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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

		Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001
or
		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from        to

Commission File Number 0-24424

CIMA LABS INC.

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.
Yes      No   

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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.      

Aggregate market value of common stock held by non-affiliates of Registrant, based upon the last sale price of the Common Stock reported on the Nasdaq National Market tier of The Nasdaq Stock Market on March 21, 2002 was $277,566,789. Common stock outstanding at March 21, 2002 was 14,126,154 shares.

Documents Incorporated by Reference

Portions of the Registrant’s definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Registrant’s Annual Meeting of Stockholders to be held on June 5, 2002 are incorporated by reference in Part III, Items 10, 11, 12 and 13, of this Form 10-K.

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PART I.

Forward-Looking Statements

         We make many statements in this Annual Report on Form 10-K under the captions Business, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Factors That Could Affect Future Results and elsewhere, which are forward-looking and are not based on historical facts. These statements relate to our future plans, objectives, expectations and intentions. We may identify these statements by the use of words such as believe, expect, will, anticipate, intend and plan and similar expressions. These forward-looking statements involve a number of risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those we discuss in Factors That Could Affect Future Results and elsewhere in this report. These forward-looking statements speak only as of the date of this report, and we caution you not to rely on these statements without considering the risks and uncertainties associated with these statements and our business that are addressed in this report.

         These forward-looking statements include statements relating to expected growth in product sales in 2002; the expected construction of a second manufacturing site; future expense levels; the timing of availability of our products; expected demand for products using our technologies and the adequacy of our production capacity; and future research and development activities relating to our current or new technologies. We are not under any duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results, except as required by law.

         Information regarding market and industry statistics contained in the Business section is included based on information available to us that we believe is accurate. It is generally based on academic and other publications that are not produced for purposes of economic analysis. We have not reviewed or included data from all sources and cannot assure you of the accuracy of the data we have included.

ITEM 1. BUSINESS

Company Overview

         We were incorporated in Delaware in 1986. Our executive offices are located at 10000 Valley View Road, Eden Prairie, Minnesota 55344-9361. Our telephone number is (952) 947-8700 and our web site is www.cimalabs.com. The information on our website is not incorporated into and is not intended to be a part of this report. Unless the context otherwise indicates, all references to the “Registrant,” the “Company,” or “CIMA” in this Form 10-K relate to CIMA LABS INC.

         All other trademarks used in this report are the property of their respective owners. We have registered “CIMA®,” “CIMA LABS INC.®,” “OraSolv®,” “OraVescent®,” “DuraSolv®” and “PakSolv®” as trademarks with the U.S. Patent and Trademark Office. We also use the trademarks “OraSolv®SR/CR,” “OraVescent®SL/BL” and “OraVescent®SS.” “Triaminic®” and “Softchews®” are trademarks of Novartis. “Zomig®,” “Zomig-ZMT®” and “Rapimelt™” are trademarks of AstraZeneca. “Remeron®” and “SolTab™” are trademarks of Organon. “Tempra®” is a registered trademark of a Canadian affiliate of Bristol-Myers Squibb. “FirsTabs™” is a trademark of Bristol-Myers Squibb. “NuLev™” is a trademark of Schwarz Pharma. “Actiq®” is a registered trademark of Anesta Corporation. “Claritin®” and “Reditabs®” are registered trademarks of Schering Corporation. “Maxalt-MLT®” is a registered trademark of Merck & Co., Inc. “Zydis®” is a registered trademark of Cardinal Health, Inc. “FlashDose®” is a registered trademark of Biovail Corporation. “WOWTab®” is a registered trademark of Yamanouchi Pharma Technologies, Inc. “Flashtab®” is a registered trademark of Ethypharm.

         We develop and manufacture fast dissolve and enhanced-absorption oral drug delivery systems. OraSolv and DuraSolv, our proprietary fast dissolve technologies, are oral dosage forms that dissolve quickly in the mouth without chewing or the need for water. We currently manufacture five pharmaceutical brands utilizing our DuraSolv and OraSolv fast dissolve technologies: three prescription brands and two over-the counter brands. These brands include Triaminic Softchews for Novartis, Tempra FirsTabs for Bristol-Myers Squibb, AstraZeneca’s Zomig-ZMT and its equivalent for the European market, Zomig Rapimelt, Remeron SolTab for Organon and NuLev for Schwarz Pharma. The U.S. Food and Drug Administration, or FDA is currently reviewing Wyeth’s (formerly known as

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American Home Products) regulatory submission for a product we developed, an orally disintegrating dosage form of loratadine, which is expected to be marketed as a generic alternative to Claritin Reditabs.

         We believe that the attributes of our OraSolv and DuraSolv fast dissolve technologies may enable consumers in certain age groups or with limited ability to swallow conventional tablets to receive medication in an oral dosage form that is more convenient than traditional tablet-based oral dosage forms. Both OraSolv and DuraSolv technologies are capable of incorporating taste masked active drug ingredients into tablets that have the following potential benefits:

	•		ease of administration;
	•		improved dosing compliance; and
	•		increased dosage accuracy compared to liquid formulations.

         We generate revenue from net sales of products we manufacture for pharmaceutical companies using our proprietary fast dissolve technologies; product development fees and licensing revenues for development activities we conduct through collaborative agreements with pharmaceutical companies; and royalties on the sales of products we manufacture, which are sold by pharmaceutical companies under licenses from us. Net sales of products we manufacture for and the royalties we receive from Novartis for Triaminic Softchews are seasonal in nature and can be affected by the strength and duration of the cough, cold or allergy season in the U.S.

         Our proprietary technologies enable our pharmaceutical company partners to differentiate their products from competing products. In addition to providing a competitive advantage in the marketplace, our proprietary technologies also may enable our pharmaceutical company partners to extend the product life cycles of their patented drug compounds beyond existing patent expiration dates of those compounds. Our technologies may also provide benefits to the healthcare system more generally. For example, improved compliance can enhance therapeutic outcomes and potentially reduce overall costs. Named pharmaceutical partners with which we have significant collaborative agreements include AstraZeneca, Bristol-Myers Squibb, Organon, Novartis, Schwarz Pharma and Wyeth.

         In addition to our proprietary OraSolv and DuraSolv fast dissolve technologies, we are developing several new drug delivery technologies. One new technology is our sustained release technology, which adds sustained release properties to the fast dissolve and taste masking attributes available with our DuraSolv and OraSolv technologies. We also are developing new OraVescent drug delivery technologies that include OraVescent SL for drug delivery under the tongue and OraVescent BL for drug delivery between the gum and the cheek. An additional OraVescent technology, OraVescent SS, is designed for site-specific administration, which may allow for an active drug ingredient to be transported to a specific part of the gastrointestinal tract where it is released for absorption. We originally designed and continue to design our OraVescent technologies to improve the transport of poorly absorbed active drug ingredients across mucosal membranes in the oral cavity or the gastrointestinal tract. In addition, our microemulsions technology is a proprietary technology that we are evaluating which may improve the bioavailability of a wide range of active drug ingredients, which may otherwise not be suitable for administration in a solid oral dosage form.

Industry Overview

Drug Delivery Methods

         Historically, pharmaceutical products were available primarily through two delivery methods, oral dosage forms or injections. Recently, drug delivery technologies have been developed for the enhanced delivery of a variety of therapeutic compounds, improving safety, efficacy, ease of patient use and patient compliance. In addition, drug delivery technologies can be used to expand markets for existing products, as well as to develop new products. Industry analysts have estimated the total sales of branded products using drug delivery technologies at approximately $12.7 billion in 2001, of which $7.8 billion were derived from orally administered products. These same sources also predict that net revenues to the drug delivery industry could nearly triple from 2001 through 2005.

         Fast dissolve technology has recently emerged as an important type of drug delivery technology that enables tablets to dissolve quickly in the mouth without the use of water or chewing. Children and the elderly, as

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well as others with certain physiological or medical conditions, frequently experience difficulty in swallowing tablets. Although our fast dissolve technology does not generally affect the speed the of absorption, it may improve compliance with a prescribed drug regimen, as fast dissolve medications are easier to swallow and may taste better than non-taste masked alternatives. In addition, fast dissolve technology may improve dosing accuracy relative to liquid formulations. Finally, and most importantly, fast dissolve technology may provide a significant commercial benefit, as studies we have conducted indicate that patients often prefer it to conventional tablets and other formulations.

Trends Affecting the Drug Delivery Industry

         Several significant trends in the health care industry have important implications for drug delivery companies. These trends include:

         Drug Patent Expirations. Based on an industry source, eighteen branded prescription products with 1999 worldwide sales exceeding $1 billion each will lose patent protection between 2000 and 2005. In order to maintain their revenues, large pharmaceutical companies are defending against generic competition by enhancing existing drug products with drug delivery technologies. These enhancements may include increased efficacy, reduced side effects and more convenient administration. We believe that pharmaceutical companies will use drug delivery systems to preserve or increase market share, enhance therapeutic performance and, in some cases, extend product life cycles.

         Direct-to-Consumer Marketing. An industry source reported that pharmaceutical companies spent an estimated $1.4 billion in the U.S. during the first six months of 2001 on direct-to-consumer marketing and promotion of prescription medications. We expect direct-to-consumer marketing and promotion spending to increase significantly in the future. We also believe that the significant trend towards direct-to-consumer marketing may focus consumers on patient-friendly pharmaceutical products, including products that incorporate innovative drug delivery technologies, such as fast dissolve technology. This focus may encourage pharmaceutical companies to develop products incorporating these technologies.

         Influence of Managed Care. Many managed care plans and other insurers actively manage the costs of prescription drugs for their clients by monitoring patient dosing compliance as well as the efficacy, quality and cost of medications. Payors have demonstrated acceptance of drug delivery technologies, such as fast dissolve and taste masking, that improve patient compliance.

Our Oral Drug Delivery Products and Technologies

         Our proprietary products and technologies focus on innovative oral drug delivery methods that meet the needs of consumers for convenient and effective medications and the needs of pharmaceutical companies for differentiated products and accurate dosing methods. Our most developed technologies are our OraSolv and DuraSolv fast dissolve drug delivery technologies. We have developed all of our fast dissolve technologies internally. We currently manufacture five pharmaceutical brands incorporating our proprietary fast dissolve technologies, of which three products use our OraSolv technology and two products use our DuraSolv technology. We are developing a product incorporating our DuraSolv technology for Wyeth, an orally disintegrating dosage form of loratadine, which is expected to be marketed as a generic alternative to Claritin Reditabs. We are also developing innovative transmucosal oral drug delivery technologies. These technologies include OraVescent SL for drug delivery under the tongue, OraVescent BL for drug delivery between the gum and the cheek and OraVescent SS for swallowable site-specific drug delivery in the gastrointestinal tract. In addition, we are evaluating our microemulsions technology, which may be useful in improving the bioavailability of a wide range of active drug ingredients that may otherwise not be suitable for oral administration in a solid oral dosage form.

Fast Dissolve Technologies

         Our two primary fast dissolve oral drug delivery technologies are OraSolv and DuraSolv. Our OraSolv technology incorporates active drug ingredients in lightly compacted fast dissolve tablets. The low level of compaction pressure applied to OraSolv tablets allows larger amounts of taste masked active drug ingredients to be

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compressed into the tablets without damage to the taste masked active drug ingredients. The low level of compaction pressure applied to OraSolv tablets also allows for a minimal portion of the tablet’s contents to be dedicated to effervescent and other fast dissolve agents, allowing for high doses of taste masked active ingredients. Our DuraSolv technology uses higher compaction pressures to produce fast dissolve tablets incorporating active drug ingredients in a more durable fast dissolve tablet. Due to their greater durability, DuraSolv tablets are easier to handle and package, and may cost less to produce, than OraSolv tablets. DuraSolv is best suited for applications involving low doses of active drug ingredients.

