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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
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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 0-28308
COLLAGENEX PHARMACEUTICALS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1758016
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
301 South State Street, Newtown, Pennsylvania 18940
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (215) 579-7388
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
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None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(Title of Class)
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
State the aggregate market value of the voting common stock held by
non-affiliates of the registrant: $96,634,170 at February 15, 1999 based on the
last sales price on that date.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of February 15, 1999:
Class Number of Shares
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Common Stock, $.01 par value 8,589,704
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the registrant's definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
TABLE OF CONTENTS
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Item Page
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PART I 1. Business................................... 1
2. Properties................................. 19
3. Legal Proceedings.......................... 19
4. Submission of Matters to a Vote of
Security Holders........................... 19
PART II 5. Market for the Company's Common Equity
and Related Stockholder Matters......... 20
6. Selected Consolidated Financial Data....... 21
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 23
7A. Quantitative and Qualitative Disclosures
About Market Risk....................... 29
8. Financial Statements and Supplementary Data 29
9. Changes in and Disagreements with
Accountants on
Accounting and Financial Disclosure..... 29
PART III 10. Directors and Executive Officers of the
Company.................................... 30
11. Executive Compensation..................... 30
12. Security Ownership of Certain Beneficial
Owners and Management................... 30
13. Certain Relationships and Related
Transactions............................... 30
PART IV 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................. 31
SIGNATURES...................................................... 32
EXHIBIT INDEX................................................... 34
FINANCIAL DATA AND SCHEDULES.................................... F-1
-i-
PART I
Item 1. Business.
General
CollaGenex Pharmaceuticals, Inc. (the "Company") is a pharmaceutical
company focused on providing innovative medical therapies for the treatment of
periodontitis and other pathologies characterized by the progressive degradation
of the body's connective tissues. The Company's core technology involves
inhibiting the activity of certain enzymes that degrade such connective tissues.
The Company's first product, Periostat(R), is a prescription pharmaceutical
capsule that was approved by the United States Food and Drug Administration (the
"FDA") in September 1998 as an adjunct to scaling and root planning ("SRP"), the
most prevalent non-surgical therapy for adult periodontitis, to promote
attachment level gain and to reduce pocket depth in patients with adult
periodontitis. Adult periodontitis, a chronic disease characterized by the
progressive loss of attachment between the tooth root and the surrounding
periodontal structures due to chronic progressive connective tissue degradation,
may result in tooth loss if untreated. See " -- Periostat."
Existing therapies and those treatments known to be under development for
periodontitis are designed primarily to treat the bacterial infection associated
with periodontitis on a short-term, periodic basis. These treatments include
mechanical and surgical techniques, prophylactic approaches, such as
mouthwashes, and locally-delivered pharmaceutical therapies. The Company
believes, however, that periodic treatments designed solely to fight bacterial
infection are inadequate and that such treatments would be considerably more
effective if augmented by a long-term pharmaceutical therapy, such as Periostat,
which inhibits connective tissue destruction.
In November 1998, Periostat first became available by prescription in
pharmacies across the country. In January 1999, the Company trained a sales
force of approximately 125 sales representatives and managers and began to
promote Periostat to the dental community.
The Company's core technology is licensed on an exclusive basis from the
Research Foundation of the State University of New York at Stony Brook ("SUNY").
This technology involves modulating the body's pathological response to certain
acute and chronic illnesses. In particular, CollaGenex has developed inhibitors
of certain chronic degenerative processes that lead to the destruction of
connective tissue during inflammation. Connective tissues are components of the
body that form the structural basis for skin, bone, cartilage and ligaments.
These inhibitors have shown the potential to treat a variety of diseases
including adult periodontitis and inflammatory diseases of the musculoskeletal,
respiratory and gastrointestinal systems. CollaGenex and its collaborators are
also researching and developing other potential applications for its technology,
particularly for cancer metastasis and diabetic complications. Phase I clinical
trials for Metastat(R), the Company's lead compound for the treatment of
metastatic cancer, were initiated in January 1998 under the sponsorship of the
National Cancer Institute (the "NCI"). The Company also has a preclinical
compound, Nephrostat(R), for the
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treatment of the complications of diabetes. SUNY has conducted animal model
studies on the Company's behalf in connection with Nephrostat.
The Company was incorporated in Delaware in January 1992 under the name
CollaGenex, Inc. The Company's name was changed to CollaGenex Pharmaceuticals,
Inc. in April 1996. The Company's executive offices are located at 301 South
State Street, Newtown, Pennsylvania 18940, and its telephone number is (215)
579-7388.
"Periostat(R)," "Metastat(R)" and "Nephrostat(R)" are United States
trademarks of the Company. All other trade names, trademarks or service marks
appearing in this Annual Report on Form 10-K are the property of their
respective owners and are not property of the Company.
Technology
The Company's core technology involves the pharmaceutical modulation of the
activity of a broad class of enzymes known as matrix metalloproteinases
("MMPs"). MMPs are responsible for the normal turnover of collagen and other
proteins that are integral components of a variety of connective tissues such as
skin, bone, cartilage and ligaments.
Under normal physiological conditions, the natural breakdown of collagen is
regulated by the interaction between the degradative properties of MMPs and a
group of naturally occurring biomolecules called tissue inhibitors of
metalloproteinases ("TIMPs"), which modulate the level of MMP activity. In many
pathological conditions, however, the balance between collagen production and
degradation is disrupted resulting in excessive loss of tissue collagen, a
process called collagenolysis. One such example is the progressive destruction
of the periodontal ligament and alveolar bone in adult periodontitis. Similar
degradative activity is associated with other disorders and conditions such as
cancer metastasis, wounds, osteoarthritis, osteoporosis, rheumatoid arthritis
and diabetic nephropathy.
The Company's core technology is licensed on an exclusive basis from SUNY
and results from the research of Drs. Lorne M. Golub and Thomas F. McNamara and
their colleagues at SUNY. These researchers demonstrated that tetracyclines can
significantly reduce the pathologically excessive collagen degradation
associated with periodontitis. They also were able to demonstrate that this
result was unrelated to the antibiotic properties of tetracyclines. Furthermore,
they demonstrated that the administration of doses of antibiotic tetracyclines
well below the dosage levels necessary to destroy microbes (sub-antibiotic
doses) was still effective in preventing the loss of connective tissue in models
of periodontitis. Studies published in scientific journals support the
hypothesis that the mechanism of action for this activity is the result, in
part, of the direct binding of tetracyclines to certain metal binding sites
associated with the MMP structure.
Although commercially available antibiotic tetracyclines show effective
anti-collagenolytic potential, long-term administration of these compounds at
normal antibiotic doses can result in well-known complications of long-term
antibiotic therapy, such as gastrointestinal disturbance, overgrowth of yeast
and fungi, and the emergence of antibiotic-resistant bacteria.
-2-
The Company's Phase III clinical trials using Periostat demonstrated that the
administration of sub-antimicrobial doses of doxycycline over a 12-month period
exerted no anti-microbial effects. Thus, the use of this dosage strength
provides the anti-collagenolytic effects without the complications of long-term
antibiotic therapies.
The Company's license from SUNY also covers a broad class of chemically
modified tetracyclines ("CMTs") that have been chemically modified to retain and
enhance their anti-collagenolytic properties but which have had the structural
elements responsible for their antibiotic activity removed. These compounds,
which lack any antibiotic activity, have shown potential in a number of
pre-clinical models of excessive connective tissue breakdown. The Company's
current research and development programs are focused on the use of CMTs in drug
therapies for potential applications where more potent doses of tetracyclines
may enhance the efficacy of the treatment. See "--Other Potential Applications."
Overview of Periodontitis
Periodontitis is a chronic disease characterized by the progressive loss of
attachment between the periodontal ligament and the surrounding alveolar bone
due to chronic progressive connective tissue degradation, ultimately resulting
in tooth loss. According to industry data, in the United States alone, an
estimated one-third of all adults, or approximately 67 million people, suffer
from some form of periodontal disease. Approximately 13 million people seek
professional treatment annually for periodontal disease, resulting in over 17
million periodontal procedures and annual expenditures of approximately $6
billion, primarily for procedures and surgeries performed by a periodontist or a
dental professional. In more severe periodontitis, the gums are partially
removed through resective surgery to reduce pocket depth around the tooth and to
improve the effectiveness of home oral hygiene techniques. These treatments are
designed primarily to treat bacterial infection associated with periodontitis
and are performed by both periodontists and general dentists.
