Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
X Annual Report Pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934 for the Fiscal Year Ended December 31, 2001 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, South San Francisco, California 94080
(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 Nasdaq National Market
(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
(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. (____)
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 5, 2002 was $74,196,080 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 5, 2002 was
17,304,976.
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
which will be filed with the Securities and Exchange Commission not later than
120 days after December 31, 2001.
CELLEGY PHARMACEUTICALS, INC. 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
Page
----
Part I
Item 1. BUSINESS......................................................... 1
Item 2. PROPERTIES....................................................... 10
Item 3. LEGAL PROCEEDINGS................................................ 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 10
Item 4a. EXECUTIVE OFFICERS OF THE REGISTRANT............................. 10
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 12
Item 6. SELECTED FINANCIAL DATA.......................................... 13
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 13
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....... 21
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................. 21
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 22
Item 11. EXECUTIVE COMPENSATION........................................... 22
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 22
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 22
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.. 23
Unless the context otherwise requires, the terms "we", "our", and
"Cellegy" refer to Cellegy Pharmaceuticals, Inc., a California corporation, and
its subsidiaries.
Anogesic and Celledirm are our registered trademarks. Cellegesic,
Tostrex, Tostrelle, and Rectogesic are our trademarks. We also refer to
trademarks of other corporations and organizations in this document. Cellegy
recently began using Cellegesic in place of Anogesic for its lead product
following discussions with the FDA during its review of our New Drug
Application.
PART I
ITEM 1: BUSINESS
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 skin care products. Our prescription
products are directed towards the treatment of gastrointestinal disorders,
sexual dysfunction of both men and women, and selected conditions affecting
women's health.
Cellegy's lead product candidate, CellegesicTM (nitroglycerin ointment),
formerly referred to as Anogesic(R), is under review by the FDA for the
treatment of chronic anal fissures, a painful condition which, in the absence of
an approved drug therapy, often requires surgery. We filed the Cellegesic New
Drug Application (NDA) with the FDA in June 2001, and an amendment to the NDA
was filed in November 2001 including data from a second Phase III clinical study
using Cellegesic to treat pain associated with chronic anal fissures. In August
2001, we submitted a Marketing Authorization Application (MAA) to the Medicines
Control Agency (MCA) in the United Kingdom requesting approval of Rectogesic(TM)
(nitroglycerin ointment) for the treatment of anal fissures. Rectogesic is a
product similar in formulation to Cellegesic. In addition, a New Drug Submission
(NDS) including data from the United States NDA for Cellegesic marketing
approval will be filed by the end of the first quarter of 2002 with the
Therapeutic Products Programme (TPP) in Canada. For all of these registrations,
Cellegy submitted expert reports and supportive data from the Australian
regulatory package for Rectogesic(TM) which was approved by the Australian
Therapeutic Goods Administration (TGA) and has been successfully marketed in
Australia since early 1999. Cellegy is also conducting two Phase II clinical
trials using Cellegesic to determine its effect on the symptoms of hemorrhoids.
Hemorrhoids afflict an estimated 22 million people annually in the United
States, Europe and Japan, according to published data.
Cellegy's second lead product candidate, Tostrex(TM) (testosterone
gel), is for the treatment of male hypogonadism, which usually results in
diminished sexual function, lethargy and, in severe cases, reduced bone and
muscle mass in men. Based on positive results achieved in an analysis of the
majority of patients in the pivotal Phase III trial in November 2001, Cellegy
completed patient enrollment and plans to file an NDA during the second quarter
of 2002. In addition to Tostrex, Cellegy is developing a second transdermal
testosterone gel, Tostrelle(TM), for the treatment of female sexual dysfunction
in postmenopausal women. Testosterone deficiency in women frequently leads to
diminished libido, decreased bone and muscle mass and reduced energy levels.
Tostrelle has successfully completed two Phase I/II clinical studies and Cellegy
expects to begin an advanced Phase II/III study by the end of the first quarter
of 2002.
In November 2001, Cellegy acquired Vaxis Therapeutics Corporation ("Vaxis"
or "Cellegy Canada"), a private Canadian company based in Kingston, Ontario.
This acquisition expands our pipeline of products for the treatment of sexual
dysfunction in males and females and complements our current products. In
addition to product candidates for the treatment of sexual dysfunction, the
Vaxis product pipeline consists of nitroglycerin and other nitric oxide donors
for the treatment of various disorders including: Reynaud's Disease, Restless
Leg Syndrome, prostate cancer and other potential indications. We have recently
expanded our research to capitalize on the scientific expertise of Cellegy
Canada's scientists.
Cellegy's research and development programs also focus on inflammation and
second generation products for anorectal diseases. In the area of inflammation,
our scientists have discovered a family of compounds that we have named
CELLEDIRM. CELLEDIRM-based products may be useful in reducing inflammation
associated with a number of skin, mucous membrane and gastrointestinal
conditions.
This Annual Report includes forward-looking statements that involve
substantial risks and uncertainties. These forward-looking statements are not
historical facts, but rather are based on current expectations, estimates and
projections about our industry, our beliefs and our assumptions. 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. Our "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains many such
forward-looking statements. These forward-looking statements are not guarantees
of future performance and concern matters that involve risks and uncertainties
that could cause our actual results to differ materially from those in the
forward-looking statements. These risks and uncertainties include those
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Operating Results" and
elsewhere in this Annual Report. Except as required by law, we
1
undertake no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may arise after the date of this Annual
Report. Actual events or results may differ materially from those discussed in
this Annual Report.
Marketing and Commercialization Strategy
Cellegy intends to become a leader in the development and marketing of
selected specialty biopharmaceutical products that are directed towards the
treatment of gastrointestinal disorders, sexual dysfunction of both men and
women, and conditions affecting women's health. Key elements of our related
business and commercialization strategy include the following:
o Self-Marketing to Specialty Physician Markets in United States. We
plan to market Cellegesic to a targeted audience of key physician
specialists, principally Colon and Rectal Surgeons,
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 the product to broader physician audiences. Cellegy
intends to commercialize Tostrex through co-promotion agreements
with partners in the United States. We plan to outlicense the
overseas rights for products we develop in exchange for upfront and
milestone payments, as well as royalties on sales.
o Marketing and Sales Agreement with Ventiv Health. We announced a
comprehensive agreement with Ventiv Health, Inc. ("Ventiv"), a
contract sales organization, in August 2001. Under the control and
direction of Cellegy, Ventiv will provide certain sales and
marketing services relating to the anticipated launch of Cellegesic,
including hiring a sales force of approximately 75 representatives.
Ventiv will advance up to $10 million, the amount and timing
depending on various circumstances, to Cellegy to cover pre-launch
and launch expenses. In return, the agreement provides Ventiv with a
share of Cellegesic profits through a multi-royalty stream towards
the end of the six-year agreement period.
o Acquisition of Complementary Products and Companies. As was done
with the acquisitions of Vaxis in Canada in November 2001, of
Rectogesic from Quay Pharmaceuticals Pty Ltd ("Quay") in Australia
in June 2000, and of Cellegesic from Neptune Pharmaceuticals
("Neptune") in the United States in December 1997, we intend to
acquire other products, technologies or companies with products and
distribution capabilities consistent with our commercial objectives.
o Manufacturing. Cellegy has established a long term agreement with
PanGeo Pharma Inc., ("PanGeo") an FDA approved contract
manufacturing company based in Canada. PanGeo has successfully
manufactured Cellegesic, Tostrex and Tostrelle for our clinical
trials and will be the commercial manufacturer for these products,
when approved.
o Distribution. Cellegy has entered into a distribution agreement for
Rectogesic in South Korea and intends to contract additional
distributors in Asia, Latin America and the Middle East.
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
currently marketing our C79 Intensive Moisturizer formulation to a major
specialty retailer which incorporates C79 into hand cream products. Our revenues
from sales of these products totaled $660,000 in 2001 and have totaled about
$3,400,000 million since product introduction late in 1998.
Products Under Development
Prescription Products
Cellegesic (nitroglycerin ointment for Treatment of Anal Fissures and
Hemorrhoids)
Cellegy's leading product candidate is Cellegesic, a topical,
nitroglycerin-based prescription product for the treatment of anal fissures and
hemorrhoids. Anal fissures are painful tears in the lining of the anal mucosa, a
condition afflicting men and women of all age groups. Of the over 600,000 new
cases of anal fissures occurring
2
each year in the United States, Europe and Japan, many of these chronic cases
require painful and expensive surgery, a procedure that sometimes leaves
patients incontinent. Hemorrhoids are dilated, swollen veins and tissue located
either in the anal canal or at the margin of the anus. In the United Sates
alone, there are approximately 9 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 Cellegesic.
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.
Cellegesic 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. Several previous third party studies reported that
nitroglycerin, once administered to the anal canal, causes relaxation of the
sphincter muscle and helps to relieve pain and promote healing of the anal
fissure in most patients.
We completed an initial Phase III clinical trial using Cellegesic for the
treatment of anal fissures and announced the results in November 1999. The trial
did not demonstrate a statistically significant rate of healing in comparison to
placebo, but did show rapid and significant pain reduction. Based on this
outcome, we initiated a second Phase III trial in 2000 to confirm the drug's
ability to reduce fissure pain, the primary trial endpoint, with healing of
chronic anal fissures as a secondary endpoint.
The second Phase III clinical trial, which included 229 patients in several
study centers in the United States and overseas, was completed in September
2001. Patients received either of two strengths of Cellegesic or placebo
administered on a daily basis over an eight-week treatment period. The patient's
pain scores were tabulated and the patients were examined to determine whether
the fissure had healed. Positive results were achieved in the primary endpoint,
which was pain reduction of chronic anal fissures. Statistical significance was
not achieved in healing, the secondary endpoint.
In June 2001, we completed patient enrollment and filed an NDA with the FDA
requesting marketing approval of Cellegesic for the treatment of pain associated
with chronic anal fissures. We amended the NDA upon completion of the second
Phase III anal fissure pain study in November 2001. The decision to file the NDA
earlier than previously contemplated followed a meeting with the FDA at which
Cellegy re-reviewed the results of its initial Cellegesic Phase III clinical
trial and presented summary data from several trials conducted with
nitroglycerin ointment by investigators around the world, as well as various
other materials. Submitting the NDA before completion of the second Phase III
trial may not necessarily reduce the period of time during which the FDA reviews
the filing and may have no effect on the regulatory review period. There can be
no assurances that the NDA filing for Cellegesic will be approved, or that
earlier filing of the NDA will result in earlier product approval.
In addition to the above mentioned fissures trial, Cellegy has two Phase II
clinical trials underway for various complications of hemorrhoids. Cellegesic is
protected by two domestic patents, both of which have been issued, the most
recent in December 1997. Similar Canadian and European patents have been issued
and numerous patent applications have been filed in most major overseas markets.
Tostrex (testosterone gel for male hormone replacement therapy)
Cellegy is currently developing a transdermal testosterone gel to treat
male hypogonadism, or below normal levels 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.
Male hypogonadism is the first indication for which we will seek regulatory
approval in the United States. Subsequently, testosterone replacement may be
used for "male andropause," a potentially greater market.
There are a number of companies currently marketing testosterone in several
different product forms in domestic and international markets. Cellegy believes
that a significant market opportunity exists for an improved product, as the
side effects and patient inconveniences associated with many of the currently
marketed products have limited their use to less than 5% of potential patients.
Current product forms include orals, injectables, transdermal patches
3
and a testosterone gel launched in 2000. The leading patch products are sold at
prices averaging about $1,000 per year per patient with one other gel product
priced at over $3,500 per year.
Cellegy's proprietary testosterone gel product candidate is transparent,
rapid-drying and non-staining. It is designed as a once-a-day application from a
unique metered dose dispenser to relatively small areas of the skin. Based on
successful Phase II dose ranging clinical studies which demonstrated Tostrex's
ability to deliver testosterone into the bloodstream, we began a pivotal Phase
III clinical trial designed to restore normal levels of testosterone in men with
testosterone deficiency. The trial, including 201 patients at several study
centers in the United States was successfully completed and positive results
were announced in November 2001. Cellegy now expects to file an NDA early in the
second quarter of 2002.
Tostrelle (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 maintaining 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%.
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.