         OraSolv. Our OraSolv technology is an oral dosage form that combines taste masked drug ingredients with a fast dissolving, low-effervescence system. The OraSolv tablet dissolves quickly in the mouth without chewing or the need for water. We have developed and manufacture several important OraSolv formulations, which include Triaminic Softchews for Novartis, Tempra FirsTabs for Bristol-Myers Squibb and Remeron SolTab for Organon.

         To create our fast dissolving tablets, we combine the taste masked active drug ingredients with fast dissolving tablet materials, which can include a variety of flavoring, coloring and sweetening agents, all of which are generally recognized as safe materials, and commonly used tablet ingredients, such as binding agents and lubricants. We add an effervescent system, composed of a dry acid and a dry base, to the tablet formulation to cause a mild effervescent reaction when the tablet contacts saliva. This reaction accelerates the disintegration of the tablet through the release of carbon dioxide. As our OraSolv tablet dissolves, it releases the coated particles of the drug into the saliva, forming a suspension of the drug in the saliva, which is then swallowed. The core U.S. patent for our OraSolv technology was granted in 1993.

         We mask the taste of the active drug ingredients in our OraSolv products to prevent or minimize unpleasant tastes. The active drugs are taste masked using a variety of coating techniques. The coating materials prevent the active drug substance in the OraSolv tablet from contacting the patient’s taste buds, and provide for the immediate or controlled release of the active ingredient in the stomach. The taste masking process is effective with a wide variety of active ingredients, in both prescription and non-prescription products.

         DuraSolv. The fast dissolve, taste masking and sustained release attributes of OraSolv are also available with our DuraSolv technology. DuraSolv is a fast dissolve oral dosage system that we designed to improve manufacturing efficiency, provide more packaging options and reduce production costs. DuraSolv is a higher compaction, more durable, solid oral dosage system formulated to achieve the primary benefits of the OraSolv fast dissolve dosage form. However, DuraSolv is capable of being packaged in conventional packaging such as foil pouches or bottles at much higher production rates and with lower packaging costs. DuraSolv is an appropriate technology for drug products requiring lower levels of active drug ingredient. Consumer testing by us and our pharmaceutical company partners has demonstrated high acceptability of this technology. The core U.S. patent for our DuraSolv technology was granted in 2000.

         We have developed and manufacture several important DuraSolv formulations, which include Zomig-ZMT and Zomig Rapimelt for AstraZeneca and NuLev for Schwarz Pharma. In addition, we are currently developing a DuraSolv formulation of loratadine for Wyeth. In December 2001, we announced that we are developing seven new prescription products based on our DuraSolv fast dissolve drug delivery system.

         Sustained Release. Our OraSolv and DuraSolv technologies may be combined with a sustained release formulation to extend the period of an active drug ingredient’s effectiveness. We incorporate time-release beads into our tablets, to provide the benefits of a sustained release of an active drug ingredient with the improved convenience of a fast dissolve dosage form. To date, we have not commercialized a product incorporating our sustained release technology.

         PakSolv. PakSolv is our proprietary packaging system for soft, brittle tablets. PakSolv is a light and moisture-proof packaging system that is used for all of our OraSolv products. The U.S. Patent and Trademark Office issued two patents for our PakSolv packaging system in 2001.

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Transmucosal Technologies

         Our OraVescent technologies are based on an enhanced-absorption oral drug delivery system intended to improve the transport of active drug ingredients across mucosal membranes. These technologies may improve the bioavailability, and accelerate the onset of action, of some drugs. The U.S. Patent and Trademark Office issued two patents for our OraVescent technologies, one in 2001 and the other in 2002. We also have several foreign patent applications pending for our OraVescent technologies.

Microemulsions Technology

         Microemulsions technology is a proprietary technology that may improve the bioavailability of a wide range of active drug ingredients, which otherwise may not be suitable for administration in a solid oral dosage form. The U.S. Patent and Trademark Office issued a patent for our microemulsions technology in 2002. We are currently evaluating applications for this new technology.

Business Strategy

         Our objective is to become a leader in fast dissolve and other innovative oral drug delivery technologies. Our strategy to achieve this objective incorporates the following principal elements:

         Partner with pharmaceutical companies to market our technologies. We pursue collaborative relationships that leverage the sales and marketing capability of our pharmaceutical company partners, allowing us to focus on technology development and manufacturing. We believe that pharmaceutical companies are attracted to our technologies for their significant advantages over our competition. Those advantages include excellent taste masking, applicability to a wide range of pharmaceutical compounds, enhanced convenience and other patient benefits. Our technologies also may enable pharmaceutical companies to differentiate their products in the market, facilitating the extension of product life cycles. By demonstrating the advantages and benefits of our technologies through our collaborations with leading pharmaceutical companies, we intend to establish our technology as the preferred fast dissolve drug delivery solution.

         Maximize the value of OraSolv and DuraSolv fast dissolve technologies. We leverage our technologies by actively identifying and marketing to pharmaceutical companies whose prescription products would benefit by incorporating our fast dissolve technologies. We believe there are a large number of pharmaceutical products that could benefit from our technologies. At times, in an effort to expand the market for our technologies, we develop what we believe will be promising applications using active ingredients that have already been successfully marketed by leading pharmaceutical companies. When these development efforts produce positive results, we market the new formulation to the pharmaceutical companies.

         Develop and commercialize new, innovative drug delivery technologies. We intend to develop new drug delivery technologies based on our expertise in fast dissolve, taste masking and sustained release technologies. Our OraVescent and microemulsions technologies represent an extension of this expertise and we intend to continue developing these and other novel drug delivery technologies. We also intend to acquire or license attractive new technologies as we encounter such opportunities. In addition, we will seek patents and other intellectual property protection for new technologies to enhance our ability to commercialize them.

         Enhance and expand our manufacturing capabilities. In an effort to control our technologies and the quality of our products, we manufacture all of our products internally. We currently have two manufacturing lines at our Eden Prairie facility in order to meet production requirements for our current pharmaceutical company partners. On the basis of expected future partnerships and the associated increased volume requirements, we plan to develop a second manufacturing site at our Brooklyn Park facility. Adding a second manufacturing site will help mitigate manufacturing risks and will enhance our ability to market our products and services to pharmaceutical companies that desire or require dual-site production.

Collaborations With Pharmaceutical Company Partners

         Our core business is focused on entering into collaborative development, licensing and manufacturing supply agreements with pharmaceutical companies. These agreements provide that the collaborating pharmaceutical

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company is responsible for marketing and distributing the developed products either worldwide or in specified markets or territories. Our collaborative agreements typically begin with a product prototyping phase. If successful, this phase may be followed by an agreement to complete development of the product. We subsequently enter into license and manufacturing supply agreements to commercialize the product. In some cases, we may develop product prototypes internally and enter directly into development, manufacturing or license agreements for commercialization of those products.

         Named pharmaceutical companies with which we currently have development and license agreements include AstraZeneca, Bristol-Myers Squibb, Organon, Novartis, Schwarz Pharma and Wyeth. In December 2001, we entered into a development, license and supply agreement with an unnamed pharmaceutical company. In each of these agreements, we have received an up-front fee, which is typically a non-refundable payment for future product development activities. We have also received milestone and development payments under each of these agreements for achieving certain product development milestone events and for completing certain predetermined product development activities, as defined in the agreements. In the aggregate for all of our agreements with pharmaceutical companies, we reported approximately $14.3 million, $10.5 million and $8.6 million in 2001, 2000 and 1999, respectively, for up-front fees, milestone and development payments and royalties.

         We have manufacturing supply agreements in place with Organon for Remeron SolTab, Novartis for Triaminic, Wyeth for loratadine, Schwarz Pharma for NuLev, AstraZeneca for fast dissolve dosage forms of Zomig and with an unnamed pharmaceutical company for seven products. We do not have a manufacturing supply agreement with Bristol-Myers Squibb for Tempra. Generally, the supply agreements define the terms by which we will manufacture and release for shipment a product for a pharmaceutical company partner and the obligations both parties have relating to payment for products and services, as well as defining the communication process, the expected production requirements and other economic terms for product supply. These agreements have varying terms of duration ranging from three to ten years. In general, our pharmaceutical company partners direct our production and shipments. In the pharmaceutical industry, parties to manufacturing supply agreements generally consider these arrangements long-term due to the complexity and lead-time required to qualify a new manufacturer with the FDA. The qualification of a new manufacturer can take up to a year while the new manufacturer completes scale-up, produces validation lots and implements stability programs. We do not consider the backlog for our products to be significant.

         We currently manufacture five pharmaceutical brands using our fast dissolve technologies for five major pharmaceutical company partners. Revenues from sales of our products were approximately 55%, 56% and 36% of our total revenue in 2001, 2000 and 1999, respectively. We also receive revenue from royalties on product sales from these five pharmaceutical company partners, which were approximately 17%, 7% and 5% of our total revenue in 2001, 2000 and 1999. Our revenue also includes product development fees and licensing revenue for development activities from a number of pharmaceutical companies, which were approximately 28%, 37% and 58% of our total revenue in 2001, 2000 and 1999, respectively. Less than 10% of our total revenues in 2001, 2000 and 1999 were derived from activities outside the U.S.

         The table below sets forth the partner, product brand name or active ingredient, therapeutic application, technology and current status for each of our major collaborative agreements.

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AstraZeneca

         In May 1999, we entered into a definitive global license agreement with an affiliate of AstraZeneca for a DuraSolv formulation of AstraZeneca’s Zomig (zolmitriptan) tablets. Under the license agreement, which is exclusive for the class of anti-migraine compounds of which Zomig is a member, we receive license and product development fees, payments upon achieving specific milestones, and royalties on any sales of the prescription product. Based on the anticipated life of our patents, we expect the license agreement to expire for the U.S. market in 2018. However, the license agreement may be terminated by AstraZeneca after a notice of 180 days or by either party upon the occurrence of a default event, such as a material breach of the agreement, that is not cured by the defaulting party within 30 days. In addition, we have the right to terminate the license agreement if AstraZeneca fails to meet certain regulatory and commercialization obligations. Upon the failure of AstraZeneca to meet minimum sales requirements, or to pay the difference between the royalty amount due on the minimum sales requirement and the royalty amount due on actual sales, we may convert AstraZeneca’s exclusive license into a non-exclusive license. In June 1999, AstraZeneca received its first European regulatory approval for Zomig Rapimelt. In September 1999, AstraZeneca launched Zomig Rapimelt in Europe and it is currently marketed in over 20 markets outside the United States. In August 2001, we entered into a supply agreement with an affiliate of AstraZeneca, which expires on a country-by-country basis at the same time as the definitive global license agreement expires. However, the supply agreement may be terminated by either party upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 45 days of notice, or by CIMA in the event AstraZeneca commercializes another fast dissolve formulation of Zomig (zolmitriptan) with a third party. AstraZeneca received FDA approval to market both the 2.5 and 5.0 milligram strengths of Zomig-ZMT in February and September of 2001, respectively. AstraZeneca announced the U.S. market launch of its 2.5 and 5.0 milligram strengths of Zomig-ZMT in the second and fourth quarters of 2001, respectively. For the three years ending December 31, 2001, we reported approximately $12.7 million in net sales of products, up-front fees, milestone and

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development payments attributable to our agreements with AstraZeneca. In 2001, these revenues represented 22% of our total revenues.