As a result of the chronic nature of periodontitis and the short-term
nature of existing therapies, patients require frequent treatments. In addition,
patients are commonly referred to a specialist for such treatments.
Periodontitis is, therefore, among the more expensive dental pathologies to
treat, and the Company believes that the treatment of periodontitis will be
increasingly important to dental health managed care organizations ("DHMOs") and
dental practitioners operating under capitated or fixed fee arrangements. The
Company also believes that Periostat is well positioned to meet the economic and
therapeutic requirements of DHMOs and dental practitioners by providing a
cost-effective therapy for periodontitis management.
Increased competition within the dental profession has created rapid
adoption of new technologies. The Company believes that a new safe, painless,
efficacious and cost-effective treatment will facilitate efforts by
periodontists and dentists to attract and retain patients with periodontitis.
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Periostat
The Company's primary focus to date has been on the development of
Periostat, which the Company believes is the first orally administered,
systemically delivered pharmaceutical indicated as an adjunct to SRP to promote
attachment level gain and to reduce pocket depth in patients with adult
periodontitis. Periostat, a 20 mg dose of doxycycline, is a unique
sub-anti-microbial dosage strength that suppresses the chronic and progressive
tissue degradation characteristic of periodontitis without exerting any
anti-microbial effect. Doxycycline is an active ingredient of several FDA
approved drugs and has been in use for approximately 30 years for the treatment
of microbial infections and, along with other tetracyclines, has a well
established safety record. Periostat's mechanism of action is believed to be
through the direct inhibition of collagenase, an MMP which is excessively
produced as a result of inflammation resulting from bacterial infection in the
gums. Periostat is intended to be taken orally by the patient between dental
visits. In September 1998, the FDA granted the Company marketing approval for
Periostat as an adjunct to SRP to promote attachment level gain and reduce
pocket depth in patients with adult periodontitis.
Prior to achieving such FDA approval and in support of its New Drug
Application ("NDA") submission, the Company completed Phase III clinical trials
consisting of three parallel, separate, multi-centered, placebo-controlled,
double-blinded clinical trials in patients with adult periodontitis.
The primary clinical endpoint of the Phase III clinical trials was the
measurement of changes in clinical attachment level ("ALv"), a parameter
defining the integrity of the connective tissue that anchors the tooth to the
alveolar bone. This endpoint is the one most often recognized by the FDA to
determine the validity of a claim for therapy of periodontitis. Each of the
Phase III clinical trials demonstrated statistically significant improvements in
ALv or probing pocket depth.
Another significant primary clinical endpoint, the percentage of all
probing sites that deteriorated by a clinically significant threshold of change,
was studied using only a manual probe. Periostat was found to reduce the
percentage of probing sites that deteriorated by a clinically significant
amount.
Several other secondary clinical endpoints were measured and analyzed using
the manual probing technique during the course of the Company's Phase III
clinical trials. These included probing pocket depth (the distance from the
gumline to the base of the periodontal pocket), the extent to which the gums
bled when the periodontal pocket was probed (a common screen for the severity of
periodontitis) and the loss of alveolar bone (measured using a complex x-ray
technique known as digital subtraction radiography). All of these secondary
clinical endpoints generally exhibited statistically significant improvements in
each of the three clinical trials and in the combined data.
The Company's three Phase III clinical trials were completed in December
1994. The Company compiled the data, performed statistical analysis and
conducted certain additional
-4-
testing necessary to complete its NDA for Periostat, which it completed and
submitted to the FDA in August 1996. The NDA was accepted for filing by the FDA
in October 1996.
During 1996, the Company initiated a fourth Phase III clinical trial to
evaluate the efficacy of Periostat as an adjunct to SRP, the most prevalent
therapy for moderate to severe periodontitis. This trial was completed and the
data analyzed in late 1997. While the earlier Phase III clinical trials were
intended to evaluate the efficacy of Periostat in conjunction with a routine
dental scaling and prophylaxis, this trial was the first to demonstrate that
Periostat can significantly enhance the efficacy of SRP.
In this study, 190 adult patients with periodontitis were administered SRP
at the outset of a nine-month, double-blind, placebo-controlled clinical trial
at five university centers in the United States. Patients were then randomly
assigned to take either Periostat or placebo. Measurements of probing pocket
depth and clinical attachment level were made every three months using a manual
probe. Results were compared with measurements taken immediately prior to the
course of SRP.
In the group receiving Periostat, statistically significant improvements in
probing pocket depth and clinical attachment level (compared with placebo) were
seen in all diseased sites as early as three months following SRP and at all
time points thereafter. As in the previous pivotal studies, the more severely
diseased sites improved the most, with improvements in probing pocket depth and
clinical attachment level of as much as 67% and 52%, respectively, over SRP with
placebo.
In September 1998, the FDA granted the Company marketing approval for
Periostat as an adjunct to SRP to promote attachment level gain and reduce
pocket depth in patients with adult periodontitis.
Cancer Metastasis
Cancer metastasis is the spread of cancer cells from a diseased organ to
the lymphatic or circulatory system, where such cells then migrate throughout
the body causing cancer to develop in other organs. Tumor cell invasion is a
complex process that involves the destruction of the basement membrane, or
structural support tissue, of the lymphatic or circulatory system, and the
migration of tumor cells to secondary sites, followed by proliferation of these
cells. Data from pre-clinical studies sponsored by the Company at two major
universities suggest that several of the Company's CMT drug candidates have
potent activity in models of cancer invasion, including prostate, breast, lung,
colon and melanoma.
These studies also demonstrated that the inhibition of certain MMP activity
by conventional tetracyclines and CMTs results in a decreased ability of tumor
cells to invade the lung in models of metastasis. In addition, CMTs have been
shown to modulate the specific type of MMP isolated from human lung cancer
cells, the activity of which has been correlated with the metastatic potential
of tumors. In animal models involving a variety of human cancer cell types,
including prostate, breast, lung, colon and melanoma, CMTs developed by the
Company exhibited an ability to inhibit metastasis.
-5-
In October 1996, the Company and the NCI executed a letter of intent to
formalize a collaborative research and development agreement pursuant to which
the NCI agreed to perform pharmacology, toxicology and Phase I clinical trials
using the Company's lead compound for the prevention of cancer metastasis,
Metastat.
In June 1997, the Company announced that it had formally extended its
Collaboration Agreement with the NCI with respect to the development of
Metastat. On December 5, 1997, the Company announced that the NCI had filed an
investigational new drug application ("IND") for Metastat. In January 1998, the
Company initiated Phase I clinical trials with respect to Metastat. Such studies
are being sponsored by the NCI pursuant to the Company's Collaboration Agreement
with the NCI. In February 1999, the Company released initial findings related to
such studies. Following oral administration, desired plasma concentrations of
the compound were achieved and no dose-limiting side effects other than
manageable phototoxicity were encountered. In February 1999, the Company also
announced the allowance of a U.S. patent which provides intellectual property
protection for the use of Metastat for the inhibition of cancer metastasis.
Diabetic Nephropathy
Diabetes is the fourth leading cause of death from disease and the number
one leading cause of blindness in the United States. Despite currently available
therapies for the treatment of diabetes, including diet restrictions, oral
medications and insulin injections, the long-term complications of this disease
continue to reduce the quality and longevity of life for diabetic patients.
Nephropathy is one of the most serious complications of diabetes. This
condition results in the progressive loss of kidney function, requiring dialysis
or a kidney transplant to maintain survival, and frequently leads to end-stage
renal disease. The destruction observed in diabetic nephropathy is associated
with elevated levels of MMPs which degrade the basement membrane of the kidney,
causing it to lose its ability to effectively act as a filter. An early
indicator of kidney disease is proteinuria, which is the excretion of protein in
the urine. Animal model studies conducted on behalf of the Company by SUNY have
shown that the administration of CMTs significantly reduces the severity of
proteinuria as well as ocular manifestations of the disease. In addition, these
animal studies showed improvements in other complications of diabetes, including
tooth loss and eye disorders. Administration of Nephrostat also increased the
longevity of the severely hyperglycemic diabetic animals used in the study.
Based on these promising early results, the Company initiated toxicology testing
of Nephrostat during 1998. Following the completion of such toxicology studies,
the Company will review and evaluate the data with the intent to initiate human
clinical trials.