Based on the results of pharmacokinetic studies in men receiving Tostrex,
Cellegy's scientists were able to estimate the proper dosage of testosterone
required to achieve normal pre-menopausal hormone levels in postmenopausal
women. The result is Cellegy's Tostrelle, a product designed to restore normal
testosterone levels in hormone deficient women.
Cellegy has successfully completed two Phase I/II pharmacokinetic studies
in which we determined the proper dose necessary to restore normal testosterone
levels to normally menopausal and surgically-induced menopausal women. Based on
these results, and a meeting with the FDA to discuss advanced trial protocols,
we now intend to initiate a Phase II/III clinical study in the first quarter of
2002.
Technology
Current Research Programs
Cellegy's research and development programs focus on nitric oxide
pharmacology, inflammation and nitric oxide treatments for anorectal and
gastrointestinal diseases, sexual function and other indications. The recent
acquisition of Vaxis has significantly broadened Cellegy research and
development efforts for the treatment of female sexual dysfunction and male
erectile dysfunction, and has also expanded our research into potential oncology
treatments.
Cellegy's ongoing research and development efforts in the area of anorectal
disease have led to the identification and formulation development of two second
generation products for the treatment of anal fissures and hemorrhoids. Early
studies showed that these formulations are stable and will be suitable for human
clinical testing.
Our overall research efforts in nitric oxide pharmacology have expanded
subsequent to the November 2001 acquisition of Vaxis. Based on research efforts
at Queen's University at Kingston, we better understand the role of nitric oxide
as a signaling molecule in modulating vascular smooth muscle relaxation, perhaps
by down-regulating endothelin expression. The significance of this finding is
that nitric oxide is capable of reducing vascular tone at a concentration much
lower than needed for a direct vaso-dilatation effect, especially in tissues
under an abnormally
4
vaso-constrictive state. This discovery presents various potential approaches to
treat conditions caused by vaso-constriction, such as peripheral vascular
insufficiency found in Raynaud's disease, male erectile dysfunction, and
selected aspects of female sexual dysfunction. We plan to verify and validate
selected potential therapeutic indications via in vivo animal testing and in
pilot human studies.
We are also investigating the role of nitric oxide in modulating cancer
cell metastasis induced by hypoxia (low oxygen) and in attenuating pain due to
nociceptor activation. Results published in the Journal of National Cancer
Institute in December 2001 showed that the administration of nitric oxide to
hypoxic cancer cells led to reversal of the metastatic phenotype. Furthermore,
nitric oxide can also reverse the development of hypoxia-induced drug resistance
cancer phenotype to chemotherapeutic agents. Follow-up experiments since the
publication further support the original findings. We will continue to expand
upon these original findings with relevant in vitro and in vivo models through
the research efforts at the Queen's University and to further explore the
ability of nitric oxide to interfere with other nociceptive signaling pathway.
In the area of inflammation, our scientists discovered a family of
compounds called CELLEDIRM (Cellegy's Dermal Inflammatory Response Modulators).
CELLEDIRM is a group of compounds that have demonstrated in pre-clinical testing
a reduction of the inflammation associated with the topical application of drugs
and other active substances. Our in-house efforts have also identified
anti-inflammatory compounds for the treatment of gastrointestinal and urogenital
inflammatory disorders. Based on the safety and in vitro profiling of screened
compounds, one compound was selected for further in vivo testing in a relevant
model. Preliminary results using an experimental vehicle showed positive effects
with the lead candidate and we are planning to conduct additional
proof-of-concept studies.
In March 1994, Cellegy entered into an exclusive, worldwide, royalty
bearing license agreement with the University of California (the "University")
for patent rights, jointly held by the University and Cellegy, relating to
certain drug delivery technologies. Cellegy agreed to pay a licensing and
maintenance fee each year until Cellegy is commercially selling a product using
the licensed technology. We are currently in discussion with the University to
terminate, on mutually acceptable terms, the license agreement for patent rights
relating to drug delivery technologies.
Cellegy's research and development expenses were $14,098,000 in 2001,
$9,574,000 in 2000, and $7,965,000 in 2001, 2000 and 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Patents and Trade Secrets
Cellegy has 19 issued United States patents, more than 70 issued foreign
patents, and over 70 pending patent applications. Two issued United States
patents, 22 issued foreign patents, and more than 10 pending patent applications
relate to Cellegy's Cellegesic product for the treatment of anal fissures. One
issued United States patent, and 16 pending patent applications relate to our
Tostrex and Tostrelle products. Four pending United States patent applications
and 21 foreign patent applications relate to possible backup compounds for our
Cellegesic product. In addition, as part of Cellegy's acquisition of Vaxis,
Cellegy gained rights to 3 issued United States patents, 2 issued foreign
patents, and more than 25 pending patent applications. 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.
Our policy is to protect our technology by, among other things, filing
patent applications for technology that we consider 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 we develop. 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 competitors 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. 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 collaborators and potential collaborators to enter into confidentiality
agreements. There can be no assurance, however, that these agreements will
provide meaningful protection of our 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
5
applications at the United States 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 currently can be
maintained in secrecy until patents issue, we cannot be certain that Cellegy was
the first inventor of the invention covered by our pending patent applications
or patents or that we were the first to file patent applications for such
inventions. Further, issued patents can later be held invalid by the patent
office 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 the
manufacture, use or sale of any of our product candidates will not infringe
patent rights of others. 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 located in other 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 and product candidates, such as Cellegesic,
Tostrex and Tostrelle are based on existing molecules with a history of use in
humans but which are being developed by us for new therapeutic uses or in novel
delivery systems which enhance therapeutic utility. We cannot obtain composition
patent claims on the compounds themselves, 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. This is the case, for example, with our
United States patents relating to Cellegesic and Tostrex. Such method-of-use
patents may provide less protection than a composition-of-matter patent, because
of the possibility of "off-label" use of the composition. Cellegy may not be
able to prevent a competitor from using a different 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.
Product Acquisitions
On November 27, 2001, Cellegy acquired Vaxis Therapeutics Corporation, a
private Canadian company. Vaxis, subsequently renamed Cellegy Canada, is a
wholly-owned research and development subsidiary with pre-eminent scientists
focusing in the areas of sexual dysfunction, peripheral vascular disorders and
nitric oxide pharmacology. This research is in line with our goal of expanding
our pipeline of products and protecting our patents. The purchase price of $4.1
million consisted of 533,612 shares of our common stock and $142,000 in cash.
There are potential future earn-out considerations payable by Cellegy in stock
or cash tied to revenues generated by Vaxis technologies.
6
In June 2000, Cellegy acquired Quay Pharmaceuticals, an Australian company
marketing Rectogesic, a nitroglycerin ointment product similar to Cellegesic.
The acquisition cost totaled $1,835,000, consisting of 169,224 shares with a
value of $977,000, 171,146 warrants to purchase common stock with a value of
$489,000, and cash payments of $369,000. Cellegy will continue to self-market
Rectogesic in Australia through its wholly-owned Cellegy Australia subsidiary
and plans to sell Rectogesic through distributors in the Pacific Rim countries
and potentially other countries around the world.
In December 1997, Cellegy acquired patent and related intellectual property
rights relating to Cellegesic, a topical product candidate for the treatment of
anal fissures and hemorrhoids, from Neptune Pharmaceuticals. Pursuant to the
purchase agreement, 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 Cellegesic in domestic and foreign
markets. Two research milestones were achieved during 2001 resulting in the
issuance of 104,113 Cellegy shares for a total value of $750,000. Future
potential milestones, payable in Cellegy common stock, could result in the
issuance of up to an additional 1,283,887 shares of Cellegy common stock worth
up to approximately $9,750,000, based on the closing price of Cellegy stock at
the time of issuance. The agreement does not provide for the payment by Cellegy
of any future product royalties to Neptune in connection with Cellegesic
revenues.
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, we 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 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
7
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.
Cellegy's prescription products, and our ongoing research and clinical
activities such as those relating to Cellegesic, Tostrex, and Tostrelle are
subject to extensive regulation by governmental regulatory authorities in the
United States and other countries. Extensive current pre-clinical and clinical
testing requirements and the regulatory approval process of the FDA in the
United States and of certain foreign regulatory authorities, or additional
future government regulations, could prevent or delay regulatory approval of
Cellegy's products. Disagreements with one or more regulatory authorities may
occur in the future, and one or more of our ongoing or planned clinical trials
could be delayed or repeated in order to satisfy regulatory requirements. Sales
of Cellegy's products outside the United States are subject to regulatory
requirements governing clinical trials and marketing approval. These
requirements vary widely from country to country and could delay introduction of
Cellegy's products in those countries.
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 pre-clinical 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 the
FDA or other international regulatory authorities will permit us to undertake
any future clinical trials for potential products or to continue any of the
current clinical trials. To date, except for our NDA relating to Cellegesic, we
have not sought FDA approval to distribute any products. Moreover, results of
pre-clinical 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 Cellegy's present or future clinical trials 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 well in early tests, only
to find that later tests, including Phase III clinical trials, were inadequate
or unsatisfactory, or that FDA Advisory Committees have declined to recommend
approval of the drugs, or that the FDA itself refused approval, with the result
that such companies' stock prices have fallen precipitously. If the FDA delays
approval of, or fails to approve, our NDA for Cellegesic or planned NDA for
Tostrex, our price would be materially and adversely affected.
New Drug Applications. After completion of the required clinical testing,
generally an NDA is submitted. FDA approval of the NDA (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 and may request
more information before it accepts the filing. 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 approvable letter or a not 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 approvable 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.
8
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 governmental approval in
foreign countries of drug formulations utilizing our 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 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 a negative 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 or 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.
Competition
The pharmaceutical and cosmeceutical industries are characterized by
extensive research efforts and rapid and significant technological changes. In
the development and marketing of topical prescription drugs, cosmeceutical and
skin care products, and drug delivery systems, Cellegy faces intense
competition. Cellegy is much smaller in terms of size and resources than many of
its competitors in the United States and abroad, which include, among others,
major pharmaceutical, cosmetic, chemical, consumer product, and biotechnology
companies, specialized firms, universities and other research institutions.
Cellegy's competitors may succeed in developing technologies and products that
are safer, more effective or less costly than any which are being developed by
us that would 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 than us. In addition, Cellegy's products are subject to
competition from existing products. For example, Cellegy's Tostrex product, if
commercialized, is expected to compete with two currently marketed transdermal
patch products sold by Johnson and Johnson and Watson Pharmaceuticals and one
transdermal testosterone gel product marketed by
9
Unimed/Solvay. Cellegy's Cellegesic product, if commercialized, is expected to
compete with over-the-counter products, such as Preparation H marketed by
American Home Products, and various other prescription products. As a result, we
cannot assure you that Cellegy's products under development will be able to
compete successfully with existing products or innovative products under
development by other organizations.
Therapies for sexual dysfunction and women's health products represent a
very large market opportunity, especially as the overall population continues to
age. As the size of the market continues to grow, the competition will expand.
The approval and marketing of competitive products and other products that treat
the indications targeted by Cellegy could adversely affect the market acceptance
of Cellegy's products. The presence of directly competitive products could also
result in more intense price competition than might otherwise exist, which could
have a material adverse effect on Cellegy. Cellegy is aware of, at least, three
other companies developing testosterone replacement products for women and
believes that competition will be intense for all of its female and male sexual
dysfunction product candidates.
Employees
As of February 28, 2002, we had 34 full-time and two part-time employees.
Twenty-one of these employees, of whom 2 are M.D.'s and another 8 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 are represented by a labor union. We have experienced no work
stoppages and we believe that our employee relations are good.
ITEM 2: PROPERTIES
Cellegy currently leases 65,340 square feet of space located in South San
Francisco, California. Approximately 33,154 square feet of this space is
currently available for sublease. This space was previously subleased over the
last two years. Total rental income from rent payments to Cellegy was $897,000
in 2001. We expect to receive substantially less rental income in 2002 and
beyond resulting from the expiration of prior subleases and excess capacity in
the office rental market. We believe our current facilities will be adequate for
our needs for expansion for at least the next five years.
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, 2001.
ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The executive officers of Cellegy are as follows:
Name Age Position
---- --- --------
K. Michael Forrest 58 Chairman, President, Chief Executive
Officer and Director
Daniel L. Azarnoff, M.D. 75 Senior Vice President, Clinical and
Regulatory Affairs
10
John J. Chandler 60 Vice President, Corporate Development
A. Richard Juelis 53 Vice President, Finance and Chief
Financial Officer
K. Michael Forrest. Mr. Forrest became Chairman in May 2000 and has been
President, CEO, and a director since 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 INEX Pharmaceuticals, a
public company developing anti-cancer products.
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, and in February of 2001 was given the additional responsibility of
Medical Director. 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. Dr. Azarnoff is a member of The Institute of Medicine of
the National Academy of Sciences. He received his M.D. from the University of
Kansas Medical School. Dr. Azarnoff was a director of Cibus Pharmaceutical,
Oread and Entropin Inc., through 1998, and is currently director of Western
Center Clinical Trials.
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 the Medical Device Division of 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 an 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.
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 for seven years
each with Hoffmann-LaRoche and Schering-Plough. He holds a B.S. in Chemistry
from Fordham University and an M.B.A. from Columbia University.
11
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.
2001 High Low
---- ---- ----
First Quarter............................ $ 7.37 4.31
Second Quarter........................... 7.75 4.20
Third Quarter............................ 7.08 5.01
Fourth Quarter........................... 9.15 6.36
2000
----
First Quarter............................ $ 9.97 $ 3.25
Second Quarter........................... 8.25 4.69
Third Quarter............................ 9.43 7.00
Fourth Quarter........................... 8.00 4.38
Holders
As of March 5, 2002, there were approximately 175 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 we will declare or pay cash dividends on our common stock in
the foreseeable future.
12
ITEM 6: SELECTED FINANCIAL DATA
The following selected historical information has been derived from audited
financial statements of Cellegy. The financial information as of December 31,
2001 and 2000 and for each of the three years in the period ended December 31
are derived from audited financial statements. The financial statements, related
notes thereto, and the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Form
10-K should read carefully. The selected data is not intended to replace the
financial statements.
($000's) Years ended December 31,
------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues ............................ $ 877 $ 1,586 $ 1,045 $ 832 $ 828
Costs and expenses .................. 21,847(1) 13,573 10,847 9,266 9,238
--------- --------- --------- --------- ---------
Loss from operations ................ (20,970) (11,987) (9,802) (8,434) (8,410)
Interest income (expense) and other,
net ............................ 1,532 569 501 1,068 556
--------- --------- --------- --------- ---------
Net loss ............................ (19,467) (11,418) (9,301) (7,366) (7,854)
Non-cash preferred dividends ........ -- -- -- -- 35
--------- --------- --------- --------- ---------
Net loss applicable to common
shareholders .................... $(19,467) $(11,418) $ (9,301) $ (7,366) $ (7,889)
========= ========= ========= ========= =========
Basic and diluted net loss per common
shareholder ..................... $ (1.26) $ (0.91) $ (0.85) $ (0.73)) $ (1.18)
========= ========= ========= ========= =========
Weighted average common shares
outstanding ......................... 15,503 12,542 10,914 10,160 6,670
(1) During the year ended December 31, 2001, we recorded one-time, non-cash charges of $3,507,134 for in-process
research and development associated with the Vaxis acquisition and $750,000 in non-cash charges for research and
development expenses associated with milestone payments to Neptune Pharmaceuticals.
December 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance Sheet Data:
Cash, cash equivalents and investments..... $17,190(2) $15,923(2) $16,737 $15,220 $21,726
Total assets............................... 22,367 21,259 20,913 19,484 22,751
Deficit accumulated during the
development stage........................ (70,377) (50,912) (39,494) (30,192) (22,826)
Total shareholders' equity ................ $19,845 18,794 15,839 14,218 21,354
(2) Includes restricted cash of $614,000.
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 that
involve substantial risks and uncertainties. These forward-looking statements
are not historical facts, but rather based on current expectations, estimates
and projections about our industry, our beliefs and our assumptions. 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 forward-looking statements are not
13
guarantees of future performance and concern matters that involve risks and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. These risks and uncertainties include those
described in "Factors That May Affect Future Operating Results" and elsewhere in
this Annual Report. Except as required by law, we undertake no obligation to
revise any forward-looking statements in order to reflect events or
circumstances that may arise after the date of this Annual Report. Actual events
or results may differ materially from those discussed in this Annual Report.
Cellegy Pharmaceuticals, Inc., a specialty biopharmaceutical company
incorporated in California in 1989, is engaged in the development of
prescription drugs and skin care products. We are developing several
prescription drugs, including Cellegesic, 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
afflics certain men, generally above the age of forty, and Tostrelle, for the
treatment of sexual dysfunction in menopausal women.
General
In December 1997, we completed an asset purchase agreement with Neptune
Pharmaceuticals to acquire patent and other intellectual property rights
relating to Cellegesic. Cellegesic expenses have been a significant part of
Cellegy's spending since the acquisition and are expected to continue to be
significant during the remainder of 2002 as a result of two Phase II clinical
trials for the treatment of hemorrhoids. We will incur significant expenses
associated with pre-launch activities and on the on-going marketing and sales of
Cellegesic, if approved.
In September 1998, we began initial shipments and product sales of C79
Intensive Moisturizing formulation to Gryphon Development Inc., ("Gryphon") 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 June 2000, we acquired all of the assets of Quay Pharmaceuticals, an
Australian pharmaceutical company producing Rectogesic, a drug similar to
Cellegesic. The acquired assets consisted of Quay's inventory, other tangible
assets, and purchased technology. The purchase price of $1,835,000 included
169,224 shares of our common stock paid to Quay with an estimated value of
$977,000, warrants to purchase 171,146 shares of common stock with an estimated
value of $489,000, and cash payments of $369,000. The purchase price was
allocated to net tangible assets of $97,000, purchased technology of $770,000,
and goodwill of $968,000 based on their estimated fair values on the acquisition
date. Purchased technology and goodwill have been amortized over three and ten
years, respectively. We evaluated this acquisition under the new accounting
pronouncements (discussed below), Statement 141 and 142. Under the new guidance
effective January 1, 2002, goodwill will no longer be amortized and will be
evaluated for impairment.
In June 2001, we completed a private placement of approximately 2.7 million
shares of our common stock, resulting in approximately $15.4 million of gross
proceeds to Cellegy. Participants included current investors Baker/Tisch
Investments and GMT Capital, as well as, five new investors.
In August 2001, Cellegy and Ventiv Integrated Solutions, a division of
Ventiv Health, Inc., signed a six year agreement to commercialize Cellegy's lead
product, Cellegesic, in the United States. Ventiv will deliver integrated
marketing and sales solutions, will provide pre-launch support and will recruit
and train a sales force that will be jointly managed by both companies. Ventiv
will loan Cellegy up to $10 million, the amount and timing depending on various
circumstances, for expenses associated with the commercialization of Cellegesic
under a funding agreement. Ventiv will also receive a share of product
profitability through a multi-year royalty stream toward the end of the six-year
agreement period.
In November 2001, we acquired a private Canadian based company, Vaxis
Therapeutics, valued at $4.1 million. The purchase was payable primarily in
shares of Cellegy stock. The purchase price was allocated to net tangible assets
of $250,000, intangible assets of $350,000 and $3,507,000 million of in-process
research and development. The intangibles of $350,000 are being amortized over
five years and the in-process research and development has been expensed in the
fourth quarter of 2001. The acquired technology was in an early stage of
development such that, as of the acquisition date, technological feasibility had
not been reached and no alternative use exists. The assumptions used in
determining the purchase price allocation were based on an appropriate discount
rate applied to expected cash flows. The intangible assets will be amortized
over 5 years.
14
The purchase agreement contains earn-out provisions for seven years that
are based on commercial sales of any products developed by Cellegy based on
technologies acquired from Vaxis. Any contingent consideration paid in the
future will be accounted for as acquired in-process research and development.
The results of operations of the acquired company have been included in the
company's consolidated financial statements since the acquisition date.
Accumulated amortization at December 31, 2001 is $6,000. The expected
amortization expense for the next five years will be approximately $68,800 per
year.
Critical Accounting Policies
Use of Estimates. The preparation of consolidated financial statements, in
conformity with accounting principles generally accepted in the United States,
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.
Revenue Recognition. Revenues related to cost reimbursement provisions
under development contracts are recognized as the costs associated with the
projects as these costs are incurred. Revenues related to milestones specified
under development contracts are recognized as the milestones are achieved.
Cellegy has received certain United States government grants that support our
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
as these costs are incurred. Revenues related to product sales are recognized
upon shipment when title to the goods has been transferred to the customer.
There is no right of return for our Rectogesic and skin care product sales.
Clinical Trial Expenses. Clinical trial expenses are payable to clinical
sites and clinical research organizations. Expenses for both of these groups are
accrued on a straight-line basis over the contracted period subject to
adjustment for actual activity based on such factors as the number of subjects
enrolled and number of subjects that have completed treatment for each trial. A
monthly reconciliation of costs accrued to cost incurred is performed by
Cellegy's clinical project managers and the finance department.
Investment Policy. Cellegy is subject to certain credit risk from our
investment in marketable securities. By policy, we restrict amounts invested by
investment type and by issuer, except for securities issued by the United States
government. Cellegy has an investment policy that is approved and periodically
reviewed by our Audit Committee. The policy states that investments must be
highly liquid with maturities of less than three years. Cellegy's policy limits
investments to the following: direct obligations of the United States Government
or fully guaranteed by a government agency or by any of the states. Investments
must have a rating of A1/P1 or A by Standard and Poors (or an equivalent
rating); money market instruments must be a member of the Federal Reserve System
with a net worth of at least $100 million and a rating of A1/AA by Standard and
Poors (or equivalent rating). Any exception to the above requires approval of
the Chief Financial Officer and the Chief Executive Officer.
Results of Operations
Years Ended December 31, 2001, 2000 and 1999
Revenues. Cellegy had revenues of $877,000, $1,586,000, and $1,045,000 in
2001, 2000 and 1999, respectively. Revenues in 2001 consisted of $660,000 in
product sales to Gryphon Development (Gryphon), the product development arm of a
major specialty retailer, and $217,000 in Rectogesic sales in Australia.
Revenues in 2000 consisted of $1,389,000 in product sales to Gryphon, $125,000
in Rectogesic sales and $72,000 in SBIR grant funding. The decrease of $709,000
in total revenue in 2001 compared with 2000 was primarily due to a 52% or
$729,000 decrease in Gryphon sales which was partially due to an overstocking of
inventory on Gryphon's part accompanied by a decline in economic conditions
during the year. The SBIR grant funding of $72,000 was completed in 2000.
Revenues in 1999 consisted of $898,000 in Gryphon sales, $30,000 in SBIR grant
funding and $117,000 in development funding from Glaxo. The increase in total
revenue in 2000 of $541,000 or 52% compared with 1999 was primarily due to a
$491,000 increase in Gryphon sales and $125,000 in Rectogesic sales partially
offset by higher grant funding of $75,000 in 1999.
Research and Development Expenses. Research and development expenses were
$14,098,000 in 2001 compared with $9,574,000 in 2000, and $7,965,000 in 1999.
Total research and development expenses represented 65%, 70% and 73% of our
total operating expenses in 2001, 2000 and 1999, respectively. Total expenses in
2001
15
compared to 2000 increased by $4,524,000. Approximately 81% or $3,632,000 of the
increase was due to expenses associated with the completion of the Cellegesic
Phase III study, NDA filing fees, costs related to the Phase II clinical studies
relating to hemorrhoids, as well as costs associated with Tostrex and Tostrelle
clinical studies. The remaining 18% or $830,000 was due to non-cash expenses
related to milestone payments made to Neptune Pharmaceuticals and non-cash
compensation charges related to stock options. Future potential milestones
payable in Cellegy common stock to Neptune on the achievement of Cellegesic
development milestones could result in future non-cash research and development
expenses of up to $10 million. The increase of $1,609,000 or 16% in 2000
compared with 1999 was primarily due to an increase in spending associated with
Cellegesic Phase III and Phase II clinical trials, as well as Phase III and
Phase I/II Tostrex and Tostrelle clinical studies, respectively. Research and
development expenses include salaries and benefits, laboratory supplies,
external research programs, clinical studies and allocated overhead costs such
as rent, supplies and utilities. In addition to clinical site payments, clinical
costs include costs of manufacturing clinical supplies and costs associated with
product stability studies.
