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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
December 31, 1996 0-18231
ATRIX LABORATORIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 84-1043826
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(State of Incorporation) (I.R.S. Employer
Identification Number)
2579 Midpoint Drive
Fort Collins, Colorado 80525
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(Address of principal (Zip Code)
executive offices)
Registrant's Telephone No., including Area Code: (970) 482-5868
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act:
Common Stock $.001 par value
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(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
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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. [ ]
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The aggregate market value of voting stock held by non-affiliates of
the Registrant as of March 3, 1997 was $140,318,341.
The number of shares of the Registrant's $.001 par value Common Stock
outstanding as of March 3, 1997 was 11,114,324.
DOCUMENTS INCORPORATED BY REFERENCE
Part III, Items 10, 11, 12 and 13 are incorporated by reference to the
definitive proxy statement for the Registrant's Annual Meeting of Shareholders
scheduled to be held on April 27, 1997.
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PART I
ITEM 1. BUSINESS
GENERAL
Atrix Laboratories, Inc. (the "Company"), originally named Vipont
Research Laboratories, Inc., was formed in August 1986 as a Delaware
corporation. The Company is engaged in the research and development of a broad
range of medical, dental and veterinary products based on its proprietary
biodegradable polymer system for drug delivery and biomaterial applications.
This patented drug delivery system, trade-named ATRIGEL(R), consists of
biodegradable polymers dissolved in biocompatible solvents that can be injected
or inserted into the target site as flowable compositions (e.g. solutions, gels,
pastes, and putties) and that solidify upon contact with body fluids to form an
implant. The ATRIGEL(R) drug delivery system can incorporate various
pharmaceutical compounds and is designed to release the compounds at targeted
rates and over predetermined periods of time. The Company believes that the
ATRIGEL(R) drug delivery system has the potential to enhance the therapeutic
benefits of a broad range of drugs through one or more of the following means:
sustained release of drug, ease of application, improved safety and efficacy,
reduced costs and greater patient compliance. The Company also believes that the
ATRIGEL(R) drug delivery system when used without the incorporation of a drug
affords the same benefits as a biomaterial for a range of medical device
applications.
The Company's drug delivery strategy is to combine the patented
ATRIGEL(R) drug delivery system with drugs whose therapeutic effectiveness may
be enhanced when administered in a sustained-release form or through increased
patient compliance. The Company conducts research activities on its own behalf
and performs contract research for third parties. The Company also conducts
research for the United States government and its agencies through government
grants. The Company has initiated early stage research programs with several
pharmaceutical companies and is evaluating the use of the ATRIGEL(R) drug
delivery system with drugs having various human and animal health applications.
In addition the Company is pursuing human medical device applications in
conjunction with other pharmaceutical and health care companies. There can be no
assurance that these programs will result in commercial products or that the
Company will ultimately enter into other funded research programs. In the past
the Company has been awarded government grants (including grants by the
Department of Defense and The National Institutes of Health) to conduct research
utilizing the ATRIGEL(R) drug delivery system. Such research continues to be
directed toward the development of products in the orthopedic and periodontal
disease areas. See - "Company's Products."
During 1996, the Company began marketing its ATRISORB(R) GTR Barrier
for guided tissue regeneration. This product utilizes the ATRIGEL(R) drug
delivery system without an active agent to aid in the selective and enhanced
regeneration of the periodontal tissue following gum surgery. The Company is
nearing commercialization of its second product, the ATRIDOX(TM) subgingival
antibiotic therapy, which uses the ATRIGEL(R) drug delivery system containing
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doxycycline to provide localized sustained delivery of an antibiotic
non-surgically to diseased periodontal tissue.
CERTAIN RECENT DEVELOPMENTS
BLOCK DRUG COMPANY. In December 1996, the Company and Block Drug
Corporation ("Block") entered into an agreement (the "Block Agreement") whereby
Block acquired North American and certain European marketing rights to the
Company's first three products and improvements thereto for the treatment of
periodontal disease, as follows: (i) the ATRISORB(R) GTR Barrier; (ii)
ATRIDOX(TM), and (iii) ATRISORB(R) with doxycycline. The Block Agreement
provides for potential milestone payments in excess of $50 million to the
Company over the next three to five years, as well as manufacturing margins and
royalties on sales. Block will have responsibility for the sales and marketing
of the products and will advise, consult and financially support various aspects
of the Company's dental research and development program.
PHASE 3 TRIALS FOR ATRIDOX(TM). The Company commenced pivotal Phase 3
clinical trials on ATRIDOX(TM) in January 1995. The pivotal Phase 3 trials
consisted of two studies which were conducted at twenty sites and included
approximately 800 patients. In August 1996, the Company announced that the two
pivotal Phase 3 clinical trials demonstrated that while standard scaling and
root planing therapy was more effective than oral hygiene alone, treatment with
the ATRIDOX(TM) product was clinically and statistically equivalent to scaling
and root planing and is superior to vehicle control. Based on the results of
these clinical studies, the Company plans to file a New Drug Application ("NDA")
with the U.S. Food and Drug Administration ("FDA") during the first half of 1997
and will file for European approval shortly thereafter. See - "Company's
Products-The ATRIDOX(TM) Product."
MANUFACTURING FACILITY. In July 1996, the Company acquired a 25,000
square foot fully operational pharmaceutical and biotechnological manufacturing
facility in Fort Collins, Colorado for a total purchase price of approximately
$3.4 million. The building contains several Class 100 suites for manufacturing
sterile products, laboratory and office areas, cold storage and warehousing. The
building will be used to produce the ATRISORB(R) GTR Barrier beginning in 1997
and the Company's future products.
COMMON STOCK OFFERING. The Company completed a public offering of its
common stock in May 1996. The offering provided gross proceeds of $30,080,000 to
the Company to further fund research of its products, commercialize its dental
products in the United States and Europe, and expand its manufacturing
capabilities.
ATRISORB(R) GTR BARRIER 510(K) FILING AND FDA CLEARANCE. On December
21, 1995, the Company filed a 510(k) notification with the FDA to market the
ATRISORB(R) GTR Barrier for guided tissue regeneration applications during
periodontal surgery. On March 21, 1996, the Company received notification that
the ATRISORB(R) GTR Barrier had been cleared for marketing in the United States.
Additionally, as of December 31, 1996, the Company had
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received clearance to market the ATRISORB(R) GTR Barrier in several European
countries. See - "Company's Products-The ATRISORB(R) GTR Barrier."
PERIODONTAL DISEASE
Periodontal disease is characterized by progressive, chronic infection
and inflammation of the gums and surrounding tissue, resulting in the formation
of periodontal pockets (spaces between the gum and tooth) resulting from loss of
the tooth's supporting structure (bone and periodontal ligament). It begins when
plaque builds up on teeth and gums causing inflammation. If left untreated, the
disease progresses and can lead to tooth loss. Periodontal disease is not
curable, but continuous maintenance can prevent and/or delay flare-ups and
further deterioration. The severity of the disease varies from the mildest
cases, clinically termed gingivitis (bleeding gums), to the more severe cases,
clinically termed periodontitis. When gingivitis is not controlled, the
condition can progress into periodontitis.
Periodontal disease is most prevalent after the age of 35. It has been
reported by the American Dental Association that over 45 million people in the
United States currently have some form of the disease, and the Company believes
that only a small percentage are now being treated. Progression of the disease
is usually painless, allowing the condition to become advanced before treatment
is sought by the patient. Periodontal disease has no known cure, and effective
treatment is possible only through periodic professional intervention to arrest
further tissue deterioration. The most common treatment, scaling and root
planing, requires the dental professional to scrape away accumulated plaque and
calculus above and below the gumline. For more serious cases, various forms of
gum surgery are the primary treatment. The Company believes that many
individuals diagnosed with the disease do not seek treatment due to a number of
factors, including cost, pain and potential medical complications associated
with currently available periodontal treatment.
COMPANY'S PRODUCTS
ATRIGEL(R) DRUG DELIVERY SYSTEM. The ATRIGEL(R) drug delivery system
offers a unique approach to drug delivery. This patented drug delivery system is
comprised of a biodegradable polymer formulation that is administered as
flowable compositions (e.g., solutions, gels, pastes, and putties), which then
solidify in situ upon contact with body fluids to form biodegradable implants.
It is designed to provide extended localized or systemic drug delivery in a
single application, without the need for surgical implantation or removal.
Depending on the intended use or the specific drug to be delivered via the
ATRIGEL(R) drug delivery system, the degradation rate of the system can be
custom-tailored. The Company believes that the unique properties of the drug
delivery system create the potential for a wide variety of medical and
veterinary applications. There can be no assurance, however, that the ATRIGEL(R)
drug delivery system will be successfully developed for commercial use.
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The Company believes that the ATRIGEL(R) drug delivery system may
provide benefits over traditional methods of drug administration such as oral
tablets and capsules, injections and continuous infusion as a result of the
following properties:
* Versatility. The ATRIGEL(R) drug delivery system may be used with a
wide variety of pharmaceutical compounds.
* Ease of Application. The ATRIGEL(R) drug delivery system can be
injected or inserted as flowable compositions (e.g., solutions, gels,
pastes, and putties) by means of ordinary needles and syringes, or can
be sprayed or painted onto tissues.
* Biodegradability. The ATRIGEL(R) drug delivery system will biodegrade
and thus is not expected to require removal when the drug is depleted.
* Site Specificity. The ATRIGEL(R) drug delivery system can be delivered
directly to the target area, thus potentially achieving higher drug
concentrations at the desired site of action and minimizing systemic
side effects.
* Systemic Drug Delivery. The ATRIGEL(R) drug delivery system can be
used to provide sustained drug release into the systemic circulation
in those applications where the entire body requires treatment, and
the drug is not active when taken by mouth.
Protein/Peptide Stability. The ATRIGEL(R) drug delivery system
can be used to deliver proteins, peptides and other compounds
having formulation instability or short in-vivo half-lives.
* Customized Continuous Release. The ATRIGEL(R) drug delivery system can
be designed to provide continuous release of incorporated
pharmaceuticals over a targeted time period so as to reduce the
frequency of drug administration.
* Custom Designed Degradation Rates. The ATRIGEL(R) drug delivery system
can be designed to degrade over weeks, months, or even one year.
* Low Cost and Ease of Manufacture. The ATRIGEL(R) drug delivery system
is manufactured using a simple and inexpensive process relative to
available sustained-release drug delivery systems.
* Increased Patient Compliance. Because the drug is implanted and
released over time, patient compliance is virtually assured.
* Safety. All current components of the ATRIGEL(R) drug delivery system
are biocompatible and have independently-established safety and
toxicity profiles. In
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addition, the polymers used in the system are members of a
class of polymers some of which have previously been approved
by the FDA for human use in other applications. The Company
has also conducted toxicological studies on the ATRIGEL(R)
drug delivery system to develop a safety and toxicological
profile.