Bristol-Myers Squibb

         In June 1997, we entered into a multi-country, non-exclusive license agreement with Bristol-Myers Squibb, covering multiple products to be developed using the OraSolv technology. We began manufacturing commercial quantities of the OraSolv dosage form of Tempra, Bristol-Myers Squibb’s pediatric pain reliever, in 1997. Mead Johnson, an affiliate of Bristol-Myers Squibb, introduced Tempra in Canada during 1997. During 1998, Bristol-Myers Squibb decided to discontinue marketing Tempra in the U.S., but expects to continue marketing Tempra in Canada through Mead Johnson. In the fourth quarter of 1998, the license agreement was amended to return to us the rights to pediatric pain relievers in the U.S. The license agreement provides that upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 60 days, either party may terminate the agreement. In November 2000, we agreed with Bristol-Myers Squibb to amend the June 1997 license agreement again. The amendment provides that Bristol-Myers Squibb may not terminate the license agreement before December 31, 2005, and afterwards may terminate for any reason by giving us 60 days written notice and paying us any royalty payments accruing through the termination date. We expect to continue to receive at least minimum royalty payments in connection with sales in Canada through 2005. For the three years ending December 31, 2001, we reported approximately $1.6 million in net sales of products, development payments, and royalties attributable to our agreement with Bristol-Myers Squibb. In 2001, these revenues represented 1% of our total revenues.

Organon

         In December 1999, we entered into a definitive global license agreement with affiliates of Akzo Nobel NV, Organon International AB and NV Organon, for an OraSolv formulation of Remeron (mirtazapine), a prescription anti-depression product. Under the license agreement, we receive license and product development fees, milestone payments upon achieving specific milestones, and royalties on any sales of the prescription product. The license agreement expires upon expiration of all patents covered under the agreement. Based on the anticipated life of our existing patents, we expect the license agreement to expire in the U.S. market in 2010. However, the license agreement may be terminated by either party upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 90 days. In July 2000, we entered into a supply agreement with Organon Inc., a U.S. affiliate Akzo Nobel NV, which has an initial term of five years and automatic renewal provisions. However, the supply agreement may be terminated by either party upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 60 days of notice. In January 2001, Organon Inc. received FDA approval to market Remeron SolTab. In February 2001, Organon announced the U.S. market launch of Remeron SolTab and its agreement with Solvay Pharmaceuticals to co-promote this product through their respective sales forces. In July 2001, Organon announced its first European approval of Remeron SolTab by the Dutch Medicines Evaluation Board, which is expected to trigger mutual recognition procedures in other European countries. Organon is expected to launch Remeron SolTab in selected European markets in 2002. For the three years ending December 31, 2001, we reported approximately $19.3 million in net sales of products, up-front fees, milestone and development payments attributable to these agreements with Organon. In 2001, these revenues represented 25% of our total revenues.

Novartis

         In July 1998, we entered into a license and a supply agreement with Novartis Consumer Health, granting to Novartis exclusive rights to use of our OraSolv technology with Novartis’ Triaminic non-prescription pediatric cold, cough and allergy product line in the U.S. and Canada. Triaminic products that have been formulated using our OraSolv fast dissolve delivery system are marketed under the trade name Softchews. The license agreement, which was amended in April 2001, expires on a country-by-country basis upon the later of January 12, 2010 or the expiration of all patents covered by the agreement. Based on the anticipated life of our patents, we expect the license agreement to expire in the U.S. market in 2010. The July 1998 supply agreement was superseded by a new supply agreement in 2001, which has a term of five years and includes an automatic renewal provision subject to agreement on product pricing for the renewal periods. The supply agreement may be terminated by Novartis by providing a 90 day notice to CIMA prior to the end of the initial five year term or any renewal period. In addition, either of the

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license or the supply agreement may be terminated by either party upon the occurrence of a default event, such as a material breach, which is not cured by the defaulting party within 90 days for the license agreement or within 60 days for the supply agreement. In addition, Novartis may terminate the license agreement on or after July 1, 2003, after giving us a notice of nine months and paying us a termination fee of $200,000 plus all accrued amounts owed to us under the agreement. Under various individual product development agreements, which apply to specific Triaminic products, we receive product development payments, and under the license agreement, we receive royalties on sales of Softchews products. In July 1999, Novartis launched three Softchews products nationally, followed by a fourth Softchews product launch during the third quarter of 2000 and three more Softchews product launches during the second half of 2001. For the three years ending December 31, 2001, we reported approximately $23.7 million in net sales of products, up-front fees, milestone and development payments, and royalties attributable to these agreements with Novartis. In 2001, these revenues, which were principally product sales, represented 33% of our total revenues.

Schwarz Pharma

         In June 2000, we entered into an exclusive development, license and supply agreement with Schwarz Pharma, Inc. to develop and manufacture NuLev, our DuraSolv formulation of a hyoscyamine sulfate prescription product, which is used to treat irritable bowel syndrome. The agreement allows us, upon the failure of Schwarz Pharma to meet minimum sales requirements, to convert Schwarz Pharma’s exclusive license into a non-exclusive license. Based on the anticipated life of our patents, we expect the agreement to expire in the U.S. in 2018. However, the agreement may be terminated by either party upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 60 days. Under the agreement, we will receive milestone payments upon achieving specific milestones and will receive manufacturing revenue and royalties on sales of the prescription product. A U.S. regulatory submission for NuLev is not required. Schwarz Pharma commenced the U.S. marketing launch of NuLev in March 2001. For the two years ending December 31, 2001, we reported approximately $3.2 million in net sales of products, up-front fees, milestone and development payments attributable to this agreement with Schwarz Pharma. In 2001, these revenues represented 6% of our total revenues.

Wyeth, formerly American Home Products

         In January 2000, we entered into an exclusive development and license agreement and a supply agreement with an affiliate of Wyeth for a fast dissolve formulation of loratadine, a non-sedating prescription antihistamine product. Loratadine is the active drug compound in Claritin and Claritin Reditabs, for which Schering Corporation has several U.S. patents, the first of which is scheduled to expire in December 2002. Wyeth is expected to market our DuraSolv formulation of loratadine as a generic alternative to Claritin Reditabs in 2003, unless Schering is successful in its efforts to secure extended exclusive rights to market Claritin. Based on the anticipated life of our patents, we expect the development and license agreement to expire in the U.S. market in 2018. The supply agreement expires on the tenth anniversary of the first commercial shipment of product. However, either agreement may be terminated by Wyeth after a six month notice or by either party upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party within 60 days. Under the development and license agreement, we receive development and milestone payments upon achieving specific milestones and will receive royalties on any sales of the prescription product. Under the supply agreement, we receive payments based on our costs of manufacturing the products. The U.S. regulatory submission for our DuraSolv formulation of loratadine was accepted for filing by the FDA in the second quarter of 2000. For the three years ending December 31, 2001, we reported approximately $2.7 million in up-front fees, milestone and development payments attributable to these agreements with Wyeth. In 2001, these revenues represented less than 1% of our total revenues.

Unnamed Pharmaceutical Company

         In December 2001, we entered into an exclusive development, license and supply agreement with an unnamed pharmaceutical company to develop and manufacture seven undisclosed prescription products based primarily on our DuraSolv fast dissolve drug delivery system. Based on the anticipated life of our patents, we expect the agreement to expire in the U.S. in 2018. However, the agreement may be terminated by either party upon the occurrence of a default event, such as a material breach of the agreement, which is not cured by the defaulting party.

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In addition, the unnamed pharmaceutical company may unilaterally terminate the agreement, in its entirety or in part, at any time prior to the market launch of any or all of the seven products by providing notice to CIMA and reimbursing CIMA for its development activities. The agreement provides that we receive license and product development fees, milestone payments upon achieving specific milestones, and will receive manufacturing revenue and royalties on sales of the products that we develop. The unnamed pharmaceutical company will be required to obtain FDA approval for each of the seven products prior to the marketing of such products. We expect the first of these products could be approved by the FDA and launched in the U.S. during the first half of 2004. For the year ending December 31, 2001, we reported approximately $583,000 in up-front fees, milestone and development payments attributable to this agreement. In 2001, these revenues represented 2% of our total revenues.

Proprietary Product Development

         In addition to entering into collaborations with pharmaceutical companies, we also expect to leverage our oral drug delivery technologies by actively identifying promising applications using active drug ingredients that have already been successfully marketed by leading pharmaceutical companies. We are selecting, funding and developing products on an internal basis and will be responsible for securing FDA approvals for such products. We plan to sell or license the marketing rights to these products to pharmaceutical companies with the appropriate sales and marketing organizations. We believe this strategy represents an important opportunity for CIMA because it eliminates the need for a collaborative agreement before developing additional products for our product pipeline. Equally important, we expect to retain a greater proportion of the economic value of those proprietary products that we successfully develop.

         To date, we have selected four proprietary products based on major active drug ingredients that are either off-patent or expected to become off-patent within the next few years. These proprietary products fall within the therapeutic categories of anti-infectives, cardiovascular, gastrointestinal and pain. Based on our current development schedule, we estimate the first of these products, OraVescent fentanyl, could be approved by the FDA for marketing in the U.S. in the second half of 2004.

         We have conducted three studies in humans with OraVescent fentanyl, a potential proprietary product for the treatment of breakthrough cancer pain. Our first study in humans compared our OraVescent BL formulation to a similar formulation without the absorption enhancing characteristics and to Actiq, a commercially available prescription product. Actiq (oral transmucosal fentanyl citrate) is indicated for breakthrough cancer pain in patients already receiving, and tolerant to, opioid therapy for underlying, persistent cancer pain. We believe this first study in humans demonstrates OraVescent BL’s superior absorption characteristics across mucosal membranes when compared to Actiq and to the other formulation without absorption enhancing characteristics. Our second study in humans compared our OraVescent SL to our OraVescent BL formulation using the same active drug ingredient contained in Actiq, fentanyl citrate. We believe this second study demonstrates a quicker onset of action with OraVescent SL when compared to our OraVescent BL formulation. Our third study in humans compared Actiq with OraVescent BL and OraVescent SL under simulated self-administration conditions. We believe preliminary results from the third study confirmed the results from our first two studies in humans. In November 2001, we participated in a pre-Investigational New Drug meeting with the FDA to discuss our OraVescent fentanyl human data and a possible clinical development path. We expect to perform additional studies in humans and animals in 2002.

         Our progress to date on the three other proprietary products has not gone beyond the pilot study phase, which includes acquiring active drug ingredients and preliminary planning. We do not expect to begin substantive work on one or more of these three proprietary products until late in 2002, or early 2003. These proprietary products would incorporate active drug ingredients with one of our proprietary oral drug delivery technologies. However, the active drug ingredients for these three products are currently protected by U.S. patents registered to third parties, of which the first is expected to expire in early 2005.

Intellectual Property

         We actively seek, when appropriate, to protect our products and proprietary information by means of U.S. and foreign patents, trademarks and contractual arrangements. We hold 14 issued U.S. patents and 15 issued foreign patents covering our technologies. The core U.S. and European patents relate to our fast dissolve and taste masking technologies. We also have over 45 U.S. and foreign patent applications pending.

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         A description of our more important issued U.S. patents and their dates of expiration are set forth in the table below. The majority of these patents are composition-of-matter patents. The actual scope of coverage for a patent is governed by the specific claims applicable to the patent. The descriptions set forth below are intended solely to identify patents relevant to various technologies and are not intended to represent the scope of these patents.