We expect our research and development expenses in 2002 to be equal to or
higher than 2001 levels, primarily due to our Phase II/III Tostrelle study, the
planned NDA filing for Tostrex, two hemorrhoid trials using Cellegesic and in
support of on-going research in Cellegy Canada. Unexpected increases in research
and development expenses may occur if the FDA requires further trials to support
our NDA filing for Cellegesic and Tostrex. However, in case of a delay in the
approval of the Cellegesic NDA, Cellegy may need to reduce or defer overall
expenditures, particularly in marketing and sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $4,042,000 in 2001, compared with $3,631,000 in
2000 and $2,613,000 in 1999. The increase of $411,000 or 11% in 2001 compared
with 2000 was mostly due to expenses associated with our business development
programs and a substantial increase in utility expenses and consulting fees. The
increase in expenses of $1,018,000 in 2000 compared with 1999 was primarily due
to non-cash compensation charges related to certain warrant grants. Our general
and administrative expenses are expected to continue to increase in the future
in support of our business development programs and product commercialization
efforts.
Acquired-In-Process Research and Development. Acquired-in-process research
and development expenses of $3,507,000 were incurred during 2001 as a result of
the Vaxis acquisition. There were no acquired-in-process research and
development expenses incurred during 2000 and 1999. The acquired technology was
an early stage of development that, at the acquisition date, technological
feasibility had not been reached and no alternative use existed.
Interest Income, and Other Net and Interest Expense. Cellegy recognized
$1,532,000 in interest income for 2001 compared with $770,000 for 2000 and
$864,000 for 1999. Fluctuations in interest income were tied primarily to
changes in the average investment balances during each year. Interest expenses
were $27,000 in 2001 compared with $201,000 in 2000 and $363,000 in 1999.
Interest expenses in 2001 were lower due to a bank loan that was repaid in 2001.
Other income includes rental income from our sub-lessees of $897,000 in 2001
compared to $80,000 in 2000. Cellegy's sub-lease agreement expired in December
2001, and this may result in significant decrease in rental income if favorable
sub-leases are not found this year.
Net Loss. The net loss applicable to common shareholders in 2001 was
$19,465,000 or $1.26 per share based on 15,503,000 weighted average shares
outstanding compared with the net loss applicable to common shareholders in 2000
of $11,418,000 or $0.91 per share based on 12,542,000 weighted average shares
outstanding. In 1999, our net loss was $9,301,000 or $0.85 per share based on
10,914,000 weighted average shares outstanding.
Liquidity and Capital Resources
We have experienced net losses and negative cash flows from operations each
year since our inception. Through December 31, 2001, we had incurred an
accumulated deficit of $70.4 million and had consumed cash from operations of
$41.7 million. Cash from equity financing transactions have included $6.4
million in net proceeds from our 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,
$10.0 million in net proceeds from a private placement in July 1999, $11.6
million in net proceeds from a private placement in October 2000 and $15.2
million in net proceeds from a private placement in June 2001. In June 1998, we
entered into a loan agreement with a commercial bank to provide up to $4.5
million with an initial interest rate at the bank's prime lending rate plus
16
0.75%. 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 $2.5 million. As of December 31, 2001, there was no loan balance
outstanding under this arrangement.
Our cash and investments were $17.2 million at December 31, 2001 compared
with $15.9 million at December 31, 2000, both of which includes $614,000 of
restricted cash. At December 31, 1999, cash and investments were $16.7 million.
The increase in cash and investments of $1.3 million in 2001 was principally due
to the net proceeds from the financing completed in June 2001, partially offset
by net cash used in operating activities of 13.4 million. Our operations have
used 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 our research and development programs, the
progress and results of pre-clinical 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.
We have a ten-year operating lease commitment on our facility with our
current landlord. Our operating lease commitments are $1,488,000 for 2002 and
$12,281,000 thereafter.
In order to complete the research and development and other activities
necessary to commercialize our products, additional financing will be required.
As a result, we will seek private or public equity investments and future
collaborative arrangements or other transactions with third parties to meet such
needs. There is no assurance that 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 our research and development
activities, planned clinical trials, marketing, sales, product promotion and
administrative programs. We believe that available cash resources and the
interest thereon, together with funding under the Ventiv agreements, will be
adequate to satisfy our capital needs through at least December 31, 2002,
although failure to obtain additional financing could require us to delay or
reduce the scope of some of our planned research, development and sales and
marketing activities.
We have paid fees to the Company's board members for their services on the
board, audit committee and compensation committee. The total fees paid to these
directors during 2001, 2000 and 1999 were $30,000, $46,500 amd $57,750,
respectively.
Additional consulting fees were paid to two board members based on a
consulting agreement. These were $80,000 and $66,000 for 2001 and 2000,
respectively.
We have also recognized $100,888 in compensation expense during 2001 for a
consulting agreement with a current board member. The Company issued stock
options to this board member for his consulting services.
Recent Accounting Pronouncements
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" (Statement 141). This Statement addresses
financial accounting and reporting for business combinations. Statement 141
supersedes APB Opinion No. 16, Business Combinations (Opinion 16), and amends or
supersedes a number of interpretations of that Opinion.
Statement 141 requires that (1) all business combinations be accounted for
by a single method the purchase method, (2) all intangible assets acquired in a
business combination are to be recognized as assets apart from goodwill if they
meet one of two criteria - the contractual-legal criterion or the separability
criterion and (3) in addition to the disclosure requirements in Opinion 16,
disclosure of the primary reasons for a business combination and the allocation
of the purchase price paid to the assets acquired and liabilities assumed by
major balance sheet caption. When the amounts of goodwill and intangible assets
acquired are significant in relation to the purchase price paid, disclosure of
other information about those assets is required, such as the amount of goodwill
by reportable segment and the amount of the purchase price assigned to each
major intangible asset class. The provisions of Statement 141 apply to all
business combinations initiated after June 30, 2001. Cellegy adopted the
provisions of Statement 141 as of July 1, 2001.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangibles" (Statement 142). Under Statement 142,
goodwill and indefinite lived intangible assets are no longer amortized but are
reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their estimated useful lives.
Prior to December 31, 2001, Cellegy had recorded goodwill of $968,000 related to
the Quay acquisition in June 2000. Cellegy will discontinue amortizing the
remaining balance in goodwill of $814,000 on January 1, 2002. The adoption of
this statement as of January 1, 2002 is not expected to have any other impact on
our financial position, results of operations or cash flows.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (Statement 144), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
Statement 144 is effective for Cellegy's fiscal year beginning January 2002.
Cellegy does not expect that the adoption of the Statement will have a
significant impact on our financial position and results of operations.
17
Factors That May Affect Future Operating Results
This report contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ significantly from the results
discussed in this Annual Report. Factors that might cause such a difference
include, but are not limited to, those discussed below.
We are subject to regulation by regulatory authorities including the FDA, which
could delay or prevent marketing of our products.
Cellegy's prescription product candidates, and our ongoing research and
clinical activities such as those relating to our product candidates Cellegesic,
Tostrex, and Tostrelle, are subject to extensive regulation by governmental
regulatory authorities in the United States and other countries. Extensive
current pre-clinical and clinical testing requirements and the regulatory
approval process of the United States Food and Drug Administration (FDA) in the
United States and of certain foreign regulatory authorities, or additional
future government regulations, could prevent or delay regulatory approval of
Cellegy's products. Disagreements may occur in the future, and one or more of
our ongoing or planned clinical trials could be delayed or be required to be
repeated in order to satisfy regulatory requirements. The FDA could impose
requirements on future trials that could delay or prevent the regulatory
approval process for Cellegesic, Tostrex or Tostrelle. Sales of Cellegy's
products outside the United States are subject to regulatory requirements
governing clinical trials and marketing approval. These requirements vary widely
from country to country and could delay introduction of Cellegy's products in
those countries.
Before we obtain regulatory approval for the commercial sale of most
potential drug products, we must demonstrate through pre-clinical 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 the FDA or
other international regulatory authorities will permit us to undertake any
future clinical trials for potential products or to continue any of the current
clinical trials. To date, except for our NDA filing in June 2001 relating to
Cellegesic, we have not sought FDA approval to distribute any products.
Moreover, results of pre-clinical studies and early clinical trials may not be
good predictors of results that will be obtained in later-stage clinical trials
and favorable results in later stage clinical trials may not ensure FDA approval
to commercialize a product. We cannot assure you that Cellegy's present or
future clinical trials 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 approval, with the result
that such companies' stock prices have fallen precipitously.
The timing of NDA submissions, the outcome of reviews by the FDA and the
initiation and completion of other clinical trials are subject to uncertainty,
change and unforeseen delays. On December 3, 2001, Cellegy announced that it had
submitted an amendment to its NDA for Cellegesic to include data from a recently
completed confirmatory Phase III clinical study using Cellegesic to treat pain
associated with chronic anal fissures. The Cellegesic NDA was originally filed
in June 2001. There can be no assurance, however, that the FDA will find the
Cellegesic trial data, the statistical analysis methodology used by Cellegy, or
other sections of the NDA acceptable for marketing approval. The FDA could
require further trials, decide to have an Advisory Panel review the submission,
with an uncertain outcome of such panel's recommendation, or take other actions
having the effect of delaying or preventing commercial introduction of
Cellegesic. In addition, having submitted the Cellegesic NDA in June 2001 before
completion of the second Phase III trial does not necessarily reduce the period
of time during which the FDA reviews the filing and may have no effect on the
regulatory review period; the FDA could decide, among other things, to re-start
its review as of November 2001, when Cellegy submitted an amendment to the NDA.
Any delay in obtaining regulatory approval for Cellegesic could have a material
adverse effect on the market price of the Common Stock and our business.
We have a history of losses, and we expect losses to continue for at least
several years.
Our accumulated deficit as of December 31, 2001 was approximately $70.4
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
two years. We plan to increase our operating expenses as we continue to devote
significant resources to pre-
18
clinical studies, clinical trials, administrative, marketing, sales and patent
activities. Accordingly, without substantial revenues from new corporate
collaborations, royalties on product sales or other revenue sources, we expect
to incur substantial operating losses in the foreseeable future as our potential
products move into commercialization, and we continue to invest in research and
clinical trials. Our 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 products. We
cannot assure you that we will ever be able to achieve or sustain profitability.
The Company faces intense competition from larger companies, and in the future
Cellegy may not have the resources required to develop innovative products.
Cellegy's products are subject to competition from existing products.
The pharmaceutical and cosmeceutical industries are subject to rapid and
significant technological changes. In the development and marketing of topical
prescription drugs, skin care and other products and drug delivery systems,
Cellegy faces intense competition. Cellegy is much smaller in terms of size and
resources than many of its competitors in the United States and abroad, which
include, among others, major pharmaceutical, chemical, cosmetic, consumer
product and biotechnology companies, specialized firms, universities and other
research institutions. Cellegy's competitors may succeed in developing
technologies and products that are more effective than any that we are
developing and could render Cellegy's 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, Cellegy's products are
subject to competition from existing products. For example, Cellegy's Tostrex
product, if commercialized, is expected to compete with two currently marketed
transdermal patch products sold by Johnson and Johnson and Watson
Pharmaceuticals and one transdermal testosterone gel product marketed by
Unimed/Solvay. Cellegy's Cellegesic product, if commercialized, is expected to
compete with over-the-counter products, such as Preparation H marketed by
American Home Products, and various other prescription products. As a result, we
cannot assure you that Cellegy's products under development will be able to
compete successfully with existing products or innovative products under
development by other organizations.
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 two years in order to fund the additional expenses required to expand our
current research and development programs and to commercialize our products once
regulatory approvals have been obtained. Cellegy has no current source of
significant ongoing revenues or capital beyond existing cash and investments,
and certain product sales of Rectogesic in Australia and sales to Gryphon, the
development subsidiary of a major specialty retailer. In order to complete the
research and development and other activities necessary to commercialize our
products, additional financing will be required.
Cellegy will seek private or public equity investments 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. Cellegy
believes that available cash resources and interest earned, together with
funding under the Ventiv agreements, will be adequate to satisfy its capital
needs through at least December 31, 2002, although failure to obtain additional
financing could require us to delay or reduce the scope of some of our planned
research, development and sales and marketing activities.
Our stock price could be volatile.