The Company believes that the ATRIGEL(R) drug delivery system without a
drug has potential uses as a biomaterial, in which case the ATRIGEL(R) drug
delivery system has all of the properties described above except those dependent
on the release of a drug.
THE ATRIDOX(TM) PRODUCT. The ATRIDOX(TM) product combines the
ATRIGEL(R) drug delivery system and an antibiotic (doxycycline) to form a
product designed to control the bacteria that cause periodontal disease. The
ATRIDOX(TM) product is intended to add a new chemotherapeutic maintenance
procedure to current periodontal treatment. The ATRIDOX(TM) product is
administered by a periodontist or a general dentist by inserting the ATRIDOX(TM)
product into the periodontal pocket through a cannula that is similar in design
to a periodontal probe. The Company has conducted clinical trials which indicate
that administration will be rapid, require a minimal amount of patient chair
time, and involve minimal discomfort compared to conventional methods of
therapy.
In January, 1995 the Company commenced pivotal Phase 3 trials on the
ATRIDOX(TM) product. The pivotal Phase 3 trials consisted of two studies which
were conducted at twenty sites and include approximately 800 patients. These
studies were completed in May, 1996 and the Company announced favorable results
in August, 1996. The studies demonstrated that while standard scaling and root
planing therapy was more effective than oral hygiene alone, treatment with the
ATRIDOX(TM) product was clinically and statistically equivalent to scaling and
root planing and superior to its vehicle control. Based on these favorable
results, the Company intends to submit an NDA to the FDA and foreign regulatory
agencies in the first half of 1997.
THE ATRISORB(R) GTR BARRIER. The ATRISORB(R) GTR Barrier is a
biodegradable, liquid polymer product that utilizes the ATRIGEL(R) drug delivery
system to aid in the regeneration of the tooth's support following osseous flap
surgery or other periodontal procedures. Osseous flap surgery, a common
treatment for severe cases of periodontal disease, involves reflecting gum
tissue to expose and debride areas not reachable by conventional scaling and
root planing procedures. The Company estimates that there are currently over 3
million flap surgeries performed each year in the United States. Published
research has shown that to obtain optimal healing following flap surgery, it is
necessary to isolate the wound healing site from the adjacent gum tissue. The
placement of a barrier that isolates the surgical site from the gum tissue has
been shown to selectively facilitate growth of the periodontal ligament cells,
leading to connective tissue and bone regeneration at the base of the
periodontal defects.
The ATRISORB(R) GTR Barrier is formed outside of the mouth using a
sterile, single-use barrier forming kit. Once placed in the mouth over the
periodontal defect, the semi-solid ATRISORB(R) GTR Barrier further solidifies
upon contact with oral fluids to form a solid barrier that isolates the healing
site in order to promote guided tissue regeneration. Sutures are not
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required to hold the barrier in place. For these reasons, the ATRISORB(R) GTR
Barrier can be placed in a shorter time relative to existing guided tissue
regeneration barrier products. In addition, the periodontists have the potential
for treatment of multiple diseased sites in one surgical session. Since the
ATRISORB(R) GTR Barrier is biodegradable, a second surgery to remove the barrier
is unnecessary. Results from pre-clinical and clinical trials have been
presented at a number of scientific meetings and published in a number of
referenced scientific journals.
The Company completed human clinical trials on the ATRISORB(R) GTR
Barrier during 1995 and filed a 510(k) notification with the FDA on December 21,
1995 to market the ATRISORB(R) GTR Barrier in guided tissue regeneration
applications during periodontal surgery. On March 22, 1996 the Company received
clearance to market the ATRISORB(R) GTR Barrier in the United States from the
FDA.
As of December 31, 1996 the Company had received clearance to market
the ATRISORB(R) GTR Barrier in Denmark, France, Ireland, Israel, Italy,
Luxembourg, the Netherlands, Saudi Arabia, Spain, and Switzerland. The Company
expects to market the product in additional foreign countries; however, there
can be no assurance that additional regulatory approvals or clearances will be
obtained.
OTHER ATRIGEL(R) DRUG DELIVERY SYSTEM APPLICATIONS. The Company
continues to evaluate the ATRIGEL(R) drug delivery system for health care
applications other than periodontal disease. These include uses as biomaterials
and drug delivery matrices. Some of these applications are funded by joint
development agreements with other pharmaceutical and health care companies. The
Company typically seeks to retain rights to any inventions, discoveries, and
technology that arise in connection with such joint development projects.
In addition to joint development projects co-funded by other companies,
the Company conducts, at its own expense, programs to establish
proof-of-concepts for a number of medical products. The specific products under
development were selected from a list compiled by a health care consulting
company hired by the Company to determine the most appropriate product
opportunities for the ATRIGEL(R) drug delivery system. The Company hopes to
enter into joint development projects with other companies relating to such
products; however, no assurance can be given that any such development
agreements can be negotiated or that any of the products developed by the
Company alone or in joint development projects with other companies will be
successfully developed for commercial use.
The following is a discussion of research programs that were ongoing or
initiated during 1996 by the Company itself or jointly with other companies.
GROWTH FACTORS. Since 1990, the Company has been pursuing the use of
its ATRIGEL(R) drug delivery system to deliver tissue growth factors for a
variety of product applications. These include the regeneration of tissue lost
as a result of periodontal disease, the healing of bone fractures and defects,
and the treatment of dermal ulcers and other soft tissue wounds. In 1996,
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the Company continued to conduct pre-clinical trials which showed that a
combination of tissue growth factors could be incorporated into the ATRIGEL(R)
drug delivery system and released at controlled rates for extended times. When
the ATRIGEL(R) formulation was applied to a bone defect in pre-clinical studies
it demonstrated biological response. The amount of new bone formed was increased
significantly over that obtained in control groups. Similarly, the ATRIGEL(R)
drug delivery system demonstrated that certain growth factors could be delivered
during periodontal osseous flap surgery to regenerate periodontal attachment in
a manner superior to controls. During 1995 and 1996, the Company completed
several preclinical trials which demonstrated the effectiveness of the product
and also lent direction to further development of the product in order to obtain
the maximum benefit in periodontal tissue regeneration or guided bone
regeneration. The Company continues to evaluate a number of different growth
factors in its drug delivery system and to modify the system for better
efficacy. The Company expects to continue these pre-clinical trials to select
the best factors and matrix for periodontal tissue regeneration as well as
healing of bone fractures.
SOLID TUMORS. In 1996, the Company continued research on a project
initiated in 1993 to evaluate its ATRIGEL(R) drug delivery system to deliver
chemotherapeutic agents locally at the sites of solid tumors. The sustained
release of these agents at the tumor site is expected to provide higher
concentrations of the agent at the site of action and fewer side effects than
systemic administration of the same drug. Preclinical studies have shown that a
number of antitumor agents can be delivered from the ATRIGEL(R) drug delivery
system directly in a tumor site and cause a reduction in the rate of tumor
growth with a resultant increase in survival time. In 1995 and 1996, preliminary
trials were conducted to test the biocompatibility of the ATRIGEL(R) drug
delivery system by direct injection into liver tissue with a view towards
evaluating the system to treat liver cancer. During 1996, the Company completed
an assessment of solid tumor applications including clinical, marketing and
technology parameters. The purpose of the assessment was to organize the
Company's research and development effort towards identifying lead compound
opportunities to be exploited.
In 1996, the Company continued pharmacokinetic trials in collaboration
with the Colorado State University Veterinary School to evaluate the efficacy of
several ATRIGEL(R) drug delivery system formulations containing an antitumor
agent to treat osteosarcoma in dogs. The pharmacokinetic trials showed that
sustained release of cisplatin could be obtained for 30 days with the ATRIGEL(R)
drug delivery system. These trials are still in progress to determine the
maximum dose of drug that can be given without toxic effects.
THE UPJOHN COMPANY. The Company has collaborated with The Upjohn
Company ("Upjohn") since 1991 to evaluate its ATRIGEL(R) drug delivery system
for the development of animal treatment products. During the past three years, a
number of different product applications have been studied, and in 1994, Upjohn
exercised its option for an exclusive license for the ATRIGEL(R) drug delivery
system technology for the delivery of animal vaccines. This decision was based
upon the successful results of a number of trials with the ATRIGEL(R) drug
delivery system containing animal vaccines. During 1995, Upjohn initiated a
number of pivotal trials in animals to evaluate the ATRIGEL(R) vaccine product
for efficacy, which trials continued
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in 1996. The Company intends to continue to work with Upjohn as needed to
optimize these products and to obtain regulatory approval for their use in
animals.
ELI LILLY AND COMPANY. In 1994, the Company signed a research and
development agreement with Eli Lilly and Company ("Lilly") to evaluate the
potential use of the ATRIGEL(R) drug delivery system with an antipsychotic drug
under development by Lilly. Atrix completed the feasibility program in 1995 and
conducted additional development work in 1996. In late 1996, Lilly notified the
Company that in order to expedite development of a depot delivery system for its
antipsychotic drug, it intends to use a delivery system that it felt had a
shorter development time to obtain approval by the FDA.
GENSIA LABORATORIES, LTD. In 1995, the Company signed an exclusive
worldwide license agreement to develop a product to be sold by Gensia
Laboratories, Ltd ("Gensia") for the treatment of solid tumor cancers using the
ATRIGEL(R) drug delivery system. Under the terms of the license, the Company
initiated feasibility studies during 1995 and 1996 to characterize release rates
of leuprolide acetate, an anti-cancer drug, incorporated into the ATRIGEL(R)
drug delivery system. The results of preclinical trials have been encouraging
and the program has moved to the next stage of pre-clinical development. A
report summarizing the feasibility program was submitted to Gensia's management
in December of 1996, and the Company is awaiting Gensia's decision to proceed to
the next phase of development.
HESKA, INC. (FORMERLY PARAVAX, INC.) In 1995, the Company signed an
exclusive worldwide license agreement to develop a product to treat periodontal
disease in companion animals. Under the terms of the license, the Company will
develop a subgingival therapy for periodontal disease in dogs and cats,
comprised of the antibiotic doxycycline and the ATRIGEL(R) drug delivery system.
Heska's management expects to receive FDA permission to market this product in
the United States in 1997 and in Europe in 1998.
RESEARCH AND DEVELOPMENT
The Company conducts the majority of its research and development
activities through its own staff and facilities. The Company's research and
development program encompasses the early stage of product development through
the receipt of FDA clearance or approval, and the expansion of new product uses
and applications. The Company has assembled a team of scientists, clinical,
regulatory and quality assurance personnel with a variety of complementary
skills and experiences, and conducts a broad-based research program in its
facilities. The Company also employs contract research organizations, academic
laboratories, independent consultants and clinical research professionals to aid
in the product development process.