         Our success will depend in part on our ability to obtain and enforce patents for our products, processes and technology, to preserve our trade secrets and other proprietary information and to avoid infringing the patents or proprietary rights of others.

         In addition to patents, we rely on trade secrets and proprietary know-how to protect our products, processes and technologies. To protect our rights to trade secrets and proprietary know-how, we require all employees, consultants and advisors to sign confidentiality agreements that prohibit the disclosure or use of confidential information to or by any third party. These agreements also require disclosure and assignment to us of discoveries and inventions made by these individuals while devoted to our activities.

Research and Development

         Our research and product development efforts are focused on developing new product applications for our drug delivery technologies and expanding our technology platform to new areas of drug delivery. As of December 31, 2001, we had 54 scientists and other technicians working on research and product development. In August 2001, we purchased for $5.2 million the building in Brooklyn Park, Minnesota, which we use for our research and development center. Based on the strength of our product development portfolio of both collaborative and internal projects, we expect to end the year 2002 with approximately 80 scientists and other technicians, and to complete a renovation and expansion of our Brooklyn Park facility at an estimated capital cost of $10.0 million.

         Our research and product development personnel, support systems and facilities are organized to develop drug delivery formulations from bench-scale through full-scale commercial production under current good manufacturing practice conditions. The key goals for our research and product development efforts include:

	•		developing innovative drug delivery products and systems that fulfill pharmaceutical companies’ needs;
	•		developing, expanding and supporting systems to fulfill good manufacturing practice production at commercial levels required by pharmaceutical company partners;
	•		recruiting and training high-quality technical and scientific personnel; and
	•		supporting our intellectual property portfolio development.

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         For the years ended December 31, 2001, 2000 and 1999, we spent approximately $6.4 million, $5.0 million and $4.4 million, respectively, on research and product development. We estimate that most of these expenditures were directly related to product development activities for which we received fees and licensing revenues from our pharmaceutical company partners.

Business Development

         We market directly to leading pharmaceutical companies for products that we believe would benefit from our fast dissolve technologies. Our strategy has been to leverage the brand names, marketing and sales capabilities of these pharmaceutical companies to maximize the value of our fast dissolve drug delivery technologies. We build our credibility with major pharmaceutical companies by speaking at technical seminars, publishing in technical journals and hosting booths at pharmaceutical and drug delivery conferences.

         We pursue agreements with leading pharmaceutical companies to fund the development of new products incorporating our drug delivery technologies. Once specific milestones have been met under these agreements, we generally enter into license and supply agreements.

Manufacturing

         Currently, our only manufacturing facility is located at our headquarters in Eden Prairie, Minnesota. We have two production lines, which collectively have an estimated production capacity in excess of 500 million tablets a year. We anticipate that our existing manufacturing capacity is more than adequate to meet the production requirements of our pharmaceutical partners in 2002. We plan to construct a second manufacturing site at our Brooklyn Park facility and expect the new manufacturing site to be operational in 2003.

         In 2000, we completed construction of a coating unit to provide taste masked active ingredients for our pharmaceutical company partners. During the third quarter of 2000, we commercialized our first coated active drug ingredient, mirtazapine, which is the active drug ingredient in Remeron SolTab. We believe our in-house coating capability will be a key factor in signing new agreements related to prescription pharmaceutical drugs. In 2002, we expect to begin using our coating unit in Eden Prairie to taste mask selected active drug ingredients for our non-prescription products.

         We currently purchase taste masked active drug ingredients for each of our non-prescription products from single sources of supply. We believe that all other ingredients used in the manufacture of our products are readily available from multiple suppliers or from our pharmaceutical company partners.

         We are currently adding a second coating unit and a high shear granulation unit to our Eden Prairie manufacturing facility. We expect that the high shear granulation unit, coupled with the additional coating unit, will enable us to develop, and ultimately commercialize, a broader range of prescription products. The types of products that would require these additional manufacturing capabilities are those with taste masking challenges based on the particle size of the active drug ingredient, as well as products requiring a high dose of active drug ingredient into a smaller tablet. We expect to complete the installation of this equipment by the end of 2002 at an expected capital cost of approximately $6.5 million.

         PakSolv, our proprietary packaging process, allows high-speed packing of soft, brittle tablets without breakage, into specially designed protective, child resistant packages and normal blister packages. We believe that this technology, which has two issued patents, gives us a competitive advantage.

         We plan our manufacturing cycles in advance of actual production in order to address lead times our suppliers may require. We generally do not stock significant quantities of raw materials for a product in excess of a partner’s orders nor do we manufacture finished product in excess of a partner’s orders.

Competition

         Competition among pharmaceutical products and drug delivery systems is intense. Our primary competitors for developing drug delivery systems and manufacturing the products we develop include other drug delivery,

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biotechnology and pharmaceutical companies. Many of these competitors have substantially greater financial, technological, manufacturing, marketing, managerial and research and development resources and experience than we have. Our products compete not only with products employing advanced drug delivery systems, but also with products employing conventional dosage forms. These competing products may obtain governmental approval or gain market acceptance more rapidly than our products. New drugs or future developments in alternative drug delivery technologies also may provide therapeutic or cost advantages over our current or future products.

         Fast dissolve tablet technologies that compete with our OraSolv and DuraSolv technologies include the Zydis technology developed by R.P. Scherer Corporation, a wholly-owned subsidiary of Cardinal Health, Inc., the WOWTab technology developed by Yamanouchi Pharma Technologies, the Flashtab technology developed by Ethypharm and the FlashDose technology developed by Fuisz Technologies Ltd., a wholly-owned subsidiary of Biovail Corporation. The Zydis technology is a fast dissolving oral drug delivery system based on a freeze-dried gelatin tablet. The WOWTab and Flashtab technologies are fast dissolving technologies used in an oral fast dissolving tablet, which are similar to our DuraSolv tablet. R.P. Scherer has commercialized its Zydis technology in several major prescription products in the U.S., including Claritin Reditabs and Maxalt-MLT. We believe that other pharmaceutical companies may be developing fast dissolve tablet technologies, which may compete with our technology in the future.

         The principal competitive factors in the market for fast dissolving tablet technologies are compatibility with taste masking techniques, packaging, dosage capacity, drug compatibility, cost, ease of manufacture, patient acceptance and required capital investment for manufacturing. We believe that our fast dissolving tablet technologies compete favorably with respect to each of these factors. In a 1997 quantitative consumer study that we conducted, consumers generally preferred the OraSolv formulation to the Zydis formulation of the same active drug ingredient. Our 1997 study was confirmed by an August 2001 study we sponsored that measured migraine sufferers’ preferences between Zomig-ZMT, a CIMA DuraSolv formulation, and Maxalt-MLT, a R.P. Scherer Zydis formulation. The 2001 study indicated that 70% of the study subjects preferred CIMA’s DuraSolv formulation, compared to 27% favoring the Zydis formulation. We also believe that we offer pharmaceutical companies the largest selection of oral fast dissolve drug delivery technologies.

Government Regulation

         Numerous governmental authorities in the U.S. and other countries extensively regulate the activities of pharmaceutical manufacturers. In the U.S., pharmaceutical products are subject to rigorous regulation by the Food and Drug Administration. The Federal Food, Drug, and Cosmetic Act and other federal and state statutes and regulations govern, among other things, the research, development, testing, manufacture, safety, storage, record keeping, labeling advertising, promotion, marketing and distribution of pharmaceutical products. If we fail to comply with the applicable requirements, we may be subject to administrative or judicially imposed sanctions such as warning letters, fines, injunctions, product seizures or recalls, total or partial suspension of production, or FDA refusal to approve pending pre-market approval applications or supplements to approved applications, as well as criminal prosecution.

         FDA approval generally is required before a new drug product may be marketed in the U.S. Many over-the-counter, or OTC, drug products are exempt, however, from the FDA’s pre-marketing approval requirements. Whether or not products require FDA approval, drug products remain subject to various ongoing FDA regulations, including good manufacturing practice requirements, labeling requirements and warning statements, advertising restrictions related to product labeling and drug ingredient specifications. Products and their manufacturing facilities are subject to FDA inspection, and failure to comply with applicable regulatory requirements may lead to administrative or judicially imposed penalties.

         We expect that our pharmaceutical company partners will seek any required FDA approvals in connection with the introduction of new products we develop for them under a collaborative agreement. The FDA submission and approval process may require significant commitments of our time and resources. The FDA approval process may delay or prevent the marketing of our products. We cannot be sure that approvals will be obtained, or that any such approvals will have the scope necessary for successful commercialization of these products. Even after an addendum or supplement to a new drug application is approved, existing FDA procedures may delay initial product

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shipment and materially reduce the period during which there is an exclusive right to exploit patented products or technologies.

         Prior to marketing a product internationally, we are likely to be required to obtain foreign regulatory approval. Foreign approval procedures vary from country to country and the time required for approval may result in delays in, or ultimately prevent, the marketing of a product. We expect our pharmaceutical company partners to obtain any necessary government approvals in foreign countries. However, we may have to spend considerable amounts of time and resources to support the submission and approval of these foreign filings. In addition, our manufacturing facility may be subject to inspections by foreign agencies, similar to the FDA, to allow for the marketing of our products in a foreign country.

         Our manufacturing facility is registered with the FDA. We must inform the FDA of every drug product we have in commercial distribution and keep an updated list of those drugs. Our manufacturing facility also is inspected by the FDA and must comply with good manufacturing practices regulations at all times during the manufacture and processing of drug products. The FDA completed pre-approval inspections of our Eden Prairie and Brooklyn Park facilities in August 2000. We were not cited for any significant shortcomings relating to the pre-approval inspections nor were we cited for any significant shortcomings in compliance with good manufacturing practices regulations. We cannot guarantee that any future FDA inspections will proceed without any compliance issues requiring time and resources to resolve. Our facilities also must be inspected by, and we have received a license from, the Minnesota Board of Pharmacy for the manufacture of drug products.

         We are subject to regulation under various federal, state and local laws, rules, regulations and policies regarding, among other things, occupational safety, environmental protection, the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain regulated materials and wastes, including controlled substances, and product advertising and promotion. We believe that we have complied with these laws and regulations in all material respects, and we have not been required to take any action to correct any material noncompliance. We do not currently anticipate that any material capital expenditures will be required in order to comply with these laws or that compliance with these laws will have a material effect on our business or financial condition. We are unable to predict, however, the impact on our business of any changes that may be made in these laws or of any new laws or regulations that may be imposed in the future. We cannot be sure that we will not be required to incur significant compliance costs or be held liable for damages resulting from any violation of these laws and regulations.

Employees

         As of March 1, 2002, we had 171 full-time employees, with 115 employees in Eden Prairie and 56 in Brooklyn Park. Of these employees, 88 are engaged in manufacturing and quality assurance, 54 in research and development and 29 in executive management and office support. None of our employees is subject to a collective bargaining agreement nor have we ever experienced a work stoppage. We believe our employee relations are good.

Executive Officers of the Registrant

         Our executive officers and their ages as of March 1, 2002 are as follows:

         Each of our executive officers has an employment agreement. There are no family relationships between or among any of our executive officers or directors.

