, chemicals,
and various radioactive compounds. Although we believe that our safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, Cellegy could be held liable for any damages that
result and any such liability could exceed our resources.
Health Care Reform. In the United States, there have been, and Cellegy
expects there will continue to be, a number of federal and state proposals to
implement cost controls and other health care regulatory measures. Future
legislation could result in a substantial restructuring of the health care
delivery system. While we cannot predict whether any legislative or regulatory
proposals will be adopted or the effect such proposals may have on our business,
the uncertainty of such proposals could have an adverse effect on our ability to
raise capital and to identify and reach agreements with potential partners, and
the adoption of such proposals could have an adverse effect on Cellegy. In both
domestic and foreign markets, sales of our therapeutic products, if any, will
depend in part on the availability of reimbursement from third-party payors.
Third-party payors and others increasingly are challenging the prices charged
for medical products and services. There can be no assurance that our products
will be considered cost effective, that reimbursement will be available. We
cannot predict the outcome of any government or industry reform initiatives or
the impact thereof on our financial position or results of operations.
Restrictions on Physician Marketing. The American Medical Association
("AMA") is questioning the ethics of physicians selling cosmeceutical products
for a significant profit. Hearings on this subject by state medical
organizations are occurring and will continue to occur over the next years. Any
action by the AMA reducing profits to physicians from such sales may reduce the
number of physicians selling such products.
Competition
The pharmaceutical and cosmeceutical industries are subject to rapid and
significant technological change. In the development and marketing of topical
prescription drugs, cosmeceutical and skin care products, and drug delivery
systems, Cellegy faces intense competition. Competitors of Cellegy in the United
States and abroad are numerous and include, among others, major pharmaceutical,
cosmetic, chemical, consumer product, and biotechnology companies, specialized
firms, universities and other research institutions. There can be no assurance
that our competitors will not succeed in developing technologies and products
that are more effective than any which are being developed by us or that would
render our technology and potential products obsolete and noncompetitive. Many
of these competitors have substantially greater financial and technical
resources, production and marketing capabilities and regulatory experience than
us. In addition, many of our competitors have significantly greater experience
in pre-clinical testing and human clinical trials of pharmaceutical products and
in obtaining FDA and other regulatory approvals of products for use in health
care. In addition, these companies and academic and research institutions
compete with us in recruiting and retaining highly qualified scientific and
management personnel.
Employees
As of March 1, 2000, we had twenty-seven full-time and two part-time
employees. Twenty-one of these employees, of whom two are M.D.'s and another
eight are Ph.D.'s, are engaged in research and development. In addition, we
utilize the services of several professional consultants, as well as contract
manufacturing and research organizations to supplement our internal staff's
activities. None of our employees is represented by a labor union. We have
experienced no work stoppages and we believe that our employee relations are
good.
11
ITEM 2: PROPERTIES
Cellegy currently leases 65,340 square feet of space located in South San
Francisco. Approximately, 30,914 square feet of this space, is in turn,
subleased to another company under three sub-lease agreements. The primary
subleases expire on December 17, 2001, but may be extended under certain
circumstances described in the agreements. Total rent payments to Cellegy by the
sublessee are $65,737 per month, a slight premium above Cellegy's cost. We
believe our current facilities will be adequate for at least the next five
years.
We also sublease our previous administrative offices in Foster City,
California to another company. The rent is currently $11,798 per month. Our
lease and the sublease term expires on July 31, 2001.
ITEM 3: LEGAL PROCEEDINGS
Cellegy is not a party to any material legal proceedings.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the fourth
quarter of the year ended December 31, 1999.
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The directors and executive officers of Cellegy are as follows:
Name Age Position
---- --- --------
K. Michael Forrest 56 President, Chief Executive Officer and Director
Carl R. Thornfeldt, M.D. 48 Medical Director and Chairman of the Board
Daniel L. Azarnoff, M.D. 73 Sr. Vice President, Clinical and Regulatory Affairs
John J. Chandler 59 Vice President, Business Development
John W. Dietrich, Ph.D. 53 Vice President, Research and Development
A. Richard Juelis 51 Vice President, Finance and Chief Financial Officer
Jack L. Bowman (1) 67 Director
Tobi B. Klar, M.D. 45 Director
Ronald J. Saldarini, Ph.D.(2) 60 Director
Alan A. Steigrod (1) 62 Director
Larry J. Wells (2) 57 Director
- ------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
K. Michael Forrest. Mr. Forrest became President, CEO, and a director in
December 1996. From January 1996 to November 1996, he served as a biotechnology
consultant. From November 1994 to December 1995, he served as President and CEO
of Mercator Genetics, a public biotechnology company. From March 1991 to June
1994, he served as President and CEO of Transkaryotic Therapies, Inc., a public
biotechnology company. From 1968 to 1991, Mr. Forrest held a series of positions
with Pfizer, Inc. and senior management positions with American Cyanamid,
including Vice President of Lederle U.S. and Lederle International. He is a
director of AlphaGene Inc., a private functional genomics company, and INEX
Pharmaceuticals, a public company developing anti-cancer products.
Carl R. Thornfeldt, M.D. Dr. Thornfeldt is the Chairman of the Board of
Directors and a co-founder of the Cellegy, as well as a physician, board
certified in dermatology. He has been Cellegy's Medical Director since our
inception. Dr. Thornfeldt served as acting CEO from July 1996 to December 1996.
In addition, Dr. Thornfeldt
12
served as Vice President, Research and Development from October 1994 until May
1996. Since 1983, Dr. Thornfeldt has maintained a private dermatology practice
and is an Assistant Clinical Professor in Dermatology at the University of
Oregon Health Sciences Center. Dr. Thornfeldt received his M.D. from the
University of Oregon Health Sciences Center. He completed his dermatology
residency at the University of California, San Diego.
Daniel L. Azarnoff, M.D. Dr. Azarnoff joined Cellegy as Vice President,
Clinical and Regulatory Affairs in October 1997. He became Senior Vice President
in July 1999. Since January 1986, Dr. Azarnoff has been President of D.L.
Azarnoff Associates and will continue consulting to the industry on a part-time
basis. From August 1978 to December 1985, he served as President of Research and
Development at G.D. Searle and Co. From July 1967 to August 1978, he was KUMC
Distinguished Professor of Medicine and Pharmacology, as well as the Director of
the Clinical Pharmacology-Toxicology Center at the University of Kansas Medical
Center. Dr. Azarnoff has also served as a member of advisory and expert
committees within the Food and Drug Administration, World Health Organization,
American Medical Association, National Academy of Sciences and National
Institutes of Health. He received his M.D. from the University of Kansas Medical
School. Dr. Azarnoff was a director of Cibus Pharmaceutical through 1998, and is
currently director of Western Center Clinical Trials, and Entropin, Inc.
John J. Chandler. Mr. Chandler became Vice President, Corporate Development
in May 1998. From January 1995 to March 1998, he served as Vice President,
Europe for American Home Products. During 1994, he was Area Director,
Europe/Latin America for American Home Products. From 1968 to 1993 he held a
series of management and senior management positions with American Cyanamid
Company. Mr. Chandler holds a M.B.A. in Marketing from Seton Hall University and
a B.S. in Biology from the Queens College of the City University of New York.
John W. Dietrich, Ph.D. Dr. Dietrich became Vice President, Research and
Development in June 1999. From 1991 to June 1999, he was Vice President,
Research and Development at Allelix Biopharmaceuticals, Inc. His
responsibilities included supervision of research in medicinal chemistry,
biology, pharmacology, gene-based drug discovery and drug development. He was
Vice President, Research at Chemex Pharaceuticals, Inc. from 1987 to 1990. Dr.
Dietrich received a Ph.D. in Pharmacology from the University of North Carolina
at Chapel Hill. Following a NIH Postdoctoral Fellowship at the University of
Connecticut Health Center, he was Assistant Professor of Pharmacology at the
University of Illinois School of Medicine.
A. Richard Juelis. Mr. Juelis became Vice President, Finance and Chief
Financial Officer in November 1994. From January 1993 to September 1994 he
served as Vice President, Finance and Chief Financial Officer for VIVUS, Inc., a
publicly traded drug delivery company. From October 1990 to December 1992, he
served as Vice President, Finance and Chief Financial Officer at XOMA
Corporation, a public biotechnology company. Mr. Juelis has also held domestic
and international financial and general management positions with
Hoffmann-LaRoche from 1976 to 1982, and Schering-Plough from 1983 to 1990.
Jack L. Bowman. Mr. Bowman became a director in December 1996. He is
currently a consultant to various pharmaceutical and biotechnology industry
groups. From August 1987 to January 1994, he was Company Group Chairman at
Johnson & Johnson, where he managed much of its global diagnostic and
pharmaceutical businesses. Before then, Mr. Bowman held executive positions with
CIBA-Geigy and American Cyanamid, where he had responsibility for worldwide
pharmaceutical, medical device, and consumer product divisions. He is currently
a director of NeoRx Corp., CytRx Corp., Cell Therapeutics, Inc., Targeted
Genetics, Inc. and Osiris Therapeutics.
Tobi B. Klar, M.D. Dr. Klar became a director of the Company in June 1995.
She is a physician, board certified in dermatology. Since 1986, Dr. Klar has
maintained a private dermatology practice and has served as Co-Chairperson of
the Department of Dermatology at New Rochelle Hospital Medical Center, New
Rochelle, New York, and Associate Clinical Professor in dermatology at Albert
Einstein Medical Center in New York City. Dr. Klar holds a M.D. from the State
University of New York.
Ronald J. Saldarini, Ph.D. Dr. Saldarini became a director in July 1999,
after retiring from American Home Products. From 1994 until July 1999, he was
President of Wyeth Lederle Vaccines. He was also President of the Lederle-Praxis
Biologics Division from 1989 to 1994, and Vice President, Lederle Laboratories;
both part of American Cyanamid Company, prior to its acquisition by American
Home Products in 1994. Dr. Saldarini has been a member of the National Vaccine
13
Advisory Committee, the National Advisory Commission on Childhood Vaccines, and
was a National Institutes of Health postdoctoral fellow at UCLA's Brain Research
Institute. He received his Ph.D. in Physiology and Biochemistry from the
University of Kansas, and a B.A. in Biochemistry and Zoology from Drew
University.
Alan A. Steigrod. Mr. Steigrod became a director in July 1996. Since
January 1996 he has been Managing Director of Newport HealthCare Ventures, which
invests in and advises biopharmaceutical companies. From March 1993 to November
1995, he served as President and CEO of Cortex Pharmaceuticals, Inc. From
February 1991 to February 1993, he worked as a biotechnology consultant. From
March 1981 through February 1991, Mr. Steigrod held a series of executive
positions with Glaxo, Inc., serving as Chairman of Glaxo's operating committee,
as well as on its board of directors. Prior to Glaxo, Mr. Steigrod held a number
of senior management positions with Boehringer Ingelheim, Ltd. and Eli Lilly &
Co. He is a director of Sepracor Inc. and NeoRx Corporation.
Larry J. Wells. Mr. Wells became a director of the Company in 1989. For the
past seventeen years, he has been a venture capitalist. He is the President of
Wells Investment Group, the General Partner of Daystar Partners, and the founder
of Sundance Venture Partners, L.P., a venture capital fund. Mr. Wells is a
director of Identix, Isonics Corp., Wings America and Legacy Brands.