The Company anticipates incurring significant research and development
expenses in the coming years as the Company initiates commercial sales,
continues its efforts to develop its present technologies, begins to move other
products to the clinical testing stage and identifies future products for
development. The Company's aggregate research and development expenses totaled
approximately $6,667,000, $9,589,000 and $10,092,000 for calendar years 1994,
1995
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and 1996, respectively. The Company expects to continue to incur substantial
research and development expenses in future periods.
GOVERNMENT REGULATION
The research and development, manufacturing and marketing of the
Company's products are subject to regulation by the FDA in the United States and
by comparable authorities in other countries. These national authorities and
other Federal, state and local entities regulate, among other things, research
and development activities and the testing, manufacture, safety, effectiveness,
labeling, storage, record keeping, approval, advertising and promotion of the
Company's products.
The Federal Food, Drug and Cosmetic Act (the "Act"), the Public Health
Services Act, the Controlled Substance Act and other Federal statutes and
regulations govern or influence all aspects of the Company's business.
Noncompliance with applicable requirements can result in fines, criminal
prosecution, recall, seizure of products, injunctions, total or partial
suspension of production and refusal of the government to approve product
license applications or to allow the Company to enter into government supply
contracts. In addition, administrative remedies can involve the recall of
products as well as the refusal of the government to approve pending
applications or supplements to approved applications. The FDA also has the
authority to withdraw approval of drugs in accordance with statutory due process
procedures.
In order to obtain FDA approval or clearance of a new product, the
Company must submit proof of safety and efficacy, and demonstrate that it is
capable of manufacturing the product in compliance with current Good
Manufacturing Practices. In most cases, such proof entails extensive
pre-clinical, clinical and laboratory tests, as well as inspections of
manufacturing facilities and records. The testing, preparation of necessary
applications and processing of those applications by the FDA, including site
inspections of the Company's manufacturing facilities, is expensive and may take
several years to complete. There can be no assurance that the FDA will act
favorably or quickly in making such reviews, and significant difficulties or
costs may be encountered by the Company in its efforts to obtain FDA approvals
that could delay or preclude the Company from marketing any products it may
develop. There can also be no assurance that the FDA will not request the
submission of additional safety data. With regard to the submission of efficacy
data, the FDA may at any time request the development of additional data. Based
upon the data, the FDA may also limit the scope of the labeling of the product
or deny the NDA. With respect to patented products or technologies, delays
imposed by the governmental approval process may materially reduce the period
during which the Company will have the exclusive right to exploit such patented
products.
The Company's products, as presently anticipated, will be regulated as
either drugs (drug delivery products) or medical devices (biomaterials). Each
type of product is regulated by different provisions of the Act. The FDA's
authority over medical devices derives from the 1976 Medical Device Amendments,
the Safe Medical Device Act of 1990 and the regulations promulgated thereunder.
At least 90 days prior to commencing commercial distribution, a
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pre-market notification under Section 510(k) of the law must be filed with the
FDA with respect to a medical device intended for commercial distribution. After
receipt of the pre-market notification, the FDA will determine whether the
device is "substantially equivalent" to a device already lawfully marketed and
whether the device is otherwise subject to a pre-market approval ("PMA")
requirement. Devices for which pre-market notifications have been filed may not
be marketed until the FDA issues an order finding the device to be substantially
equivalent to an already legally marketed device which is not otherwise subject
to a requirement of pre-market approval under Section 515 of the Act. Devices
which are found by the FDA to be not substantially equivalent to a legally
marketed device, and devices which are substantially equivalent to a device that
requires pre-market approval before marketing, must submit and receive approval
of a PMA before commercialization may commence. Review of a PMA is complex,
typically includes both animal and human trials and may take several years to
complete. Such trials must be conducted under an Investigational Device
Exemption and must be monitored by an Institutional Review Board ("IRB").
In 1996, the FDA determined that the ATRISORB(R) GTR Barrier was safe
and "substantially equivalent" to an already legally marketed device for its
intended use, and granted a 510(k) clearance allowing the Company to market the
ATRISORB(R) GTR Barrier in the United States. The regulatory requirements for
marketing medical devices in the European Community (the "EC") are currently in
transition as the EC's new Medical Device Directive is being implemented. Some
countries do not currently require pre-market approval or notification for this
type of product, while other countries do not distinguish between medical
devices and drug products. The EC's Medical Device Directive transition period
will end in June 1998, after which time all medical devices will require a
Communaute Europeene (a "CE Mark") before they can be marketed in any EC member
states. Obtaining the CE Mark requires information similar to that which is
submitted to the FDA in the 510(k) notification, plus additional manufacturing
and quality assurance documentation (and inspections) mandated by the
International Standards Organization 9000 standards. These quality assurance
programs are being implemented, and the Company intends to apply for the CE mark
in 1997.
Products such as the Company's ATRIDOX(TM) drug delivery system are
generally regulated under the new drug and related provisions of the Act. The
process required by the FDA before a drug delivery system may be marketed in the
United States depends on whether the drug has existing approval for use in other
dosage forms. If the drug is a new chemical entity that has not been approved,
then the process includes (i) pre-clinical laboratory and animal tests, (ii) an
investigational new drug ("IND") exemption which has become effective, (iii)
adequate and well controlled human clinical trials to establish the safety and
efficacy of the drug in its intended application and (iv) FDA approval of an
NDA. If the drug has been previously approved, then the approval process is
similar, except that certain toxicity tests normally required for the IND are
frequently not required.
Clinical trials are conducted in accordance with protocols that detail
the objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol is submitted to the FDA as part
of the IND. Each clinical study is conducted
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under the auspices of an independent IRB at the institution at which the study
will be conducted. The IRB will consider, among other things, ethical factors,
the safety of human subjects, the protection of patient confidentiality and the
possible liability of the institution.
Clinical trials are typically conducted in three sequential phases, but
these phases may overlap. During Phase 1, the initial introduction of the drug
into healthy human subjects, the product is tested for safety, dosage tolerance,
absorption, distribution, metabolism and excretion. Phase 2 involves trials in a
limited patient population to (i) determine the efficacy of the product for
specific, target indications, (ii) determine dosage tolerance and optimal dosage
and (iii) identify possible adverse effects and safety risks. If Phase 2
evaluations demonstrate that a drug has promising therapeutic benefits and has
an acceptable safety profile, Phase 3 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 plan, or
"protocol," must be submitted to the FDA prior to the commencement of each
clinical trial. All patients involved in the clinical trials must provide
informed consent prior to their participation. The results of the clinical
trials are submitted to the FDA as part of the NDA to establish the safety and
effectiveness of the drug for its intended indications. The FDA may order the
temporary or permanent discontinuation of clinical trials at any time if it
believes that clinical subjects are being exposed to an unacceptably high safety
risk or the design of the trial will not meet its stated objectives.
The results of product development, pre-clinical trials and clinical
trials are submitted to the FDA in an NDA for approval of the marketing and
commercial shipment of the product. Although the Prescription Drug User Fee Act
of 1992 requires that the FDA complete the review of 90% of NDAs submitted in
1997 within 12 months, prosecution of an NDA can take several years to complete
if additional data is required.
The FDA may deny an NDA if applicable regulatory criteria, including
compliance with current Good Manufacturing Practices ("cGMP"), are not
satisfied. The FDA may require additional clinical testing or other types of
testing, or manufacturing or quality control changes. Even if such data are
submitted or such changes are made, the FDA may ultimately decide that the NDA
does not satisfy the criteria for approval. Following approval of an NDA, the
FDA may withhold authorization to commence marketing of the drug subject to FDA
inspection and clearance of records and manufacturing processes relating to the
production and laboratory testing of the finished drug product. Product
approvals may be withdrawn by the FDA if compliance with regulatory standards is
not maintained or if new evidence demonstrating that the drug is unsafe or lacks
efficacy for its intended uses becomes known after the product reaches the
market. The FDA may require testing and surveillance programs to monitor the
effect of proprietary drug delivery systems which have been commercialized, and
has the power to prevent or limit further marketing of the product based on the
results of these post-marketing surveillance programs.
Each domestic drug product manufacturing establishment must be
registered with, and achieve a satisfactory inspection from, the FDA.
Establishments handling controlled substances
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must be licensed by the United States Drug Enforcement Administration ("DEA").
Domestic manufacturing establishments are routinely subject to inspection by the
FDA prior to the approval of an NDA and to biennial inspections by the FDA for
cGMP compliance after an NDA has been approved. The Prescription Drug User Fee
Act of 1992, enacted to expedite drug approval by providing the FDA with
resources to hire additional medical reviewers, also imposes three kinds of user
fees on manufacturers of NDA-approved prescription drugs.
ADDITIONAL REGULATORY ISSUES
Under the Drug Price Competition and Patent Term Restoration Act of
1984, a patent which claims a product, use or method of manufacture covering
drugs and certain other products may be extended for up to five years to
compensate the patent holder for a portion of the time required for research and
FDA review of the product. This law also establishes a period of time following
approval of a drug during which the FDA may not accept or approve applications
for certain similar or identical drugs from other sponsors unless those sponsors
provide their own safety and effectiveness data. There can be no assurance that
the Company will be able to take advantage of either the patent term extension
or marketing exclusivity provisions of this law.
The National Institutes of Health has been requested by the Department
of Health and Human Services to submit proposals for addressing potential
conflicts of interest in the federally-funded biomedical research sector.
Although the proposal request is aimed at establishing rules to treat potential
abuses in the system without imposing unnecessary burdens and disincentives,
there can be no assurance that any rules adopted will not adversely affect the
Company's ability to obtain research grants. Various aspects of the Company's
business and operations are regulated by a number of other governmental agencies
including the Occupational Safety and Health Administration and the Securities
and Exchange Commission.
THIRD PARTY REIMBURSEMENT
The cost of a significant portion of medical care in the United States
is funded by government and private insurance programs, such as Medicare,
Medicaid, health maintenance organizations and private insurers, including Blue
Cross/Blue Shield plans. Governmental imposed limits on reimbursement of
hospitals and other health care providers (including dental practitioners) have
significantly impacted their spending budgets. Under certain government
insurance programs, a health care provider is reimbursed a fixed sum for
services rendered in treating a patient, regardless of the actual charge for
such treatment. Private third-party reimbursement plans are also developing
increasingly sophisticated methods of controlling health care costs through
redesign of benefits and exploration of more cost-effective methods of
delivering health care. In general, these government and private
cost-containment measures have caused health care providers to be more selective
in the purchase of medical products.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products, and there can be no assurance that adequate
third-party coverage will be available. Limitations imposed by government and
private insurance programs and the failure of certain
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third-party payers to fully or substantially reimburse health care providers for
the use of the products could have a material adverse effect on the Company.