Our stock price has from time to time experienced significant price and
volume fluctuations. Sometimes our stock price has varied depending on
fluctuations in the Nasdaq National Market generally, and sometimes fluctuations
have resulted from matters more specific to Cellegy, such as an announcement of
clinical trial or regulatory results or other corporate developments.
Announcements that could significantly impact our stock price include:
o clinical trial results, such as results of Cellegesic, Tostrex or
Tostrelle trials;
o developments or disputes concerning patent or proprietary rights;
o publicity or announcements regarding regulatory developments relating
to our products under review or by our competitors;
19
o period-to-period fluctuations in our financial results, including
operating expenses or profits, and
o negative announcements by our key suppliers or service providers.
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 Cellegy's products are based on existing compounds with a
history of use in humans but are being developed by Cellegy for new therapeutic
uses. Cellegy 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. Cellegy may not be able to prevent a competitor from
using our formulations or compounds for a different purpose. Certain United
States and foreign patents have previously been issued to Cellegy. However, 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 Cellegy's 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. For example, we reported in July 2001 that two
oppositions had been filed with the European Patent Office regarding our
European patent protecting the manufacture and use of nitroglycerin ointment and
related compounds for the treatment of anal disorders, including fissures and
various hemorrhoidal conditions. An adverse outcome in either opposition
proceeding could have a material adverse effect on Cellegy, including marketing
efforts in Europe. In addition, many other organizations are engaged in research
and product development efforts in drug delivery, skin biology and cosmeceutical
fields that may overlap with Cellegy's 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 Cellegy. These rights may prevent us from
commercializing technology, or may require Cellegy 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 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. Cellegy is subject to the risk that individuals
or organizations located in such countries will engage in development, marketing
or sales activities of Cellegy's products.
Our product sales strategy involving corporate partners is highly uncertain.
Cellegy is seeking to enter into agreements with certain corporate partners
granting rights to commercialize our lead product candidates, Cellegesic and
Tostrex. Other than the agreement with Ventiv, Cellegy has not entered into any
agreements with third parties to commercialize either product candidate. Cellegy
may not be able to establish any such collaborative arrangements and we may not
have the resources or the experience to successfully commercialize any such
products on our own. Failure to enter into any such arrangements could prevent,
delay or otherwise have a material adverse effect on our ability to develop and
market Cellegesic, Tostrex or other products (particularly in certain
international markets) that we desire to commercialize through third party
arrangements. Similarly, if we are unable to find another corporate partner to
develop or market our cosmeceutical products, they may never be commercialized.
If we are able to enter into one or more corporate partner arrangements, we may
rely on our partners to conduct clinical trials, obtain regulatory approvals
and, if approved, manufacture, distribute and market or co-promote these
products.
However, reliance on third party partners can create risks to our product
commercialization efforts. Once agreements are completed, Cellegy 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, any arrangements that may be established may not be
successful.
For example, Cellegy and Ventiv finalized a six-year services agreement and
a related funding agreement to commercialize our lead product, Cellegesic. There
is no guarantee that Ventiv will be able to successfully complete its funding or
other obligations to Cellegy. Non-performance by Ventiv could delay the
commercial introduction of
20
Cellegesic and delay sales of Cellegesic. Cellegy may need to seek alternative
arrangements for the commercialization of the product which could have a
material adverse effect on our business and our ability to commercialize
Cellegesic in a timely manner.
No History of Manufacturing Products; Limited Number of Critical Suppliers.
Cellegy has no direct experience in manufacturing commercial quantities of
products and currently does not have any capacity to manufacture products on a
large commercial scale. We currently rely on a limited number of contract
manufacturers, primarily PanGeo, and suppliers to manufacture our formulations.
Although we believe that there will be 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 causing product shipment delays or a situation where the
contractor may not be able to maintain compliance with the FDA's current good
manufacturing practice requirements necessary to continue manufacturing our
products.
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 35% securities will mature in 2002, 35% will mature in 2003 and
the rest in 2004. We believe that potential near-term losses in future earnings,
fair values or cash flows related to our investment portfolio are not
significant.
At December 31, 2001, our investment portfolio consisted of $6,758,000 in
corporate notes, $2,022,000 in government securities and $2,000,000 in
commercial paper. We currently do not hedge interest rate exposure. If market
interest rates were to increase by 100 basis points or 1% from December 2001
levels, the fair value of our portfolio would decline by no more than $50,000.
The modeling technique used measures the change in fair value from a
hypothetical shift in market interest rates.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by item 8 are set forth below on pages
F-1 through F-20 of this report.
Index to Financial Statements
Page
--------
Report of Ernst & Young LLP, Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Shareholders' Equity F-5
Consolidated Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-11
F-1
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
Cellegy Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Cellegy
Pharmaceuticals, Inc. and subsidiaries (a development stage company) as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2001, and for the period from June 26, 1989
(inception) to December 31, 2001. 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 consolidated financial position of Cellegy
Pharmaceuticals, Inc. and subsidiaries (a development stage company) at December
31, 2001 and 2000 and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, and for
the period from June 26, 1989 (inception) to December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
February 7, 2002
F-2
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Balance Sheets
December 31,
-------------------------
2001 2000
----------- -----------
Assets
Current assets
Cash and cash equivalents ................. $ 5,795,378 $ 8,838,192
Short-term investments..................... 4,053,280 6,470,537
Prepaid expenses and other current assets.. 837,344 856,076
----------- -----------
Total current assets............................ 10,686,002 16,164,805
Property and equipment, net..................... 2,467,907 2,848,020
Long-term investments........................... 6,727,240 --
Restricted cash................................. 613,999 613,999
Intangible assets, net.......................... 1,522,266 1,531,939
Other assets.................................... 350,000 100,000
----------- -----------
Total assets.................................... $22,367,414 $21,258,763
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable and accrued liabilities... $ 1,893,253 $ 1,443,230
Accrued compensation and related expenses.. 144,614 139,073
Current portion of note payable............ -- 548,133
----------- -----------
Total current liabilities....................... 2,037,867 2,130,436
Long term liabilities........................... 484,826 --
Non-current portion of note payable............. -- 333,937
Commitments:
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, 2001 and
2000.................................. -- --
Common stock, no par value; 25,000,000
shares authorized: 17,295,274 shares
issued and outstanding at December 31,
2001 and 13,838,053 shares issued and
outstanding at December 31, 2000....... 90,137,811 69,735,022
Accumulated other comprehensive
income (loss).......................... 83,458 (28,807)
Deficit accumulated during the
development stage...................... (70,376,548) (50,911,825)
----------- -----------
Total shareholders' equity...................... 19,844,721 18,794,390
----------- -----------
Total liabilities and shareholders' equity...... $22,367,414 $21,258,763
=========== ===========
See accompanying notes.
F-3
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Operations
Period from
June 26, 1989
Years ended December 31, to
------------------------------------------- December 31,
2001 2000 1999 2001
---- ---- ---- ----
Revenues:
Licensing and contract revenue from affiliate $ -- $ -- $ -- $ 1,145,373
Licensing, milestone, and development funding -- -- 117,303 1,551,408
Government grants ............................ 566 71,793 29,976 502,335
Product sales................................. 876,925 1,513,830 897,859 3,746,584
------------ ------------ ------------ ------------
Total revenues .................................... 877,491 1,585,623 1,045,138 6,945,700
Costs and expenses:
Cost of products sold ........................ 200,338 368,113 269,358 950,882
Research and development ..................... 14,097,746 9,574,293 7,965,477 51,214,170
Selling, general and administrative .......... 4,041,642 3,630,616 2,612,601 20,560,749
Acquired in-process research and development . 3,507,134 -- -- 7,350,102
------------ ------------ ------------ ------------
Total costs and expenses .......................... 21,846,860 13,573,022 10,847,436 80,075,903
------------ ------------ ------------ ------------
Operating loss .................................... (20,969,369) (11,987,399) (9,802,298) (73,130,203)
Other income (expense):
Interest expense ............................. (27,283) (200,689) (362,735) (1,476,593)
Interest income and other, net ............... 1,531,929 769,875 863,877 5,678,753
------------ ------------ ------------ ------------
Net loss .......................................... (19,464,723) (11,418,213) (9,301,156) (68,928,043)
Non-cash preferred dividends ...................... -- -- -- 1,448,505
------------ ------------ ------------ ------------
Net loss applicable to common shareholders ........ $(19,464,723) $(11,418,213) $ (9,301,156) $(70,376,548)
============ ============ ============ ============
Basic and diluted net loss per common share $ (1.26) $ (0.91) $ (0.85)
============ ============ ============
Weighted average common shares used in computing
basic and diluted net loss per common share ....... 15,502,918 12,542,232 10,913,554
============ ============ ============
See accompanying notes.
F-4
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statement of Shareholders' Equity
Series A Convertible Series B Convertible Series C Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock
--------------- --------------- --------------- ------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
Issuance of convertible
preferred stock, net of
issuance cost through
December 31, 1998 ........ 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, 1998......... 625,845 1,199,536 -- -- -- -- -- --
Issuance of convertible
preferred stock for
services rendered, and
license agreement through
December 31, 1998 ........ 50,110 173,198 -- -- -- -- -- --
Issuance of Series B
convertible preferred
stock in exchange for
convertible promissory
notes..................... -- -- 12,750 114,000 -- -- -- --
Non-cash preferred dividends -- 1,448,505 -- -- -- -- -- --
Conversion of preferred
stock, including
dividends, to common stock
through December 31, 1998. (703,604) (9,622,969) (12,750) (114,000) (477,081) (4,978,505) 3,014,644 14,715,474
Issuance of warrants in
connection with notes
payable in financing ..... -- -- -- -- -- -- -- 487,333
Issuance of common stock in
connection with private
placement of common stock
in July 1997, net of
issuance cost ............ -- -- -- -- -- -- 1,547,827 3,814,741
Issuance of common stock in
connection with the public
offering of common stock
in November 1997, net of
issuance cost ............ -- -- -- -- -- -- 2,012,500 13,764,069
Issuance of common stock in
connection with the
acquisition of Neptune
Pharmaceutical ........... -- -- -- -- -- -- 462,809 3,842,968
Accumulated Deficit
Other Accumulated
Comprehensive During the Total
Income Development Shareholders'
(Loss) Stage Equity
------ ----- ------
Issuance of convertible
preferred stock, net of
issuance cost through
December 31, 1998 ........ $ -- $ -- $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, 1998......... -- -- 1,199,536
Issuance of convertible
preferred stock for
services rendered, and
license agreement through
December 31, 1998 ........ -- -- 173,198
Issuance of Series B
convertible preferred
stock in exchange for
convertible promissory
notes..................... -- -- 114,000
Non-cash preferred dividends -- (1,448,505) --
Conversion of preferred
stock, including
dividends, to common stock
through December 31, 1998. -- -- --
Issuance of warrants in
connection with notes
payable in financing ..... -- -- 487,333
Issuance of common stock in
connection with private
placement of common stock
in July 1997, net of
issuance cost ............ -- -- 3,814,741
Issuance of common stock in
connection with the public
offering of common stock
in November 1997, net of
issuance cost ............ -- -- 13,764,069
Issuance of common stock in
connection with the
acquisition of Neptune
Pharmaceutical ........... -- -- 3,842,968
See accompanying notes
F-5
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statement 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
------ ------ ------ ------ ------ ------
Issuance of common stock in
connection with IPO in
August 1995.................... -- -- -- -- -- --
Issuance of common stock for
cash through December 31, 1998. -- -- -- -- -- --
Issuance of common stock for
services rendered through
December 31, 1998.............. -- -- -- -- -- --
Repurchase of common shares
in 1992........................ -- -- -- -- -- --
Issuance of common stock in
exchange for notes payable..... -- -- -- -- -- --
Exercise of warrants to
purchase common stock.......... -- -- -- -- -- --
Exercise of options to
purchase common stock.......... -- -- -- -- -- --
Compensation expense related
to the extension of option
exercise periods............... -- -- -- -- -- --
Unrealized gain on investments.... -- -- -- -- -- --
Net loss for the period June
26, 1989 (inception) to
December 31, 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 cost........... -- -- -- -- -- --
Exercise of warrants to
purchase common stock.......... -- -- -- -- -- --
Exercise of options to
purchase common stock.......... -- -- -- -- -- --
Unrealized loss on investments.... -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Total Comprehensive Loss..........