Directors hold office until the next annual meeting of shareholders and
until their respective successors have been elected and qualified. Executive
officers are chosen by and serve at the discretion of the Board of Directors,
subject to any written employment agreements with the Company.
Standing committees of the Board include an Audit Committee and a
Compensation Committee. Mr. Wells and Dr. Saldarini are current members of the
Audit Committee. The Audit Committee reviews the Company's accounting practices,
internal control systems and meets with the Company's outside auditors
concerning the scope and terms of their engagement and the results of their
audits. Messrs. Bowman and Steigrod are the current members of the Compensation
Committee. The Compensation Committee recommends compensation for officers and
employees of the Company, and grants options and stock awards under the
Company's employee benefit plans.
14
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Price Range of Common Stock
Cellegy's common stock currently trades on The Nasdaq Stock Market under
the symbol "CLGY." The following table sets forth the range of high and low
sales prices for the common stock as reported on The Nasdaq Stock Market for the
periods indicated below.
1999 High Low
- ---- ---- ---
First Quarter........................................ $ 4.63 $ 3.50
Second Quarter....................................... 5.44 3.31
Third Quarter........................................ 8.88 5.00
Fourth Quarter....................................... 10.88 3.16
1998
First Quarter........................................ $ 9.13 $ 7.00
Second Quarter....................................... 7.38 5.13
Third Quarter........................................ 5.75 2.75
Fourth Quarter....................................... 4.94 3.13
Holders
As of March 1, 2000, there were approximately 106 shareholders of record
excluding beneficial holders of stock held in street name.
Dividend Policy
We have never paid cash or declared dividends on our common stock. We do
not anticipate that it will declare or pay cash dividends on our common stock in
the foreseeable future.
15
ITEM 6: SELECTED FINANCIAL DATA
The following balance sheet data as of December 31, 1998 and 1999 and
the statement of operations data for each of the three years ended December 31,
1999 and for the period from June 26, 1989 (inception) through December 31, 1999
are derived from the Company's audited financial statements that are included
elsewhere in this report. The balance sheet data set forth below as of December
31, 1995, 1996 and 1997, and the statement of operations data for the years
ended December 31, 1995, 1996 and 1997, are derived from our audited financial
statements which are not included herein. The data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements.
Period From
June 26, 1989
($000's) (Inception)
Years Ended December 31, Through
-------------------------------------------------------- December 31,
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- --------
Statement of Operations Data:
Revenues ................................. $ 1,000 $ 648 $ 828 $ 832 $ 1,045 $ 4,482
Costs and expenses ....................... 2,535 4,346 9,238 9,266 10,847 44,656
-------- -------- -------- -------- -------- --------
Loss from operations ..................... (1,535) (3,698) (8,410) (8,434) (9,802) (40,174)
Interest income (expense) and other, net . (617) 330 556 1,068 501 2,130
-------- -------- -------- -------- -------- --------
16
Net loss ................................. (2,152) (3,368) (7,854) (7,366) (9,301) (38,044)
Non-cash preferred dividends ............. -- 1,414 35 -- -- 1,449
-------- -------- -------- -------- -------- --------
Net loss applicable to common
shareholders ........................... $ (2,152) $ (4,782) $ (7,889) $ (7,366) $ (9,301) $(39,493)
======== ======== ======== ======== ======== ========
Basic and diluted net loss per common
shareholder .............................. $ (0.67) $ (1.11) $ (1.18) $ (0.73) $ (0.85)
======== ======== ======== ======== ========
Weighted average common shares outstanding 3,206 4,307 6,670 10,160 10,914
As of December 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Balance Sheet Data:
Cash, cash equivalents and investments .. $ 3,820 $ 7,315 $ 21,726 $ 15,220 $ 16,737
Total assets ............................ 4,028 7,696 22,751 19,484 20,913
Deficit accumulated during the
development stage ..................... (10,155) (14,937) (22,826) (30,192) (39,494)
Total shareholders' equity .............. 3,648 7,387 21,354 14,218 15,839
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K includes forward-looking statements.
Words such as "believes," "anticipates," "expects," "intends" and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. These statements concern matters
that involve risks and uncertainties that could cause actual results to differ
materially from those in the forward-looking statements. Further, we undertake
no obligation to revise any statements in order to reflect events or
circumstances that may arise after the date of this report. Actual events or
results may differ materially from those discussed in this Report. See "Factors
That May Affect Future Operating Results."
Cellegy Pharmaceuticals, Inc., a specialty biopharmaceutical company
incorporated in California in 1989, is engaged in the development of
prescription drugs and high performance skin care products. We are developing
several prescription drugs, including Anogesic, a nitroglycerin-based product
for the treatment of anal fissures and hemorrhoids and two transdermal
testosterone gel products, Tostrex, for the treatment of male hypogonadism, a
condition that affects men, generally above forty, and Tostrelle, for the
treatment of diminished sexual energy in menopausal women. We are testing and
developing a line of anti-wrinkling cosmeceutical products which we believe will
address the skin care needs of an affluent and aging population.
General
In December 1997, we completed an asset purchase agreement with Neptune
Pharmaceutical Corporation ("Neptune") to acquire patent and other intellectual
property rights relating to Anogesic. Our expenses relating to Anogesic product
development and clinical trials are expected to increase during the remainder of
2000 as a result of the second confirmatory Phase III clinical trials initiated
in the first quarter 2000.
In September 1998, we began initial shipments and product sales of C79
Intensive Moisturizing formulation to Gryphon Development Inc., the product
development arm of a major specialty retailer. C79 is a key ingredient in a line
of healing hand creams sold at most of the specialty retailer's stores in the
United States.
In July 1999, we completed a self-managed, $10.1 million private placement
of 1.6 million shares of common stock. Participants in the offering included
three institutional investors and our President and Chief Executive Officer.
In October 1999, Cellegy and Glaxo terminated the Glylorin license
agreement with the return to us of Glylorin product rights. In 1999, we received
$117,300 in remaining development funding due from Glaxo through the date
17
of termination. We repaid Glaxo approximately $200,000 in funds previously
advanced by Glaxo. We do not currently intend to develop Glylorin itself, but
will seek an appropriate partner to develop the product in exchange for certain
milestone payments and royalties on future sales.
Results of Operations
Years Ended December 31, 1999, 1998 and 1997
Revenues. Cellegy had revenues of $1,045,000, $832,000, and $828,000 in
1999, 1998 and 1997, respectively. The increase of $213,000 in 1999 compared
with 1998 is due primarily to an increase in product sales to Gryphon
Development of $440,000 offset somewhat by a decrease in development funding
from Glaxo of $154,000. The minor increase in 1998 compared with 1997 was
primarily due to first time Gryphon sales of $458,000 in 1998 offset by grant
funding revenues which were lower in 1998 by $454,000.
Sales to Gryphon during the first quarter of 2000 will exceed $400,000.
There can be no assurance that sales will continue at that level.
Research and Development Expenses. Research and development expenses were
$7,965,000 in 1999, compared with $6,668,000 in 1998 and $3,786,000 in 1997. The
increase of $1,297,000 in 1999 was primarily due to clinical trial expenses
related to Anogesic, including costs incurred to complete a Phase III clinical
trial. Additionally, we incurred higher rent and related utility expenses
associated with our new laboratory facilities in South San Francisco,
California. The increase of $2,882,000 in 1998 compared with 1997 was due to
clinical expenses related to the start up of Anogesic clinical trials including
costs of manufacturing clinical supplies and costs associated with product
stability studies.
We expect our research spending in 2000 to be, at least, equal to or higher
than 1999 levels, primarily in support of our second confirmatory Phase III
Anogesic clinical trial, as well as two hemorrhoid trials using Anogesic. In
addition, there will be, at least, two on-going testosterone clinical trials.
General and Administrative Expenses. General and administrative expenses
were $2,613,000 in 1999, compared with $2,485,000 in 1998 and $1,608,000 in
1997. The increase of $127,000 in 1999 was due to travel, consulting, and other
expenses associated with our business development programs. The increase of
$877,000 in 1998 compared with 1997 was due to increased professional fees in
connection with construction and design of our new facility, as well as
personnel related expenses in connection with our business development and
marketing programs.
Our general and administrative expenses are expected to continue to increase
in the future in support of our research and product commercialization efforts.
Acquired In-Process Technology. No acquired in-process technology expenses
were incurred during 1999 and 1998, while $3,843,000 was incurred in 1997. This
non-cash charge to operations resulted from common stock issued pursuant to the
Anogesic purchase agreement we signed with Neptune in 1997. We expect to have
additional non-cash charges in future years, including 2000, if certain
milestones are achieved. Although the dollar amount of future milestone payments
is fixed by the agreement, the amount of the non-cash accounting charge will
vary as a function of the share price of Cellegy's common stock at the time the
milestone is achieved.
Interest Income and Other, net and interest expenses. Cellegy recognized
$864,000 in interest income for 1999, compared with $1,091,000 for 1998 and
$556,000 for 1997. Fluctuations in interest income earned were tied primarily to
changes in average investment balances during each period. Changing investment
balances were associated with the timing and amounts raised in two financings
completed by Cellegy. Interest expense in 1999 was $363,000 compared with
$22,000 in interest expense during 1998 reflecting interest payments on a higher
bank loan balance. No interest expense was recorded in 1997.
Net Loss. The net loss applicable to common shareholders was $9,301,000 or
$0.85 per share in 1999 based on 10,914,000 weighted average shares outstanding,
compared with a net loss of $7,366,000 or $0.73 per share in 1998 based on
10,160,000 weighted average shares outstanding, and $7,889,000 or $1.18 per
share in 1997 based on 6,670,000 weighted average shares outstanding.
18
Liquidity and Capital Resources
We had experienced net losses and negative cash flow from operations each
year since our inception. Through December 31, 1999, we had incurred an
accumulated deficit of $39.5 million and had consumed cash from operations of
$32.5 million. The public financings included $6.4 million in net proceeds from
its initial public offering in August 1995, $6.8 million in net proceeds from a
preferred stock financing in April 1996, $3.8 million in net proceeds from a
private placement of common stock in July 1997, $13.8 million in net proceeds
from a follow-on public offering in November 1997 and $10.0 million in net
proceeds from a private placement in July 1999. In June 1998, we secured a loan
with a commercial bank to provide up to $4.5 million with an initial interest
rate at the bank's prime lending rate plus one percentage point (9.5% at
December 31, 1999). In December 1999, the loan was amended to include a
revolving credit line allowing us to pay down principal balances at any time or
increase borrowings up to a maximum of $5.0 million. As of December 31, 1999,
$4.0 million was outstanding under this arrangement and $1.0 million is
available.
Our cash and investments were $16.7 million at December 31, 1999, compared
with $15.2 million at December 31, 1998. The increase in cash and investments of
$1.5 million was principally due to net proceeds from the financing completion
in July 1999 offset somewhat by net cash used in operating activities. Our
operations have and will continue to use substantial amounts of cash. Future
expenditures and capital requirements depend on numerous factors including,
without limitation, the progress and focus of its research and development
programs, the progress and results of preclinical and clinical testing, the time
and costs involved in obtaining regulatory approvals, the costs of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, our ability to establish new collaborative arrangements, the
initiation of commercialization activities, the purchase of capital equipment,
and the availability of other financing.
In order to complete the research and development and other activities
necessary to commercialize its products, additional financing will be required.