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         John M. Siebert, Ph.D. has been our President and Chief Executive Officer since September 1995, President and Chief Operating Officer from July 1995 to September 1995, and has served as a director since May 1992. From 1992 to 1995, Dr. Siebert was Vice President, Technical Affairs at Dey Laboratories, Inc., a pharmaceutical company. From 1988 to 1992, Dr. Siebert worked at Bayer Corporation. Dr. Siebert has also been employed by E.R. Squibb & Sons, Inc., G.D. Searle & Co. and The Procter & Gamble Company. On March 18, 2002, Dr. Siebert announced that he will retire from the Company at the end of 2003. Our Board of Directors has appointed a search committee to identify and recruit a new President and Chief Executive Officer. At the appointment of his successor, Dr. Siebert will become the Chairman of the Board of Directors and will serve as Chairman until December 31, 2003.

         John Hontz, Ph.D. has been our Chief Operating Officer since January 2000. From 1997 to January 2000, Dr. Hontz was our Vice President of Research and Development. From 1995 to 1997, Dr. Hontz was senior Group Leader of Product Development at Glaxo Wellcome plc, a pharmaceutical company. From 1987 to 1995, Dr. Hontz was with Burroughs-Wellcome, which was acquired by Glaxo in 1995, most recently as Section Head of Product Development.

         David A. Feste has been our Vice President, Chief Financial Officer and Secretary since February 2000. From 1995 to 1999, Mr. Feste was Vice President and Chief Financial Officer for Orphan Medical, Inc., a pharmaceutical company. From 1992 to 1995, Mr. Feste was self-employed as a financial consultant. From 1985 to 1991, Mr. Feste was with Tonka Corporation, most recently as its Corporate Vice President of Financial Services and Audit.

ITEM 2. PROPERTIES

         Through March 2002, we leased a 75,000 square foot facility in Eden Prairie, Minnesota, a suburb of Minneapolis, which houses our corporate headquarters, manufacturing facility and warehouse space. In March 2002, we purchased this facility at a capital cost of approximately $5.7 million pursuant to the terms of an option under our lease. The facility is currently our sole manufacturing facility and contains two production lines and a coating unit. We expect to add an additional coating unit and a granulator to this facility in 2002.

         In August 2001, we purchased a 107,000 square foot facility in Brooklyn Park, Minnesota at a capital cost of approximately $5.2 million. This facility currently houses our research and product development center. In 2002, we expect to complete a $10.0 million capital expenditure program to expand research and product development capabilities of this facility. By 2003, we also expect to add to this facility manufacturing capabilities, a tablet press and a bottling line for products utilizing our DuraSolv fast dissolve delivery system, at an expected capital cost of approximately $6.0 million.

         We believe that both of these owned facilities are adequate to meet our foreseeable requirements.

ITEM 3. LEGAL PROCEEDINGS

None.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II.

         Our common stock is traded on the Nasdaq National Market under the symbol CIMA. The following table presents, for the periods indicated, the range of high and low closing sale prices for our common stock as reported on the Nasdaq National Market.

Holders

         On March 21, 2002 the last reported sale price of our common stock was $26.76 per share. We had 66 stockholders of record and an estimated 4,476 beneficial owners of our common stock as of March 21, 2002.

Dividends

         We have never declared or paid any dividends. We anticipate that all of our earnings, if any, will be retained for development of our business and we do not anticipate paying any cash dividends in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

         This section presents our historical financial data. You should read carefully the financial statements included in this Annual Report, including the notes to the financial statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations. The statement of operations data for the years ended December 31, 2001, 2000 and 1999 and the balance sheet data as of December 31, 2001 and 2000 have been derived from our financial statements that have been audited by Ernst & Young LLP, independent auditors, and are included elsewhere in this Annual Report on Form 10-K. The statement of operations data for the years ended December 31, 1998 and 1997 and the balance sheet data as of December 31, 1999, 1998 and 1997 have been derived from financial statements that have been audited by Ernst & Young LLP, and are not included elsewhere in this Annual Report. Historical results are not necessarily indicative of future performance. See the notes to the financial statements for an explanation of the method used to determine the number of shares used in computing basic and diluted net income (loss) per share and see Item 7 of this report for an explanation of accounting changes regarding revenue recognition under the caption “Recently Issued Accounting Pronouncements.”

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Selected Financial Data

[Additional columns below]

[Continued from above table, first column(s) repeated]

				(in thousands, except per share data)
				Year Ended December 31,
				1999				1998				1997
Statement of Operations Data:
Operating revenues:
	Net sales			$	4,839			$	1,097			$	2,628
	Product development fees and licensing				7,818				6,141				2,282
	Royalties				735				374				—
Total operating revenues					13,392				7,612				4,910
Operating expenses:
	Costs of goods sold				7,546				4,476				4,376
	Research and product development				4,388				3,307				3,364
	Selling, general and administrative				2,836				3,138				3,487
Total operating expenses					14,770				10,921				11,227
Other income, net					116				122				479
Income (loss) before cumulative effect of a change in accounting principle and income tax benefit					(1,262	)			(3,187	)			(5,838	)
Cumulative effect of a change in accounting principle					—				—				—
Income tax benefit					—				—				—
Net income (loss)				$	(1,262	)		$	(3,187	)		$	(5,838	)
Net income (loss) per share:
	Basic Net income (loss) per share before cumulative effect of a change in accounting principle			$	(.13	)		$	(.33	)		$	(.61	)
		Net loss per share from cumulative effect of a change in accounting principle			—				—				—
	Net income (loss) per basic share			$	(.13	)		$	(.33	)		$	(.61	)
	Diluted Net income (loss) per share before cumulative effect of a change in accounting principle			$	(.13	)		$	(.33	)		$	(.61	)
		Net loss per share from cumulative effect of a change in accounting principle			—				—				—
	Net income (loss) per diluted share			$	(.13	)		$	(.33	)		$	(.61	)
Weighted average of number of shares:
	Basic				9,615				9,610				9,519
	Diluted				9,615				9,610				9,519

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The following discussion and analysis of our financial condition and results of operations should be read together with “Selected Financial Data” and our financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those set forth under “Factors That Could Affect Future Results” and elsewhere in this report.

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Overview

         We develop and manufacture pharmaceutical products based on our proprietary OraSolv and DuraSolv fast dissolve technologies. We currently manufacture five pharmaceutical brands utilizing our fast dissolve technologies: three prescription and two over-the counter brands. These products include Triaminic Softchews for Novartis, Tempra FirsTabs for a Canadian affiliate of Bristol-Myers Squibb, AstraZeneca’s Zomig-ZMT and its equivalent for the European market, Zomig Rapimelt, Remeron SolTab for Organon and NuLev for Schwarz Pharma. The FDA is currently reviewing Wyeth’s (formerly known as American Home Products) regulatory submission for a product we developed, an orally disintegrating dosage form of loratadine. We are also currently developing other oral drug delivery technologies for ourselves and others. We operate within a single business segment, the development and manufacture of fast dissolve and enhanced-absorption oral drug delivery systems. Our revenues are comprised of three components, including net sales of products we manufacture for pharmaceutical companies using our proprietary fast dissolve technologies, product development fees and licensing revenues for development activities we conduct through collaborative agreements with pharmaceutical companies, and royalties on the sales of products we manufacture, which are sold by pharmaceutical companies under licenses from us.

         Revenues from product sales and from royalties will fluctuate from quarter to quarter and from year to year depending on, among other factors, demand by consumers for the products we produce, new product introductions, the seasonal nature of some of the products we produce to treat seasonal ailments, pharmaceutical company ordering patterns and our production schedules. Revenues from product development fees and licensing revenue will fluctuate depending on, among other factors, the number of new collaborative agreements that we enter into, the number and timing of product development milestones that we achieve under collaborative agreements and the level of our development activity conducted for pharmaceutical companies.

         Components of revenue, expenses and net income (loss) as a percentage of total operating revenue for the years ending December 31:

Critical Accounting Policies and Estimates

General

         The following discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

         We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

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Revenue Recognition

         We recognize revenue in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, or SAB 101, “Revenue Recognition in Financial Statements.” SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an agreement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Revenues from our business activities are recognized from net sales of manufactured products upon shipment; from product development fees as the contracted services are rendered; from product development milestones upon completion and acceptance; from up-front product development license fees, which are amortized over the expected development term of the proposed products; and from royalties on the sales of products sold by pharmaceutical companies under license from us. The determination of SAB 101 criteria (3) and (4) for each source of revenue is based on our judgments regarding the fixed nature and collectibility of each source of revenue. Revenue recognized for any reporting period could be adversely affected should changes in conditions cause us to determine that these criteria are not met for certain future transactions.

Deferred Taxes

         The carrying value of our net deferred tax assets assumes that we will be able to generate sufficient taxable income in the United States, based on estimates and assumptions. We record a valuation allowance to reduce the carrying value of our net deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the requirements for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase net income in the period such determination is made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the net deferred tax asset would decrease net income in the period such determination is made. On a quarterly basis, we evaluate the realizability of our deferred tax assets and assess the requirements for a valuation allowance. For the year ended December 31, 2001, we have recorded a $16.2 million valuation allowance related to our net deferred tax assets of $22.4 million, compared to a valuation allowance of $21.4 million related to our net deferred tax assets of $21.4 million for the year ended December 31, 2000.

Results of Operations

Years Ended December 31, 2001, 2000 and 1999

         Operating Revenues. Our total operating revenues were $32.0 million in 2001, compared to $23.9 million in 2000 and $13.4 million in 1999. Operating revenues from AstraZeneca, Organon and Novartis, our three largest pharmaceutical company partners, together represented 80%, 82% and 85% of our total revenues in 2001, 2000 and 1999, respectively. The increases in total operating revenues in each year were due to sequentially increasing development activity for new products that resulted in higher product development fees and licensing revenue, as well as sequentially increasing sales of products we manufacture and royalties on sales by our pharmaceutical company partners under license from us.

         Revenues from sales of products we manufacture were $17.8 million in 2001, compared to $13.4 million in 2000 and $4.8 million in 1999. The increase from 2000 to 2001 was due primarily to a $2.5 million increase in shipments of branded prescription products. The increase from 1999 to 2000 was due primarily to a $5.9 million increase in shipments of branded prescription products. In 2002, revenues from product sales are expected to increase from 2001 levels, with a higher proportion of sales coming from branded prescription products.

         Product development fees and licensing revenues were $8.9 million in 2001, compared to $8.8 million in 2000 and $7.8 million in 1999. The increase from 2000 to 2001 was due primarily to our increased development activity for proposed new products and the achievement of certain milestones for AstraZeneca and Organon. The increase from 1999 to 2000 was due primarily to our increased development activity for proposed new products and the achievement of certain milestones for Wyeth, AstraZeneca and Organon. Licensing revenues in 2001 and 2000 are not directly comparable to 1999 due to the change in accounting policy for up-front license fees resulting from the implementation of SAB 101, retroactive to January 1, 2000. Based on this accounting policy, 2001 product development fees and licensing revenues include amortization of deferred revenue of $400,000, compared to $1.3

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million in amortization of deferred revenue in 2000. In 2002, we expect combined revenues attributable to product development fees and licensing revenues to increase by approximately 20 to 25% from 2001 levels.

         Royalties were $5.4 million in 2001, compared to $1.7 million in 2000 and $735,000 in 1999. The increase from 2000 to 2001 was due primarily to increased sales by AstraZeneca of Zomig Rapimelt in Europe and the U.S. market introduction of Zomig-ZMT in the second quarter of 2001, as well as the U.S. market introduction of Remeron SolTab by Organon and NuLev by Schwarz Pharma in the first quarter of 2001. The increase from 1999 to 2000 was due primarily to increased European sales by AstraZeneca of Zomig Rapimelt, which was launched in selected European countries in late 1999, and due to increased sales by Novartis of Triaminic. In 2002, we expect royalties to increase by approximately 100% from 2001 levels.