Research and Development
In April 1998, the Company entered into a Research and Development
Agreement with Quintiles Scotland Ltd. ("Quintiles") pursuant to which Quintiles
will perform certain research
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and development activities with respect to Nephrostat. Such studies are
currently in progress and should be completed during 1999.
Other Potential Applications
The Company's research and discoveries relating to CMTs have yielded other
potential therapeutic programs which the Company may develop and commercialize,
possibly through the establishment of corporate partnering arrangements. The
Company believes that its core technology may be utilized to develop therapies
for other diseases and conditions which, like periodontitis, are characterized
by the progressive destruction of connective tissues of the body, such as cancer
metastasis (see above), wounds, osteoarthritis, osteoporosis, rheumatoid
arthritis and diabetic nephropathy (see above). In November 1997, the Company
announced that it had signed an agreement with Heska Corporation ("Heska")
pursuant to which Heska is evaluating certain of the Company's CMTs for use in
companion animal health applications, including osteoarthritis, periodontitis
and cancer.
Wound Repair
The repair of the connective tissue in response to acute injury involves
the remodeling of collagen and related proteins. The Company has generated data
in pre-clinical studies conducted at SUNY which suggest the potential utility of
certain of its compounds in facilitating this process. To further explore this
application, the Company has entered into an evaluation agreement with Smith &
Nephew, pursuant to which Smith & Nephew is seeking to validate the preliminary
efficacy data developed at SUNY in the field of wound repair. The Company has
granted to Smith & Nephew a right of first negotiation with respect to certain
compounds in the field of wound repair.
Osteoarthritis
Osteoarthritis is a progressive, degenerative joint disease involving the
breakdown of the synovial cartilage in the joint. Trauma, resulting in joint
instability, most often is the cause of this disease, which results in the
gradual destruction of bone and especially of collagen. Several pre-clinical
studies carried out by the Company in collaboration with a major teaching
hospital and other institutions have demonstrated that the use of the Company's
compounds inhibit the loss of synovial cartilage in the joint. In May 1996, the
Company entered into a research agreement with Istituto Gentili, an Italian
pharmaceutical company (now called Abiogen), to evaluate the application of the
Company's technology in the field of osteoarthritis. Istituto Gentili was
acquired and the research agreement has lapsed.
Osteoporosis
Osteoporosis is characterized by reductions in both the amount and strength
of bone tissue due to the loss of calcium from the bone, resulting in
susceptibility to fracture. A pre-clinical study carried out by the Company in
collaboration with a major university demonstrated that many of the Company's
CMTs inhibit bone resorption, or the loss of bone tissue, in various
-7-
experimental models. A clinical study using doxycycline has been initiated in
post-menopausal women at SUNY to study surrogate markers of bone decay.
Rheumatoid Arthritis
Rheumatoid arthritis is a chronic inflammatory joint disease with many
pathophysiological similarities to periodontitis. Substantial evidence
implicates collagenase, an MMP, as a cause of bone, joint and tissue destruction
in this disease. Several animal studies carried out by the Company and SUNY in
collaboration with a major teaching hospital have demonstrated that the use of
the Company's CMTs significantly reduced radiographic evidence of cartilage and
bone destruction in the joint that correlated with the normalization of MMP
activity.
Sales and Marketing
The Company markets and sells its products in the United States through a
direct sales force and, internationally in collaboration with marketing partners
upon receipt of the requisite foreign regulatory approvals. This strategy is
intended to enable the Company to gain rapid market acceptance and establish a
commercial presence in the dental market with Periostat.
United States
In June of 1997, the Company hired a Vice President of Marketing and a Vice
President of Sales. In January 1999, under their direction, the Company trained
a sales force of approximately 125 sales representatives and managers and began
to promote Periostat to the dental community.
In order to provide an integrated dental product line and leverage the
Company's sales and marketing organization, the Company is actively seeking to
in-license or acquire high-quality diagnostic and therapeutic dental products
complementary to Periostat. In May 1997, the Company announced that it had
signed an exclusive marketing agreement with the Parke-Davis Division
("Parke-Davis") of the Warner Lambert Company to promote the Parke-Davis
product, Ponstel(R) (Mefenamic Acid), to the professional community. Ponstel is
a nonsteroidal anti-inflammatory drug indicated for the relief of moderate pain.
Following FDA marketing approval of Periostat, the Company decided to
discontinue promotional efforts with respect to Ponstel. In June 1997, the
Company announced that it had signed a marketing agreement with Advanced
Clinical Technologies, Inc. pursuant to which the Company promotes Periocheck(R)
to the professional dental community. Periocheck is an FDA-approved test for
monitoring periodontal disease progression in the dentist's office. Because
Periocheck measures the level of tissue-destructive enzymes in a patient's
gingival fluid, it is a natural complement to Periostat, which inhibits those
enzymes.
The Company executed a Co-Promotion Agreement with SmithKline Beechman
Consumer Healthcare, L.P. ("SmithKline") in October 1998 pursuant to which the
Company will promote SmithKline's Denavir(R) product, an FDA-approved
prescription pharmaceutical for the
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treatment of recurrent cold sores in healthy adults, to the United States dental
community. The agreement provides for certain payments by SmithKline to the
Company upon future sales of Denavir.
Consistent with the Company's strategy to outsource certain specialty
functions, in September 1998, the Company entered into a Professional Services
Agreement with Science Oriented Solutions ("SOS") pursuant to which SOS will
establish and operate a medical professional inquiry support center to field
product inquiries regarding Periostat from the professional community.
International
The Company is establishing relationships with key partners to market and
sell Periostat internationally, upon receipt of the requisite foreign regulatory
approvals. In 1996, the Company executed a manufacturing and distribution
agreement with Roche S.P.A. (formerly Boehringer Mannheim Italia) pursuant to
which Roche S.P.A. has the exclusive right to market Periostat in Italy, San
Marino and The Vatican City. In 1997, the Company announced that a Marketing
Authorization for Approval was filed for Periostat by Roche S.P.A. with the
Italian Ministry of Health. The Marketing Authorization for Approval is
currently under review.
In July 1998, the Company executed a licensing agreement with Laboratoires
Pharmascience S.A. ("Laboratories Pharmascience") pursuant to which Laboratoires
Pharmascience will market and distribute Periostat on an exclusive basis in
France, Morocco, Algeria, Tunisia and other countries of French speaking Africa.
In October 1998, the Company announced that a Marketing Authorization
Application had been filed with the United Kingdom Medicine Control Agency with
respect to Periostat. Such application was filed under the European Mutual
Recognition System in order to expedite the approval process for Periostat in
other European countries. There can be no assurance that the Company will
achieve such approvals, or will successfully market Periostat, in the United
Kingdom or other European countries.
Manufacturing, Distribution and Suppliers
The Company has entered into a supply agreement with Hovione International
Limited ("Hovione") pursuant to which the active ingredient in Periostat,
doxycycline, is supplied by Hovione from its offshore facilities. Hovione
supplies a substantial portion of the doxycycline used in the United States from
two independent, FDA-registered and approved facilities, providing for a back-up
supply in the event that one facility is unable to manufacture. The supply
agreement is in effect until January 25, 2000 and will automatically renew for
successive two-year periods unless, 90 days prior to the expiration of any such
periods, either party gives the other party written notice of termination. In
addition, in the event of a default, uncured for 90 days, the non-defaulting
party can terminate the agreement effective immediately at the end of such
90-day period. The Company relies on Hovione as its sole supplier of
doxycycline.
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The Company relies on third-party contract manufacturers to produce
doxycycline, the active drug ingredient in Periostat, and for the commercial
manufacturing of Periostat. In June, 1998, the Company finalized its
manufacturing arrangements with Applied Analytical Industries, Inc. ("AAI"), in
Wilmington, North Carolina for the manufacture of Periostat. AAI supplied a
portion of the products used in the Company's Phase III clinical trials. The
Company's agreement with AAI terminates three years from the date of the initial
product launch and automatically extends for consecutive one-year periods unless
12-month prior written notice is provided before the expiration of the
applicable term. AAI is required to comply with good manufacturing practices
("GMP") requirements. The Company is currently identifying ways to reduce its
cost of product sales by exploring a tablet formulation of Periostat.