As a result, we will seek private or public equity investments and future
collaborative arrangements with third parties to meet such needs. There is no
assurance that such financing will be available for us to fund our operations on
acceptable terms, if at all. Insufficient funding may require us to delay,
reduce or eliminate some or all of its research and development activities,
planned clinical trials and administrative programs. We believe that available
cash resources and the interest thereon will be adequate to satisfy its capital
needs through at least December 31, 2000.
Factors That May Affect Future Operating Results
Our year 2000 issues were minimal.
To address the potential impact of year 2000, we established a Y2K
cross-functional project team in August 1998, chaired by our Vice President,
Finance and Chief Financial Officer. The Y2K project team reports to the
Information Systems ("IS") committee which consists of our Chief Executive
Officer and all its other officers. The Y2K project team developed a phased
approach to identify and resolve any Year 2000 issues.
All three phases of our compliance program were completed by the third
quarter 1999. The total cost of the program was less than $35,000. No problems
have been encountered associated with Y2K through March 1, 2000. We have a
contingency plan in place in the unlikely event that a business interruption
caused by Year 2000 problems should occur in the future.
We have a history of losses, and we expect losses to continue for at least
several years.
Our accumulated deficit as of December 31, 1999 was approximately $39.5
million. We have never operated profitably and, given our planned level of
operating expenses, we expect to continue to incur losses for at least the next
several years. We plan to increase our operating expenses as we continue to
devote significant resources to preclinical studies, clinical trials,
administrative, marketing and patent activities. We have not generated any
significant revenues from royalties or licensing of our technologies, and we
expect that it will take several years for any of the prescription products to
be approved for marketing. Accordingly, without substantial revenues from new
corporate collaborations, royalties on product sales or other revenue sources,
we expect to incur substantial and increased operating losses in the foreseeable
future as our earlier stage potential products move into clinical development,
and as we invest in research or acquire additional technologies, product
candidates or businesses. Our
19
losses may increase in the future, and even if we achieve our revenue targets,
we may not be able to sustain or increase profitability on a quarterly or annual
basis. The amount of future net losses, and the time required to reach
profitability, are both highly uncertain. To achieve sustained profitable
operations, we must, among other things, successfully discover, develop, obtain
regulatory approvals for and market pharmaceutical or cosmeceutical products. We
cannot assure you that we will ever be able to achieve or sustain profitability.
Our clinical trial results are very difficult to predict in advance, and failure
of one or more clinical trials could adversely affect our business and our stock
price.
Before we obtain regulatory approval for the commercial sale of most
potential drug products, we must demonstrate through preclinical studies and
clinical trials that the product is safe and efficacious for use in the clinical
indication for which approval is sought. We cannot assure you that we will be
permitted by the U.S. Food and Drug Administration or other international
regulatory authorities to undertake or continue clinical trials for any of our
potential products or, if such trials are permitted, that such products will
demonstrate safety and efficacy. Moreover, results of preclinical studies and
early clinical trials may not be good predictors of results that will be
obtained in later-stage clinical trials. We cannot assure you that our present
or future clinical trials, including for example, the current II and III
clinical trials using our Anogesic product, or the planned Phase III clinical
study for testosterone gel, will demonstrate the results required for approval
to market these potential products or even to continue with additional clinical
development. Because of the independent and blind nature of certain human
clinical testing, there will be extended periods during the testing process when
we will have only limited, or no, access to information about the status or
results of the tests. Other pharmaceutical companies have believed that their
products performed satisfactorily in early tests, only to find their performance
in later tests, including Phase III clinical trials, to be inadequate or
unsatisfactory, or that FDA Advisory Committees have declined to recommend
approval of the drugs,or that the FDA itself refused the result that such
companies' stock prices have fallen precipitously fails to successfully complete
its current Phase III trial or other clinical testing, including toxicology
studies, our business and stock price would be materially and adversely
affected.
Our potential products are in early stages of product development, and we have
not sought regulatory approval to distribute any products.
To date, we have not sought regulatory approval to distribute any products.
The time and resource commitment required to achieve market success for any
individual product is extensive and uncertain. We cannot assure you that our
product development efforts will be successful, that required regulatory
approvals can be obtained, that potential products can be manufactured at an
acceptable cost and with appropriate quality or that any approved products can
be successfully marketed.
With the exception of certain skin care cosmeceutical products, we have not
yet completed the development of other products or sought regulatory approval
for the marketing of our drug products and have not begun to market or generate
revenues from our prescription products. Development of our potential products
will require significant additional research and development. Many of our
product development efforts are based upon technologies and therapeutic
approaches that have not been widely tested or used. Moreover, our beliefs
regarding the therapeutic and commercial potential for our products are based on
studies conducted to date, and later studies may not support our current
beliefs. In addition, results of our studies have not been published in medical
journals or reviewed by independent third parties, and as a result have not been
subjected to the same degree of scrutiny as results that have been published or
subjected to review by independent parties.
Our potential products are subject to the risks of failure inherent in the
development of all products based on new technologies. These possible risks
include:
o Cellegy's therapeutic approaches will not be successful;
o the results from future clinical trials may not correlate with any
safety or efficacy results from prior clinical studies conducted
by Cellegy or others;
o Cellegy's potential products will not be successfully developed;
20
o products will not be found to be safe and effective by the FDA, or
other international regulatory agencies;
o our future clinical and research and development activities will
not result in any commercially viable products.
Possible FDA regulation of our cosmeceutical products as drugs would adversely
impact our planned marketing program.
Cellegy intends to introduce products that will compete in the
cosmeceutical market, including a product line that will compete in what is
generally referred to as the "anti-wrinkling" market. "Cosmeceuticals" are not
defined in the Food, Drug and Cosmetics Act (the "FD&C Act"). The FDA has not
defined the term "cosmeceuticals" and may consider use of this term to imply
drug-like qualities. Cosmeceuticals (a hybrid of the words "cosmetics" and
"pharmaceuticals") are products that contain active ingredients which, when
applied to the skin, will enhance appearance. Cosmeceuticals which satisfy the
definition of a cosmetic under the FD&C Act and which are not also drugs under
that statute are not subject to the same FDA requirements as drug products. The
FDA may contend that one or more cosmeceutical products, including Cellegy's or
competitors' anti-wrinkling products that are currently marketed or may in the
future be marketed, are not cosmetics but instead are subject to regulation as
drugs.
Competition and technological change is increasing. In the future, Cellegy may
not have the resources required to develop innovative products.
The pharmaceutical and cosmeceutical industries are subject to rapid and
significant technological change. In the development and marketing of topical
prescription drugs, skin care and other cosmeceutical products and drug delivery
systems, we face intense competition. Competitors in the United States and
abroad are numerous and include, among others, major pharmaceutical, chemical,
cosmetic, consumer product, and biotechnology companies, specialized firms,
universities and other research institutions. Our competitors may succeed in
developing technologies and products that are more effective than those we are
developing and could render our technology and potential products obsolete and
noncompetitive. Many of these competitors have substantially greater financial
and technical resources, clinical production and marketing capabilities and
regulatory experience. In addition, these companies and academic and research
institutions compete with us in recruiting and retaining highly qualified
scientific and management personnel. As a result, we cannot assure you that our
products under development will be able to compete successfully with existing
products or innovative products under development by other organizations.
The type and scope of patent coverage we have may limit the commercial success
of our products.
Cellegy's success depends, in part, on our ability to obtain patent
protection for our products and methods, both in the United States and in other
countries. Several of our products are based on existing compounds with a
history of use in humans but are being developed by us for new therapeutic use
in skin diseases. We cannot obtain composition patent claims on the compound
itself, and will instead need to rely on patent claims, if any, directed to use
of the compound to treat certain conditions or to specific formulations we are
attempting to develop. We may not be able to prevent a competitor from using our
formulations or compounds for a different purpose. We cannot assure you that any
additional patents will be issued to Cellegy, that the protection of any patents
issued in the future will be commercially valuable or that current or future
patents will be held valid if subsequently challenged.
The patent position of companies engaged in businesses such as Cellegy's
business generally is uncertain and involves complex legal and factual
questions. There is a substantial backlog of patent applications at the United
States Patent and Trademark Office. Further, issued patents can later be held
invalid by the patent office issuing the patent or by a court. There can be no
assurance that any patent applications relating to our products or methods will
issue as patents, or, if issued, that the patents will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
us a competitive advantage. In addition, many other organizations are engaged in
research and product development efforts in drug delivery, skincare products and
cosmeceutical fields that may overlap with our products. Such organizations may
currently have, or may obtain in the future, legally blocking proprietary
rights, including patent rights, in one or more products or methods under
development or consideration by us. These rights may prevent us from
commercializing technology, or may require us to obtain a license from the
organizations to use the technology. Cellegy may not be able to obtain any such
licenses that may be required
21
on reasonable financial terms, if at all, or that the patents underlying any
such licenses will be valid or enforceable. Moreover, the laws of certain
foreign countries do not protect intellectual property rights relating to United
States patents as extensively as those rights are protected in the United
States. We are subject to the risk that individuals or organizations located in
such countries will engage in development, marketing or sales activities of our
products.
Our agreements with the University of California give us exclusive license
rights to certain drug delivery and other technologies that contain certain
development and performance milestones which we must satisfy in order to retain
such rights. While we currently believe we will be able to satisfy the revised
milestone dates, a loss of rights to these technologies could have a material
adverse effect on our business and stock price.
Our product sales strategy involving corporate partners is highly uncertain.
Cellegy is actively seeking to enter into agreements with certain corporate
partners granting rights to commercialize our lead products. We have an
agreement with one academic institution, and we intend to enter into other
collaborative agreements in the future. We may rely on its partners to:
o conduct clinical trials;
o to obtain regulatory approvals; and,
o if approved, to manufacture and market or co-promote these
products.
Once agreements are completed, we may have little or no control over the
development of these potential products and little or no opportunity to review
clinical data before or after public announcement of results. Further, we may
not be able to establish any such collaborative arrangements, and any
arrangements that may be established may not be successful. Failure to enter
into any such arrangements could have a material adverse effect on our ability
to develop and market our products, particularly in certain international
markets. If we are unable to find another corporate partner to develop and
market Glylorin, it may never be commercialized.
We are subject to regulation by regulatory authorities including the FDA;
obtaining approval to market drugs is a lengthy process, and regulatory
authorities could delay or prevent marketing of our products.
The research, development, testing, manufacture, labeling, distribution,
marketing and advertising of products such as Cellegy's products, and our
ongoing research and development activities, are subject to extensive regulation
by governmental regulatory authorities in the United States and other countries.
The extensive preclinical and clinical testing requirements and regulatory
approval process of the FDA in the United States and of certain foreign
regulatory authorities require a number of years and the expenditure of
substantial resources. We may not be able to obtain the necessary approvals for
clinical testing or for the marketing of products on a timely basis or at all.
Moreover, additional government regulations may be established that could
prevent or delay regulatory approval of our products. Delays in obtaining
regulatory approvals could have a material adverse effect on our business and
stock price. Even if regulatory approval of a product is granted, such approval
may include significant limitations on the indicated uses of the product or the
manner in which or conditions under which the product may be marketed. Moreover,
failure to comply with regulatory requirements for marketing drugs, or if our
cosmeceutical products are deemed to be drugs by the FDA, could subject Cellegy
to regulatory or judicial enforcement actions, including, but not limited to,
product recalls or seizures, injunctions against production, distribution, sales
and marketing, civil penalties, criminal prosecution of Cellegy, our officers or
employees, refusals to approve new products and suspensions and withdrawals of
existing approvals, as well as potentially increased product liability exposure.