Accumulated Deficit
Other Accumulated
Comprehensive During the Total
Common Stock Income Development Shareholders'
Shares Amount (Loss) Stage Equity
------ ------ ------ ----- ------
Issuance of common stock in
connection with IPO in
August 1995................... 1,322,500 6,383,785 -- -- 6,383,785
Issuance of common stock for
cash through December 31, 1998 953,400 126,499 -- -- 126,499
Issuance of common stock for
services rendered through
December 31, 1998............. 269,116 24,261 -- -- 24,261
Repurchase of common shares
in 1992....................... (3,586) (324) -- -- (324)
Issuance of common stock in
exchange for notes payable.... 42,960 268,500 -- -- 268,500
Exercise of warrants to
purchase common stock......... 377,082 100,484 -- -- 100,484
Exercise of options to
purchase common stock......... 174,045 496,862 -- -- 496,862
Compensation expense related
to the extension of option
exercise periods.............. -- 338,481 -- -- 338,481
Unrealized gain on investments... -- -- 47,353 -- 47,353
Net loss for the period June
26, 1989 (inception) to
December 31, 1998............. -- -- -- (28,743,951) (28,743,951)
---------- ----------- ------- ----------- -----------
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 cost.......... 1,616,000 10,037,662 -- -- 10,037,662
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......................... -- -- -- (9,301,156) (9,301,156)
---------- ----------- ------- ----------- -----------
Total Comprehensive Loss......... (9,383,980)
See accompanying notes.
F-6
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statement 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
------ ------ ------ ------ ------ ------
Balances at December 31, 1999.. -- -- -- -- -- --
Issuances of common stock in
connection with the
private placement of
common stock in October
2000, net of issuance
costs of $22,527............ -- -- -- -- -- --
Exercise of warrants to
purchase common stock....... -- -- -- -- -- --
Exercise of options to
purchase common stock....... -- -- -- -- -- --
Fair value of warrants issued
in Quay acquisition......... -- -- -- -- -- --
Common stock issued in
connection with Quay
acquisition................. -- -- -- -- -- --
Compensation expense related
to warrants and options
granted to non-employees.... -- -- -- -- -- --
Unrealized gain on investments. -- -- -- -- -- --
Foreign currency translation... -- -- -- -- -- --
Net loss....................... -- -- -- -- -- --
----- ----- ----- ----- ----- -----
Total Comprehensive Loss.......
Balances at December 31, 2000.. -- -- -- -- -- --
Issuance of common stock in
connection with the
private placement of
common stock in June 2001,
net of issuance
costs of $184,795........... -- -- -- -- -- --
Exercise of warrants to
purchase common stock....... -- -- -- -- -- --
Exercise of options to
purchase common stock....... -- -- -- -- -- --
Common stock issued in
connection with Vaxis
acquisition................. -- -- -- -- -- --
Compensation expense related
to warrants and options
granted to non-employees.... -- -- -- -- -- --
Accumulated Deficit
Other Accumulated
Comprehensive During the Total
Common Stock Income Development Shareholders'
Shares Amount (Loss) Stage Equity
------ ------ ------ ----- ------
Balances at December 31, 1999.. 12,010,242 55,367,903 (35,471) (39,493,612) 15,838,820
Issuances of common stock in
connection with the
private placement of
common stock in October
2000, net of issuance
costs of $22,527............ 1,500,000 11,602,473 -- -- 11,602,473
Exercise of warrants to
purchase common stock....... 62,833 315,800 -- -- 315,800
Exercise of options to
purchase common stock....... 95,754 380,516 -- -- 380,516
Fair value of warrants issued
in Quay acquisition......... -- 489,477 -- -- 489,477
Common stock issued in
connection with Quay
acquisition................. 169,224 977,105 -- -- 977,105
Compensation expense related
to warrants and options
granted to non-employees.... -- 601,748 -- -- 601,748
Unrealized gain on investments. -- -- 8,201 -- 8,201
Foreign currency translation... -- -- (1,537) -- (1,537)
Net loss....................... -- -- -- (11,418,213) (11,418,213)
---------- ---------- ------- ----------- -----------
Total Comprehensive Loss....... (11,411,549)
-----------
Balances at December 31, 2000.. 13,838,053 69,735,022 (28,807) (50,911,825) 18,794,390
Issuance of common stock in
connection with the
private placement of
common stock in June 2001,
net of issuance
costs of $184,795........... 2,747,143 15,199,206 -- -- 15,199,206
Exercise of warrants to
purchase common stock....... 12,000 48,000 -- -- 48,000
Exercise of options to
purchase common stock....... 60,803 203,437 -- -- 203,437
Common stock issued in
connection with Vaxi
acquisition................. 533,612 3,852,630 -- -- 3,852,630
Compensation expense related
to warrants and options
granted to non-employees.... -- 349,516 -- -- 349,516
See accompanying notes
F-7
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statement 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
------ ------ ------ ------ ------ ------
Issuance of common stock in
connection with the
achievement of Neptune
milestones.................. --- --- --- --- --- ---
Unrealized gain on investments. --- --- --- --- --- ---
Foreign currency translation... --- --- --- --- --- ---
Net loss....................... --- --- --- --- --- ---
----- ----- ----- ----- ----- -----
Total Comprehensive Loss....... --- --- --- --- --- ---
Balances at December 31, 2001.. -- $ -- -- $ -- -- $ --
===== ===== ===== ===== ===== =====
Accumulated Deficit
Other Accumulated
Comprehensive During the Total
Common Stock Income Development Shareholders'
Shares Amount (Loss) Stage Equity
------ ------ ------ ----- ------
Issuance of common stock in
connection with the
achievement of Neptune
milestones.................. 104,113 750,000 --- --- 750,000
Unrealized gain on investments. --- --- 130,655 --- 130,655
Foreign currency translation... --- --- (18,390) --- (18,390)
Net loss....................... --- --- --- (19,464,723) (19,464,723)
--------- ---------- ------- ------------ ------------
Total Comprehensive Loss....... --- --- --- --- (19,352,458)
------------
Balances at December 31, 2001.. 17,295,724 $90,137,811 $ 83,458 $(70,376,548) $ 19,844,721
========== =========== ======== ============ ============
See accompanying notes.
F-8
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Cash Flows
Period from
June 26, 1989
Years ended December 31, (inception)
------------------------------------------------ December 31,
2001 2000 1999 2001
------------ ------------ ------------ ------------
Operating activities
Net loss ................................................... $(19,464,723) $(11,418,213) $ (9,301,156) $(68,928,043)
Adjustment to reconcile net loss to net cash used in
operating activities:
Acquired in-process research and development ............ 3,507,134 -- -- 7,350,102
Depreciation and amortization ........................... 530,643 502,470 428,980 1,745,088
Intangible assets amortization .......................... 358,673 298,351 -- 657,024
Compensation expense related to warrants and
options granted ....................................... 349,516 601,748 -- 951,264
Compensation expense related to the extension of
option exercise periods ............................... -- -- -- 338,481
Amortization of discount on notes payable and
deferred financing costs .............................. -- -- -- 24,261
Issuance of common shares for services .................. -- -- -- 990,918
Issuance of common stock for services rendered,
interest, and Neptune milestones ...................... 750,000 -- -- 567,503
Changes in operating assets and liabilities:
Prepaid expenses and other current assets ............ 18,732 70,250 407,068 (937,344)
Accounts payable and accrued liabilities ............. 450,173 729,227 (931,685) 1,893,403
Other long term liabilities .......................... 484,826 -- (250,000) 484,826
Accrued compensation and related expenses ............ 5,541 32,850 37,126 144,614
------------ ------------ ------------ ------------
Net cash used in operating activities ...................... (13,009,635) (9,183,317) (9,609,667) (54,718,053)
Investing activities
Purchases of property and equipment ........................ (232,018) (201,106) (747,556) (4,104,245)
Purchases of investments ................................... (16,789,905) (10,575,000) (19,947,556) (87,890,354)
Sales of investments ....................................... 7,500,000 9,549,557 8,525,450 31,468,877
Maturities of investments .................................. 4,980,239 10,500,000 9,015,000 45,617,759
Acquisitions of Vaxis & Quay, net of cash provided
to (acquired) .............................................. (142,456) (369,000) -- (511,456)
------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities ....... (4,602,652) 8,904,451 (3,154,662) (15,419,419)
Financing activities
Proceeds from notes payable ................................ $ -- $ -- $ 1,279,187 $ 8,047,424
Repayment of notes payable ................................. (880,070) (3,152,828) (465,102) (6,610,608)
Other long-term liabilities ................................ -- (218,993) 138,737) --
Net proceeds from issuance of common stock ................. 15,450,643 12,298,789 11,004,770 63,431,568
Other assets ............................................... -- (613,999) -- (613,999)
Issuance of convertible preferred stock, net of
issuance costs .......................................... -- -- -- 11,757,735
Deferred financing costs ................................... -- -- -- (80,170)
------------ ------------ ------------ ------------
Net cash provided by financing activities .................. 14,568,573 8,312,969 11,957,592 75,931,950
Net decrease in cash and cash equivalents .................. (3,043,714) 8,034,103 (806,737) $ 5,795,378
============
Cash and cash equivalents, beginning of period ............. 8,838,192 804,089 1,610,826 --
Cash and cash equivalents, end of period ................... $ 5,795,378 $ 8,838,192 $ 804,089 $ 5,795,378
============ ============ ============ ============
F-9
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Consolidated Statements of Cash Flows (Continued)
Period from June
26, 1989 through
December 31,
2001 2000 1999 2001
---- ---- ----- ----
Supplemental cash flow information
Interest Paid......................................... $ 27,281 $ 200,689 $ 362,735 $ 612,851
============= ============== ============== ===========
Supplemental disclosure of non-cash transactions:
Issuance of common stock in connection with
acquired-in-process technology..................... $ 3,507,134 $ -- $ -- $ 7,350,102
Conversion of preferred stock to common stock......... $ -- $ -- $ -- $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
payable............................................ $ -- $ -- $ -- $ 1,268,316
============= ============== ============== ===========
Issuance of common stock for milestone payments....... $ 750,000 $ -- $ -- $ 750,000
See accompanying notes.
F-10
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements
1. Accounting Policies
Description of Business and Principles of Consolidation
The consolidated financial statements include the accounts of Cellegy
Pharmaceuticals, Inc. and its subsidiaries (the "Company"). All significant
inter-company balances and transactions have been eliminated in consolidation.
The Company was incorporated in California in June 1989 and is a
development stage company. Since its inception, the Company has engaged
primarily in research and clinical development activities associated with its
current and potential future products and its transdermal drug delivery and
topical formulation expertise. The Company has conducted a number of clinical
trials using its products, including the preparation of manufactured clinical
materials. A number of sponsored, external research programs have been
undertaken.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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.
Revenue Recognition 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 product sales are recognized upon shipment when title to goods has been
transferred to the customer. There is no right of return for product sales.
Receivables are collected within thirty days of shipment.
Research and development costs are expensed as incurred. The type of costs
included in research and development expenses include salaries and benefits,
laboratory supplies, external research programs, clinical studies and allocated
costs such as rent, supplies and utilities.
Clinical trial expenses are payable to clinical sites and clinical research
organizations. Expenses for both of these groups are accrued on a straight-line
basis over the contracted period subject to adjustment for actual activity based
on such factors as the number of subjects enrolled and number of subjects that
have completed treatment for each trial. A monthly reconciliation of costs
accrued to cost incurred is performed by Cellegy's clinical project managers and
the finance department.
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, 2001 and 2000. The Company
considers all its investments as available-for-sale and reports these
investments at estimated fair market value using available market information.
Unrealized gains or losses on available-for-sale securities are included in
shareholders' equity as other comprehensive income (loss) 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.
The Company is subject to credit risk from its portfolio of marketable
securities. By policy, the Company restricts amounts invested in such securities
by investment type and by issuer except for securities issued by the U.S.
government.
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. Amortization for leasehold improvements is taken over the shorter of
the estimated useful life of the asset or the remaining lease term.
F-11
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Goodwill
Goodwill that is related to the purchase of Quay Pharmaceuticals in June
2000, included in intangible assets, represents the excess purchase price over
the fair value of net assets acquired which was being amortized over 10 years
using the straight-line method. The carrying value of goodwill is based on
management's current assessment of recoverability using objective and subjective
factors.