In November 1998, the Company executed a Distribution Services Agreement
with Cord Logistics, Inc. ("Cord"), pursuant to which Cord will act as the
Company's exclusive distribution agent for Periostat in the United States and
Puerto Rico. Cord is a subsidiary of Cardinal Health, Inc., a leading wholesale
distributor of pharmaceutical and related healthcare products. Under this
agreement, Cord will warehouse and ship Periostat from its central distribution
facility to wholesalers and large national retail chains who in turn will
distribute Periostat to pharmacies throughout the United States, for
prescription sale to patients. Cord will also provide various financial support
services to the Company, including billing and collections, contract pricing
maintenance, cash application, chargeback processing and related reporting
services. Under this agreement, Cord will provide certain customer service
functions and supply data for certain of the Company's required governmental
filings. The Distribution Services Agreement has an initial term of three years
and will renew automatically for successive one-year periods unless notice of
termination is provided by either party 90 days prior to expiration.
There can be no assurance that the Company will be able to enter into
additional, or maintain existing manufacturing, distribution or supply
agreements on acceptable terms, if at all. In the event that the Company is
unable to obtain sufficient quantities of doxycycline or Periostat on
commercially reasonable terms, or in a timely manner, or if the Company's
suppliers fail to comply with GMP, or if the Company's distributors are unable
to ship or support the Company's products, the Company's business, financial
condition and results of operations would be materially adversely affected. See
"--Government Regulation."
Research and Development
The Company's research and development activities are conducted by third
parties, primarily contract research organizations, academic and government
institutions and corporate partners. The main focus of these activities is the
identification and development of novel tetracycline-based compounds for
application in a variety of inflammatory and tissue-destructive disorders.
Other than Periostat, the most advanced program involves Metastat, the
Company's lead compound for treating metastatic cancer. Three Phase I
dose-escalation studies of patients with refractory metastatic disease are
underway in collaboration with NCI, and NCI plans to initiate at least one
additional clinical study of this compound in additional tumor types during
1999. The
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second most significant development program currently underway is preclinical
toxicology studies for Nephrostat, a compound aimed at ameliorating the
complications of diabetes, in particular diabetic nephropathy (kidney failure).
The Company expects to continue pre-clinical trials on Nephrostat to determine
whether to file an IND with the FDA seeking permission to begin human clinical
trials.
Metastat and Nephrostat, may also have application in other inflammatory
disorders involving connective tissue destruction such as osteoarthritis,
rheumatoid arthritis and periodontitis, as well as diseases involving connective
tissue destruction in the lung such as cystic fibrosis.
Furthermore, the Company has established a three-year research agreement
with SUNY to screen novel tetracyclines, developed in collaboration with a
research team funded by the Company at the University of Rochester, in a variety
of in vitro and in vivo assay systems in order to identify new, proprietary
compounds with particular properties relevant to their clinical application in a
variety of acute and chronic inflammatory disorders.
The Company receives certain proprietary rights to inventions or
discoveries that arise as a result of this research. The Company's current
research and development objective is to develop additional products utilizing
its CMT technology. See "--Technology" and "-- Other Potential Applications."
The Company's research and development expenditures were approximately $4.4
million, $4.2 million and $4.7 million in 1996, 1997 and 1998, respectively.
Patents, Trade Secrets and Licenses
The Company's success will depend in part on patent and trade secret
protection for its technologies, products and processes, and on its ability to
operate without infringement of proprietary rights of other parties both in the
United States and in foreign countries. Because of the substantial length of
time and expense associated with bringing new products through development to
the marketplace, the pharmaceutical industry places considerable importance on
obtaining and maintaining patent and trade secret protection for new
technologies, products and processes.
The Company depends on the license from the Research Foundation of the
State of New York at Stony Brook for all of its core technology (the "SUNY
License"). The SUNY License grants the Company an exclusive worldwide license to
make and sell products employing tetracyclines that are designed or utilized to
alter a biological process. Nineteen United States patents and ten United States
patent applications held by SUNY are licensed to the Company under the SUNY
License. One of the ten patent applications has been co-assigned to the
University of Miami, Florida, and another patent application has been
co-assigned to Washington University. The primary United States patent claims
methods of use of conventional tetracyclines to inhibit pathologically excessive
collagenolytic activity (the "Primary Patent"), while a related United States
patent claims methods of use of tetracyclines which have no
-11-
antibiotic activity (the "Secondary Patent"). The seventeen other United States
patents relate to the compositions of certain CMTs with anti-collagenolytic
properties, methods of use of tetracyclines to reduce bone loss and methods of
use of tetracyclines to enhance bone growth and inhibit protein glycosylation.
SUNY did not apply in foreign countries for patents corresponding to the Primary
Patent but has obtained patents that correspond to the Secondary Patent in
Australia, Canada and certain European countries. A patent application
corresponding to the Secondary Patent is pending in Japan. SUNY also has
obtained patents in certain European countries, Canada and Japan and has pending
patent applications in certain other foreign countries which correspond to its
United States patents relating to methods of use of tetracyclines to reduce bone
loss. All of SUNY's United States and foreign patents expire between 2004 and
2017. The Company's rights under the SUNY License are subject to certain
statutory rights of the United States government resulting from federal support
of research activities at SUNY. The failure to obtain and maintain patent
protection may mean that the Company will face increased competition in the
United States and in foreign countries. The SUNY License is terminable by SUNY
on 90 days prior notice only upon the Company's failure to make timely payments,
reimbursements or reports, if the failure is not cured by the Company within 90
days. The termination of the SUNY License, or the failure to obtain and maintain
patent protection for the Company's technologies, would have a material adverse
effect on the Company's business, financial condition and results of operations.
One of the United States patents and a corresponding Japanese patent
application licensed to the Company under the SUNY License are owned jointly by
SUNY and a Japanese company. These patent rights, which expire in 2012, cover
particular CMTs (the "Jointly Owned CMTs") that were involved in research
activities between SUNY and the Japanese company. The Japanese company may have
exclusive rights to these Jointly Owned CMTs in Asia, Australia and New Zealand
and may have a non-exclusive right to exploit these Jointly Owned CMTs in other
territories. These Jointly Owned CMTs are not involved in the Company's
Periostat product but could, in the future, prove to be important for one or
more of the Company's other potential applications of its technology. If the
Company does incorporate the Jointly Owned CMTs in any future product, it may be
precluded from marketing these products in Asia, Australia and New Zealand and
could experience increased competition in other markets from the joint owner.
In consideration of the license granted to the Company, the Company: (i)
issued to SUNY 78,948 shares of Common Stock; and (ii) has agreed to pay SUNY
royalties on the net sales of products employing tetracyclines, with minimum
annual royalty payments per year. The term of the license is: (i) until the
expiration of the last to expire of the licensed patents in each country; or
(ii) until 20 years from the first commercial sale of any collagenase
inhibition-related product by the Company for know-how, at which time the
Company has a fully paid, non-exclusive license.
In addition to the patents and patent applications licensed from SUNY which
represent the core technology, the Company owns additional technology for which
applications for United States patents have been filed and have been issued. In
this regard, the Company reports the existence of two issued patents as follows:
for (i) a toothpaste/mouthwash formulation for the
-12-
amelioration of dentin hypersensitivity; and (ii) a method for treating H.
Pylori. Furthermore, the Company reports a pending application covering new
tetracycline derivatives having increased lipophilicity.
The Company intends to enforce its patent rights against third-party
infringers. Due to the general availability of generic tetracyclines for use as
antibiotics, the Company could become involved in infringement actions, which
could entail substantial costs to the Company. Regardless of the outcome,
defense and prosecution of patent claims is expensive and time consuming, and
results in the diversion of substantial financial, management and other
resources from the Company's other activities.
The patent positions of pharmaceutical firms, including the Company, are
generally uncertain and involve complex legal and factual questions.
Consequently, as to the patent applications licensed to it, even though the
Company currently is prosecuting such patent applications with United States and
foreign patent offices, the Company does not know whether any of such
applications will result in the issuance of any additional patents or, if any
additional patents are issued, whether they will provide significant proprietary
protection or will be circumvented or invalidated. Since patent applications in
the United States are maintained in secrecy until patents issue, and since
publication of discoveries in the scientific and patent literature tends to lag
behind actual discoveries by several months, the Company cannot be certain that
it was the first creator of inventions covered by pending patent applications or
that it was the first to file patent applications for such inventions.