         Cost of goods sold. Cost of goods sold was $16.0 million in 2001, compared to $12.4 million in 2000 and $7.5 million in 1999. The increase from 2000 to 2001 was principally due to the increased production volumes of our three branded prescription products and Triaminic, as well as higher depreciation costs associated with new manufacturing equipment. The increase from 1999 to 2000 was principally due to the initial production volumes of U.S. launch supplies of Remeron SolTab for Organon and Nulev for Schwarz Pharma, as well as increased production volumes of Zomig Rapimelt for AstraZeneca. In 2002, we expect cost of goods sold to be comparable in terms of dollar amounts to the 2001 level.

         Gross profits on product sales, defined as net sales less cost of goods sold, were $1.8 million in 2001, compared to $1.0 million in 2000 and a negative gross margin in 1999. The increase from 2000 to 2001 was principally due to increases in production volumes of higher margin branded prescription products, offset in part by higher depreciation costs associated with a second production line placed in service during 2001. The increase from 1999 to 2000 was principally due to significant increases in production volumes of higher margin branded prescription products. In 2002, we expect gross profits on product sales to increase from 2001 levels in terms of dollar amounts and as a percentage of product sales.

         Research and product development expenses. Research and product development expenses were $6.4 million in 2001, compared to $5.0 million in 2000 and $4.4 million in 1999. The increase from 2000 to 2001 was due to increased development activity for AstraZeneca, Organon, Novartis and Schwarz Pharma. A partner collaboration with an unnamed pharmaceutical company for seven products also contributed to the increase in 2001. The increase from 1999 to 2000 was due primarily to increased development activity for Organon, Novartis and Schwarz Pharma. In 2002, we expect research and product development expense to increase by approximately 50% from 2001 levels due to a significant increase in partner funded collaborations, as well as internally funded development efforts related to OraVescent fentanyl.

         Selling, general and administrative expenses. Selling, general and administrative expenses were $5.1 million in 2001, compared to $3.9 million in 2000 and $2.8 million in 1999. The increase from 2000 to 2001 was due primarily to increased recruiting costs, additional consulting costs in support of expanded business development efforts and higher levels of staffing and consulting in support of our computer and information systems. The increase from 1999 to 2000 was due primarily to marketing and related consulting costs associated with our business development efforts, and hiring costs associated with increased professional staffing. In 2002, we expect selling, general and administrative expenses to increase by up to 50% from 2001 levels as we continue to make investments in people and systems to support our anticipated growth.

         Other income, net. Other income was $10.3 million in 2001, compared to $2.1 million in 2000 and $116,000 in 1999. Other income consists primarily of investment income on invested funds, net of interest expense on bank lines, loan agreements and capitalized leases. The increase from 2000 to 2001 was due primarily due to the full-year effect of investing the $150.3 million of cash proceeds from our November 2000 public offering. The increase from 1999 to 2000 was due primarily due to higher levels of cash available for investment as a result of the completion of our public offering in November 2000. In 2002, we expect other income to decrease by approximately 40% from 2001 levels due to the impact of lower interest rates, as well as lower levels of cash available for investment due to expected uses of cash for capital expenditures.

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Liquidity and Capital Resources

         We have financed our operations to date primarily through private and public sales of equity securities and revenues from product sales, product development fees and licensing revenues and royalties.

         Working capital, which is defined as current assets less current liabilities, decreased by $76.2 million from $109.7 million at December 31, 2000 to $33.5 million at December 31, 2001. The decrease was due primarily to the use of $66.4 million to purchase available-for-sale securities classified as other assets, the use of $14.2 million for capital expenditures and the use of $17.9 million to repurchase approximately 534,000 shares of Common Stock, partially offset by $12.2 million in net cash provided by operating activities and by $3.0 million in cash provided by exercises of stock options. We invest excess cash in interest-bearing money market accounts and investment grade securities.

         During 2002, we plan to spend approximately $30.0 to $35.0 million to complete various improvements to our Eden Prairie manufacturing facility and Brooklyn Park R&D center. On March 6, 2002, we purchased our Eden Prairie facility for $5.7 million. During the next twelve months, we also expect to complete a second manufacturing site, which will be located at our Brooklyn Park R&D center. We expect this second manufacturing site to be operational in 2003. In addition, we expect to fund additional product development activities related to our OraVescent technology and to develop proprietary products using our OraSolv and DuraSolv technologies. We may also acquire technologies that complement our current portfolio of oral drug delivery technologies. We believe that our cash and cash equivalents and available-for-sale securities, together with expected revenues from operations, will be sufficient to meet our anticipated capital requirements for the foreseeable future. However, we may require additional funds to support our working capital requirements or for other purposes and may seek to raise such additional funds through public or private equity financings or from other sources. We cannot be certain that additional financing will be available on terms favorable to us, or at all, or that any additional financing will not be dilutive.

Factors That Could Affect Future Results

         Certain statements made in this Annual Report on Form 10-K are forward-looking statements based on our current expectations, assumptions, estimates and projections about our business and our industry. These forward-looking statements involve risks and uncertainties. Our business, financial condition and results of operations could differ materially from those anticipated in these forward-looking statements as a result of certain factors, as more fully described below and elsewhere in this Form 10-K. You should consider carefully the risks and uncertainties described below, which are not the only ones facing our company. Additional risks and uncertainties also may impair our business operations.

The Loss Of One Of Our Major Customers Could Reduce Our Revenues Significantly.

         Revenues from AstraZeneca, Organon and Novartis together represented approximately 80% of our total operating revenues for the year ended December 31, 2001. The loss of any one of these customers could cause our revenues to decrease significantly, resulting in losses from our operations. If we cannot broaden our customer base, we will continue to depend on a few customers for the majority of our revenues. We may be unable to negotiate favorable business terms with customers that represent a significant portion of our revenues. If we cannot, our revenues and gross profits may not grow as expected and may be insufficient to allow us to achieve sustained profitability.

We Rely On Third Parties To Market, Distribute And Sell The Products Incorporating Our Drug Delivery Technologies And Those Third Parties May Not Perform.

         Our pharmaceutical company partners market and sell the products we develop and manufacture. If one or more of our pharmaceutical company partners fails to pursue the marketing of our products as planned, our revenues and gross profits may not reach our expectations, or may decline. We often cannot control the timing and other aspects of the development of products incorporating our technologies because our pharmaceutical company partners may have priorities that differ from ours. Therefore, our commercialization of products under development may be delayed unexpectedly. Because we incorporate our drug delivery technologies into the oral dosage forms of products marketed and sold by our pharmaceutical company partners, we do not have a direct marketing channel to consumers for our drug delivery technologies. The marketing organizations of our pharmaceutical company partners may be unsuccessful, or they may assign a low level of priority to the marketing of our products that is different from our priorities. Further, they may discontinue marketing the products that incorporate our drug

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delivery technologies. If marketing efforts for our products are not successful, our revenues may fail to grow as expected or may decline.

If We Do Not Enter Into Additional Collaborative Agreements with Pharmaceutical Companies, We May Not Be Able To Achieve Sustained Profitability.

         We depend upon collaborative agreements with pharmaceutical companies to develop, test and obtain regulatory approval for, and commercialize oral dosage forms of, active pharmaceutical ingredients using our drug delivery technologies. The number of products that we successfully develop under these collaborative agreements will affect our revenues. If we do not enter into additional agreements in the future, or if our current or future agreements do not result in successful marketing of our products, our revenues and gross profits may be insufficient to allow us to achieve sustained profitability.

We face additional risks related to our collaborative agreements, including the risks that:

•		any existing or future collaborative agreements may not result in additional commercial products;
•		additional commercial products that we may develop may not be successful;
•		we may not be able to meet the milestones established in our current or future collaborative agreements;
•		we may not be able to successfully develop new drug delivery technologies that will be attractive in the future to potential pharmaceutical company partners; and
•		our pharmaceutical company partners may exercise their limited rights to terminate their collaborative agreement with us.

If We Cannot Increase Our Production Capacity, We May Be Unable To Meet Expected Demand For Our Products And We May Lose Revenues.

         We must increase our production capacity to meet expected demand for our products. We currently have two production lines and are planning to add a bottling line and other manufacturing equipment by 2003. If we are unable to increase our production capacity as scheduled, we may be unable to meet expected demand for our products, we may lose revenues and we may not be able to maintain our relationships with our pharmaceutical company partners. Production lines in the pharmaceutical industry generally take 16 to 24 months to complete due to the long lead times required for precision production equipment to be manufactured and installed, as well as the required testing and validation process that must be completed once the equipment is installed. We may not be able to increase our production capacity quickly enough to meet the requirements of our pharmaceutical company partners with which we are developing our drug delivery technologies.

If We Do Not Properly Manage Our Growth, We May Be Unable To Sustain The Level Of Revenues We Have Attained Or Effectively Pursue Additional Business Opportunities.

         Our operating revenues increased 79% and 34% for the years ended December 31, 2000, and December 31, 2001, respectively, placing significant strain on our management, administrative and operational resources. If we do not properly manage the growth we have recently experienced and expect in the future, our revenues may decline or we may be unable to pursue sources of additional revenues. To properly manage our growth, we must, among other things, implement additional (and improve existing) administrative, financial and operational systems, procedures and controls on a timely basis. We will also need to expand our finance, administrative and operations staff. We may not be able to complete the improvements to our systems, procedures and controls necessary to support our future operations in a timely manner. We may not be able to hire, train, integrate, retain, motivate and manage required personnel and may not be able to successfully identify, manage and pursue existing and potential market opportunities. Improving our systems and increasing our staff will increase our operating expenses. If we fail to generate additional revenue in excess of increased operating expenses in any fiscal period we may incur losses, or our losses may increase in that period.

We May Be Unable To Achieve Our Anticipated Revenues and Profits Because The Markets For The Products We Develop And Manufacture For Our Pharmaceutical Company Partners Are Subject To Market Risks From The Introduction of Generic Prescription Products, The Pricing Strategies Of Generic Competitors And From Regulatory Strategies That Could Switch A Prescription Product To An Over-The-Counter Product.

         In January 2002, Mylan Laboratories and Teva Pharmaceutical Industries announced that they have been granted tentative approval from the FDA for their mirtazapine tablets, which are the generic version of Organon’s Remeron tablets. The active drug ingredient in Organon’s Remeron tablets is mirtazapine, for which Organon has a patent listed in the FDA’s Orange Book. The U.S. market launch of mirtazapine tablets by Mylan Laboratories and

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Teva Pharmaceutical Industries, and possibly others, is subject to final FDA approval, which could occur after the resolution of all legal and patent related issues relating to Organon’s rights for mirtazapine. Organon is vigorously defending its patent rights, which it believes apply through June 2017. In February 2001, Organon began a marketing campaign to transition patients of its standard Remeron tablets to Remeron SolTab, a different dosage form of Remeron tablets, which incorporates mirtazapine with our OraSolv fast dissolve delivery system. Mylan Laboratories and Teva Pharmaceutical Industries’ mirtazapine tablets are not a generic substitute for Remeron SolTab, which is classified as a separate and unique dosage form by the FDA. There can be no assurance that Organon will be successful in its efforts to transition standard Remeron patients to Remeron SolTab or that a transition to Remeron SolTab would be successful against the potential impact of lower product pricing resulting from generic competition. Furthermore, there can be no assurance that a competitor would not develop and market a fast dissolve formulation of mirtazapine tablets using a competing fast dissolve technology. Due to the large number of variables and high degree of uncertainty, we are unable to predict the timing for the market introduction of a generic mirtazapine tablet by Mylan Laboratories and Teva Pharmaceutical Industries, and possibly others, and the effect of such generic product introductions on our business.