Sales of Cellegy's products outside the United States will be subject to
regulatory requirements governing clinical trials and marketing approval. These
requirements vary widely from country to country and could delay introduction of
our products in those countries.
Our prospects for obtaining additional financing, if required, are uncertain and
failure to obtain needed financing could affect our ability to develop or market
products.
Throughout our history, we have consumed substantial amounts of cash. Our
cash needs are expected to continue to increase significantly over at least the
next several years in order to fund the additional expenses required to expand
our current research and development programs. We have no current source of
ongoing revenues or capital beyond existing cash and investments, and product
sales to Gryphon, the development
22
subsidiary of major specialty retailer. In order to complete the research and
development and other activities necessary to commercialize our products,
additional financing will be required.
We will seek private or public equity financials and future collaborative
arrangements with third parties to help fund future cash needs. Such funding may
not be available on acceptable terms, if at all. Insufficient funding may
require us to delay, reduce or eliminate some or all of our research and
development activities or planned clinical trial programs.
We currently have no products we sell on our own and have limited sales and
marketing experience.
We may market certain of our products, if successfully developed and
approved, through a direct sales force in the United States and through sales
and marketing partnership or distribution arrangements outside the United
States. We have no history or experience in sales, marketing or distribution. To
market our products directly, we intend to establish a marketing group and
direct sales force or obtain the assistance of our marketing partner. If we
enter into marketing or licensing arrangements with established pharmaceutical
companies, our revenues will be subject to the terms and conditions of such
arrangements and will be dependent on the efforts of our partner. We may not be
able to successfully establish a direct sales force, or assure you that our
collaborators will effectively market any of our potential products. Either
circumstance could have a material adverse effect on our business and stock
price.
We have not manufactured products before and are dependent on a limited number
of critical suppliers.
Cellegy has no direct experience in manufacturing of products and currently
does not have any capacity to manufacture on a large commercial scale. We
currently rely on a limited number of contract manufacturers and suppliers to
manufacture our formulations. Our major contract manufacturer is a Canadian
company recently acquired by another foreign pharmaceutical company. Although we
believe that there will be continuity of supply from current contractors and
that there are adequate third party manufacturers, there can be no assurance
that we will be able to enter into acceptable agreements with them. In the
future, we may not be able to obtain contract manufacturing on commercially
acceptable terms for compounds or product formulations in the quantities we
need. Manufacturing or quality control problems could occur at the contract
manufacturers such that they may not be able to maintain compliance with the
FDA's current good manufacturing practice requirements necessary to continue
manufacturing our products.
The health care industry is unpredictable, and changes in the health care
industry could adversely affect our business.
The healthcare industry is subject to changing political, economic and
regulatory influences that may significantly affect the purchasing practices and
pricing of human therapeutics. Cost containment measures, whether instituted by
health care providers or enacted as a result of government health administration
regulators or new regulations, such as pricing limitations or formulating
eligibility for dispensation by medical providers, could result in greater
selectivity in the availability of treatments. Such selectivity could have an
adverse effect on Cellegy's ability to sell prescription products, and adequate
patient insurance coverage may not be available for Cellegy to maintain price
levels. The trend towards managed health care in the United States, as well as
legislative proposals to reform health care or reduce government insurance
programs, may result in lower prices or reduced markets for Cellegy's products.
The adoption of any such measures or reforms could have a material adverse
effect on the business and financial condition of Cellegy. Moreover,
cosmeceutical products generally are not reimbursed by third party payors.
We have very limited staffing and will continue to be dependent upon key
employees.
Our success is dependent upon the efforts of a small technical and
management team. If key individuals leave Cellegy, we could be adversely
affected if suitable replacement personnel are not quickly recruited. Our future
success depends upon our ability to continue to attract and retain qualified
scientific, marketing and technical personnel. There is intense competition for
qualified personnel in all functional areas and competition will make it
difficult to attract and retain the qualified personnel necessary for the
development and growth of our business.
23
We are subject to the risk of product liability lawsuits.
The testing, marketing and sale of human health care products entails an
inherent risk of allegations of product liability. We are subject to the risk
that substantial product liability claims could be asserted against us in the
future. Cellegy has obtained limited amounts of insurance relating to our
clinical trials. There can be no assurance that we will be able to obtain or
maintain insurance on acceptable terms for clinical and commercial activities or
that any insurance obtained will provide adequate protection against potential
liabilities.
Our stock price could be volatile.
Our stock price has from time to time experienced significant price and
volume fluctuations that may be unrelated to operating performance.
Announcements that could significantly impact our stock price include:
o clinical trial results;
o developments or disputes concerning patent or proprietary rights;
o publicity regarding actual or potential clinical results relating
to our products under development or by our competitors;
o regulatory developments in both the United States and foreign
countries;
o overall movement in stock prices of comparable biopharmceutical
companies;
o economic and other external factors; and,
o period-to-period fluctuations in financial results.
Our quarterly operating results are subject to fluctuations, which could affect
our stock price.
Given the uncertain nature of drug development, it is difficult for us to
predict operating expenses and revenues from period to period. If our products
are approved, it will be very difficult to predict the sustainability of initial
prescription patterns and resulting revenues of our products. These potential
fluctuations in financial results may negatively impact our stock price.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cellegy invests its excess cash in short-term, investment grade, fixed
income securities under an investment policy. All of our investments are
classified as available-for-sale (see Financial Statements - Note 2).
Approximately $10,970,718 of our securities will mature by the end of 2000. We
believe that potential near-term losses in future earnings, fair values or cash
flows related to their investment portfolio would not be significant. Cellegy
has a long-term note payable outstanding (see Financial Statements - Note 4)
with an interest rate which currently varies with the lender's prime rate.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by item 7 are
set forth below on pages F-1 through F-21 of this report.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
24
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to directors and compliance
with Section 16(a) of the Securities Exchange Act of 1934 may be found in the
sections captioned "Election of Cellegy Directors" and "Compliance under Section
16(a) of the Securities Exchange Act of 1934" appearing in the definitive Proxy
Statement to be delivered to shareholders in connection with the Annual Meeting
of Shareholders expected to be held on May 31, 2000. Such information is
incorporated herein by reference. Information required by this Item with respect
to executive officers may be found in Part I hereof in the section captioned
"Executive Officers of the Registrant."
ITEM 11: EXECUTIVE COMPENSATION
Information with respect to this Item may be found in the section captioned
"Executive Compensation" appearing in the definitive Proxy Statement to be
delivered to shareholders in connection with the Annual Meeting of Shareholders
expected to be held on May 31, 2000. Such information is incorporated herein by
reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this Item may be found in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the definitive Proxy Statement to be delivered to Shareholders in connection
with the Annual Meeting of Shareholders expected to be held on May 31, 2000.
Such information is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this Item may be found in the section captioned
"Certain Relationships and Related Transactions" appearing in the definitive
Proxy Statement to be delivered to Shareholders in connection with the Annual
Meeting of Shareholders expected to be held on May 31, 2000. Such information is
incorporated herein by reference.
25
Index to Financial Statements
Page
--------
Report of Ernst & Young LLP, Independent Auditors F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Shareholders' Equity F-5
Statements of Cash Flows F-8
Notes to Financial Statements F-10
F-1
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Cellegy Pharmaceuticals, Inc.
We have audited the accompanying balance sheets of Cellegy Pharmaceuticals, Inc.
(a development stage company) as of December 31, 1999 and 1998, and the related
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999, and for the period from June
26, 1989 (inception) through December 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cellegy Pharmaceuticals, Inc.
at December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, and for
the period from June 26, 1989 (inception) through December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
Palo Alto, California
February 4, 2000
F-2
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Balance Sheets
December 31,
----------------------------
1999 1998
------------ ------------
Assets
Current assets
Cash and cash equivalents ........................................................ $ 804,089 $ 1,610,826
Short-term investments ........................................................... 10,970,718 7,282,233
Prepaid expenses and other current assets ........................................ 1,026,326 1,433,394
------------ ------------
Total current assets .................................................................. 12,801,133 10,326,453
Property and equipment, net ........................................................... 3,149,384 2,830,808
Long-term investments ................................................................ 4,962,420 6,326,623
------------ ------------
Total assets .......................................................................... $ 20,912,937 $ 19,483,884
============ ============
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities ......................................... $ 475,166 $ 1,551,600
Deferred revenue ................................................................. -- 250,000
Accrued research fees ............................................................ 238,837 94,088
Accrued compensation and related expenses ........................................ 106,223 69,097
Current portion of note payable 1,152,828 402,602
------------ ------------
Total current liabilities ............................................................. 1,973,054 2,367,387
Long-term portion of note payable and other long term liabilities ..................... 2,882,070 2,818,211
Other long-term liabilities ........................................................... 218,993 80,256
Commitments and contingencies
Shareholders' equity
Preferred stock, no par value; 5,000,000 shares authorized: Series A
convertible preferred stock 1,100 shares designated; no shares issued
or outstanding at
December 31, 1999 and 1998 ................................................... -- --
Common stock, no par value; 20,000,000 shares authorized: 12,010,242 shares
issued and outstanding at December 31, 1999 and 10,173,294 shares issued
and outstanding at December 31, 1998 ......................................... 55,367,903 44,363,133
Accumulated other comprehensive income (loss) .................................... (35,471) 47,353
Deficit accumulated during the development stage ................................. (39,493,612) (30,192,456)
------------ ------------
Total shareholders' equity ....................................................... 15,838,820 14,218,030
------------ ------------
Total liabilities and shareholders' equity ............................................ $ 20,912,937 $ 19,483,884
============ ============
See accompanying notes.
F-3
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Statements of Operations
Period from
June 26, 1989
(inception)
Years ended December 31, through
------------------------------------------- December 31,
1999 1998 1997 1999
------------ ------------ ------------ ------------
Revenues:
Licensing and contract revenue from affiliate ... $ -- $ -- $ -- $ 1,145,373
Licensing, milestone, and development funding ... 117,303 271,248 603,700 1,551,408
Government grants ............................... 29,976 102,502 223,995 429,976
Product sales ................................... 897,859 457,970 -- 1,355,829
------------ ------------ ------------ ------------
Total revenues ....................................... 1,045,138 831,720 827,695 4,482,586
Costs and expenses:
Cost of products sold ........................... 269,358 113,073 -- 382,431
Research and development ........................ 7,965,477 6,668,014 3,786,411 27,542,131
General and administrative ...................... 2,612,601 2,485,341 1,608,319 12,888,491
Acquired in-process technology .................. -- -- 3,842,968 3,842,968
------------ ------------ ------------ ------------
Total costs and expenses ............................. 10,847,436 9,266,428 9,237,698 44,656,021
------------ ------------ ------------ ------------
Operating loss ....................................... (9,802,298) (8,434,708) (8,410,003) (40,173,435)
Interest expense ................................ (362,735) (22,146) -- (1,248,621)
Interest income and other, net .................. 863,877 1,090,523 555,935 3,376,949
------------ ------------ ------------ ------------
Net loss ............................................. (9,301,156) (7,366,331) (7,854,068) (38,045,107)
Non-cash preferred dividends ......................... -- -- 34,740 1,448,505
------------ ------------ ------------ ------------
Net loss applicable to common shareholders ........... $ (9,301,156) $ (7,366,331) $ (7,888,808) $(39,493,612)
============ ============ ============ ============
Basic and diluted net loss per common share ..... $ (0.85) $ (0.73) $ (1.18)
============ ============ ============
Weighted average common shares used in computing basic
and diluted net loss per common share ................ 10,913,554 10,160,026 6,670,192
============ ============ ============
See accompanying notes.