COMPETITION
The biotechnology and pharmaceutical industries are characterized by
rapidly evolving technology and intense competition. The Company's competitors
include major pharmaceutical, chemical and specialized biotechnology companies,
many of which have financial, technical and marketing resources significantly
greater than those of the Company. In addition, many specialized biotechnology
companies have formed collaborations with large, established pharmaceutical
companies to support research, development and commercialization of products
that may be competitive with those of the Company. Moreover, from time to time,
there have been research reports from various sources describing other sustained
release drug delivery systems for use in treating periodontal disease. Further,
the Company is aware that other companies are developing products that may
compete with the Company's products. There can be no assurance that product
introductions or developments by others will not render the Company's products
or technologies obsolete or place them at a competitive disadvantage.
Products utilizing the Company's proprietary drug delivery systems are
expected to compete with other products for specified indications, including
drugs marketed in conventional and alternative dosage forms. New drugs or
further developments in alternative drug delivery methods may provide greater
therapeutic benefits for a specific drug or indication, or may offer comparable
performance at lower cost, than those offered by the Company's drug delivery
systems. The Company expects proprietary products approved for sale to compete
primarily on the basis of product efficacy, safety, patient convenience,
reliability, availability, price and patent position. There can be no assurance
that product introductions or developments by others will not render the
Company's expected products or technologies noncompetitive or obsolete.
MARKETING AND SALES
In 1996, the Company launched its first commercial product, the
ATRISORB(R) GTR Barrier in certain European countries and the United States and
began to develop a marketing and sales organization to market the ATRISORB(R)
GTR Barrier in the United States. On December 17, 1996, the Company entered into
the Block Agreement pursuant to which Block acquired North American and certain
European marketing rights to the Company's first three products and improvements
thereto for the treatment of periodontal disease, as follows: (i) the
ATRISORB(R) GTR Barrier; (ii) ATRIDOX(TM), and (iii) ATRISORB(R) with
doxycycline. As a result of the Block Agreement, the Company eliminated its
marketing and sales force devoted to the United States, but will continue to
develop its marketing and sales capabilities for the ATRISORB(R) GTR Barrier in
Europe and for both ATRISORB(R) GTR Barrier and ATRIDOX(TM) in other worldwide
markets.
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MANUFACTURING
The Company has limited experience in manufacturing its products on a
commercial scale, although certain of its officers have had extensive experience
in similar activities for other companies. The Company recently expanded and
upgraded its pilot manufacturing facility. In addition to producing supplies at
pilot scale for clinical trials, this facility is now producing the first
commercial quantities of the ATRISORB(R) GTR Barrier. In July 1996, the Company
purchased a 25,000 square foot commercial production facility and is in the
process of renovating and validating the facility for the production of the
ATRISORB(R) GTR Barrier, the ATRIDOX(TM) product, the Heska veterinary product
and clinical study supplies for additional products in development.
In connection with its research and development activities, the Company
may seek to enter into collaborative arrangements with pharmaceutical or
biotechnology companies to assist in funding development costs. It is
anticipated that some of these collaborators are capable of and may also be
responsible for commercial scale manufacturing of certain potential products. In
addition, these arrangements may involve the grant by the Company of the
exclusive or semi-exclusive right to sell specific products to specified market
segments in particular geographic territories in exchange for up-front payments,
royalties, milestone payments or other financial arrangements. The Company
believes that these arrangements could be more effective in promoting and
distributing certain therapeutic products, due to the extensive marketing
networks and large advertising budgets of large pharmaceutical and biotechnology
companies. The Company may ultimately determine to establish its own
manufacturing capability for certain products, in which case it will require
substantial additional funds and personnel. As an alternative to establishing
its own manufacturing capabilities or entering into collaborative agreements,
the Company may contract its manufacturing to an independent third party. There
can be no assurance that the Company will be able to enter into any such
arrangements with a collaborative partner or independent third parties on
favorable terms, or at all.
PATENTS AND TRADEMARKS
The Company considers patent protection and proprietary position to be
materially significant to its business. Since its formation, the Company has
submitted one hundred and seven patent applications, of which thirty-eight were
filed in the U.S. and sixty-nine were filed in foreign national or Patent
Cooperation Treaty ("PCT") countries. The Company maintains eleven U.S. patents
and ten foreign national or PCT patents for a total of twenty-one. In addition,
the Company currently has seventeen U.S. and fifty foreign patent applications
pending for various improvements and technologies.
Based on its own research, seven of the submitted U.S. and eight of the
foreign patent applications have been granted thus far. These issued patents
relate to the purification and use of benzophenanthridine alkaloids such as
sanguinarine, methods and compositions for treating periodontal diseases,
polymeric systems for use in guided tissue regeneration of periodontal
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tissues, and the liquid polymeric delivery systems. These patents provide
protection for the Perio Product and the ATRISORB(R) GTR Barrier currently under
development.
In 1996, the Company had two new patents issued. These patents relate
to the biodegradable in situ forming implants and the biodegradable polymer
composition and process for periodontal tissue.
The Company also has exclusive rights, under Amendment No. 3 to the
Master Technology Transfer Agreement (the "Revised Agreement"), to patents
relating to benzophenanthridine alkaloid products, including sanguinarine, and
methods in all fields other than that of human oral care. These rights are based
upon thirteen U.S. and a number of foreign patents owned by Vipont
Pharmaceutical, Inc. These patents relate to compositions that include
benzophenanthridine alkaloid and methods for potentially promoting oral hygiene
and tissue health as well as methods for preparation of benzophenanthridine or
sanguinaria extracts.
Notwithstanding the Company's pursuit of patent protection, there is no
assurance that others will not develop delivery systems, compositions and/or
methods that infringe the Company's patent rights resulting from outright
ownership or non-revocable exclusive licensure of patents which relate to the
Company's delivery systems, composition and/or methods. In that event, such
delivery systems, compositions and methods may compete with the Company's
systems, compositions and methods and may adversely affect the operations of the
Company. Further, there is no assurance that patent protection will afford
adequate protection against competitors with similar systems, composition or
methods, nor is there any assurance that the patents will not be infringed or
circumvented by others. Moreover, it may be costly to pursue and to prosecute
patent infringement actions against others, and such actions could hamper the
business of the Company. The Company also relies on its unpatented proprietary
know-how. No assurance can be given that others will not be able to develop
substantially equivalent proprietary know-how or otherwise obtain access to the
Company's know-how, or that the Company's rights under any patents will afford
sufficient protection.
In 1995, the Company registered two U.S. trademarks for use in
designating its products and compositions, the ATRIGEL(R) drug delivery system
and ATRISORB(R) GTR Barrier. As part of the Block Agreement, the Company
transferred ownership of the ATRISORB(R) trademark in the United States and
Canada to Block. In addition, in 1996 the ATRISORB(R) GTR Barrier mark was
registered in Germany, and U.S. trademarks were registered for the Company name
and logo.
The Company has also submitted and maintains several U.S. and numerous
foreign trademark and service applications for registrations of its name, logo,
products and compositions. The Company expects that the Trademark Office
examinations of these applications will be successful and registrations granted.
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PRODUCT LIABILITY INSURANCE
The Company currently has in force general and professional liability
insurance with coverage limits of $3 million per year in the aggregate and $1
million per occurrence. The Company's product liability coverage limit is $5
million per year. The Company's insurance policies provide coverage on a claims
made basis and are subject to annual renewal. Such insurance may not be
available in the future on acceptable terms or at all. There can be no assurance
that the coverage limits of such policies will be adequate.
EMPLOYEES
As of December 31, 1996, the Company employed ninety employees on a
full-time basis and three people on a part-time basis. Of the ninety full-time
employees, seventy-six are engaged in research and clinical testing and the
remaining fourteen are in administrative capacities. Twenty-three employees have
earned advanced degrees, including nine doctorate designations. None of the
Company's employees are represented by a union or collective bargaining unit and
management considers relations with employees to be good.
ADDITIONAL INFORMATION
Compliance with federal, state and local law regarding the discharge of
materials into the environment or otherwise relating to the protection of the
environment has not had, and is not expected by the Company to have, any adverse
effect upon capital expenditures, earnings or the competitive position of the
Company. The Company is not presently a party to any litigation or
administrative proceeding with respect to its compliance with such environmental
standards. In addition, the Company does not anticipate being required to expend
any funds in the near future for environmental protection in connection with its
operations.
The Company does not believe that any aspect of its business is
significantly seasonal in nature.
No significant portion of the Company's business is subject to
renegotiation of profits or termination of contracts or subcontracts at the
election of the United States Government.
The Company currently obtains supplies of the polymer used in the
polymer delivery system from two separate sources. Supplies of doxycycline are
obtained from both domestic and foreign sources. The Company believes that, in
the event that it should lose any of its suppliers of raw materials, it could
locate and obtain such raw materials from other available sources without
substantial adverse delay or increased expense.
ITEM 2. PROPERTIES.
The Company leases approximately 25,200 square feet of office and
research laboratory space located in Fort Collins, Colorado, pursuant to a lease
that expires on June 1, 1998. In
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addition, the Company leases an additional 4,000 square feet of space at the
same location for pre- clinical and initial manufacturing activities, pursuant
to a lease which expires on December 1, 1999.
The Company owns a 25,000 square foot manufacturing facility in Fort
Collins which it acquired in July 1996. As part of the building acquisition, the
Company acquired two acres of vacant land, directly adjacent to the building.
This land could be used for possible future development or expansion.
The Company owns substantially all of its laboratory and manufacturing
equipment, which it considers to be adequate for its research, development and
testing requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders
through the solicitation of proxies during the fourth quarter of the Company's
most recent fiscal year.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The common stock is traded on The Nasdaq Stock Market under the symbol
"ATRX." The following table sets forth, for the fiscal periods indicated, the
range of high and low sales price per share of the common stock, as reported on
The Nasdaq Stock Market:
High Low
---- ---
1996:
First Quarter $15 1/2 $6 1/4
Second Quarter 15 1/2 8 1/4
Third Quarter 12 5/8 6 7/8
Fourth Quarter 12 3/4 8 3/4
1995:
First Quarter $ 7 $5 3/8
Second Quarter 8 1/8 6 3/8
Third Quarter 8 5 1/2
Fourth Quarter 7 3/4 4 7/8
As of March 3, 1997, there were approximately 3,397 holders of record of common
stock.