         Another product that involves a high degree of uncertainty is loratadine, which is currently a prescription product. We have developed for Wyeth (formerly known as American Home Products) a fast dissolve formulation of loratadine, which Wyeth is expected to market as a generic alternative to Claritin Reditabs in 2003, unless Schering Corporation is successful in its efforts to secure extended exclusive rights to market Claritin. Schering Corporation, the loratadine patent holder, is vigorously defending its legal and patent rights against Wyeth and other generic competitors.

         In May 2001, a joint committee of the FDA’s Nonprescription Drugs Advisory Committee and Pulmonary-Allergy Drugs Advisory Committee made a non-binding recommendation that loratadine, the active drug ingredient in Claritin, has a safety profile acceptable for over-the-counter marketing. In March 2002, Schering Corporation announced that the FDA has accepted for filing its application to switch all formulations of Claritin to over-the-counter products.

         The ongoing litigation against Wyeth and others by Schering Corporation to prevent or delay the market entry of a generic loratadine product, as well as Schering Corporation’s application to switch loratadine to the over-the-counter market, could affect our anticipated revenues and profits. The potential switch of loratadine from the prescription market to the over-the-counter market affects pricing, distribution channels, advertising, insurance reimbursement and a variety of other marketing and regulatory factors. The effects of a delayed market entry of Wyeth’s generic alternative to Claritin Reditabs and the potential switch from the prescription market to the over-the-counter market involve a high degree of uncertainty and we are unable to predict the effect of such changes on our business.

We May Experience Significant Delays In Expected Product Releases While Our Pharmaceutical Company Partners Seek Regulatory Approvals For The Products We Develop And, If They Are Not Successful In Obtaining The Approvals, We May Be Unable To Achieve Our Anticipated Revenues And Profits.

         The federal government, principally the U.S. Food and Drug Administration, and state and local government agencies regulate all new pharmaceutical products, including our existing products and those under development. Our pharmaceutical company partners may experience significant delays in expected product releases while attempting to obtain regulatory approval for the products we develop. If they are not successful, our revenues and profitability may decline. We cannot control, and our pharmaceutical company partners cannot control, the timing of regulatory approval for the products we develop.

         Applicants for FDA approval often must submit extensive clinical data and supporting information to the FDA. Varying interpretations of the data obtained from pre-clinical and clinical testing could delay, limit or prevent regulatory approval of a drug product. Changes in FDA approval policy during the development period, or changes in regulatory review for each submitted new drug application, also may cause delays or rejection of an approval. Even if the FDA approves a product, the approval may limit the uses or “indications” for which a product may be marketed, or may require further studies. The FDA also can withdraw product clearances and approvals for failure to comply with regulatory requirements or if unforeseen problems follow initial marketing.

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         Manufacturers of drugs also must comply with applicable good manufacturing practices requirements. If we cannot comply with applicable good manufacturing practices, we may be required to suspend the production and sale of our products, which would reduce our revenues and gross profits. We may not be able to comply with the applicable good manufacturing practices and other FDA regulatory requirements for manufacturing as we expand our manufacturing operations.

         If our products are marketed in foreign jurisdictions, we, and the pharmaceutical company partners with which we are developing our technologies, must obtain required regulatory approvals from foreign regulatory agencies and comply with extensive regulations regarding safety and quality. If approvals to market our products are delayed, if we fail to receive these approvals, or if we lose previously received approvals, our revenues would be reduced. We may be required to incur significant costs in obtaining or maintaining foreign regulatory approvals.

Our Commercial Products Are Subject To Continuing Regulations And We May Be Subject To Adverse Consequences If We Fail To Comply With Applicable Regulations.

         Even if our products receive regulatory approval, either in the U.S. or internationally, we will continue to be subject to extensive regulatory requirements. These regulations are wide-ranging and govern, among other things:

•		adverse drug experience reporting regulations;
•		product promotion;
•		product manufacturing, including good manufacturing practice requirements; and
•		product changes or modifications.

         If we fail to comply or maintain compliance with these laws and regulations, we may be fined or barred from selling our products. If the FDA determines that we are not complying with the law, it can:

•		issue warning letters;
•		impose fines;
•		seize products or order recalls;
•		issue injunctions to stop future sales of products;
•		refuse to permit products to be imported into, or exported out of, the U.S.;
•		totally or partially suspend our production;
•		withdraw previously approved marketing applications; and
•		initiate criminal prosecutions.

We Have A Single Manufacturing Facility And We May Lose Revenues And Be Unable To Maintain Our Relationships With Our Pharmaceutical Company Partners If We Lose Its Production Capacity.

         We manufacture all of the products that we produce on our existing production lines in our Eden Prairie facility. If our existing production lines or facility becomes incapable of manufacturing products for any reason, we may be unable to meet production requirements, we may lose revenues and we may not be able to maintain our relationships with our pharmaceutical company partners. Without our existing production lines, we would have no other means of manufacturing products incorporating our drug delivery technologies until we were able to restore the manufacturing capability at our facility or develop an alternative manufacturing facility. Although we carry business interruption insurance to cover lost revenues and profits in an amount we consider adequate, this insurance does not cover all possible situations. In addition, our business interruption insurance would not compensate us for the loss of opportunity and potential adverse impact on relations with our existing pharmaceutical company partners resulting from our inability to produce products for them. Although we currently plan to add a second manufacturing site at our Brooklyn Park, Minnesota facility to reduce this risk, we may encounter unforeseen difficulties or delays in doing so.

We Rely On Single Sources For Some Of Our Raw Materials And We May Lose Revenues And Be Unable To Maintain Our Relationships With Our Pharmaceutical Company Partners If Those Materials Were Not Available.

         We rely on single suppliers for some of our raw materials and packaging supplies. If these raw materials or packaging supplies were no longer available we may be unable to meet production requirements, we may lose revenues and we may not be able to maintain our relationships with our pharmaceutical company partners. Without adequate supplies of raw materials or packaging supplies, our manufacturing operations may be interrupted until another supplier could be identified, its products validated and trading terms with it negotiated. We may not be able

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to identify an alternative supplier in a timely manner, or at all. Furthermore, we may not be able to negotiate favorable terms with an alternative supplier. Any disruptions in our manufacturing operations from the loss of a supplier could potentially damage our relations with our pharmaceutical company partners.

If We Cannot Develop Additional Products, Our Ability To Increase Our Revenues Would Be Limited.

         We intend to continue to enhance our current technologies and pursue additional proprietary drug delivery technologies. If we are unable to do so, we may be unable to achieve our objectives of revenue growth and sustained profitability. Even if enhanced or additional technologies appear promising during various stages of development, we may not be able to develop commercial applications for them because:

•		the potential technologies may fail clinical studies;
•		we may not find a pharmaceutical company to adopt the technologies;
•		it may be difficult to apply the technologies on a commercial scale; or
•		the technologies may be uneconomical to market.

If We Cannot Keep Pace With The Rapid Technological Change And Meet The Intense Competition In Our Industry, We May Lose Business.

         Our success depends, in part, on maintaining a competitive position in the development of products and technologies in a rapidly evolving field. If we cannot maintain competitive products and technologies, our current and potential pharmaceutical company partners may choose to adopt the drug delivery technologies of our competitors. Fast dissolve tablet technologies that compete with our OraSolv and DuraSolv technologies include the Zydis technology developed by R.P. Scherer Corporation, a wholly-owned subsidiary of Cardinal Health, Inc., the WOWTab technology developed by Yamanouchi Pharma Technologies, the Flashtab technology developed by Ethypharm and the FlashDose technology developed by Fuisz Technologies Ltd., a wholly-owned subsidiary of Biovail Corporation. We also compete generally with other drug delivery, biotechnology and pharmaceutical companies engaged in the development of alternative drug delivery technologies or new drug research and testing. Many of these competitors have substantially greater financial, technological, manufacturing, marketing, managerial and research and development resources and experience than we do and represent significant competition for us.

         Our competitors may succeed in developing competing technologies or obtaining governmental approval for products before us. The products of our competitors may gain market acceptance more rapidly than our products. Developments by competitors may render our products, or potential products, noncompetitive or obsolete.

If We Cannot Adequately Protect Our Technology And Proprietary Information, We May Be Unable To Sustain A Competitive Advantage.

         Our success depends, in part, on our ability to obtain and enforce patents for our products, processes and technologies and to preserve our trade secrets and other proprietary information. If we cannot do so, our competitors may exploit our innovations and deprive us of the ability to realize revenues and profits from our developments. We have been granted ten patents on our drug delivery and packaging systems in the U.S., which will expire beginning in 2010.

         Any patent applications we may have made or may make relating to our potential products, processes and technologies may not result in patents being issued. Our current patents may not be valid or enforceable. They may not protect us against competitors that challenge our patents, obtain patents that may have an adverse effect on our ability to conduct business or are able to circumvent our patents. Further, we may not have the necessary financial resources to enforce our patents.

         To protect our trade secrets and proprietary technologies and processes, we rely, in part, on confidentiality agreements with our employees, consultants and advisors. These agreements may not provide adequate protection for our trade secrets and other proprietary information in the event of any unauthorized use or disclosure, or if others lawfully develop the information.

Third Parties May Claim That Our Technologies, Or The Products In Which They Are Used, Infringe On Their Rights And We May Incur Significant Costs Resolving These Claims.

         Third parties may claim that the manufacture, use or the sale of our drug delivery technologies infringe on their patent rights. If such claims are asserted, we may have to seek licenses, defend infringement actions or challenge the validity of those patents in court. If we cannot obtain required licenses, are found liable for

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infringement or are not able to have these patents declared invalid, we may be liable for significant monetary damages, encounter significant delays in bringing products to market or be precluded from participating in the manufacture, use or sale of products or methods of drug delivery covered by the patents of others. We may not have identified, or be able to identify in the future, U.S. and foreign patents that pose a risk of potential infringement claims.

         We enter into collaborative agreements with pharmaceutical companies to apply our drug delivery technologies to drugs developed by others. Ultimately, we receive license revenues and product development fees, as well as revenues from, and royalties on, the sale of products incorporating our technology. The drugs to which our drug delivery technologies are applied are generally the property of the pharmaceutical companies. Those drugs may be the subject of patents or patent applications and other forms of protection owned by the pharmaceutical companies or third parties. If those patents or other forms of protection expire, are challenged or become ineffective, sales of the drugs by the collaborating pharmaceutical company may be restricted or may cease.

Because We Have A Limited Operating History, Potential Investors In Our Stock May Have Difficulty Evaluating Our Prospects.

         We recorded the first commercial sales of products using our fast dissolve technologies in early 1997. Accordingly, we have only a limited operating history, which may make it difficult for you and other potential investors to evaluate our prospects. The difficulty investors may have in evaluating our prospects may cause volatile fluctuations, including decreases, in the market price of our common stock as investors react to information about our prospects. Since 1997, we have generated revenues from product development fees and licensing arrangements, sales of products using our fast dissolve technologies and royalties. We are currently making the transition from research and product development operations with limited production to commercial operations with expanding production capabilities in addition to research and product development activities. Our business and prospects, therefore, must be evaluated in light of the risks and uncertainties of a company with a limited operating history and, in particular, one in the pharmaceutical industry.