F-4
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Statements of Shareholders' Equity
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
--------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount
Issuance of common stock for cash
through December 31, 1996 ............. -- $ -- -- $ -- -- $ --
Issuance of common stock for services
rendered through December 31, 1996 .... -- -- -- -- -- --
Repurchase of common shares in 1992 ...... -- -- -- -- -- --
Issuance of convertible preferred
stock, net of issuance cost through
December 31, 1996 ..................... 27,649 6,801,730 -- -- 477,081 4,978,505
Issuance of Series A convertible
preferred stock and warrants to
purchase 14,191 shares of Series A
convertible preferred stock in
exchange for convertible promissory
notes and accrued interest through
December 31, 1996 ..................... 625,845 1,199,536 -- -- -- --
Issuance of convertible preferred stock
for services rendered, and license
agreement through December 31, 1996 ... 50,110 173,198 -- -- -- --
Issuance of Series B convertible
preferred stock in exchange for
convertible promissory notes in 1992 .. -- -- 12,750 114,000 -- --
Issuance of common stock in exchange
for notes payable ..................... -- -- -- -- -- --
Issuance of warrants in connection with
notes payable financing ............... -- -- -- -- -- --
Issuance of common stock in connection
with IPO in August 1995 ............... -- -- -- -- -- --
Deficit
Accumulated Accumulated
Other During the Total
Common Stock Comprehensive Development Shareholders'
Shares Amount Income (Loss) Stage Equity
------ ------ ------------- ----- ------
Issuance of common stock for cash
through December 31, 1996 ............. 953,400 $ 126,499 $ -- $ -- $ 126,499
Issuance of common stock for services
rendered through December 31, 1996 .... 269,116 24,261 -- -- 24,261
Repurchase of common shares in 1992 ...... (3,586) (324) -- -- (324)
Issuance of convertible preferred
stock, net of issuance cost through
December 31, 1996 ..................... -- -- -- -- 11,780,235
Issuance of Series A convertible
preferred stock and warrants to
purchase 14,191 shares of Series A
convertible preferred stock in
exchange for convertible promissory
notes and accrued interest through
December 31, 1996 ..................... -- -- -- -- 1,199,536
Issuance of convertible preferred stock
for services rendered, and license
agreement through December 31, 1996 ... -- -- -- -- 173,198
Issuance of Series B convertible
preferred stock in exchange for
convertible promissory notes in 1992 .. -- -- -- -- 114,000
Issuance of common stock in exchange
for notes payable ..................... 42,960 268,500 -- -- 268,500
Issuance of warrants in connection with
notes payable financing ............... -- 487,333 -- -- 487,333
Issuance of common stock in connection
with IPO in August 1995 ............... 1,322,500 6,383,785 -- -- 6,383,785
See accompanying notes.
F-5
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Statements of Shareholders' Equity - (Continued)
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
--------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Conversion of preferred stock,
including dividends, to common stock
through December 31, 1996 ............. (703,409) (7,426,958) (12,750) (114,000) (477,081) (4,978,505)
Exercise of warrants to purchase common
stock ................................. -- -- -- -- -- --
Exercise of options to purchase common
stock ................................. -- -- -- -- -- --
Compensation expense related to the
extension of option exercise periods... -- -- -- -- -- --
Non-cash preferred dividends ............. -- 1,413,765 -- -- -- --
Unrealized gains on investments .......... -- -- -- -- -- --
Net loss for the period June 26, 1989
(inception) through December 31, 1996 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1996 ............ 195 2,161,271 -- -- -- --
Exercise of warrants to purchase common
stock ................................. -- -- -- -- -- --
Non-cash preferred dividends ............. -- 34,740 -- -- -- --
Conversion of preferred stock,
including dividends, to common stock (195) (2,196,011) -- -- -- --
Exercise of options to purchase common
stock ................................. -- -- -- -- -- --
Compensation expense related to the
extension of option exercise periods -- -- -- -- -- --
Issuance of common stock in connection
with the private placement in July
1997, net of issuance costs ........... -- -- -- -- -- --
Issuance of common stock in connection
with the public offering of common
stock in November 1997, net of
issuance costs ........................ -- -- -- -- -- --
Issuance of common stock in connection
with the acquisition of product
rights from Neptune Pharmaceutical
Corp. ................................. -- -- -- -- -- --
Unrealized loss on investments ........... -- -- -- -- -- --
Net loss - 1997 .......................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total Comprehensive Loss - 1997 -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balances at December 31, 1997 ............ -- -- -- -- -- --
Deficit
Accumulated Accumulated
Other During the Total
Common Stock Comprehensive Development Shareholders'
Shares Amount Income (Loss) Stage Equity
------ ------ ------------- ----- ------
Conversion of preferred stock,
including dividends, to common stock
through December 31, 1996 ............. 2,426,762 12,519,463 -- -- --
Exercise of warrants to purchase common
stock ................................. 135,256 51,814 -- -- 51,814
Exercise of options to purchase common
stock ................................. 6,344 11,553 -- -- 11,553
Compensation expense related to the
extension of option exercise periods -- 268,486 -- -- 268,486
Non-cash preferred dividends ............. -- -- -- (1,413,765) --
Unrealized gains on investments .......... -- -- 22,167 -- 22,167
Net loss for the period June 26, 1989
(inception) through December 31, 1996.. -- -- -- (13,523,552) (13,523,552)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1996 ............ 5,152,752 20,141,370 22,167 (14,937,317) 7,387,491
Exercise of warrants to purchase common
stock ................................. 227,847 930 -- -- 930
Non-cash preferred dividends ............. -- -- -- (34,740) --
Conversion of preferred stock,
including dividends, to common stock 587,879 2,196,011 -- -- --
Exercise of options to purchase common
stock ................................. 132,137 362,303 -- -- 362,303
Compensation expense related to the
extension of option exercise periods -- 69,995 -- -- 69,995
Issuance of common stock in connection
with the private placement in July
1997, net of issuance costs ........... 1,547,827 3,814,741 -- -- 3,814,741
Issuance of common stock in connection
with the public offering of common
stock in November 1997, net of
issuance costs ........................ 2,012,500 13,764,069 -- -- 13,764,069
Issuance of common stock in connection
with the acquisition of product
rights from Neptune Pharmaceutical
Corp. ................................. 462,809 3,842,968 -- -- 3,842,968
Unrealized loss on investments ........... -- -- (34,000) -- (34,000)
Net loss - 1997 .......................... -- -- -- 7,854,068) (7,854,068)
----------- ----------- ----------- ----------- -----------
Total Comprehensive Loss - 1997 -- -- -- -- (7,888,068)
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1997 ............ 10,123,751 44,192,387 (11,833) (22,826,125) 21,354,429
See accompanying notes.
F-6
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Statements of Shareholders' Equity - (Continued)
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock
--------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Exercise of warrants to purchase common
stock .............................. -- -- -- -- -- --
Exercise of options to purchase common
stock .............................. -- -- -- -- -- --
Unrealized gain on investments ........ -- -- -- -- -- --
Net loss - 1998 ....................... -- -- -- -- -- --
----- --------- ----- --------- ----- --------
Total Comprehensive Loss - 1998 ....... -- -- -- -- -- --
----- --------- ----- --------- ----- --------
Balances at December 31, 1998 ......... -- $ -- -- $ -- -- $ --
Issuance of common stock in connection
with the private placement of common
stock in July 1999, net of issuance
costs .............................. -- -- -- -- -- --
Exercise of warrants to purchase common
stock .............................. -- -- -- -- -- --
Exercise of options to purchase common
stock .............................. -- -- -- -- -- --
Unrealized loss on investments ........ -- -- -- -- -- --
Net loss - 1999 ....................... -- -- -- -- -- --
----- --------- ----- --------- ----- --------
Total Comprehensive Loss - 1999 ....... -- -- -- -- -- --
----- --------- ----- --------- ----- --------
Balances at December 31, 1999 ......... -- $ -- -- $ -- -- $ --
===== ========= ===== ========= ===== ========
Deficit
Accumulated Accumulated
Other During the Total
Common Stock Comprehensive Development Shareholders'
Shares Amount Income (Loss) Stage Equity
------ ------ ------------- ----- ------
Exercise of warrants to purchase common
stock .............................. 13,979 47,740 -- -- 47,740
Exercise of options to purchase common
stock .............................. 35,564 123,006 -- -- 123,006
Unrealized gain on investments ........ -- -- 59,186 -- 59,186
Net loss - 1998 ....................... -- -- -- (7,366,331) (7,366,331)
------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss - 1998 ....... -- -- -- -- (7,307,145)
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1998 ......... 10,173,294 $ 44,363,133 47,353 $(30,192,456) $ 14,218,030
Issuance of common stock in connection
with the private placement of common
stock in July 1999, net of issuance
costs .............................. 1,616,000 10,037,662 -- -- 10,037,66
Exercise of warrants to purchase common
stock .............................. 119,171 502,195 -- -- 502,195
Exercise of options to purchase common
stock .............................. 101,777 464,913 -- -- 464,913
Unrealized loss on investments ........ -- -- (82,824) -- (82,824)
Net loss - 1999 ....................... -- -- -- (9,301,156) (9,301,156)
------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss - 1999 ....... -- -- -- -- (9,383,980)
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1999 ......... 12,010,242 $ 55,367,903 $ (35,471) $(39,493,612) $ 15,838,820
------------ ------------ ------------ ------------ ------------
See accompanying notes.
F-7
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Statements of Cash Flows
Period from
June 26, 1989
(inception)
Years ended December 31, through
-------------------------------------------- December 31,
1999 1998 1997 1999
------------ ------------ ------------ ------------
Operating activities
Net loss .............................................. $ (9,301,156) $ (7,366,331) $ (7,854,068) $(38,045,107)
Adjustment to reconcile net loss to net cash used in
operating activities:
Acquired in-process technology ..................... -- -- 3,842,968 3,842,968
Depreciation and amortization ...................... 428,980 15,015 17,618 711,975
Compensation expense related to the extension of
option exercise periods .......................... -- -- 69,995 338,481
Amortization of discount on notes payable and
deferred financing costs ......................... -- -- -- 567,503
Issuance of common shares for services ............. -- -- -- 24,261
Issuance of convertible preferred stock for
services rendered, interest, and license agreement -- -- -- 240,198
Changes in operating assets and liabilities:
Prepaid expenses and other current assets .......... 407,068 (421,481) (661,352) (1,026,326)
Accounts payable and accrued liabilities ........... (1,076,434) 846,447 435,140 475,166
Deferred revenue ................................... (250,000) (250,000) 500,000 --
Accrued research fees .............................. 144,749 (60,577) 133,665 238,837
Accrued compensation and related expenses .......... 37,126 31,877 19,262 106,223
------------ ------------ ------------ ------------
Net cash used in operating activities ................. (9,609,667) (7,205,050) (3,496,772) (32,525,821)
Investing activities
Purchases of property and equipment ................... (747,556) (2,832,160) -- (3,752,609)
Purchases of investments .............................. (19,947,556) (5,039,440) (18,915,933) (60,525,449)
Sales of investments .................................. 8,525,450 5,893,870 -- 14,419,320
Maturities of investments ............................. 9,015,000 5,500,000 6,256,000 30,137,520
------------ ------------ ------------ ------------
Net cash provided by (used in) investing activities ... (3,154,662) 3,522,270 (12,659,933) (19,721,218)
See accompanying notes.