The Company has never paid cash dividends. The Company currently anticipates
that it will retain all available funds for use in the operation of its business
and does not anticipate paying any cash dividends in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
The financial data presented below is derived from the financial statements
of the Company, which has been audited and reported upon by Deloitte & Touche
LLP, independent auditors. The selected financial information set forth in the
table below is not necessarily indicative of the results of future operations of
the Company and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements, related notes and independent auditors' report, included herein.
Three
Year Ended Year Ended Year Ended Months Year Ended Year Ended
Dec. 31, Dec. 31, Dec. 31, Ended Dec. Sept. 30, Sept. 30,
1996 1995 1994 31, 1993 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
(In thousands, except share data)
SUMMARY OF OPERATIONS:
Total revenue $ 2,896 $ 1,562 $ 1,815 $ 539 $ 3,092 $ 3,161
Total expenses 14,328 14,220 7,355 1,546 6,791 10,061
Net loss (11,432) (12,658) (5,540) (1,007) (3,698) (6,900)
Net loss per common share (1.13) (1.58) (0.72) (0.13) (0.48) (0.94)
Weighted average shares 10,147 8,002 7,741 7,721 7,695 7,340
outstanding
BALANCE SHEET DATA:
Working capital $ 24,669 $ 10,913 $ 12,616 $ 13,478 $ 9,372 $ 17,779
Total assets 38,463 14,894 22,006 27,912 29,074 36,515
Long-term obligations -- -- -- -- -- 4,000
Shareholders' equity 30,284 12,807 21,191 26,978 28,118 31,529
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The statements contained in this report, if not historical, are forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, and involve risks and uncertainties that could cause actual
results to differ materially from the financial results described in such
forward looking statements. These risks and uncertainties include, among others,
whether the Company will receive regulatory approval to market any products
besides the ATRISORB(R) GTR Barrier product, the results of current and future
clinical trials, the time, costs and expenses associated with the regulatory
approval process for products. The success of the Company's business operations
is in turn dependent on factors such as the effectiveness of the Company's
marketing strategies to market its current and any future products, the
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Company's ability to manufacture products on a commercial scale, the appeal of
the Company's mix of products, the Company's success at entering into and
collaborating with others to conduct effective strategic alliances and joint
ventures, general competitive conditions within the biotechnology and drug
delivery industry and general economic conditions. Further, any forward looking
statement or statements speak only as of the date on which such statement or
statements were made, and the Company undertakes no obligation to update any
forward looking statement or statements to reflect events or circumstances after
the date on which such statement or statements were made.
Since its inception, the Company has devoted its efforts and resources
primarily to the research and development of periodontal products. Prior to
1996, the Company's revenues have been derived from interest income and payments
from unaffiliated third parties for contract research. In March, 1996, the
Company received clearance from the FDA to market its first dental product, the
ATRISORB(R) GTR Barrier. Shortly thereafter, the Company commenced sales of the
ATRISORB(R) GTR Barrier in the United States and certain European countries and
began recording sales revenues.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO
YEAR ENDED DECEMBER 31, 1995
Total revenue for the year ended December 31, 1996, was approximately
$2,896,000 compared to approximately $1,562,000 for the year ended December 31,
1995, representing an 85.3% increase. The increase in total revenue was
primarily due to increases in sales, contract revenue and interest income.
The Company had sales of approximately $636,000 during the year ended
December 31, 1996, primarily representing sales of the ATRISORB(R) GTR Barrier
during 1996. The Company had no product sales during 1995.
Contract revenue was approximately $1,004,000 for the year ended
December 31, 1996, compared to approximately $580,000 for the year ended
December 31, 1995, representing a 73% increase. Contract revenue represents
revenue the Company received from grants and from unaffiliated third parties for
performing contract research and development activities utilizing the ATRIGEL(R)
drug delivery system. The increased revenues are primarily due to the Company
being awarded two federal research grants during the current year.
Interest income for the year ended December 31, 1996, was approximately
$1,204,000 compared to approximately $987,000 for the year ended December 31,
1995, representing a 22% increase. The increase in interest income was due to an
increase in principal investments during 1996 as a result of the receipt of
approximately $27,844,000 in proceeds from the Company's common stock offering
completed in May 1996.
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Cost of goods sold were $364,000, for the year ended December 31, 1996
were primarily associated with the launch of the Company's first dental product,
the ATRISORB(R) GTR Barrier product in the United States and certain European
countries. The Company did not record cost of goods sold for the year ended
December 31, 1995.
Research and development - ATRIDOX(TM) product expenses for the year
ended December 31, 1996, were approximately $5,268,000 compared to approximately
$5,684,000 for the year ended December 31, 1995, representing a 7% decrease due
to the completion of Phase 3 clinical trials on ATRIDOX(TM) in May 1996.
Research and development - other expenses, which included activities
for the ATRISORB(R) GTR Barrier product and other research activities for the
year ended December 31, 1996, were approximately $4,824,000 for the year ended
December 31, 1996 compared to approximately $3,905,000 for the year ended
December 31, 1995, representing a 24% increase. The increase was primarily a
result of hiring additional personnel in the Manufacturing and Quality
Assurance/Quality Control departments, and expenses related to federal grants
received in 1996.
Administrative and marketing expenses were approximately $3,872,000 for
the year ended December 31, 1996, compared to $830,000 for the year ended
December 31, 1995, representing a 367% increase. The primary reasons for this
increase were expenses related to the initiation of marketing and sales efforts
related to the ATRISORB(R) GTR Barrier product. This expense is expected to
decrease in future years with the signing of the Block Agreement.
During 1996, the Company recorded a one-time non-cash charge of
approximately $585,000 for compensation expense associated with the cancellation
of certain employee incentive stock options with a five year term and the
issuance of new non-qualified stock options which extended the term to ten
years.
The Company recorded a net loss of approximately $11,432,000 for the
year ended December 31, 1996, compared to a net loss of $12,658,000 for the year
ended December 31, 1995, representing a 10% decrease. However, exclusive of a
one-time charge of approximately $3,802,000 associated with the acquisition of
Vipont Royalty Income Fund, Ltd. (the "Acquisition"), the prior year loss would
be approximately $8,856,000. Therefore, the loss for the year ended December 31,
1996 actually represents a 29% increase over the year ended December 31, 1995.
The increased loss was primarily due to expenses associated with the
commencement of marketing and manufacturing activities related to the
ATRISORB(R) GTR Barrier product.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO
YEAR ENDED DECEMBER 31, 1994
Contract revenue represented revenue the Company received from grants
and from unaffiliated third parties for performing contract research and
development activities for the
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ATRIGEL(R) drug delivery system, and was approximately $558,000 for the year
ended December 31, 1995, compared to approximately $713,000 for the year ended
December 31, 1994. The decrease in contract revenue was a result of the Company
completing a number of contracts that were in progress in the comparable period,
while contracts initiated in the period ended December 31, 1995 generated less
revenue.
Interest income for the year ended December 31, 1995, was approximately
$987,000 compared to approximately $1,320,000 for the year ended December 31,
1994. Interest income decreased due to a reduction in principal balances of
investments as a result of the funds being used in general operations. The
majority of the funds were invested in U.S. government bond funds, long-term
U.S. government and government agency investments. The remaining cash and cash
equivalents were invested in interest bearing accounts to fund the Company's
short-term operations.
A loss on sale of marketable securities for the year ended December 31,
1995, was approximately $5,000 compared to a loss of approximately $218,000 for
the year ended December 31, 1994. The loss for the year ended December 31, 1995
was substantially less than the comparable period due to improved market
conditions at the time at which the securities were sold. The prior period loss
resulted from the sale of securities, available-for-sale at a time when the bond
market had substantially declined compared to the period when the securities
were purchased. The proceeds from the sale of marketable securities were used to
fund normal operations.
Research and development - ATRIDOX(TM) product expenses for the year
ended December 31, 1995, were approximately $5,684,000 compared to approximately
$2,765,000 for the year ended December 31, 1994. The increase was significant
and resulted from the continuation of two Phase 3 clinical trials which began in
January 1995.
Administrative and marketing expenses increased to approximately
$830,000 during the year ended December 31, 1995, from approximately $688,000
for the year ended December 31, 1994. The increase resulted primarily from
expenses associated with efforts to obtain a corporate marketing partner, legal
fees and expenses associated with the recruitment and hiring of new employees.
Acquisition of rights for approximately $3,802,000 for the year ended
December 31, 1995 represented (i) the issuance of 550,868 shares of common stock
valued at approximately $6.40 per share in the Acquisition and (ii)
approximately $278,000 in expenses related to the Acquisition.
The Company recorded a net loss of approximately $12,658,000 for the
year ended December 31, 1995, compared to a net loss of approximately $5,540,000
for the year ended December 31, 1994. The loss for the year ended December 31,
1995 was higher primarily due to a one-time charge of $3,802,000 associated with
the Acquisition. The current period loss was further increased due to decreased
revenues from research contracts, increased expenses
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associated with the continuation of two, Phase 3 clinical trials for the
ATRIDOX(TM) product, and additional research and development on the ATRISORB(R)
GTR Barrier and the ATRIGEL(R) drug delivery system.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash and cash equivalents of
approximately $18,368,000, marketable securities available-for-sale of
approximately $6,040,000, $7,000,000 in restricted cash, and other current
assets of approximately $1,441,000, for total current assets of approximately
$32,849,000. Current liabilities were approximately $8,180,000, which resulted
in working capital of approximately $24,669,000.
Restricted cash represents $7,000,000 received by the Company from
Block as a payment under the Block Agreement for the sale of marketing rights to
the ATRISORB(R) GTR Barrier, which was placed in escrow until February 1, 1997.
Accordingly, the Company deferred recognition of the revenue until 1997, and the
$7,000,000 payment is included in restricted cash equivalents as of December 31,
1996.
During the year ended December 31, 1996, the Company used net cash from
operating activities of approximately $11,516,000. This was primarily a result
of a net loss of approximately $11,432,000.
Net cash provided by investing activities was approximately $517,000
during the year ended December 31, 1996. The principal reason for the increase
was from the sale of marketable securities and the proceeds from maturities of
marketable securities to fund normal operating activities reduced by the
acquisitions of property, plant and equipment.
Net cash provided by financing activities was approximately $28,442,000
from the issuance and sale of 2,587,500 shares of common stock which was
completed in May 1996.
The Company's long-term capital expenditure requirements will depend on
numerous factors, including the progress of the Company's research and
development programs, the time required to file and process regulatory approval
applications, the development of the Company's commercial manufacturing
facilities, the ability of the Company to obtain additional licensing
arrangements, and the demand for the Company's products, if and when approved.
The Company expended approximately $4,353,000 for property, plant and equipment
and leasehold improvements and approximately $221,000 for patent development in
the year ended December 31, 1996 compared to $715,000 and $167,000,
respectively, for the year ended December 31, 1995. The increase is a result of
the purchase of the new manufacturing facility and equipment during 1996.