Amortization taken to date as of December 31, 2001 was approximately
$652,000. Effective January 1, 2002, the Company will no longer amortize the
remaining balance of goodwill of $814,400 but will assess goodwill, at least
annually, for impairment. (see New Accounting Standards below).
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 25") and related Interpretations. The Company has elected to
follow the disclosure-only alternative prescribed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"). Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Compensation for options granted to
non-employees has been determined in accordance with FAS 123 at the fair value
of the equity instruments issued.
Foreign Currency Translation
The foreign subsidiaries functional currencies are their local currencies.
The gains and losses resulting from translating the foreign subsidiaries'
financial statements into US dollars have been reported in other comprehensive
income (loss).
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net loss and other comprehensive
income (loss). Accumulated other comprehensive income (loss) presented in the
consolidated balance sheets consists of the accumulated net unrealized gain
(loss) on available-for-sale investments and foreign currency translation
adjustments.
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 are anti-dilutive. The
total number of shares excluded was 5,041,375, 5,232,337 and 5,386,830 for the
years ended December 31, 2001, 2000 and 1999, respectively.
New Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("Statement 141"). This Statement addresses financial accounting and reporting
for business combinations. Statement 141 supersedes APB Opinion No. 16, Business
Combinations (Opinion 16), and amends or supersedes a number of interpretations
of that Opinion.
Statement 141 requires that (1) all business combinations be accounted for
by a single method - the purchase method, (2) all intangible assets acquired in
a business combination are to be recognized as assets apart from goodwill if
they meet one of two criteria - the contractual-legal criterion or the
separability criterion and (3) in addition to the disclosure requirements in
Opinion 16, disclosure of the primary reasons for a business combination and the
allocation of the purchase price paid to the assets acquired and liabilities
assumed by major balance sheet caption. When the amounts of goodwill and
intangible assets acquired are significant in relation to the purchase price
paid, disclosure of other information about those assets is required, such as
the amount of goodwill by reportable segment and the amount
F-12
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
of the purchase price assigned to each major intangible asset class. The
provisions of Statement 141 apply to all business combinations initiated after
June 30, 2001. The Company adopted the provisions of Statement 141 as of July 1,
2001 for its Vaxis acquisition.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangibles" ("Statement 142"). Under Statement
142, goodwill and indefinite lived intangible assets are no longer amortized but
are reviewed annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their estimated useful lives.
Cellegy had recorded goodwill prior to December 31, 2001 related to the Quay
acquisition. The adoption of this statement as of January 1, 2002 will decrease
amortization expense by approximately $97,000 per year for 2002 through 2009 as
that goodwill will no longer be amortized.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("Statement 144"), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
Statement 144 is effective for fiscal years beginning after January 1, 2002. The
Company adopted Statement 144 as of January 1, 2002 and it does not expect that
the adoption of the Statement will have a significant impact on the Company's
financial position and results of operations.
Reclassification
Certain prior year balances have been reclassified for comparative purposes.
2. Investments
At December 31, 2001 and 2000, investments consist of the following:
2001 2000
--------------------------------------------- --------------------------------------------
Gross Gross
Unrealized Estimated Unrealized Estimated
Cost Gains Fair Value Cost Gains Fair Value
---- ----- ---------- ---- ----- ----------
Corporate notes......... $ 6,678,378 $ 79,642 $ 6,758,020 $ 999,836 $ (8,879) $ 990,957
U.S. government notes... 2,000,000 22,500 2,022,500 1,997,971 (18,391) 1,979,580
Commercial paper........ 2,000,000 -- 2,000,000 3,500,000 -- 3,500,000
----------- ----------- ----------- ----------- ----------- ----------
$10,678,378 $ 102,142 $10,780,520 $ 6,497,807 $ (27,270) $6,470,537
=========== =========== =========== =========== =========== ==========
There have been no significant gross realized gains or losses on the sale
of available-for-sale securities for the years ended December 31, 2001 and 2000.
All available-for-sale securities at December 31, 2001 have maturities between
twelve months through thirty six months from the balance sheet date.
3. Property and Equipment
Property and equipment consist of the following:
F-13
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
December 31,
2001 2000
----------- ------------
Furniture and fixtures........................... $ 178,926 $ 175,271
Office equipment................................. 242,233 173,419
Laboratory equipment............................. 742,882 662,506
Leasehold improvements........................... 2,917,075 2,919,390
----------- -----------
4,081,116 3,930,586
Less accumulated depreciation and amortization... (1,613,209) (1,082,566)
----------- -----------
$ 2,467,907 $ 2,848,020
=========== ===========
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 rates equal to
the bank's prime rate plus one percentage point. The Company was 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 $2.5 million at an interest rate equal to the
bank's prime rate plus 0.75%. 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 approximated its fair value. As of December 31, 2001, the note
payable was fully repaid.
5. Lease Commitments
The Company leases its facilities and certain equipment under
non-cancelable operating leases. Future minimum lease payments, net of future
minimum sublease income at December 31, 2001, are as follows:
Lease
Years ending December 31, Commitments
------------------------------ ----------------
2002.......................... 1,487,927
2003.......................... 1,595,976
2004.......................... 1,726,431
2005.......................... 1,885,690
2006.......................... 2,082,131
Thereafter.................... 4,990,577
-----------
$13,768,732
===========
Rental expense, net of sublease income, was $1,653,337, $1,817,427, and
$1,815,502 for the years ended December 31, 2001, 2000, and 1999, respectively.
The Company received $896,896 in sublease income during the year ended December
31, 2001.
Restricted cash at December 31, 2001 and 2000 was approximately $614,000
and secures two letters of credit related to our leases.
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% of the employee's annual
salary. Expenses related to the plan for the years ended December 31, 2001, 2000
and 1999 were not significant.
7. Acquisitions, Licenses and Other Agreements
Acquisitions
F-14
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
In December 1997, the Company acquired patent and related intellectual
property rights relating to Cellegesic (the "Agreement"), a topical product
candidate for the treatment of anal fissures and hemorrhoids from Neptune
Pharmaceuticals Corporation ("Neptune"). 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. The Agreement calls for a series of
additional payments, payable in shares of common stock, upon successful
completion of various development milestones. Upon completion of milestones in
2001, the Company issued 104,113 shares of common stock valued at $750,000 which
has been recorded to research and development expenses. The remaining
milestones, if achieved, would become payable over the next several years.
Depending on several factors, including the market price of the common stock,
such payments, which are fixed based on the Agreement, could result in the
issuance of a significant number of shares of common stock. Future potential
milestones payable in Cellegy common stock could result in the issuance of up to
an additional 1,284,000 shares of Cellegy common stock based worth up to
approximately $9,750,000, on the closing price of Cellegy stock at time of
issuance. The Agreement does not provide for the payment by the Company of any
future product royalties in connection with sales of Cellegesic.
In June 2000, Cellegy acquired all assets of Quay Pharmaceuticals Pty Ltd
("Quay"), an Australian pharmaceutical company producing Rectogesic, a drug
similar to Cellegesic. The acquired assets consisted of Quay's inventory,
purchased at Quay's cost at the time of acquisition, other tangible assets and
purchased technology. The aggregate purchase price of $1,835,000 included the
aggregate value of the 169,224 shares of Cellegy common stock issued to Quay
with a value of $977,000, warrants to purchase 171,146 shares of common stock
with a fair value of $489,000, and cash payments of $369,000. The purchase price
was allocated to the net tangible assets of $97,000, purchased technology of
$770,000, and goodwill of $968,000, based on their estimated fair values on the
acquisition date. Purchased technology and goodwill were being amortized over
three and ten years, respectively. Following the adoption of FAS 142, the
goodwill will no longer be amortized as of January 1, 2002. This transaction has
been accounted for by the purchase method of accounting and accordingly, the
approximated purchase price, shown above, has been allocated to the net assets
acquired and the liabilities assumed based on the estimated fair values at the
date of acquisition, with the excess of the purchase price over assigned asset
values recorded as goodwill. The results of operating the acquired company have
been included in the Company's consolidated financial statements since the
acquisition date.
On November 27, 2001, Cellegy acquired Vaxis Therapeutics, a private
Canadian company. Vaxis, renamed Cellegy Canada, is a small early stage research
and development entity with access to pre-eminent scientists in the areas of
sexual dysfunction, peripheral vascular disorders and nitric oxide pharmacology.
The acquisition of this research is in line with the Company's goal of expanding
its pipeline of products and protecting its patents. The purchase price of $4.1
million consisted of 533,612 shares of common stock and $142,000 in cash. The
purchase price was allocated as follows: $350,000 to intangible assets, $250,000
to tangible assets and $3,500,000 to acquired in-process research and
development. The acquired technology was in an early stage of development that,
as of the acquisition date, technological feasibility had not been reached and
no alternative use existed. The assumptions used in determining the purchase
price allocation was a discount rate of 37% on probability of expected cash
flows. The intangible assets will be amortized over 5 years, the period of
contractual obligation.
The Vaxis purchase agreement contains earn-out provisions for seven years
that are based on commercial sales of any products developed by the Company or
other revenues generated from the acquired research. Any contingent
consideration paid in the future will be accounted for as a cost of earning the
related revenues. The results of operations of the acquired company have been
included in the Company's consolidated financial statements since the
acquisition date.
Accumulated amortization of the Vaxis intangible assets at December 31,
2001 was $6,000. The expected amortization expense for the next five years will
be approximately $68,800 per year.
Other Agreements
In October 1993, Cellegy entered into a license agreement with the
University of California 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 University and Cellegy, in
consideration of the issuance to the University 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, Cellegy entered into an exclusive,
worldwide, royalty bearing license agreement with the University for patent
rights, jointly held by the University of California and Cellegy, relating to
certain 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. The Company is currently in
the process of terminating the exclusive license for patent rights relating to
drug delivery technologies. Following the termination, each of the joint owners
of the patent
F-15
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
rights will retain non-exclusive rights to the patents. The termination of these
licenses reflects, in part, a shift towards development of products from the
Company's own research efforts in areas believed to have the potential to be
more commercially viable.
In August 2001, Cellegy announced a comprehensive agreement with Ventiv
Integrated Solutions, a division of Ventiv Health, Inc. ("Ventiv"), a contract
sales organization. Under the control and direction of Cellegy, Ventiv will
provide certain sales and marketing
services relating to the anticipated launch of Cellegesic, including a sales
force of approximately 75 representatives. Ventiv will advance up to $10
million, the amount and timing depending on various circumstances, to Cellegy to
cover pre-launch and launch expenses. In return, the agreement provides Ventiv
with a share of Cellegesic profits with Cellegy retaining more than 80% of
product operating profit over the six-year life of the agreement. Activity under
the agreement was minimal through December 31, 2001.
9. Shareholders' Equity
Common Stock Private Placements
In July 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.
In October 2000, Cellegy completed a private placement of 1,500,000 shares
of common stock at a price of $7.75 to a group of institutional investors. Net
proceeds were $11,602,473.
In June 2001, we completed a private placement of approximately 2,700,000
million shares of common stock at a price of $5.60. Participants included two
current investors, Baker/Tisch Investments and GMT Capital, as well as, five new
investors. Net proceeds were $15,199,206.
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.
Stock Option Plans
In 1995, Cellegy 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, Cellegy reserved 700,000 shares for issuance.
From 1996 to 2001, an additional 2,750,000 shares were reserved for issuance
under the Plan.