F-8
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Statements of Cash Flows - (Continued)
Period from
June 26, 1989
(inception)
Years ended December 31, through
-------------------------------------------- December 31,
1999 1998 1997 1999
------------ ------------ ------------ ------------
Financing activities
Proceeds from notes payable ......................... $ 1,279,187 $ 3,220,813 $ -- $ 8,047,424
Repayment of notes payable .......................... (465,102) -- -- (2,575,710)
Other long-term liabilities ......................... 138,737 80,256 -- 218,993
Net proceeds from issuance of common stock .......... 11,004,770 170,746 17,942,043 35,682,136
Issuance of convertible preferred stock, net of
issuance costs ................................... -- -- -- 11,757,735
Deferred financing costs ............................ -- -- -- (80,170)
------------ ------------ ------------ ------------
Net cash provided by financing activities ........... 11,957,592 3,471,815 17,942,043 53,050,408
------------ ------------ ------------ ------------
Net increase (decrease) in cash ..................... (806,737) (210,965) 1,785,338 804,089
Cash and cash equivalents, beginning of period ...... 1,610,826 1,821,791 36,453 --
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period ............ $ 804,089 $ 1,610,826 $ 1,821,791 $ 804,089
============ ============ ============ ============
Supplemental disclosure of non-cash transactions:
Issuance of common stock in connection with acquired
in-process technology ............................... $ -- $ -- $ 3,842,968 $ 3,842,968
============ ============ ============ ============
Conversion of preferred stock to common stock ....... $ -- $ -- $ 2,196,011 $ 14,715,474
============ ============ ============ ============
Issuance of common stock for notes payable .......... $ -- $ -- $ -- $ 277,250
============ ============ ============ ============
Issuance of warrants in connection with notes payable
financing ........................................ $ -- $ -- $ -- $ 487,333
============ ============ ============ ============
Issuance of convertible preferred stock for notes ... $ -- $ -- $ -- $ 1,268,316
============ ============ ============ ============
See accompanying notes.
F-9
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Financial Statements
1. Accounting Policies
Description of Business
Cellegy Pharmaceuticals, Inc., incorporated in California in June 1989,
is a development stage company. Since its inception, the Company has engaged
primarily in research and development activities based upon its patented
transdermal and topical formulation expertise. The Company has conducted a
number of clinical trials using its products, including the preparation of
manufactured clinical materials. Laboratory equipment and facility improvements
have been purchased and installed in support of its research and development
activities. A number of sponsored, external research programs have been
undertaken.
Basis of Presentation
In the course of its development, the Company incurred significant
losses and will continue to incur additional losses during its development
phase. As a result, the Company will require substantial additional funds for
its operational activities and may seek private or public equity financings and
future collaborative arrangements with third parties to meet its cash needs.
There is no assurance that such additional funds will be available on acceptable
terms or available at all. Insufficient funding may require the Company to
delay, reduce, or eliminate some or all of its research and development, planned
clinical trials, and administrative programs.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenues and Research and Development Expenses
Revenues related to cost reimbursement provisions under development
contracts are recognized as the costs associated with the projects are incurred.
Revenues related to milestones specified under development contracts are
recognized as the milestones are achieved. The Company receives certain United
States government grants that support the Company's research effort in defined
research projects. These grants generally provide for reimbursement of approved
costs incurred as defined in the various grants. Revenues associated with these
grants are recognized as costs under each grant are incurred. Revenues related
to cosmeceutical product sales are recognized upon shipment.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101") summarizes certain areas of the Staff's views in applying generally
accepted accounting principles to revenue recognition. Cellegy believes that its
current revenue recognition principles comply with SAB 101.
Research and development costs are expensed as incurred.
Cash, Cash Equivalents and Investments
Cash equivalents consist of highly liquid financial instruments with
original maturities of three months or less. The carrying value of cash and cash
equivalents approximates fair value at December 31, 1999 and 1998. The Company
considers all its investments as available-for-sale and reports these
investments at estimated fair market value. Unrealized gains or losses on
available-for-sale securities are included in shareholders' equity until their
disposition. The cost of securities sold is based on the specific identification
method. Realized gains or losses and declines in value judged to be other than
temporary on available-for-sale securities are included in interest income and
other, net.
F-10
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. At December 31, 1999 and 1998, inventories consisted entirely of raw
materials.
Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation. Furniture and fixtures, and office and laboratory equipment are
depreciated using the straight-line method over estimated useful lives ranging
from three to five years. Depreciation for leasehold improvements is provided
over the shorter of the asset life or the remaining lease term.
Stock-Based Compensation
The Company accounts for its stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB Opinion No. 25") and has elected to follow the disclosure-only
alternative prescribed by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123").
Segment Reporting
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 supersedes FASB Standard No. 14, "Financial Reporting for Segments of a
Business Enterprise." SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS No. 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of SFAS No.131 did not
affect results of operations or financial position, but did affect the
disclosure of segment information. (See note 10)
Advertising Costs
Advertising costs are accounted for as expenses in the period in which
they are incurred. Advertising expenses for the years ended December 31, 1999
and 1998 were $99,363 and $174,815 respectively. There were no advertising costs
in 1997.
Basic and Diluted Net Loss per Common Share
Basic net loss per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share incorporates the incremental shares issued upon the assumed
exercise of stock options and warrants, when dilutive. There is no difference
between basic and diluted net loss per common share, as presented in the
statement of operations, because all options and warrants (see note 6) are
anti-dilutive. Total shares outstanding would have been 14,298,277 if all
warrants and vested options were exercised by December 31, 1999.
2. Investments
At December 31, 1999, available-for-sale securities consist of the
following:
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ----------- ----------- -----------
Corporate notes ............... $ 8,264,411 $ -- $ (18,793) $ 8,245,618
U.S. government notes ......... 6,481,239 -- (17,019) 6,464,220
Time deposits ................. 227,500 -- -- 227,500
Commercial paper .............. 995,459 341 -- 995,800
----------- ----------- ----------- -----------
Total available-for-sale
securities ................. $15,968,609 $ 341 $ (35,812) $15,933,138
=========== =========== =========== ===========
F-11
At December 31, 1998, available-for-sale securities consist of the
following:
Gross Gross
Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Corporate notes .......... $ 9,337,751 $ 45,080 $ (7,020) $ 9,375,811
U.S. government notes .... 3,996,252 9,293 -- 4,005,545
Time deposits ............ 227,500 -- -- 227,500
Money market ............. 1,463,698 -- -- 1,463,698
------------ ------------ ------------ ------------
Total available-for-sale
securities ............ 15,025,201 54,373 (7,020) 15,072,554
Less amounts classified as
cash equivalents ...... (1,463,698) -- -- (1,463,698)
------------ ------------ ------------ ------------
Total investments ........ $ 13,561,503 $ 54,373 $ (7,020) $ 13,608,856
============ ============ ============ ============
The amortized cost and estimated fair value of available-for-sale
securities at December 31, 1999, by contractual maturity, were as follows:
Estimated
Cost Fair Value
----------- -----------
Due in 1 year or less ..................... $10,994,515 $10,970,718
Due in 1 - 3 years ........................ 4,974,094 4,962,420
----------- -----------
Total available-for-sale securities ....... 15,968,609 15,933,138
Less amounts classified as cash equivalents -- --
----------- -----------
Total investments ......................... $15,968,609 $15,933,138
=========== ===========
There have been no significant realized gains or losses on the sale of
available-for-sale securities for the years ended December 31, 1999 and 1998.
3. Property and Equipment
Property and equipment consist of the following:
December 31,
------------------------------------------
1999 1998 Delete column
----------- ----------- -----------
Furniture and fixtures ....................... $ 163,965 $ 145,395 $ 49,702
Office equipment ............................. 136,287 100,872 39,142
Laboratory equipment ......................... 553,724 373,767 65,310
Leasehold improvements ....................... 2,875,504 2,369,890 3,610
----------- ----------- -----------
3,729,480 2,989,924 157,764
Less accumulated depreciation and amortization (580,096) (159,116) (144,101)
----------- ----------- -----------
$ 3,149,384 $ 2,830,808 $ 13,663
=========== =========== ===========
4 Note Payable
In June 1998, the Company entered into a loan agreement with a bank to
provide up to $4.5 million through December 1999 with interest expense rates
equal to the bank's prime rate plus one percentage point. The Company is
required to repay the principal amount borrowed in 48 equal monthly installments
ending in July 2003. In December 1999, the loan was amended to include a
revolving credit line allowing the Company to pay down principal balances at any
time or increase its borrowing up to a maximum of $5.0 million at an interest
rate equal to the bank's prime rate plus one percentage point (9.5% at December
31, 1999). The fair value of the note payable is estimated based on current
interest rates available to the Company for debt instruments with similar terms,
degrees of risk, and remaining maturities. The carrying value of the note
approximates its fair value. As of December 31, 1999, a total of $4.0 million is
outstanding under the arrangement and $1.0 million is available. The note is
secured by all of Cellegy's assets and requires the Company to maintain certain
financial covenants, all of which were met as of December 31, 1999.
F-12
5. Lease Commitments
The Company leases its facilities and equipment under non-cancelable
operating leases. Future minimum lease payments, net of future minimum sublease
rentals at December 31, 1999, are as follows:
Lease
Commitments
Lease Sublease Net of Sublease
Commitments Rentals Rentals
----------- ----------- -----------
2000 .............. $ 1,777,472 $ 930,420 847,052
2001 .............. 1,667,672 852,217 815,455
2002 .............. 1,539,310 -- 1,539,310
2003 .............. 1,514,832 -- 1,514,832
2004 .............. 1,553,220 -- 1,553,220
2005 and thereafter 6,620,328 -- 6,620,328
----------- ----------- -----------
$14,672,834 $ 1,782,637 $12,890,197
=========== =========== ===========
Rental expense was $1,815,502, $437,245, and $362,532 for the years
ended December 31, 1999, 1998, and 1997, respectively. For the year ended
December 31, 1999, such lease expense included $141,879 of facility operating
lease commitment, and $302,720 in equipment lease. The Company received a
sublease income of $824,844 during the year ended December 31, 1999.
6. 401(K) Plan
The Company maintains a savings and retirement plan under Section
401(k) of the Internal Revenue Code. All employees are eligible to participate
on their first day of employment with the Company. Under the plan, employees may
contribute up to 15% of salaries per year subject to statutory limits. The
Company provides a matching contribution equal to 25% of the employee's rate of
contribution, up to a maximum contribution rate of 4%.
7. Shareholders' Equity
Convertible Series A Preferred Stock Offering
For the year ended December 31, 1997, the Company had non-cash
preferred dividends of $34,740 reflecting the 8% per annum mandatory preferred
dividends of the Series A preferred stock which was originally issued as part of
a financing completed in April 1996.
Common Stock Private Placement
On July 23, 1997, the Company completed a $3,850,000 private placement
of 1,547,827 shares of common stock. Net proceeds were $3,814,741. The purchase
price for all investors, except the Company's chief executive officer, was
$2.375 per share. The purchase price for the shares purchased by the Company's
chief executive officer in the private placement was $2.875 per share, which is
equal to the closing price of the common stock on the Nasdaq SmallCap Market on
the date immediately preceding the closing date of the private placement.
Follow-on Public Offering
On November 24, 1997, the Company completed a public offering of
2,012,500 shares of common stock at $7.50 per share. Net proceeds were
$13,764,069.