There can be no assurance that patent applications to which the Company
holds rights will result in the issuance of patents, that any patents issued or
licensed to the Company will not be challenged and held to be invalid, or that
any such patents will provide commercially significant protection to the
Company's technology, products and processes. In addition, there can be no
assurance that others will not independently develop substantially equivalent
proprietary information not covered by patents to which the Company owns rights
or obtain access to the Company's know-how, or that others will not be issued
patents which may prevent the sale of one or more of the Company's products, or
require licensing and the payment of significant fees or royalties by the
Company to third parties in order to enable the Company to conduct its business.
In the event that any relevant claims of third-party patents are upheld as valid
and enforceable, the Company could be prevented from selling its products or
could be required to obtain licenses from the owners of such patents. There can
be no assurance that such licenses would be available or, if available, would be
on terms acceptable to the Company. The Company's failure to obtain these
licenses would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's success also is dependent upon know-how, unpatentable trade
secrets, and the skills, knowledge and experience of its scientific and
technical personnel. The Company requires all employees to enter into
confidentiality agreements that prohibit the disclosure of confidential
information to anyone outside the Company and require disclosure and assignment
to the Company of their ideas, developments, discoveries and inventions. In
addition, the Company seeks to obtain such agreements from its consultants,
advisors and research
-13-
collaborators. There can be no assurance that adequate protection will be
provided for the Company's trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure. The Company
occasionally provides information and chemical compounds to research
collaborators in academic institutions, and requests that the collaborators
conduct tests in order to investigate certain properties of the compounds. There
can be no assurance that the academic institutions will not assert intellectual
property rights in the results of the tests conducted by the research
collaborators, or that the academic institutions will grant licenses under such
intellectual property rights to the Company on acceptable terms. If the
assertion of intellectual property rights by an academic institution can be
substantiated, failure of the academic institution to grant intellectual
property rights to the Company could have a material adverse effect on the
Company's business, financial condition and results of operations.
Government Regulation
The Company's activities and product candidates are subject to extensive
and rigorous regulation by a number of governmental entities in the United
States, primarily the FDA, and by comparable regulatory authorities in other
countries. These governmental entities regulate, among other things, research
and development activities including animal and human testing, manufacturing,
safety, effectiveness, labeling, storage, record keeping, approval, advertising,
promotion, distribution and sale of prescription drug products. Different types
of FDA regulation apply to various drug products, depending upon whether they
are marketed only upon the order of a physician (prescription drugs) or
over-the-counter, are biological or antibiotic drugs or are controlled drugs,
such as narcotics. Product development and approval within this regulatory
framework takes a number of years, involves the expenditure of substantial
resources and approval is uncertain. Many products that initially appear
promising ultimately do not reach the market because they are not found to be
safe and effective, as demonstrated by testing required by government regulation
during the development process. In addition, there can be no assurance that this
regulatory framework will not change or that additional regulation will not
arise at any stage of the Company's product development that may affect
approval, delay an application or require additional expenditure by the Company.
Moreover, even if approval is obtained, failure to comply with present or future
regulatory requirements, or new information adversely reflecting on the safety
or effectiveness of the approved drug, can lead to FDA withdrawal of approval to
market the product. Failure to comply with applicable FDA and other regulatory
requirements can result in sanctions being imposed on the Company or the
manufacturers of its products, including warning letters, product recalls or
seizures, injunctions, refusals to permit products to be imported into or
exported out of the United States, refusals of the FDA to grant pre-market
approval of drugs or to allow the Company to enter into government supply
contracts, withdrawals of previously approved marketing applications and
criminal prosecutions.
The activities required before a new drug product may be marketed in the
United States begin primarily with pre-clinical testing. Pre-clinical tests
include laboratory evaluation of product chemistry and other characteristics and
animal studies to assess the potential safety and efficacy of the product as
formulated. Many pre-clinical (toxicology) studies are regulated by the
-14-
FDA under Good Laboratory Practice ("GLP") regulations. Violations of these
regulations can, in some cases, lead to invalidation of the studies, requiring
such studies to be repeated.
The entire body of pre-clinical development work necessary to administer
investigational drugs to human volunteers or patients is provided in an IND
filed with the FDA. FDA regulations provide that human clinical trials may begin
30 days following receipt of an IND, unless the FDA advises otherwise or
requests additional information, clarification or additional time to review the
IND submission. There is no assurance that the submission of an IND will
eventually allow a company to commence clinical trials. Once trials have
commenced, the FDA may stop the trials, or particular types of trials, by
placing a "clinical hold" on such trials because of concerns about, for example,
the safety of the product being tested or the adequacy of the trial design. Such
holds can cause substantial delay and, in some cases, may require abandonment of
a product. Clinical testing involves the administration of the drug to healthy
human volunteers or to patients under the supervision of a qualified principal
investigator, usually a physician, pursuant to a FDA reviewed protocol. Each
clinical study is conducted under the auspices of independent Institutional
Review Boards ("IRBs") at the institutions at which the study will be conducted.
An IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution. Human clinical trials
typically are conducted in three sequential phases, but the phases may overlap.
Phase I trials consist of testing the product in a small number of patients or
normal volunteers, primarily for safety and tolerance, in one or more dosages,
as well as characterization of a drug's pharmacokinetic and/or pharmacodynamic
profile. In Phase II, in addition to safety, the efficacy of the product is
evaluated in a patient population. Phase III trials typically involve additional
testing for safety and clinical efficacy with an expanded population at
geographically dispersed sites. A clinical plan, or "protocol," accompanied by
the approval of an IRB, must be submitted to the FDA prior to commencement of
each clinical trial. All patients involved in the clinical trial must provide
informed consent prior to their participation.
A company seeking FDA approval to market a new drug must file an NDA with
the FDA pursuant to the Federal Food, Drug and Cosmetic Act. In addition to
reports of the pre-clinical and clinical trials conducted under the FDA-approved
IND, the NDA includes information pertaining to the preparation of the drug
substance, analytical methods, drug product formulation, details on the
manufacture of finished products as well as proposed product packaging and
labeling. Submission of an NDA does not assure FDA approval for marketing. The
application review process generally takes one to three years to complete,
although reviews of treatments for cancer and other rare or life-threatening
diseases may be accelerated or expedited. However, the process may take
substantially longer if, among other things, the FDA has questions or concerns
about the safety or efficacy of a product. In general, the FDA requires at least
two properly conducted, adequate and well-controlled clinical studies
demonstrating safety and efficacy with sufficient levels of statistical
assurance. However, additional information may be required. For example, the FDA
also may request long-term toxicity studies or other studies relating to product
safety or efficacy. Notwithstanding the submission of such data, the FDA
ultimately may decide that the application does not satisfy its regulatory
criteria for approval. Finally, the FDA may require additional clinical tests
following NDA approval to further delineate safety and efficacy (Phase IV
clinical trials).
-15-
The FDA has requested that a post-approval, post-marketing animal study
related to long-term dosing and carcinogenicity of Periostat be conducted to
satisfy the regulatory requirement for a chronically administered drug. Such
studies are currently underway.
The FDA may, in some circumstances, impose restrictions on the use of a
drug, compliance with which may be difficult and expensive. Product approvals
may be withdrawn if compliance with regulatory requirements is not maintained or
if problems occur after the product reaches the market. After a product is
approved for a given indication in an NDA, subsequent new indications or dosages
for the same product are reviewed by the FDA by the filing of an NDA supplement.
The NDA supplement is much more focused than the NDA and deals primarily with
safety and effectiveness data related to the indication or dosage, and labeling
information for the new indication. Finally, the FDA requires reporting of
certain information that becomes known to a manufacturer of an approved drug.
The FDA does not permit a manufacturer or distributor to market or promote
an approved drug product for an unapproved "off label" use or dosage level.
Therefore, any company that markets or promotes doxycycline for use in the
treatment of adult periodontitis in an unapproved dosage level (for example, a
50 mg scored tablet) without first obtaining FDA approval for such use and
dosage would be subject to regulatory action. Generally, the FDA, under its
"practice of medicine" policy, does not prohibit a physician, dentist or other
licensed practitioner from prescribing an approved drug product for an
unapproved use or dosage. Nor does the FDA generally regulate the practice of
pharmacy where the pharmacist fills a prescription issued by a licensed
practitioner for an individual patient. There can be no assurance that the FDA
or a state agency regulating the practice of medicine would initiate regulatory
action against a licensed practitioner for prescribing doxycycline in the
currently available dosage for use in the treatment of adult periodontitis.