Activity under the Plan is summarized as follows:
Shares Exercise Price Weighted
Under Range Average
Option Per Share Exercise Price
------------ ------------------- ----------------
Balance at January 1, 1999... 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) $0.50 - $7.25 $4.57
-----------
Balance at December 31, 1999. 2,187,763 $0.50 - $8.81 $4.82
Granted............. 191,350 $3.31 - $9.00 $6.21
Canceled............ (132,718) $3.00 - $9.00 $5.35
Exercised........... (95,754) $1.81 - $6.25 $3.97
-----------
Balance at December 31, 2000. 2,150,641 $0.50 - $9.00 $5.00
Granted............. 476,000 $4.56 - $15.00 $7.96
F-16
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Canceled............ (123,634) $3.69 - $7.87 $5.71
Exercised........... (60,803) $1.81 - $4.62 $3.35
-----------
Balance at December 31, 2001. 2,442,204 $0.50 - $15.00 $5.59
===========
At December 31, 2001, options to purchase 1,576,834 shares of common stock
were vested and exercisable at exercise prices ranging from $0.46 to $15.00 per
share. At December 31, 2001, 519,638 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, 2001:
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------------
Weighted Weighted Weighted
Average Average Average
Outstanding at Remaining Exercise Exercisable at Exercise
Range of Exercise Price December 31, 2001 Contractual Life Price December 31, 2001 Price
----------------------- ----------------- ---------------- ----- ----------------- -----
$0.46 - $3.88.... 824,424 6.7 years $3.55 625,358 $3.49
$4.00 - $6.99.... 1,007,180 6.7 years $5.50 565,701 $5.20
$7.00 - $15.00.... 610,600 7.3 years $8.49 385,775 $7.50
--------- ---------
Total 2,442,204 6.9 years $5.59 1,576,834 $5.08
========= =========
Director's Stock Option Plan
In 1995, Cellegy adopted the 1995 Directors' Stock Option Plan (the
"Directors' Plan") to provide for the issuance of non-qualified stock options to
eligible outside Directors. When the plan was established, Cellegy reserved
150,000 shares for issuance. During 2000, Cellegy reserved an additional 100,000
shares for issuance under the Directors' Plan.
Activity under the Directors' Plan is summarized as follows:
Shares Price Weighted
Under Range Average
Option Per Share Exercise Price
------------------ ------------------- ------------------
Balance at January 1, 1999......................... 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
Granted................................... 70,000 $4.81 $4.81
---------
Balance at December 31, 2000....................... 182,500 $3.25 - $8.50 $5.01
Granted................................... 46,000 $5.50 - $6.50 $5.85
---------
Balance at December 31, 2001....................... 228,500 $3.25 - $8.50 $7.26
=========
At December 31, 2001, options to purchase 134,999 shares of common stock
were vested and exercisable at exercise prices ranging from $3.25 to $8.50 per
share. At December 31, 2001, options to purchase 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, 2001:
F-17
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------------
Weighted Weighted Weighted
Average Average Average
Outstanding at Remaining Exercise Exercisable at Exercise
Range of Exercise Price December 31, 2001 Contractual Life Price December 31, 2001 Price
- ----------------------- ----------------- ---------------- ----- ----------------- -----
$3.25.............. 4,000 5.3 years $3.25 4,000 $3.25
$4.50 - $5.50...... 206,500 7.1 years $5.08 129,999 $5.07
$6.50 - $8.50...... 18,000 8.9 years $6.72 1,000 $8.50
------- -------
Total 228,500 7.3 years $5.18 134,999 $5.04
======= =======
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 related to employee or director
grants.
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 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 valuation model.
The Company valued its options using the following weighted average
assumptions for the years ended December 31, 2001, 2000 and 1999:
2001 2000 1999
------------- ------------- --------------
Risk-free interest rate.................... 3.5% 6.00% 5.54%
Dividend yield............................. 0% 0% 0%
Volatility................................. 0.60 0.91 0.83
Expected life of options in years.......... 4.3 4.3 3.7
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 for the years ended December 31 are as follows:
2001 2000 1999
----------------- ----------------- -----------------
Net loss as reported........................ $ (19,464,723) $ (11,418,213) $ (9,301,156)
Pro forma net loss.......................... $ (22,152,474) $ (13,105,202) $ (10,612,716)
Basic and diluted net loss as reported...... $ (1.43) $ (0.91) $ (0.85)
Pro forma basic and diluted net loss per
share applicable to common shareholders.. $ (1.26) $ (1.04) $ (0.97)
F-18
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
The weighted average grant date fair value of options granted during the
years ended December 31, 2001, 2000, and 1999 was $5.33, $4.30 and $2.47,
respectively. The weighted average remaining contractual life of those options
is 6.8 years, 7.2 years and 8.1 years during the years ended December 31, 2001,
2000 and 1999, 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, 2001, the Company has reserved shares of common stock
for future issuance as follows:
Warrants............................ 635,700
Stock Option Plans.................. 3,191,175
Neptune Agreement................... 1,285,000
---------
Total............................... 5,041,375
=========
10. Income Taxes
At December 31, 2001 the Company had net operating loss carryforwards of
approximately $58,000,000 and $10,000,000 for federal and state purposes,
respectively. The federal net operating loss carryforwards expire between the
years 2004 and 2021. The state net operating loss carryforwards expire between
the years 2002 and 2005. At December 31, 2001, the Company also had research and
development credit carryforwards of approximately $1,300,000 and $900,000 for
federal and state purposes, respectively. The federal credits expire between the
years 2006 and 2021. 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,
----------------------------------
2001 2000
------------------ ---------------
Deferred tax assets:
Net operating loss carryforwards.. $ 20,200,000 $ 15,400,000
Credit carryforwards.............. 1,900,000 1,600,000
Capitalized intangibles........... 1,800,000 1,200,000
Other, net........................ 300,000 400,000
-------------- -------------
Total deferred tax assets............ 24,200,000 18,600,000
Valuation allowance.................. (24,200,000) (18,600,000)
-------------- -------------
Net deferred tax assets.............. $ --- $ ---
============== =============
The valuation allowance for deferred tax assets for 2001, 2000, and 1999
increased by approximately $5,700,000, $3,500,000, and $3,800,000, respectively.
11. Segment Reporting
The Company has two business segments: pharmaceuticals and cosmeceuticals.
Pharmaceuticals include primarily research and clinical development expenses for
potential prescription products to be marketed directly by Cellegy or through
corporate partners. Current pharmaceutical revenues consist primarily of
Rectogesic sales in Australia. 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.
F-19
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
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 one of the
company's products, exclusively in the United States, through a major specialty
retailer.
Cellegy allocates its revenues and operating expenses to each business
segment, but does not assess segment performance or allocate resources based on
a segment's assets and, therefore, asset depreciation and amortization and
capital expenditures 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.
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 a more 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, 2001,
2000, and 1999:
Years ended December 31,
---------------------------------------------
2001 2000 1999
------------ ------------ -----------
Revenues:
Pharmaceuticals...... $ 217,439 $ 196,434 $ 147,279
Cosmeceuticals....... 660,052 1,389,189 897,859
------------ ------------ -----------
$ 877,491 $ 1,585,623 $ 1,045,138
============ ============ ===========
Operating Income (Loss):
Pharmaceuticals...... $(21,021,796) $(13,114,538) $(9,888,212)
Cosmeceuticals....... 52,427 1,127,139 85,914
------------ ------------ -----------
$(20,969,369) $(11,987,399) $(9,802,298)
============ ============ ===========
Revenue from Major Customer
Revenues from product sales to one customer represented approximately 75%,
88%, and 86% of consolidated revenue for 2001, 2000 and 1999, respectively.
Total assets were minimal for the cosmeceutical segment.
Geographic data
Approximately 25% of our total revenues are from sales of Rectogesic in
Australia. All other sales are in the United States.
12. Related Party Transactions
We have paid fees to the Company's board members for their services on the
board, audit committee and compensation committee. The total fees paid to these
directors during 2001, 2000 and 1999 were $30,000, $46,500 amd $57,750,
respectively.
Additional consulting fees were paid to two board members based on a
consulting agreement. These were $80,000 and $66,000 for 2001 and 2000,
respectively.
We have also recognized $100,888 in compensation expense during 2001 for a
consulting agreement with a current board member. The Company issued stock
options to this board member for his consulting services.
13. Quarterly Financial Data ( unaudited )
(amounts in thousands except per share data)
2001 First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------------- -------------- -------------- -------------- --------------
Total revenue.......................... $ 41 $ 53 $ 265 $ 518 $ 877
Operating loss......................... (4,206) (4,352) (4,182) (8,229) (20,969)
Net loss............................... (3,777) (4,156) (3,871) (7,661) (19,465)
Basic & diluted net loss per common
share.................................. $ (0.27) $ (0.29) $ (0.23) $ (0.47) $ (1.26)
F-20
Cellegy Pharmaceuticals, Inc.
(a development stage company)
Notes to Consolidated Financial Statements - (Continued)
2000 First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------------- -------------- --------------- -------------- --------------
Total revenue.......................... $ 530 $ 132 $ 626 $ 298 $ 1,586
Operating loss......................... (1,981) (2,894) (3,122) (3,990) (11,987)
Net loss............................... (1,915) (2,690) (3,059) (3,754) (11,418)
Basic & diluted net loss per common
share.................................. $ (0.16) $ (0.22) $ (0.25) $ (0.28) $ (0.91)
F-21
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.
None.
21
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 (the "2002 Proxy Statement") to be delivered to shareholders in
connection with the Annual Meeting of Shareholders expected to be held on June
5, 2002. 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 2002 Proxy Statement and 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 2002 Proxy Statement and 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 2002 Proxy
Statement and is incorporated herein by reference.
22
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 file no. 333-46087
on February 11, 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.)
10.1 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.)
*10.2 1992 Stock Option Plan. (Incorporated by reference to Exhibit
10.12 to the SB-2.)
10.5 Warrant Agreement dated as of February 10, 1995. (Incorporated by
reference to Exhibit 10.15 to the SB-2.)
10.6 Agency Agreement dated as of February 10, 1995. (Incorporated by
reference to Exhibit 10.16 to the SB-2.)
*10.7 1995 Equity Incentive Plan (Incorporated by reference to Exhibit
10.17 to the Annual Report on Form 10-KSB for the year ended
December 31, 1995 (the "1995 Form 10-KSB").)
*10.8 1995 Directors' Stock Option Plan (Incorporated by reference to
Exhibit 10.18 to the 1995 Form 10-KSB.)
10.9 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.)
10.10 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.)
*10.11 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".)
10.12 Services Agreement dated as of August 10, 2001 by and among the
Company, Ventiv Health Inc. and VIS Financial LLC. (Confidential
treatment has been requested with respect to portions of this
agreement.)
10.13 Funding Arrangement dated August 10, 2001 by and among the
Company, Ventiv Health Inc. and VIS Financial LLC. (Confidential
treatment has been requested with respect to portions of this
agreement.)
10.14 Share Purchase Agreement dated as of November 27, 2001, by and
among the Company, Vaxis Therapeutics Corporation and certain
stockholders of Vaxis.
23
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 Cellegy on January 3, 2002 announcing
our acquisition of Vaxis Therapeutics and our submission of the NDA supplement
with the FDA in December 2001.
- --------------------------------------------------------------------------------
(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.
24
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 12th of March, 2002.
CELLEGY PHARMACEUTICALS, INC.
By: /s/ K. Michael Forrest
------------------------------------------
K. Michael Forrest
Chairman, President and Chief
Executive Officer
Power of Attorney
Each person whose signature appears below constitutes and appoints each of
K. Michael Forrest and A. Richard Juelis, 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 Chairman, President, Chief March 12, 2002
- ---------------------------------- Executive Officer
K. Michael Forrest
Principal Financial Officer
and Principal Accounting Officer:
/s/ A. Richard Juelis Vice President, Finance, March 12, 2002
- ---------------------------------- Chief Financial
A. Richard Juelis Officer and Secretary
Directors:
/s/ Carl R. Thornfeldt Director March 12, 2002
- ----------------------------------
Carl R. Thornfeldt, M.D.
/s/ Jack L. Bowman Director March 12, 2002
- ----------------------------------
Jack L. Bowman
/s/ Felix J. Baker Director March 12, 2002
- ----------------------------------
Felix J. Baker, Ph.D.
/s/ Julian C. Baker Director March 12, 2002
- ----------------------------------
Julian C. Baker
/s/ Tobi B. Klar Director March 12, 2002
- ----------------------------------
Tobi B. Klar, M.D.
/s/ Ronald J. Saldarini Director March 12, 2002
- ----------------------------------
Ronald J. Saldarini, Ph.D.
/s/ Alan A. Steigrod Director March 12, 2002
- ----------------------------------
Alan A. Steigrod
/s/ Larry J. Wells Director March 12, 2002
- ----------------------------------
Larry J. Wells
25
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
EXHIBITS
to
Form 10-K
Under
THE SECURITIES EXCHANGE ACT OF 1934
----------
CELLEGY PHARMACEUTICALS, INC.
26