Private Placement of Public Equity
On July 30, 1999, Cellegy completed a private placement of 1,616,000
shares of common stock at a price of $6.25 per share to a small group of
institutional investors and the Company's President and Chief Executive Officer.
Net proceeds were $10,038,000.
F-13
Preferred Stock
The Company's Articles of Incorporation provide that the Company may
issue up to 5,000,000 shares of preferred stock in one or more series. The Board
of Directors is authorized to establish from time to time the numbers of shares
to be included in, and the designation of, any such shares to determine or alter
the rights, preferences, privileges, and restrictions granted to or imposed upon
any wholly unissued series of preferred stock and to increase or decrease the
number of shares of any such series without any further vote or action by the
shareholders.
F-14
Warrants
The Company has the following warrants outstanding to purchase common
stock at December 31, 1999:
Number of Exercise Price Date Expiration
Shares per Share Issued Date
------------- ------------- --------------- -------------------
35,496 $4.51 October 1994 December 31, 2000
4,005 0.01 February 1995 December 31, 2000
341,328 7.81 February 1995 December 31, 2000
44,374 9.02 March 1995 December 31, 2000
29,000 5.19 August 1995 December 31, 2000
115,000 10.31 August 1995 August 11, 2000
57,500 15.47 August 1995 August 11, 2000
661,250 9.38 August 1995 August 11, 2000
12,400 7.23 April 1996 April 18, 2001
94,063 9.75 November 1997 November 24, 2002
12,000 4.00 January 1999 January 19, 2001
2,000 4.69 January 1999 June 2, 2000
20,000 8.25 September 1999 December 31, 2001
---------
1,428,416
=========
Included in the table above are warrants to acquire 661,250 shares of
common stock at a price of $9.38 per share that were issued in connection with
the Company's initial public offering. The warrants are exercisable at any time
unless previously redeemed by August 11, 2000. The Company may redeem the
warrants, in whole or in part, at any time upon at least thirty days prior
written notice to the warrant holders at a price of $0.05 per warrant provided
that the closing price of the common stock has been at least $12.50 for at least
ten consecutive trading days ending on a date within 30 days before the date of
the notice of redemption. No warrants have been redeemed through December 31,
1999.
Stock Option Plans
In 1995, the Company adopted the Equity Incentive Plan (the "Plan") to
provide for the issuance of incentive stock options and non-statutory stock
options. When the Plan was established, the Company reserved 700,000 shares for
issuance. In 1996, 1997 and 1998, an additional 300,000 shares, 450,000 shares,
and 1,000,000 shares were reserved for issuance under the Plan, respectively.
Under the Plan, incentive stock options may be granted at a price per share of
not less than the fair market value of common stock on the date of grant.
Nonqualified options may be granted at a price per share of not less than 85% of
fair market value on the date of grant. Options are exercisable to the extent
vested. The Compensation Committee of the Board establishes the vesting
schedules.
Director's Stock Option Plan
In 1995, the Company adopted the 1995 Director's Stock Option Plan (the
"Director's Plan") to provide for the issuance of non-qualified stock options to
eligible outside Directors. When the Plan was established, the Company reserved
150,000 shares for issuance which is the current reserve share balance.
Nonqualified options are granted at fair market value on the date of the grant.
Options are issued to new Directors when they join the Board and subsequent
annual grants are issued to active Directors. Options are exercisable to the
extent vested.
F-15
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Financial Statements - (Continued)
Activity under the Plan is summarized as follows:
Shares Price Weighted
Under Range Average
Option Per Share Exercise Price
---------- ------------- -----------
Balance at January 1, 1997 . 996,345 $0.45 - $8.25 $4.34
Granted ........... 430,500 $3.00 - $8.81 $5.17
Canceled .......... (213,371) $3.07 - $8.25 $5.58
Exercised ......... (132,138) $0.45 - $5.69 $2.74
----------
Balance at December 31, 1997 1,081,336 $0.46 - $8.81 $4.62
Granted ........... 544,000 $3.25 - $8.50 $6.68
Canceled .......... (46,344) $3.07 - $8.25 $6.19
Exercised ......... (35,564) $0.46 - $5.50 $3.46
----------
Balance at December 31, 1998 1,543,428 $0.46 - $8.81 $5.32
Granted ........... 905,100 $3.69 - $6.25 $4.13
Canceled .......... (124,655) $3.62 - $8.81 $5.14
Exercised ......... (136,110) $0.46 - $7.25 $5.18
----------
Balance at December 31, 1999 2,187,763 $0.46 - $8.81 $4.82
At December 31, 1999, options to purchase 811,026 shares of common
stock were vested and exercisable at exercise prices ranging from $0.46 to $8.81
per share. At December 31, 1999, options to purchase 50,000 shares of common
stock at an exercise price of $4.62 per share and 60,000 shares of common stock
at an exercise price of $5.12 vest over a period of four years but are subject
to earlier vesting if certain performance criteria are met. At December 31,
1999, there were 12,000 shares of common stock at an exercise price of $3.75 per
share which vest in the year of 2002 but are subject to earlier vesting if
certain performance criteria are met. At December 31, 1999, 104,127 options to
purchase shares of common stock were available for future option grants under
the Plan.
The following table summarizes information about stock options
outstanding and exercisable related to the Plan at December 31, 1999:
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------
Weighted Weighted Weighted
Average Average Average
Outstanding at Remaining Exercise Exercisable at Exercise
Range of Exercise Price December 31, 1999 Contractual Life Price December 31, 1999 Price
----------------------- ----------------- ---------------- ----- ----------------- -----
$0.46 - $3.88 ........ 974,703 8.4 years $3.41 228,263 $2.63
$4.00 - $6.63 ........ 817,560 7.7 years $5.16 429,718 $5.12
$7.00 - $8.81 ........ 395,500 8.3 years $7.59 152,378 $7.69
--------- -------
Total ............... 2,187,763 8.1 years $4.82 811,026 $4.91
========= =======
F-16
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Financial Statements - (Continued)
Activity under the Directors' Plan is summarized as follows:
Shares Price Weighted
Under Range Average
Option Per Share Exercise Price
------------------ ------------------- -------------------
Balance at January 1, 1997 ............ 70,000 $4.50 - $8.50 $5.22
Granted .................... 6,000 $3.25 $3.25
------------------
Balance at December 31, 1997 .......... 76,000 $3.25 - $8.50 $5.07
Granted .................... 40,000 $5.50 $5.50
Cancelled .................. (2,000) $3.25 - $8.50 $5.88
------------------
Balance at December 31, 1998 .......... 114,000 $3.25 - $8.50 $5.20
Granted ................... 32,000 $5.00 $5.00
Cancelled .................. (12,083) $3.25 - $8.50 $5.46
Exercised .................. (21,417) $3.25 - $8.50 $5.12
------------------
Balance at December 31, 1999 .......... 112,500 $3.25 - $8.50 $5.13
==================
At December 31, 1999, options to purchase 48,543 shares of common stock
were vested and exercisable at exercise prices ranging from $3.25 to $8.50 per
share. At December 31, 1999, options to purchase 16,833 shares of common stock
were available for future option grants under the Directors' Plan.
The following table summarizes information about stock options
outstanding and exercisable related to the Directors' Plan at December 31, 1999:
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------------
Weighted Weighted Weighted
Average Average Average
Outstanding at Remaining Exercise Exercisable at Exercise
Range of Exercise Price December 31, 1999 Contractual Life Price December 31, 1999 Price
- ----------------------- ----------------- ---------------- ----- ----------------- -----
$3.25 ............. 4,000 7.4 years $3.25 2,000 $3.25
$4.50 - $5.50...... 106,500 8.0 years $5.14 45,043 $5.10
$8.50 ............. 2,000 6.4 years $8.50 1,500 $8.50
------- ------
Total ................ 112,500 8.0 years $5.10 48,543 $5.13
======= ======
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its stock options since, as discussed below,
the alternative fair market value accounting provided for under FAS 123 requires
use of option valuation models that were not developed for use in valuing stock
options. Under APB Opinion No. 25, if the exercise price of the Company's stock
options is equal to the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net loss and net loss per common share
is required by FAS 123, which requires that the information be determined as if
the Company has accounted for its common stock options granted subsequent to
December 31, 1994 under the fair market value method. The fair market value of
options granted has been estimated at the date of the grant using a
Black-Scholes option-pricing model.
F-17
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Financial Statements - (Continued)
The Company valued its options using the following weighted average
assumptions for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
------------- ------------- --------------
Risk-free interest rate ..................... 5.54% 5.14% 6.20%
Dividend yield .............................. 0% 0% 0%
Volatility ................................. 0.826 0.531 0.487
Expected life of options in years............ 3.7 4.6 4.9
The Black-Scholes option valuation model was developed for use in
estimating the fair market value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions, including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair market value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair market value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
1999 1998 1997
----------------- ----------------- -----------------
Pro forma net loss applicable to common
shareholders ............................ $(10,612,716) $ (8,220,952) $ (8,221,875)
Pro forma basic and diluted net loss per
share applicable to common shareholders . $ (0.97) $ (0.81) $ (1.23)
The weighted average grant date fair value of options granted during
the years ended December 31, 1999, 1998, and 1997 was $2.47, $2.88, and $2.57,
respectively.
The effects of applying FAS 123 pro forma disclosures are not likely to
be representative of the effects on reported net loss for future years.
Shares reserved
As of December 31, 1999, the Company has reserved shares of common
stock for future issuance as follows:
Warrants ..................... 1,428,416
Stock Option Plans ........... 2,421,223
Neptune Agreement (see note 7) 1,537,191
---------
Total ........................ 5,386,830
=========
F-18
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Financial Statements - (Continued)
8. Product Acquisitions
In December 1997, the Company acquired patent and related intellectual
property rights relating to "Anogesic" (the "Anogesic Acquisition"), a topical
product candidate for the treatment of anal fissures and hemorrhoids from
Neptune Pharmaceuticals Corporation. Under the terms of the Agreement, the
Company issued 429,752 shares of common stock to Neptune on December 31, 1997.
Upon the signing of a letter of intent on November 3, 1997, 33,057 shares of
common stock were issued to Neptune. No additional shares have been issued to
Neptune through December 31, 1999. The Agreement calls for a series of
additional payments, payable in shares of common stock, upon successful
completion of various milestones which, if achieved, would occur over the next
several years. Depending on several factors, including the market price of the
common stock, such payments could result in issuance of a significant number of
shares of common stock. Future potential milestones payable in Cellegy common
stock could result in the issuance of an additional 1,388,000 shares of Cellegy
common stock. The Agreement does not provide for the payment by the Company of
any future product royalties in connection with sales of Anogesic.
9. License Agreements
In November 1996, the Company entered into an agreement with Glaxo
Wellcome Inc. ("Glaxo") for licensing rights to Glylorin, Cellegy's compound for
the treatment of ichthyoses. Under the terms of the agreement, Cellegy provided
Glaxo with an exclusive license of patent rights and know-how covering Glylorin
in most of the world's major markets. In exchange for this license, the Company
received from Glaxo an initial license fee payment. In October 1999, Cellegy and
Glaxo terminated the license agreement with the return to Cellegy of Glylorin
product rights.