The Company expects to continue to incur substantial expenditures for
research and development, testing, regulatory compliance and to hire additional
management, scientific, manufacturing and administrative personnel. The Company
will also continue to expend a
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significant amount of funds in its ongoing clinical studies. These expenses will
be partially offset by a decrease in sales and marketing expenses as a result of
the Block Agreement and potential fees and royalties. Further, the Company
expects to continue to incur substantial operating losses for the foreseeable
future. Depending on the results of the Company's research and development
activities, the Company may determine to accelerate or expand its efforts in one
or more of its proposed areas and may therefore require additional funds earlier
than presently anticipated. Management believes that under the current operating
plan its existing capital resources will be sufficient to meet its operating
expenses and capital expenditure requirements for the foreseeable future.
Management currently has no commitments for raising additional capital.
The Company's long-term success depends on sales of products that must
undergo an extensive regulatory approval process. There can be no assurance that
regulatory agency approvals will be obtained for any products or drugs developed
or discovered by the Company, or that the Company will be successful in
developing any products or drugs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company required by Regulation S-X are
attached to this Report. Reference is made to Item 14 below for an index to the
financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained in the Company's definitive proxy statement
for the Company's Annual Meeting of Shareholders scheduled to be held on April
27,1997 regarding directors and officers of the Company and compliance with
Section 16(a) of the Exchange Act is incorporated herein by reference in
response to this item.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained in the Company's definitive proxy statement
for the Company's Annual Meeting of Shareholders scheduled to be held on April
27,1997 regarding executive compensation is incorporated herein by reference in
response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information in the Company's definitive proxy statement for the
Company's Annual Meeting of Shareholders scheduled to be held on April 27,1997
regarding security ownership
24
27
of certain beneficial owners and management is hereby incorporated herein by
reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information in the Company's definitive proxy statement for the
Company's Annual Meeting of Shareholders scheduled to be held on April 27,1997
regarding certain relationships and related transactions is hereby incorporated
herein by reference in response to this item.
25
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents of the Company are filed as part of this
Report:
1. Financial Statements
Report of Independent Auditors Balance Sheets -
December 31, 1996 and 1995 Statements of Operations -
Years Ended December 31, 1996, 1995
and 1994
Statements of Changes in Shareholders' Equity - Years
Ended December 31, 1996, 1995 and 1994
Statements of Cash Flows - Years Ended December 31,
1996, 1995 and 1994
Notes to the Financial Statements
2. Financial Statement Schedules
Schedules for which provision is made in the
applicable regulations of the Securities and Exchange
Commission have been omitted because they are not required
under the related instructions or the information related is
contained elsewhere in the financial statements.
3. Exhibits
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation(1)
3.2 Amended and Restated Bylaws(2)
4.1 Form of Common Stock Certificate(3)
10.1 Employment Agreement between Registrant and John E.
Urheim dated June 4, 1993(3)
10.2 Amendment No. 3 and Restatement of Master Technology
Transfer Agreement between Registrant and Vipont
Pharmaceutical, Inc.(2)
10.3 Incentive Stock Option Agreement(2)
26
29
10.4 Agreement between Registrant and Vipont
Pharmaceutical, Inc.(2)
10.5 Termination Agreement dated September 27, 1995
between Registrant and Atrix, L.P.(4)
10.6 Lease Agreement dated May 11, 1991 between the
Registrant and GB Ventures*
10.7 Agreement of Purchase and Sale dated June 11, 1996
between the Registrant and D.C. Pitcairn Holdings,
Inc.*
10.8 Agreement dated December 16, 1996 between the
Registrant and Block Drug Corporation(5)
23 Consent of Deloitte & Touche LLP*
27 Financial Data Schedule*
- -------------------
(1) Incorporated by reference to Registrant's Current Report on Form 8-K, dated
December 1, 1989, as filed with the Securities and Exchange Commission on
December 15, 1989.
(2) Incorporated by reference to the Registrant's Registration Statement on Form
S-1, file number 33-34882.
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993 as filed with the Securities and Exchange
Commission.
(4) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 as filed with the Securities and Exchange
Commission.
(5) Incorporated by reference to Registrant's Current Report on Form 8-K dated
December 16, 1996, as filed with the Securities and Exchange Commission.
* Filed herewith.
(b) Reports on Form 8-K:
1. A Current Report on Form 8-K, dated December 17,
1996, was filed with the Securities and Exchange
Commission under Item 5 regarding an agreement
between Atrix Laboratories, Inc. and Block Drug
Corporation.
No other reports on Form 8-K were filed during the period
ended December 31, 1996.
27
30
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ATRIX LABORATORIES, INC.
(Registrant)
March 7, 1997 By: /s/ John E. Urheim
------------------------
John E. Urheim
Vice Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ David R. Bethune Director March 7, 1997
- --------------------------
David R. Bethune
/s/ H. Stuart Campbell Director March 7, 1997
- --------------------------
H. Stuart Campbell
/s/ Dr. D. Walter Cohen Director March 7, 1997
- --------------------------
Dr. D. Walter Cohen
/s/ Dr. Charles P. Cox Vice President of New March 7, 1997
- -------------------------- Business Development
Dr. Charles P. Cox
/s/ Michael R. Duncan Vice President of March 7, 1997
- -------------------------- Manufacturing
Michael R. Duncan
/s/ Dr. Richard L. Dunn Vice President of Drug March 7, 1997
- -------------------------- Delivery Research
Dr. Richard L. Dunn
/s/ Dr. J. Steven Garrett Vice President of Dental March 7, 1997
- -------------------------- Clinical Research
Dr. J. Steven Garrett
/s/ Elaine M. Gazdeck Vice President of Regulatory March 7, 1997
- ---------------------------- Affairs & Quality Assurance
Elaine M. Gazdeck
31
/s/ Dr. Jere E. Goyan Director March 7, 1997
- ----------------------------
Dr. Jere E. Goyan
/s/ Dr. R. Bruce Merrifield Director March 7, 1997
- ----------------------------
Dr. R. Bruce Merrifield
/s/ C. Rodney O'Connor Director March 7, 1997
- ----------------------------
C. Rodney O'Connor
/s/ William C. O'Neil, Jr. Chairman of the Board of March 7, 1997
- ---------------------------- Directors
William C. O'Neil, Jr.
/s/ Rees M. Orland Vice President of Marketing March 7, 1997
- ---------------------------- and Sales
Rees M. Orland
/s/ Brian G. Richmond Corporate Controller and March 7, 1997
- ---------------------------- Assistant Secretary
Brian G. Richmond
/s/ Dr. G. Lee Southard President, Chief Scientific March 7, 1997
- ---------------------------- Officer and Director
Dr. G. Lee Southard
/s/ John E. Urheim Vice Chairman of the Board March 7, 1997
- ---------------------------- of Directors and Chief
John E. Urheim Executive Officer
32
FINANCIAL STATEMENT INDEX
Page
----
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS:
Balance Sheets - December 31, 1996 and 1995 F-3
Statements of Operations - Years Ended December 31, 1996,
1995 and 1994 F-4
Statements of Changes in Shareholders' Equity - Years Ended
December 31, 1996, 1995 and 1994 F-5
Statements of Cash Flows - Years Ended December 31, 1996,
1995 and 1994 F-6
NOTES TO THE FINANCIAL STATEMENTS F-7 - F-16
F-1
33
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Atrix Laboratories, Inc.
Fort Collins, Colorado
We have audited the accompanying balance sheets of Atrix Laboratories,
Inc. (the "Company") as of December 31, 1996 and 1995, and the related
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. 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, such financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1996
and 1995, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
January 24, 1997
F-2
34
ATRIX LABORATORIES, INC.
BALANCE SHEETS
ASSETS
December 31, December 31,
1996 1995
-----------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 18,368,472 $ 925,487
Restricted cash equivalents 7,000,000 --
Marketable securities, at fair value 6,040,389 10,996,847
Accounts receivable, net of allowance for doubtful accounts
of $10,000 in 1996 and $0 in 1995 681,290 190,665
Interest receivable 154,128 112,303
Inventories 303,505 202,264
Prepaid expenses and deposits 301,321 572,751
-----------------------------
Total current assets 32,849,105 13,000,317
-----------------------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment 5,888,007 1,847,164
Leasehold improvements 565,608 506,190
-----------------------------
Total 6,453,615 2,353,354
Accumulated depreciation and amortization (1,687,056) (1,133,864)
-----------------------------
Property, plant and equipment, net 4,766,559 1,219,490
-----------------------------
OTHER ASSETS:
Intangible assets, net of accumulated
amortization of $69,624 and $52,240 847,830 674,116
-----------------------------
TOTAL $ 38,463,494 $ 14,893,923
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 933,147 $ 1,862,850
Accrued salaries and payroll taxes 88,868 72,199
Other accrued liabilities 155,657 152,108
Deferred revenue 7,002,192 --
-----------------------------
Total current liabilities 8,179,864 2,087,157
-----------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000
shares authorized, none issued or outstanding
Common stock, $.001 par value; 25,000,000
shares authorized; 11,113,624 and 8,433,296 shares
issued and outstanding 11,114 8,433
Additional paid-in capital 72,913,274 43,889,473
Unrealized holding loss on marketable securities (152,641) (35,176)
Accumulated deficit (42,488,117) (31,055,964)
-----------------------------
Total shareholders' equity 30,283,630 12,806,766
-----------------------------
TOTAL $ 38,463,494 $ 14,893,923
=============================
See notes to the financial statements
F-3
35
ATRIX LABORATORIES, INC.
STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
---------------------------------------------
REVENUE:
Sales $ 635,517 $ -- $ --
Contract revenue 1,004,201 580,164 713,112
Interest income 1,204,352 986,995 1,320,258
Gain (loss) on sale of marketable
securities 36,419 (4,895) (218,043)
Other income 15,036 -- --
---------------------------------------------
Total revenue 2,895,525 1,562,264 1,815,327
---------------------------------------------
EXPENSES:
Cost of goods sold 363,517 -- --
Research and development
- ATRIDOX(TM)product 5,268,070 5,683,805 2,764,587
- Other 4,823,666 3,904,730 3,902,480
Administrative and marketing 3,872,425 829,509 688,122
Acquisition of rights -- 3,802,491 --
---------------------------------------------
Total expenses 14,327,678 14,220,535 7,355,189
---------------------------------------------
NET LOSS $(11,432,153) $(12,658,271) $(5,539,862)
=============================================
NET LOSS PER COMMON SHARE $ (1.13) $ (1.58) $ (0.72)
=============================================
WEIGHTED AVERAGE SHARES
OUTSTANDING 10,146,703 8,001,985 7,740,981
=============================================
See notes to the financial statements.