The Drug Price Competition and Patent Term Restoration Act of 1984 provides
for abbreviated approval requirements for generic drugs, exclusivity protection
for innovative products that prevents FDA approval of generic versions, and
patent extension for a certain period of time that it takes to obtain FDA
approval. Periostat is being treated by the FDA as an "antibiotic." Therefore,
the Company will have to rely solely on its patent protection as Periostat will
not be entitled to a three-year period of marketing exclusivity before generic
versions can be approved by the FDA for commercial sale, and no patent-term
extension will be available. In addition, the Company will be subject to certain
user fees that the FDA is authorized to collect under the Prescription User Fees
Act of 1992 for reviewing NDAs and other marketing applications.
Among the requirements for product approval is the requirement that the
prospective manufacturer conform to GMP regulations. In complying with the GMP
regulations, manufacturers must continue to expend time, money and effort in
product, record-keeping and quality control to assure that the product meets
applicable specifications and other requirements. The FDA periodically inspects
manufacturing facilities in the United States in order to assure compliance with
applicable GMP requirements. Foreign manufacturers also are inspected by the FDA
if their drugs are marketed in the United States. Failure of the Company's
foreign supplier
-16-
of the active ingredient used in the manufacture of the Company's products or
failure of the Company's manufacturer of its finished dosage form products to
comply with the GMP regulations or other FDA regulatory requirements would have
a material adverse effect on the Company's business, financial condition or
results of operations.
In September 1998, the FDA granted the Company marketing approval for
Periostat as an adjunct to SRP to promote attachment level gain and reduce
pocket depth in patients with adult periodontitis. The Company is subject to
numerous continuing requirements with regard to such approval. For example,
quality control and manufacturing must conform to complex and detailed GMP
requirements. In addition, the FDA may require post-marketing testing and will
require surveillance to monitor the record of the product and continued
compliance with regulatory requirements. Upon approval, a prescription drug may
only be marketed for the approved indications in the approved dosage forms and
at the approved dosage. Also, an NDA holder is required to report certain
adverse reactions to the FDA, and to comply with certain requirements concerning
advertising and promotion labeling for their products. There can be no assurance
that approval from the FDA to market Periostat will not be withdrawn or that
Periostat will never be recalled. Withdrawal of FDA marketing approval or a
recall of Periostat would have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition to the applicable FDA requirements, the Company is subject to
foreign regulatory authorities governing clinical trials and drug sales. Whether
or not FDA approval has been obtained, approval of a pharmaceutical product by
the comparable regulatory authorities of foreign countries must be obtained
prior to the commencement of marketing of the product in those countries. The
approval process varies from country to country and the time required may be
longer or shorter than that required for FDA approval.
Competition
The pharmaceutical industry is subject to intense competition as well as
rapid and significant technological change. The Company believes that a
significant competitive factor is the relative speed with which the Company can
supply commercial quantities of the product to the market on an ongoing basis.
In addition, the Company expects that competition in the periodontal area will
be based on other factors, including product efficacy, safety,
cost-effectiveness, ease of use, patient discomfort, availability, price and
patent position.
-17-
The Company believes that Periostat is distinguished from other existing
and known periodontitis treatments in that it is the only treatment which is
directed to suppression of the enzymes that degrade periodontal support tissues.
The Company believes that all other therapies focus on temporarily removing the
bacteria associated with periodontitis. Periostat is a prescription
pharmaceutical capsule indicated as an adjunct to SRP to promote attachment
level gain and to reduce pocket depth in patients with adult periodontitis that
is taken by the patient between dental visits. The Company believes that the
following chart summarizes the available forms of periodontitis treatment, other
than SRP, resective surgery and systemic antibiotics:
Product Product Dental Delivery Patient Treatment
Name Manufacturer/Marketer Procedure Route Administered Focus
---- --------------------- --------- -------- ------------ ---------
Periostat(R) CollaGenex No Systemic Yes Tissue
Pharmaceuticals, Inc. degradation
Atridox(TM) Atrix Laboratories/ Yes Local No Bacteria
Block Drug
Actisite(R) Alza/Proctor & Gamble Yes Local No Bacteria
Periochip(TM)PerioProducts, Ltd./ Yes Local No Bacteria
Astra U.S.
Many of the companies participating in the periodontal area have
substantially greater financial, technical and human resources than the Company
and may be better equipped to develop, manufacture and market products. These
companies may develop and introduce products and processes competitive with or
superior to those of the Company.
Employees
The Company historically has outsourced its manufacturing, clinical trials,
NDA preparation and other activities. The Company intends to continue to
outsource many of the activities which it historically has outsourced. As of
December 31, 1998, the Company employed 134 persons. Each of its management
personnel has had extensive prior experience with pharmaceutical, biotechnology
or medical products companies. The Company has increased its sales and marketing
staff to include approximately 123 sales representatives and managers
nationwide, of which 19 are part-time. In addition, the Company plans to recruit
additional sales representatives in 1999; however, there can be no assurance
that the Company will be able to recruit and retain qualified inside sales and
marketing personnel, additional foreign sub-licensees or distributors or
marketing partners or that the Company's marketing and sales efforts will be
successful. Currently, none of the Company's employees are covered by collective
bargaining agreements. In general, the Company's employees are covered by
confidentiality agreements. The Company considers relations with its employees
to be excellent.
-18-
Item 2. Properties.
The Company owns no real property. The Company leases 3,500 square feet of
office space in Newtown, Pennsylvania under two leases. The Company's facility
contains all of its executive and administrative offices. One of the Company's
leases expired in September of 1998 and the second lease expires in December of
2000. The Company has agreed to extend the lease at its current facility on a
month-to-month basis. In May 1999, the Company expects to move its executive and
administrative offices to a new facility in Newtown, Pennsylvania with
approximately 14,000 square feet of office space. The Company expects to
negotiate a ten-year lease for such facility.
Item 3. Legal Proceedings.
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
-19-
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.
Prior to June 1996, there was no established market for the Company's
Common Stock. Since June 20, 1996, the Common Stock has traded on the Nasdaq
National Market ("NNM") under the symbol "CGPI."
The following table sets forth the high and low bid information for the
Common Stock for each of the quarters in the period beginning January 1, 1997
through December 31, 1998 as reported on NNM. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
Quarter Ended High Low
- --------------------------------------------------------
March 31, 1997.......... $ 17.50 $ 8.00
June 30, 1997........... $ 14.50 $10.50
September 30, 1997...... $ 12.875 $ 9.75
December 31, 1997....... $ 16.625 $ 9.875
March 31, 1998.......... $ 13.125 $ 5.50
June 30, 1998........... $ 10.75 $ 7.25
September 30, 1998...... $ 14.50 $ 7.75
December 31, 1998....... $ 14.375 $ 8.25
As of February 15, 1999, the approximate number of holders of record of the
Common Stock was 118 and the approximate number of beneficial holders of the
Common Stock was 3000.
The Company has never declared or paid any cash dividends on its capital
stock. Except as set forth below, the Company intends to retain any earnings to
fund future growth and the operation of its business. In connection with a Stock
Purchase Agreement entered into in March 1999, the Company plans to seek the
approval of its stockholders at the 1999 Annual Meeting of Stockholders of the
Company for a private placement of Series D Cumulative Convertible Preferred
Stock. If stockholder approval is obtained, the Company would have cumulative
cash and common stock dividend obligations in the future to the holders of the
Series D Cumulative Convertible Preferred Stock. Such financing arrangement also
limits the Company's ability to generally declare dividends to its common
stockholders. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
-20-
Item 6. Selected Consolidated Financial Data.
The selected consolidated financial data set forth below with respect to
the Company's statement of operations data for each of the years in the
three-year period ended December 31, 1998, and with respect to the consolidated
balance sheet data at December 31, 1997 and 1998 are derived from and are
qualified by reference to the audited consolidated financial statements and the
related notes thereto of the Company found at "Item 14. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K." The consolidated statement of
operations data for the years ended December 31, 1994 and 1995 and with respect
to the consolidated balance sheet data as of December 31, 1994, 1995 and 1996
are derived from consolidated audited financial statements not included in this
Annual Report on Form 10-K. The selected consolidated financial data set forth
below should be read in conjunction with and is qualified in its entirety by,
the Company's audited consolidated financial statements and related notes
thereto found at "Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" which are included elsewhere in this Annual
Report on Form 10-K.