If We Are Not Profitable In The Future, The Value Of Our Stock May Fall.

         Although we were profitable for the year ended December 31, 2001, we have accumulated aggregate net losses from inception of approximately $27.0 million. If we are unable to sustain profitable operations in future periods, the market price of our stock may fall. The costs for research and product development of our drug delivery technologies and general and administrative expenses have been the principal causes of our losses. Our ability to achieve sustained profitable operations depends on a number of factors, many of which are beyond our direct control. These factors include:

•		the demand for our products;
•		our ability to manufacture our products efficiently and with the required quality;
•		our ability to increase our manufacturing capacity;
•		the level of product and price competition;
•		our ability to develop additional commercial applications for our products;
•		our ability to control our costs; and
•		general economic conditions.

We May Require Additional Financing, Which May Not Be Available On Favorable Terms Or At All And Which May Result In Dilution Of The Equity Interest Of An Investor.

         We may require additional financing to fund the development and possible acquisition of new drug delivery technologies and to increase our production capacity beyond what is currently anticipated. If we cannot obtain financing when needed, or obtain it on favorable terms, we may be required to curtail our plans to develop and possibly to acquire new drug delivery technologies or limit the expansion of our manufacturing capacity. We believe our cash and cash equivalents, and expected revenues from operations will be sufficient to meet our anticipated capital requirements for the foreseeable future. However, we may elect to pursue additional financing at any time to more aggressively pursue development of new drug delivery technologies and expand manufacturing capacity beyond that currently planned.

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         Other factors that will affect future capital requirements and may require us to seek additional financing include:

•		the level of expenditures necessary to develop and, or, acquire new products or technologies;
•		the progress of our research and product development programs;
•		the need to construct a larger than currently anticipated manufacturing facility, or additional manufacturing facilities, to meet demand for our products;
•		the results of our collaborative efforts with current and potential pharmaceutical company partners; and
•		the timing of, and amounts received from, future product sales, product development fees and licensing revenue and royalties.

Demand For Some Of Our Products Is Seasonal, And Our Sales And Profits May Suffer During Periods When Demand Is Light.

         Certain non-prescription products that we manufacture for our pharmaceutical company partners treat seasonal ailments such as colds, coughs and allergies. Our pharmaceutical company partners may choose to not market those products in off-seasons and our sales and profits may decline in those periods as a result. For full-year 2001, operating revenues from Novartis, which included revenues related to Triaminic, a seasonal cold, cough and allergy product, represented 33% of our total operating revenues. We may not be successful in developing a mix of products to reduce these seasonal variations.

If The Marketing Claims Asserted About Our Products Are Not Approved, Our Revenues May Be Limited.

         Once a drug product incorporating our technologies is approved by the FDA, the Division of Drug Marketing, Advertising and Communication, the FDA’s marketing surveillance department within the Center for Drug Evaluation and Research, must approve marketing claims asserted about it by our pharmaceutical company partners. If our pharmaceutical company partners fail to obtain from the Division of Drug Marketing acceptable marketing claims for a product incorporating our drug technology, our revenues from that product may be limited. Marketing claims are the basis for a product’s labeling, advertising and promotion. The claims our pharmaceutical company partners are asserting about our drug delivery technology, or the drug product itself, may not be approved by the Division of Drug Marketing.

We May Face Product Liability Claims Related To Participation In Clinical Trials Or The Use Or Misuse Of Our Products.

         The testing, manufacturing and marketing of products using our drug delivery technologies may expose us to potential product liability and other claims resulting from their use. If any such claims against us are successful, we may be required to make significant compensation payments. Any indemnification that we have obtained, or may obtain, from contract research organizations or pharmaceutical companies conducting human clinical trials on our behalf may not protect us from product liability claims or from the costs of related litigation. Similarly, any indemnification we have obtained, or may obtain, from pharmaceutical companies with which we are developing our drug delivery technologies may not protect us from product liability claims from the consumers of those products or from the costs of related litigation. If we are subject to a product liability claim, our product liability insurance may not reimburse us, or be sufficient to reimburse us, for any expenses or losses we may suffer. A successful product liability claim against us, if not covered by, or if in excess of, our product liability insurance, may require us to make significant compensation payments, which would be reflected as expenses on our statement of operations and reduce our earnings.

Anti-Takeover Provisions Of Our Corporate Charter Documents, Delaware Law And Our Stockholders’ Rights Plan May Affect The Price Of Our Common Stock.

         Our corporate charter documents, Delaware law and our stockholders’ rights plan include provisions that may discourage or prevent parties from attempting to acquire us. These provisions may have the effect of depriving our stockholders of the opportunity to sell their stock at a price in excess of prevailing market prices in an acquisition of us by another company. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the rights, preferences and privileges of those shares without any further vote or action by our stockholders. The rights of holders of our common stock may be adversely affected by the rights of the holders of any preferred stock that may be issued in the future. Additional provisions of our certificate of incorporation and bylaws could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting common stock. These include provisions that limit the ability of stockholders to call special meetings or remove a director for cause.

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         We are subject to the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, either alone or together with affiliates and associates, owns (or within the past three years, did own) 15% or more of the corporation’s voting stock.

         We also have a stockholders’ rights plan, commonly referred to as a poison pill, which makes it difficult, if not impossible, for a person to acquire control of us without the consent of our board of directors.

Our Stock Price Has Been Volatile And May Continue To Be Volatile.

         The trading price of our common stock has been, and is likely to continue to be, highly volatile. The market value of your investment in our common stock may fall sharply at any time due to this volatility. In the year ended December 31, 2001, the closing sale price for our common stock ranged from $30.05 to $85.75. As of March 21, 2002, the last reported sale price of our stock was $26.76 per share. The market prices for securities of drug delivery, biotechnology and pharmaceutical companies historically have been highly volatile. Factors that could adversely affect our stock price include:

•		fluctuations in our operating results;
•		announcements of technological collaborations, innovations or new products by us or our competitors;
•		governmental regulations;
•		developments in patent or other proprietary rights owned by us or others;
•		public concern as to the safety of drugs developed by us or others;
•		the results of pre-clinical testing and clinical studies or trials by us or our competitors;
•		litigation;
•		decisions by our pharmaceutical company partners relating to the products incorporating our technologies;
•		actions by the FDA in connection with submissions related to the products incorporating our technologies; and
•		general market conditions.

Our Operating Results May Fluctuate, Causing Our Stock Price To Fall.

         Fluctuations in our operating results may lead to fluctuations, including declines, in our stock price. Our operating results may fluctuate from quarter to quarter and from year to year depending on:

•		demand by consumers for the products we produce;
•		new product introductions;
•		the seasonal nature of the products we produce to treat seasonal ailments;
•		pharmaceutical company ordering patterns;
•		our production schedules;
•		the number of new collaborative agreements that we enter into;
•		the number and timing of product development milestones that we achieve under collaborative agreements;
•		the level of our development activity conducted for, and at the direction of, pharmaceutical companies under collaborative agreements; and
•		the level of our spending on new drug delivery technology development and technology acquisition, and internal product development.

Recent Accounting Pronouncements

         In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, or SFAS 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS 133 establishes new standards of accounting and reporting for derivative instruments and hedging activities. We adopted SFAS 133 on January 1, 2001, and the adoption did not materially impact our financial statements.

         In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, or SAB 101, “Revenue Recognition in Financial Statements.” SAB 101 requires that up-front license fees

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received from research collaborators be recognized over the term of the agreement unless the fee is in exchange for products delivered or services performed that represent the culmination of a separate earnings process. We implemented SAB 101 in the quarter ended on June 30, 2000. Implementation of SAB 101 was retroactive to January 1, 2000. We reported a charge to earnings of $799,000 for the cumulative effect of a change in accounting principle, which is included in income for the year ended December 31, 2000. The effect of the change on the year ended December 31, 2000 was to increase income before cumulative effect of the change in accounting principle by $799,000 or $0.06 per diluted share. For the year ended December 31, 2000, we recognized $799,000 in revenue that is included in the cumulative effect adjustment as of January 1, 2000.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company is subject to interest rate risks on cash, cash equivalents and available-for-sale securities. Our investments in fixed-rate debt securities, which are classified as available-for-sale at December 31, 2001, have remaining maturities ranging from 3 to 40 months and are exposed to the risk of fluctuating interest rates. Available-for-sale securities had a market value of $147.6 million at December 31, 2001, and represented 74% of our total assets. The primary objective of our investment activities is to preserve capital. We have not used derivative financial instruments in our investment portfolio.

         We performed a sensitivity analysis assuming a hypothetical 10% adverse movement in interest rates applicable to fixed rate investments maturing during the next twelve months that are subject to reinvestment risk. As of December 31, 2001, the analysis indicated that these hypothetical market movements would not have a material effect on our financial position, results of operations or cash flow.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

         Our financial statements as of December 31, 2001 and 2000 and for each of the years ended December 31, 2001, 2000 and 1999 begin on page F-1 of this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         None.

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PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1). Financial Statements

(a)(2). Financial Statement Schedules

         The following financial statement schedule should be read in conjunction with the Audited Financial Statements referred to under Item 14 (a)(1) above. Financial statement schedules not included in this Form 10-K have been omitted because they are not applicable or the required information is shown in the Audited Financial Statement or Notes thereto.

(a)(3). Listing of Exhibits

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(7)		Filed as an exhibit to CIMA’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 0-24424, and incorporated herein by reference.
(8)		Filed as an exhibit to CIMA’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, File No. 0-24424, and incorporated herein by reference.
(9)		Filed as an exhibit to CIMA’s Annual Report on Form 10-K for the year ended December 31, 1999, File No. 0-24424, and incorporated herein by reference.
(10)		Filed as an exhibit to CIMA’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 0-24424, and incorporated herein by reference.
(11)		Filed as an exhibit to CIMA’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, File No. 0-24424, and incorporated herein by reference.
(12)		Filed as an exhibit to CIMA’s Annual Report on Form 10-K for the year ended December 31, 2000, File No. 0-24424, and incorporated herein by reference.
		(13 ) Filed as an exhibit to CIMA’s Registration Statement on Form S-8, filed June 13, 2001, File No. 333-62954, and incorporated herein by reference.
(14)		Filed as an exhibit to CIMA’s Registration Statement on Form S-8, filed June 14, 2001, File No. 333-63026, and incorporated herein by reference.
(15)		Incorporated by reference to Exhibit 1 to the Registrant’s Amendment No. 1 to Registration Statement on Form 8-A/A, filed July 18, 2001, File No. 0-24424.
(16)		Filed as an exhibit to CIMA’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001, File No. 0-24424, and incorporated herein by reference.

(b). Reports on Form 8-K
None.

(c). Exhibits
See Item 14(a)(3) above.

(d). Financial Statement Schedules
See Item 14(a)(2) above.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Eden Prairie, Minnesota, on the 27th day of March, 2002.

CIMA LABS INC. By:   /s/ David A. Feste David A. Feste Vice President and Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1934 this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated as of March 27, 2002.

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REPORT OF INDEPENDENT AUDITORS

Board of Directors
CIMA LABS INC.

We have audited the accompanying balance sheets of CIMA LABS INC. as of December 31, 2001 and 2000, and the related statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the index at item 14(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

         We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CIMA LABS INC. at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
February 12, 2002

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CIMA LABS INC.
BALANCE SHEETS