F-4
36
ATRIX LABORATORIES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Additional Unrealized Total
Paid-in Capital Holding Gain Accumulated Shareholders'
Shares Amount (Loss) Deficit Equity
-----------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1993 7,721,023 $ 7,721 $39,902,248 $ (74,003) $(12,857,831) $ 26,978,135
Exercise of stock options 14,080 14 35,340 -- -- 35,354
Issuance of common stock for warrants 7,975 8 39,867 -- -- 39,875
Unrealized holding loss -- -- -- (322,962) -- (322,962)
Net loss for the year -- -- -- -- (5,539,862) (5,539,862)
-----------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1994 7,743,078 7,743 39,977,455 (396,965) (18,397,693) 21,190,540
Exercise of stock options 139,350 139 391,611 -- -- 391,750
Acquisition of rights 550,868 551 3,520,407 -- -- 3,520,958
Unrealized holding gain -- -- -- 361,789 -- 361,789
Net loss for the year -- -- -- -- (12,658,271) (12,658,271)
-----------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1995 8,433,296 8,433 43,889,473 (35,176) (31,055,964) 12,806,766
Exercise of stock options 92,828 93 597,824 -- -- 597,917
Issuance of common stock for cash 2,587,500 2,588 27,841,389 -- -- 27,843,977
Unrealized holding loss -- -- -- (117,465) -- (117,465)
Compensation-stock options -- -- 584,588 -- -- 584,588
Net loss for the year -- -- -- -- (11,432,153) (11,432,153)
-----------------------------------------------------------------------------------
BALANCE
DECEMBER 31, 1996 11,113,624 $11,114 $72,913,274 $(152,641) $(42,488,117) $ 30,283,630
===================================================================================
See notes to the financial statements.
F-5
37
ATRIX LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
=============================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,432,153) $(12,658,271) $(5,539,862)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 554,595 369,663 277,075
(Gain) on sale of equipment (3,017) -- --
Amortization of patents 17,384 15,175 13,632
Amortization of bond premiums 39,239 241,623 360,763
Gain loss on sale of marketable securities (36,419) 4,895 218,043
Write-off of patents 29,579 5,506 134,380
Acquisition of rights through issuance of
common stock -- 3,520,958 --
Compensation - stock options 584,588 -- --
Net changes in current assets and liabilities:
Restricted cash equivalents (7,000,000) -- --
Accounts receivable (490,625) (97,196) (62,176)
Interest receivable (41,825) 28,545 17,035
Inventories (101,241) (202,264) --
Prepaid expenses and deposits 271,430 (453,649) 43,199
Accounts payable - trade (929,703) 1,381,583 (18,134)
Accrued salaries and payroll taxes 16,669 9,199 10,412
Other accrued liabilities 3,549 (43,707) (32,106)
Deferred revenue 7,002,192 (75,000) (79,357)
---------------------------------------------
Net cash used in operating activities (11,515,758) (7,952,940) (4,657,096)
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (4,293,064) (577,342) (312,294)
Acquisition of leasehold improvements (59,418) (137,339) (27,055)
Investment in intangible assets (220,677) (167,157) (157,829)
Proceeds from sale of property, plant, and
equipment 253,835 -- --
Proceeds from maturity of marketable
securities 1,000,000 5,185,800 5,000,000
Proceeds from sale of marketable securities 4,070,501 2,533,283 4,848,194
Investment in marketable securities (234,328) (230,843) (3,478,191)
---------------------------------------------
Net cash provided by investing activities 516,849 6,606,402 5,872,825
---------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and
exercise of stock options 28,441,894 391,750 75,229
---------------------------------------------
Net cash provided by financing activities 28,441,894 391,750 75,229
---------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 17,442,985 (954,788) 1,290,958
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 925,487 1,880,275 589,317
---------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,368,472 $ 925,487 $ 1,880,275
=============================================
See notes to the financial statements.
F-6
38
ATRIX LABORATORIES, INC.
NOTES TO THE FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Atrix Laboratories, Inc. (the "Company") was incorporated in 1986. Its
principal business is the research and development of a broad range of medical,
dental and veterinary products based upon a biodegradable release drug delivery
system. The majority of its products are in either the research, development, or
clinical stage. The Company commenced sales of its first product, the
ATRISORB(R) GTR Barrier in both the United States and Europe during 1996.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments with an original
maturity of three months or less.
RESTRICTED CASH EQUIVALENTS
Restricted cash equivalents consists of highly liquid investments with an
original maturity of three months or less.
MARKETABLE SECURITIES
Marketable securities are classified as available-for-sale and carried at
fair value with the unrealized holding gain or loss included in shareholders'
equity. Premiums and discounts associated with bonds are amortized using the
effective interest rate method.
INVENTORIES
Inventories are stated at the lower of cost, determined by the first-in,
first out method, or market. The components of inventories as of December 31,
1996 and 1995 are as follows:
1996 1995
---- ----
Raw Materials $228,533 $155,632
Work In Progress 13,435 46,632
Finished Goods 61,537 --
-------- --------
$303,505 $202,264
======== ========
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the straight-line
method over the estimated useful life of the assets. Leasehold improvements are
amortized over the term of the related lease.
F-7
39
Betterments, renewals and extraordinary repairs that extend the life of an
asset are capitalized; other repairs and maintenance are expensed. Repairs and
maintenance expense was $93,072, $83,106 and $72,865 for the years ended
December 31, 1996, 1995 and 1994 respectively.
INTANGIBLE ASSETS
Certain technology rights acquired from the Company's former parent, Vipont
Pharmaceutical, Inc., a wholly owned subsidiary of Colgate-Palmolive Company,
were transferred at cost less accumulated amortization and are being amortized
on a straight-line basis over their estimated useful life. Also included in
intangible assets are the legal costs incurred to obtain patents. Upon
receiving a determination that the Company's claims have been approved, these
costs are amortized over the patent's estimated useful life commencing with the
approval of the patent. Costs associated with patents are expensed upon the
determination that such costs are not recoverable.
REVENUE RECOGNITION
The Company recognizes revenue on sales at the time of shipment. Revenue is
recognized on research contracts as research work is performed and costs are
incurred. Deferred revenue is recorded with respect to payments received that
relate to research activities to be performed in subsequent periods.
RESEARCH AND DEVELOPMENT
Costs incurred in connection with research and development activities are
expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities that
perform certain research on behalf of the Company.
LOSS PER COMMON SHARE
Net loss per common share is computed by dividing net loss by the weighted
average number of shares outstanding during the period. The computation of fully
diluted net loss per share was antidilutive in each of the periods presented;
therefore, the amounts reported for primary and fully diluted loss per share are
the same.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
40
STOCK OPTION PLANS
The Company accounts for stock-based compensation to employees and directors
using the intrinsic value method in accordance with Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees. The Company
accounts for stock-based compensation to non-employees in accordance with
Statements of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation."
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires an asset and liability approach to financial accounting and reporting
for income taxes. Deferred income tax assets and liabilities are computed
annually for differences between the financial statement basis and the income
tax basis of assets and liabilities that will result in taxable or deductible
amounts in the future. Such deferred income tax liability computations are based
on enacted tax laws and rates applicable to the years in which the differences
are expected to affect taxable income. A valuation allowance is established when
necessary to reduce deferred income tax assets to the amounts expected to be
realized.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year's presentation.
2. MARKETABLE SECURITIES
As of December 31, 1996 marketable securities consist of the following:
Estimated
Number of shares/ Fair
Principal Amount Cost Value
----------------- ---------- ---------
U.S. Government and Agency
Bond Funds
Thornburg Fund 38,450 $ 486,327 $ 472,936
Pimco Fund 386,542 3,676,706 3,544,584
--------- ---------- ----------
Total 424,992 4,163,033 4,017,520
U.S. Government and
Agency Bonds 2,025,000 2,030,000 2,022,872
--------- ---------- ----------
Total 2,449,992 $6,193,033 $6,040,392
========= ========== ==========
F-9
41
As of December 31, 1995 marketable securities consist of the following:
Estimated
Number of shares/ Fair
Principal Amount Cost Value
----------------- ----------- -----------
U.S. Government and Agency
Bond Funds
Thornburg Fund 36,161 $ 458,151 $ 453,461
Pimco Fund 363,720 3,470,553 3,422,601
--------- ----------- -----------
Total 399,881 3,928,704 3,876,062
U.S. Government and Agency Bonds 7,025,000 7,103,319 7,120,785
--------- ----------- -----------
Total 7,424,881 $11,032,023 $10,996,847
========= =========== ===========
As of December 31, 1996 gross unrealized gains and losses pertaining to
marketable securities are $0 and $152,641, respectively.
3. ACQUISITION OF RIGHTS
The Company was the sole general partner of Vipont Royalty Income Fund,
Ltd., a Colorado limited partnership (the "Partnership"). The primary asset of
the Partnership was its right to receive payments from the Company based on
royalties and/or proceeds from the sale of rights relating to the ATRIDOX(TM)
product, if any, pursuant to certain agreements (the "Agreements") between the
Company and the Partnership. On September 27, 1995, the limited partners (the
"Limited Partners") of the Partnership approved the merger (the "Merger"), of
the Partnership with and into Atrix, L.P., a Colorado limited partnership
("Atrix, L.P."). The Company was the sole limited partner of Atrix, L.P.
AtrixSub, a Colorado corporation and a wholly-owned subsidiary of the Company,
was the sole general partner of Atrix, L.P. The Company determined the value of
the Partnership using an income valuation approach based on projected royalty
payments from projected sales of the ATRIDOX(TM) product. The Company issued
550,868 shares of common stock, valued at $6.40 per share for purposes of the
Merger, for a total consideration of $3,524,000. Additional expenses related to
the Merger of approximately $278,000 were paid by the Company. The total cost of
acquiring the Partnership rights of approximately $3,802,000 was considered a
research and development cost and accordingly, was expensed in 1995. Immediately
following the Merger, the Agreements were terminated pursuant to a Termination
Agreement dated September 27, 1995 entered into between the Company and Atrix,
L.P. Subsequent to the Merger, Atrix, L.P. and AtrixSub were dissolved.
F-10
42
4. STOCK OPTION PLANS
As of December 31, 1996, the Company has two stock-based compensation
plans, which are discussed below.
Performance Stock Option Plan
The 1987 Performance Stock Option Plan, as amended and restated in 1992
(The "Plan") permits the granting of both incentive stock options, as defined
under Section 422 of the Internal Revenue Code, and non-qualified stock options
to employees, officers and directors. The exercise price of each option, which
have a maximum ten year life, is equal to the market price of the Company's
common stock on the date of grant.