-21-
Years Ended December 31,
------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Consolidated Statement of (in thousands except for per share data)
Operations Data: ------------------------------------
Revenues:
Product sales......... $ -- $ -- $ -- $ -- $3,053
License revenues...... -- -- 400 325 400
Contract revenues..... -- -- -- 9 8
----- ----- ----- ---- ----
Total revenues......... -- -- 400 334 3461
----- ----- ----- ---- ----
Operating expenses:
Cost of product sales. -- -- -- -- 745
Research and development 1,928 3,635 4,436 4,200 4,670
Selling, general and
administrative........ 793 1,548 2,527 6,096 10,600
Operating loss......... (2,721)(5,183) (6,563) (9,962)(12,554)
Net loss............... (2,653)(5,269) (5,918) (8,624)(11,566)
Net loss allocable to
common stockholders... (3,229)(6,028) (6,638) (8,624)(11,566)
Net loss per share(1):
Basic................. $(19.91) $(1.74) $(1.04) $(1.35)
Diluted............... (14.60) (1.72) (1.04) (1.35)
Shares used in computing
net loss per share(1):
Basic................. 303 3,809 8,291 8,579
Diluted............... 413 3,864 8,291 8,579
As of December 31,
------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Balance Sheet Data: (in thousands)
Cash, cash equivalents and
short-term investments... $ 617 $5,806 $18,215 $22,771 $10,250
Total assets............... 628 5,840 18,437 23,165 14,740
Mandatorily redeemable
convertible preferred
stock.................... 7,510 18,908 -- -- --
Accumulated deficit........ (6,552) (11,820) (17,739) (26,362) (37,928)
Total stockholders'
equity(deficit)............ (7,581) (13,581) 17,592 20,708 9,281
(1) See Note 2 of Notes to Consolidated Financial Statements for information
concerning computation of net loss per share.
-22-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
CollaGenex Pharmaceuticals, Inc. began operations in January 1992 and is
focused on providing innovative medical therapies for the treatment of
periodontitis and other pathologies characterized by the progressive degradation
of the body's connective tissues. The Company's core technology involves
inhibiting the activity of certain enzymes that degrade such connective tissues.
The Company's first product, Periostat, is a prescription pharmaceutical capsule
that was approved by the FDA in September 1998 as an adjunct to SRP, the most
prevalent therapy for periodontitis, to promote attachment level gain and to
reduce pocket depth in patients with adult periodontitis. Periostat has been
shipped to wholesalers and is presently available to patients throughout the
United States.
Since inception, the Company has operated with a minimal number of
employees. Substantially all pharmaceutical development activities, including
clinical trials, have been contracted to independent contract research and other
organizations. The Company has recently increased, and expects to continue to
increase, the number of its employees over the next several years, primarily in
the selling, general and administrative areas.
The Company has incurred losses each year since inception and had an
accumulated deficit of $37.9 million at December 31, 1998. The Company expects
to continue to incur losses in the foreseeable future from expenditures on drug
development, marketing, manufacturing and administrative activities.
Statements contained or incorporated by reference in this Annual Report on
Form 10-K that are not based on historical fact are "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "continue," or similar terms, variations of such terms or the
negative of those terms. This Form 10-K contains forward-looking statements that
involve risks and uncertainties. The Company's business of selling, marketing
and developing pharmaceutical products is subject to a number of significant
risks, including risks relating to the implementation of the Company's sales and
marketing plans for Periostat, risks inherent in research and development
activities, risks associated with conducting business in a highly regulated
environment, risks relating to the Company's Year 2000 compliance and the Year
2000 compliance of the Company's vendors, suppliers, manufacturers,
distributors, marketing partners and certain other parties, uncertainty relating
to clinical trials of products under development and uncertainty relating to
stockholder approval of the Company's proposed Preferred Stock financing and
whether such Preferred Stock financing will be consummated in a timely fashion,
if at all. The success of the Company depends to a large degree upon the market
acceptance of Periostat by periodontists, dental practitioners, other health
care providers, patients and insurance companies. Other than Periostat, which
has been FDA approved for marketing in the United States, there can be no
assurance that any of the Company's other product candidates will be
-23-
approved by any regulatory authority for marketing in any jurisdiction or, if
approved, that any such products will be successfully commercialized by the
Company. The Company's actual results may differ materially from the results
discussed in the forward-looking statements contained herein.
Results of Operations
From its founding through the quarter ending September 30, 1998, the
Company had no revenues from sales of its own products. During the fourth
quarter of 1998, the Company achieved net product sales of $3.1 million
following the commercial launch of Periostat in November 1998. The Company
realized a net loss during the fourth quarter of 1998, however, resulting
primarily from pre-launch and post-launch marketing activities incurred during
1998. Total operating expenses consist of the cost of product sales, research
and development expenses and selling, general and administrative expenses. Cost
of product sales consists primarily of direct manufacturing expenses and
royalties. Research and development expenses consist primarily of funds paid to
contract research organizations for the provision of services and materials for
drug development and clinical trials. Selling, general and administrative
expenses consist primarily of personnel salaries and benefits, direct marketing
costs, professional and consulting fees, insurance and general office expenses.
The Company anticipates that selling, general and administrative expenses will
increase during the next several years due to the continued expansion of its
commercial infrastructure, primarily in sales and marketing.
Years Ended December 31, 1998 and December 31, 1997
The Company realized $3.5 million in net revenues during 1998 compared to
$334,000 during 1997. Revenues in 1998 included $3.1 million in net sales of
Periostat and $408,000 in licensing and contract revenues. The 1998 licensing
revenues of $400,000 were attributable to a licensing agreement with
Laboratories Pharmascience pursuant to which Laboratories Pharmascience will,
following all requisite regulatory approvals, market Periostat in France and
certain other related territories. Revenues in 1997 included a non-refundable
$300,000 licensing fee from Boehringer Mannheim Italia (now called Roche S.P.A.)
related to the achievement of the first milestone under a licensing agreement
pursuant to which Roche S.P.A. will, following all requisite regulatory
approvals, distribute and manufacture Periostat in Italy.
Cost of product sales were $745,000 in 1998, while there were no cost of
product sales in 1997. Such increase resulted from the Company's initial sales
of Periostat in 1998.
Research and development expenses increased from $4.2 million in 1997 to
$4.7 million in 1998. This increase resulted primarily from expenses relating to
additional costs associated with the Company's amendment to its NDA for
Periostat submitted to the FDA in March 1998, a Phase 3b clinical trial intended
to support future marketing activities for Periostat, the initiation of certain
pre-clinical studies for Nephrostat, the Company's compound for the treatment of
diabetic complications, and consulting and product registration fees associated
with the Marketing Authorization Application that the Company has filed with the
United Kingdom Medicine Control Agency with respect to potential Periostat sales
in the United Kingdom.
-24-
Selling, general and administrative expenses increased from $6.1 million in
1997 to $10.6 million in 1998. This increase was due primarily to the Company's
pre-launch marketing activities related to Periostat, the hiring of additional
sales personnel and sales and marketing efforts related to certain contractual
marketing arrangements entered into during 1997.
Interest income decreased from $1.3 million in 1997 to $988,000 in 1998.
This decrease was due to lower balances in cash and short-term investments as a
result of normal operating activities since the Company's follow-on public
offering of Common Stock in April 1997.
Years Ended December 31, 1997 and December 31, 1996
The Company earned $325,000 in licensing fee revenue during 1997 compared
to $400,000 during 1996. During 1996, the Company executed a licensing agreement
with Boehringer Mannheim Italia (now called Roche S.P.A.), pursuant to which
Roche S.P.A. will, following all requisite regulatory approvals, distribute and
manufacture Periostat in Italy. The agreement provided for Roche S.P.A. to pay a
$400,000 license fee upon signing, additional fees to be paid upon the
achievement of future milestones and royalty payments upon future sales of
Periostat in Italy, San Marino and the Vatican City. During the second quarter
of 1997, the Company received a non-refundable $300,000 licensing fee from Roche
S.P.A. related to the achievement of the first milestone under the agreement.
Research and development expenses decreased from $4.4 million in 1996 to
$4.2 million in 1997. This decrease resulted primarily from lower costs
associated with the NDA for Periostat, which was submitted in 1996. Research and
development expenses in 1997 related primarily to costs associated with
completing a Phase III scaling and root planing trial, validating Periostat
manufacturing processes and continuing certain toxicology studies.