In October 1993, the Company entered into a license agreement with the
University of California (the "Licensor") providing for an exclusive, worldwide,
royalty-bearing license, subject to customary government rights, for patent
rights relating to barrier repair formulations, jointly held by the Licensor and
the Company, in consideration of the issuance to the Licensor of certain shares
of preferred stock (which subsequently converted into shares of common stock)
and the payment by the Company of a licensing fee. In March 1994, the Company
entered into a second exclusive, worldwide, royalty-bearing license agreement
with the Licensor for patent rights jointly held by the Licensor and the
Company, relating to drug delivery technologies, in consideration of the payment
by the Company of a licensing fee, and an annual maintenance fee payable each
year until the Company is commercially selling a licensed product. Both
agreements require the Company to pay the Licensor royalties based on net sales
of consumer and prescription products (with minimum annual royalty payments).
The Company has the right to grant sublicenses to third parties under both
agreements. In May and October 1997, the Licensor and the Company amended these
agreements. The amendments modified and extended certain development and
commercialization milestones contained in the original agreements. The revised
milestones are tied to the achievement of certain clinical, regulatory, or
product commercialization goals over the next several years. Although there can
be no assurance that such goals will be achieved, the Company believes its
development programs in place will result in the satisfaction of such
milestones.
F-19
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Financial Statements - (Continued)
10. Income Taxes
At December 31, 1999, the Company has net operating loss carryforwards
of approximately $32,400,000 and $9,700,000 for federal and state purposes,
respectively. The federal net operating loss carryforwards expire between the
years 2004 and 2019. The state net operating loss carryforward expire between
the years 2000 and 2004. At December 31, 1999, the Company also has research and
development credit carryforwards of approximately $900,000 and $400,000 for
federal and state purposes, respectively. The federal credits expire between the
years 2006 and 2019. Pursuant to the "change in ownership" provisions of the Tax
Reform Act of 1986, utilization of the Company's net operating loss and research
and development tax credit carryforwards may be limited if a cumulative change
of ownership of more than 50% occurs within any three-year period. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets are as follows
December 31,
----------------------------------
1999 1998
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 11,600,000 $ 8,600,000
Credit carryforwards ........... 1,100,000 700,000
Capitalized intangibles ........ 2,400,000 2,200,000
Other, net -- (200,000)
------------ ------------
Total deferred tax assets ......... 11,300,000 15,100,000
Valuation allowance ............... (15,100,000) (11,300,000)
------------ ------------
Net deferred tax assets ........... $ -- $ --
============ ============
The valuation allowance for deferred tax assets 1998 and 1997 increased
by approximately $4,100,000 and $1,800,000 during the years ended December 31,
1998 and 1997, respectively.
11. Segment Reporting
The Company has two business segments: pharmaceuticals and
cosmeceuticals. Pharmaceuticals includes primarily research and development
expenses for potential prescription products to be marked directly by the
Company or through corporate partners. Current pharmaceutical revenues consist
primarily of SBIR grant funding. The Company expects to complete other corporate
collaborations in the future for a number of its potential pharmaceutical
products, which may result in milestones, development funding and royalties on
sales. Cellegy expects to generate future revenues on potential products it
intends to self-market.
The cosmeceutical business segment includes primarily development
expenses for non-prescription anti-aging products. Using related technologies,
Cellegy is currently incurring development expenses and receiving all of its
product sales from one customer, Gryphon Development, Inc., which is selling
product through a major specialty retailer exclusively in the United States.
Cellegy allocates its research expenses and personnel to each business
segment, but does not assess segment performance or allocate resources based on
a segment's assets and, therefore, assets are not reported by segment. The
accounting policies of the reportable segments are the same as those described
in the summary of significant accounting policies.
F-20
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Financial Statements - (Continued)
The Company's segments are business units that will, in some cases,
distribute products to different types of customers through different marketing
programs. The potential future sales of cosmeceutical products requires a
significantly different marketing effort than sales of pharmaceutical products
to physicians and other traditional pharmaceutical distribution channels.
Pharmaceutical products require more extensive clinical testing and ultimately
regulatory approval by the FDA and other worldwide health registration agencies,
requiring more a extensive level of development, manufacturing and compliance
than a cosmeceutical product.
The following table contains information regarding revenues and
operating income (loss) of each business segment for the years ended December
31, 1999, 1998, and 1997:
Years ended December 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenues:
Pharmaceuticals ....... $ 147,279 $ 373,750 $ 827,695
Cosmeceuticals ........ 897,859 457,970 --
----------- ----------- -----------
$ 1,045,138 $ 831,720 $ 827,695
=========== =========== ===========
Loss from Operations:
Pharmaceuticals ....... $(9,888,212) $(8,011,630) $(8,066,973)
Cosmeceuticals ........ 85,914 (423,078) (343,030)
----------- ----------- -----------
$(9,802,298) $(8,434,708) $(8,410,003)
=========== =========== ===========
F-21
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Exhibits
--------
(a) The following exhibits are attached hereto or incorporated
herein by reference:
Exhibit
Number Exhibit Title
------- -------------
2.1 Asset Purchase Agreement dated December 31, 1997 between the
Company and Neptune Pharmaceutical Corporation. (Confidential
treatment has been granted with respect to portions of this
agreement.) (Incorporated by reference to Exhibit 4.4 of the
Company's Registration Statement on Form S-3 declared
effective on February 19, 1998.)
3.1 Amended and Restated Articles of Incorporation of the Company.
(Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-93288
LA) declared effective on August 11, 1995 (the "SB-2").)
3.2 Bylaws of the Company. (Incorporated by reference to Exhibit
3.3 to the SB-2.)
4.1 Specimen Common Stock Certificate. (Incorporated by reference
to Exhibit 4.1 to the SB-2.)
4.2 Specimen Warrant Certificate. (Incorporated by reference to
Exhibit 4.2 to the SB-2.)
4.3 Form of Warrant Agreement Between the Company and First
Interstate Bank of California. (Incorporated by reference to
Exhibit 4.3 to the SB-2.)
4.4 Form of Representatives' Warrant Agreement. (Incorporated by
reference to Exhibit 27.2 to the SB-2.)
10.1 Barrier Repair Formulations License Agreement, dated October
26, 1993 between the Company and the University of California.
(Incorporated by reference to Exhibit 10.5 to the SB-2.)
10.2 License Agreement, dated March 4, 1994, regarding Drug
Delivery by Skin Barrier Disruption, between the Company and
University of California. (Incorporated by reference to
Exhibit 10.6 to the SB-2.)
*10.3 Employment Agreement, dated as of January 21, 1996, between
the Company and Dr. Carl Thornfeldt. (Incorporated by
reference to Exhibit 10.7 to the Company's Form 10-KSB for
fiscal year ended December 31, 1995 (the "1995 Form 10-KSB".)
10.4 Amended and Restated Registration Rights Agreement dated April
10, 1992. (Incorporated by reference to Exhibit 10.11 to the
SB-2.)
*10.5 1992 Stock Option Plan. (Incorporated by reference to Exhibit
10.12 to the SB-2.)
10.6 Secured Debenture and Warrant Purchase Agreement dated as of
February 10, 1995. (Incorporated by reference to Exhibit 10.13
to the SB-2.)
10.7 Amended and Restated Registration Rights Agreement dated as of
February 10, 1995. (Incorporated by reference to Exhibit 10.14
to the SB-2.)
25
Exhibit
Number Exhibit Title
------- -------------
10.8 Warrant Agreement dated as of February 10, 1995. (Incorporated
by reference to Exhibit 10.15 to the SB-2.)
10.9 Agency Agreement dated as of February 10, 1995. (Incorporated
by reference to Exhibit 10.16 to the SB-2.)
*10.10 1995 Equity Incentive Plan (Incorporated by reference to
Exhibit 10.17 to the 1995 Form 10-KSB.)
*10.11 1995 Directors' Stock Option Plan (Incorporated by reference
to Exhibit 10.18 to the 1995 Form 10-KSB.)
10.12 Standard Industrial Lease dated April 6, 1992, between the
Company and H&H Management. (Incorporated by reference to
Exhibit 10.20 to the 1995 Form 10-KSB.)
10.13 Loan and Security Agreement between Silicon Valley Bank and
the Company dated June 10, 1998 (Incorporated by reference to
Exhibit 10.01 to the Company's Form 10-QSB for the fiscal
quarter ended June 30, 1998.)
10.14 Lease Agreement between the Company and TCNorthern California
Inc. dated April 8, 1998 (Incorporated by reference to Exhibit
10.01 to the Company's Form 10-QSB for fiscal quarter ended
March 31, 1998.)
*10.15 Employment Agreement dated November 20, 1996, between the
Company and K. Michael Forrest. (Incorporated by reference to
Exhibit 10.19 to the Company's Form 10-KSB for fiscal year
ended December 31, 1996 (the "1996 Form 10-KSB".)
10.16 Exclusive Licensing Agreement for Glylorin between the Company
and Glaxo Wellcome Inc. dated November 11, 1996. (Confidential
treatment has been granted with respect to portions of this
agreement.) (Incorporated by reference to Exhibit 10.20 to the
1996 Form 10-KSB.)
10.17 Termination of Exclusive Licensing Agreement between the
Company and Glaxo Wellcome Inc. dated October 15, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (See signature page.)
27.1 Financial Data Schedule.
- ----------------
* Represents a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
One report on Form 8-K was filed by the Company on 12/1/99 reporting on the
results of the Phase III Anogesic trial.
(c) Financial Statement Schedules
All schedules are omitted because they are not applicable or are not
required, or the information required to be set forth therein is included
in the financial statements or notes thereto.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of South San Francisco, State of California, on the 14th day of March,
2000.
CELLEGY PHARMACEUTICALS, INC.
By: /s/ K. MICHAEL FORREST
---------------------------------------
K. Michael Forrest
President and Chief Executive Officer
Power of Attorney
Each person whose signature appears below constitutes and appoints K.
Michael Forrest and A. Richard Juelis, jointly and severally, his true and
lawful attorneys-in-fact, each with the power of substitution, for him in any
and all capacities, to sign amendments to this Report on Form 10-K, and to file
the same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and conforming all
that said attorneys-in-fact, or his substitute or substitutes, may do or cause
to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons in the capacities
and on the dates indicated.
Name Title Date
Principal Executive Officer:
/s/ K. MICHAEL FORREST President, Chief Executive Officer and March 14, 2000
- -------------------------------------------- Director
K. Michael Forrest
Principal Financial Officer
and Principal Accounting Officer:
/s/ A. RICHARD JUELIS Vice President, Finance, Chief Financial March 14, 2000
- -------------------------------------------- Officer and Secretary
A. Richard Juelis
Directors:
/s/ CARL R. THORNFELDT, M.D. Chairman of the Board of Directors March 14, 2000
- --------------------------------------------
Carl R. Thornfeldt, M.D.
/s/ JACK L. BOWMAN Director March 14, 2000
- --------------------------------------------
Jack L. Bowman
/s/ TOBI B. KLAR, M.D. Director March 14, 2000
- --------------------------------------------
Tobi B. Klar, M.D.
/s/ RONALD J. SALDARINI, PH.D. Director March 14, 2000
- --------------------------------------------
Ronald J. Saldarini, Ph.D.d
/s/ ALAN A. STEIGROD Director March 14, 2000
- --------------------------------------------
Alan A. Steigrod
/s/ LARRY J. WELLS Director March 14, 2000
- --------------------------------------------
Larry J. Wells
27
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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EXHIBITS
to
Form 10-K
Under
THE SECURITIES EXCHANGE ACT OF 1934
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CELLEGY PHARMACEUTICALS, INC.