The Company accounts for the Plan using the intrinsic value method in
accordance with APB No. 25 and has adopted the disclosure-only provisions of
SFAS No. 123. Accordingly, no compensation expense has been recognized for the
Plan. Had compensation cost for the Plan been determined based on the fair value
at the grant dates of awards under the Plan consistent with SFAS No. 123, the
Company's net loss and loss per share would have been reduced to the pro forma
amounts indicated below:
1996 1995
-------------- --------------
Net income - as reported $ (11,432,153) $ (12,658,271)
============== ==============
- pro forma (12,188,993) (12,858,329)
============== ==============
Earnings per share - as reported (1.13) (1.58)
- pro forma (1.20) (1.61)
The Company has reserved 1,500,000 of its authorized but unissued
common stock for stock options to be granted under the Plan. Under the terms of
the Plan, options are not exercisable for a period of one to three years from
the date of grant. The exercise price of all options is the closing bid price of
the stock on the date of grant. There are 71,973 shares which remain available
under the plan for future employee stock option grants.
The fair value of options granted under the Plan was estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995: no dividend
yield, expected volatility of 37.8% for 1996 and 66.1% for 1995, risk
free interest rate of 7.0%, and expected life of 5 years.
F-11
43
The following table summarizes information on stock option activity for the
Plan:
Weighted
Number of Exercise Price Average
Shares Per Share Exercise Price
--------- -------------- --------------
Options outstanding, December 31, 1993 845,792 $ .50 - 20.75 $ 6.35
Options granted 19,000 6.13 - 9.13 6.96
Options canceled or expired (58,850) 5.88 - 14.00 10.24
Options exercised (14,080) .50 - 3.75 2.51
--------
Options outstanding, December 31, 1994 791,862 .50 - 20.75 6.15
Options granted 153,088 6.63 - 6.88 5.05
Options canceled or expired (45,345) 5.88 - 15.88 7.95
Options exercised (139,350) .50 - 5.88 2.81
--------
Options outstanding, December 31, 1995 760,255 .50 - 20.75 6.64
Options granted 602,574 .50 - 14.00 8.64
Options canceled or expired (408,580) 5.88 - 20.75 8.58
Options exercised (92,828) .50 - 9.88 6.44
--------
Options outstanding, December 31, 1996 861,421 .50 - 14.00 7.14
========
Options outstanding are available for exercise as follows:
Currently Exercisable 546,657 $ 6.20
1997 125,090 8.46
1998 118,924 8.52
1999 70,750 9.74
--------
Total 861,421 7.14
========
On November 18, 1996, the Company canceled certain incentive and
non-qualified stock options with a five year term and issued new non-qualified
stock options which extended the original term to ten years. The effect of this
cancellation and reissuance was a $584,588 charge to compensation expense during
1996.
F-12
44
The following table summarizes information about stock options outstanding
under the Plan as of December 31, 1996:
WEIGHTED WEIGHTED
NUMBER WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE EXERCISE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE AT PRICE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE PRICE 12/31/96 EXERCISABLE
====================================================================================================
$0.50 72,200 2 years $ 0.50 72,200 $ 0.50
0.50 56,000 3 years 0.50 56,000 0.50
6.13 1,000 3 years 6.13 667 6.13
6.63 - 6.88 144,523 8 years 6.74 48,174 6.74
10.00 - 12.38 63,955 9 years 11.62 -- --
6.50 - 14.00 482,975 4 years 8.54 328,847 8.38
5.88 40,768 9 years 5.88 40,769 5.88
- ----------------------------------------------------------------------------------------------------
$0.50 to 14.00 861,421 5.05 years $ 7.14 546,657 $ 6.20
====================================================================================================
Non-qualified Stock Option Plan
The Company has reserved 100,000 of its authorized but unissued common
stock for stock options to be granted to outside consultants under its
Non-qualified Stock Option Plan (the "Non-qualified Plan"). The option price and
exercisability of options granted under the Non-qualified Plan are set by the
Compensation Committee. The exercise price of all options granted under the
Non-qualified Plan currently outstanding is the closing market price at the date
of grant. There are 43,020 shares which remain available under the Non-qualified
Plan for future stock option grants.
The fair value of options granted under the Non-qualified Plan was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used in 1996 and 1995: no dividend
yield, expected volatility of 37.79% for 1996 and 66.1% for 1995, risk free
interest rate of 7.0%, and expected lives of 5 years.
The following table summarizes information on stock option activity for the
Nonqualified Plan.
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45
Weighted
Number of Exercise Price Average
Shares Per Share Exercise Price
------------------------------------------------
Options outstanding, December 31, 1993 30,000 $ 3.75 $3.75
Options granted 7,500 6.50 6.50
Options canceled or expired 0
---------
Options outstanding, December 31, 1994 37,500 3.75 - 6.50 4.30
Options granted 10,360 5.13 - 6.63 5.45
Options canceled or expired 0
Options outstanding, December 31, 1995 47,860 3.75 - 6.63 4.55
Options granted 9,120 6.63 - 9.50 7.78
Options canceled or expired 0
Options outstanding, December 31, 1996 56,980 3.75 - 9.50 5.07
The following table summarizes information about stock options outstanding
under the Non-qualified Plan as of December 31, 1996:
WEIGHTED WEIGHTED
NUMBER WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE EXERCISE
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE AT PRICE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE PRICE 12/31/96 EXERCISABLE
====================================================================================================
$ 3.75 30,000 3 years $3.75 30,000 $ 3.75
6.50 7,500 7 years 6.50 7,500 6.50
5.13 - 6.63 10,360 8 years 5.62 10,360 11.76
6.63 - 9.50 9,120 9 years 7.78 6,373 7.37
- ----------------------------------------------------------------------------------------------------
$ 3.75 to 9.50 56,980 5.40 years $5.10 54,233 $ 5.35
====================================================================================================
5. MAJOR CUSTOMERS
Contract revenue for three major unrelated customers during 1996 was
$198,000, $235,000 and $270,000. Contract revenue for two unrelated customers
was $225,000 and $227,000 for 1995 and $210,000 and $335,357 for 1994.
6. INCOME TAXES
Net deferred tax assets and the valuation allowance at December 31, 1996
and 1995, consist of:
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46
1996 1995
----------- ------------
Deferred tax assets (liabilities):
Net operating loss carry forwards $11,065,000 $ 9,941,000
Amortization of intangibles 2,685,000 2,881,000
Marketable securities 13,000
Depreciation 90,000 60,000
Other items 295,000 (50,000)
----------- ------------
Net deferred tax assets 14,135,000 12,845,000
----------- ------------
Less valuation allowance 14,135,000 (12,845,000)
----------- ------------
Total $ 0 $ 0
=========== ============
At December 31, 1996 and 1995, the Company has approximately $37,894,000
and $26,652,000 of federal income tax net operating loss carry forwards which
expire through 2010.
7. LEASE COMMITMENTS
As of December 31, 1996, minimum rental commitments under non-cancelable
operating leases of one year or more are as follows:
Year Ending
December 31,
- ------------
1997 $283,729
1998 146,586
1999 42,507
2000 6,585
--------
Total $479,407
========
Other accrued liabilities include deferred rent of $96,802 as of December
31, 1996 and $152,108 as of December 31, 1995. Rent expense was $205,583 for
1996, $202,503 for 1995 and $179,204 for 1994.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 1996 and 1995 are follows:
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47
1995 1995 1996 1996
Carrying Estimated Carrying Estimated
Amount Fair Amount Fair
Value Value
-----------------------------------------------------------------------
Cash and cash
equivalents $ 925,487 925,487 18,368,472 18,368,472
Restricted cash -- -- 7,000,000 7,000,000
equivalents
Marketable securities 10,996,847 10,996,847 6,040,389 6,040,389
The following methods and assumptions were used to estimate the fair value of
financial instruments:
Cash and cash equivalents - The carrying amount approximates fair value.
Restricted cash equivalents - The carrying amount approximates fair value.
Marketable securities - The fair value is based on quoted market prices or
dealer quotes.
F-16
48
9. SAVINGS AND RETIREMENT PLAN
The Company has an employee savings plan (the "Savings Plan") which
qualifies as a deferred salary arrangement under Section 401(k) of the Internal
Revenue Code. This Savings Plan allows eligible employees to contribute from 1%
to 17% of their income to this Savings Plan. The Company matches 50% of the
first 6% of the employee's contributions which are immediately vested. The
Company's matching contributions to the Savings plan were approximately $48,461,
$43,597 and $44,060 for 1996, 1995, 1994 respectively.
10. BLOCK DRUG COMPANY AGREEMENT
On December 17, 1996, the Company entered into an agreement with Block Drug
Company ("Block"). Under the terms of the agreement, Block acquired the North
American and certain European marketing rights to the first three Company
products for the treatment of periodontal disease. The Company received an
advance payment of $7,000,000 for the sale of the marketing rights to the
ATRISORB(R) GTR Barrier. The funds were deposited in an escrow account until
February 1, 1997, at which time substantially all of the initial services
required by the agreement were performed. Accordingly, the Company deferred
recognition of the initial payment as revenue until 1997. The $7,000,000 initial
payment is included in restricted cash equivalents as of December 31, 1996.
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49
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation(1)
3.2 Amended and Restated Bylaws(2)
4.1 Form of Common Stock Certificate(3)
10.1 Employment Agreement between Registrant and John E. Urheim
dated June 4, 1993(3)
10.2 Amendment No. 3 and Restatement of Master Technology Transfer
Agreement between Registrant and Vipont Pharmaceutical, Inc.(2)
10.3 Incentive Stock Option Agreement(2)
10.4 Agreement between Registrant and Vipont Pharmaceutical, Inc.(2)
10.5 Termination Agreement dated September 27, 1995 between
Registrant and Atrix, L.P.(4)
10.6 Lease Agreement dated May 11, 1991 between the Registrant and
GB Ventures*
10.7 Agreement of Purchase and Sale dated June 11, 1996 between the
Registrant and D.C. Pitcairn Holdings, Inc.*
10.8 Agreement dated December 16, 1996 between the Registrant and
Block Drug Corporation(5)
23 Consent of Deloitte & Touche LLP*
27 Financial Data Schedule*
- -------------------
(1) Incorporated by reference to Registrant's Current Report on Form 8-K, dated
December 1, 1989, as filed with the Securities and Exchange Commission on
December 15, 1989.
(2) Incorporated by reference to the Registrant's Registration Statement on Form
S-1, file number 33-34882.
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended September 30, 1993 as filed with the Securities and Exchange
Commission.
50
(4) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995 as filed with the Securities and Exchange
Commission.
(5) Incorporated by reference to Registrant's Current Report on Form 8-K dated
December 16, 1996, as filed with the Securities and Exchange Commission.
* Filed herewith.