Selling, general and administrative expenses increased from $2.5 million in
1996 to $6.1 million in 1997. This increase was due primarily to higher
marketing, general and administrative expenses associated with the expansion of
the Company's commercial infrastructure.
Interest income increased from $645,000 in 1996 to $1.3 million in 1997.
This increase was due to higher balances in cash and short-term investments as a
result of the Company's follow-on public offering of Common Stock in 1997.
Liquidity and Capital Resources
Since its origin in January 1992, the Company has financed its operations
through private placements of preferred stock and common stock, an initial
public offering of 2,000,000 shares of common stock, which generated net
proceeds to the Company of approximately $18.0 million after underwriting fees
and related expenses, and a subsequent public offering of 1,000,000 shares of
common stock, which generated net proceeds to the Company of approximately $11.6
million after underwriting fees and related expenses. On March 19, 1999, the
Company announced that it had entered into an agreement with investors who have
committed to purchase $20.0 million of Series D Cumulative Convertible Preferred
Stock (the "Preferred Stock") of the
-25-
Company at a purchase price of $100 per share. In accordance with certain
stockholder approval requirements of the Nasdaq Stock Market, Inc., the
Preferred Stock financing is expected to be presented to the Company's common
stockholders for approval at the Company's Annual Meeting of Stockholders in May
1999 and, assuming such approval, the Company expects to consummate the
Preferred Stock financing as soon as practicable following such Annual Meeting
of Stockholders. Simultaneous with the signing of the Preferred Stock financing
agreement, the Company executed a Senior Secured Convertible Note (the "Note")
pursuant to which the Company received $10.0 million from one of the investors
in the financing transaction to be used for working capital purposes. The Note
has a term of one year, bears interest at a rate of 12.0% per annum, must be
repaid upon the closing of the Preferred Stock financing and is secured by
certain intellectual property of the Company. In the event the Preferred Stock
financing is not consummated by June 30, 1999, the noteholder shall have the
option to convert the principal due under the Note into 1,538,462 shares of
Common Stock. Any interest due under the Note would also be convertible into
shares of Common Stock at a conversion price of $6.50 per share. At December 31,
1998, the Company had cash, cash equivalents and short-term investments of
approximately $10.3 million, a decrease of $12.5 million from the $22.8 million
balance at December 31, 1997. In accordance with investment guidelines approved
by the Company's Board of Directors, cash balances in excess of those required
to fund operations have been invested in short-term United States Treasury
securities and commercial paper with a credit rating no lower than A1/P1. The
Company's working capital at December 31, 1998 was $9.0 million, a decrease of
$11.6 million from December 31, 1997. This decrease was primarily attributable
to the payment of normal operating expenses incurred during 1998.
The Company had no debt or capital leases outstanding (other than accounts
payable and accrued expenses) at December 31, 1998. On June 26, 1997, the
Company entered into a credit arrangement consisting of a $5,000,000 line of
credit (the "LOC") to support the future working capital needs of the Company.
The LOC will be unsecured as long as the Company's cash and investment balances
maintained with the lender or an affiliate of the lender equal or exceed $10.0
million. At the Company's option, the LOC will bear interest at either the prime
rate charged by the lender or LIBOR plus 2.15%. The LOC is terminable by the
lender at any time. No balance was outstanding under the LOC at December 31,
1998.
The Company anticipates that its existing working capital, including the
$10.0 million proceeds from the Note, will be sufficient to fund the Company's
operations through at least year end 1999. The Company's future capital
requirements and the adequacy of its available funds will depend on many
factors, including, the size and scope of the Company's marketing effort and
sales of Periostat, the terms of agreements entered into with corporate
partners, if any, and the results of research and development and pre-clinical
and clinical studies for other applications of the Company's core technology.
Over the long-term, the Company's liquidity is dependent on market acceptance of
its products and technology.
As of December 31, 1998, the Company had available $35.3 million and $29.6
million in net operating loss carryforwards to offset future Federal and state
taxable income. The Federal and state net operating loss carryforwards will
begin expiring in the year 2007 and 2005, respectively, if not utilized. In
addition, the utilization of the state net operating loss
-26-
carryforwards is subject to a $1.0 million annual limitation. The Company had
research and experimentation tax credits of approximately $500,000, which begin
expiring in 2007 and are available to reduce Federal income taxes. As a result
of past financings, including the Company's initial public offering in June 1996
and the Company's follow-on public offering in April 1997, the Company
experienced ownership changes as defined by rules enacted with the Tax Reform
Act of 1986 (the "Reform Act"). Accordingly, the Company's ability to use its
net operating loss and research and experimentation credit carryforwards is
subject to certain limitations as defined by the Reform Act and may be limited.
Year 2000 Issues
Assessment
The Company believes its exposure to Year 2000 problems lies primarily in
two areas: (i) its own internal operating systems; and (ii) Year 2000 compliance
by third parties with whom the Company has a material relationship. The Company
has completed an assessment of its principal internal systems. However, the
Company is continuing to assess its Year 2000 exposure with respect to third
parties. While the costs of these assessment efforts are not expected to be
material to the Company's financial condition or any year's results of
operations, there can be no assurance that this will be the case.
Internal Operating Systems
The Company believes that its principal internal systems are Year 2000
compliant. The Company recently installed upgraded versions of its internal
accounting, management and financial reporting applications which the vendor has
represented are Year 2000 compliant. Some of the Company's non-critical
applications, however, may not be Year 2000 compliant. The Company is conducting
a program to identify and resolve any such exposure. Although the costs related
to these efforts are not expected to be material to the Company's business,
financial condition or results of operations, no assurance can be made that this
will be the case.
Third-Party Relationships
The Company is conducting a program to identify and resolve Year 2000
exposure from third parties. The Company is presently conducting inquiries of
its outside vendors, suppliers, manufacturers, distributors and marketing
partners to assess their Year 2000 readiness. Any failure of third parties with
whom the Company has a material relationship to resolve Year 2000 problems in a
timely manner could materially adversely affect the Company's business,
financial condition or results of operations.
Risks of the Company's Year 2000 Issues
The Company expects to identify and resolve all Year 2000 problems that
could materially adversely affect the Company's business, financial condition or
results of operations. However, the Company believes that it is not possible to
determine with complete certainty that all Year 2000 problems affecting it have
been identified or will be corrected. Further, the
-27-
Company cannot accurately predict how many failures related to the Year 2000
problem will occur or the severity, duration or financial consequences of such
failures. As a result, the Company expects that it could possibly suffer the
following consequences:
o A significant number of operational inconveniences and inefficiencies
for the Company and the Company's customers that may divert the
Company's time and attention and financial and human resources from
the Company's ordinary business activities; and
o A lesser number of serious system failures (whether the Company's
systems or those of its vendors, suppliers, manufacturers,
distributors and marketing partners) that may require significant
efforts by the Company, its customers or third parties to prevent or
alleviate material business disruptions.
Costs
Other than time spent by the Company's own personnel, to date the Company
has not incurred any significant costs in identifying and remediating Year 2000
problems.
The Company's Contingency Plans
The Company believes its plans for addressing the Year 2000 problem are
adequate. The Company does not believe it will incur a material financial impact
from system failures, or from the costs associated with assessing and addressing
the risks of failure, arising from the Year 2000 problem. Consequently, the
Company does not intend to create a detailed contingency plan. In the event that
the Company does not adequately identify and resolve its Year 2000 issues, the
absence of a detailed contingency plan may materially adversely affect its
business, financial condition and results of operations.
European Monetary Union
On January 1, 1999, eleven of the fifteen member countries of the European
Union set fixed conversion rates between their existing legacy currencies and
the euro. At such time, these participating countries adopted the euro as their
common legal currency. The eleven participating countries will now issue
sovereign debt exclusively in euro and will redenominate outstanding sovereign
debt. The legacy currencies will continue to be used as legal tender through
January 1, 2002, at which point the legacy currencies will be canceled and euro
bills and coins will be used for cash transactions in the participating
countries.
The Company does not denominate its international licensing agreements in
foreign currencies. The Company currently does not believe that the euro
conversion will have a material impact on the Company's results of operations or
financial condition.
-28-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company is not subject to a material impact to its financial position
or results of operations.
Item 8. Financial Statements and Supplementary Data.
The financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial statements
filed herewith is found at "Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K."
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
-29-
PART III
Item 10. Directors and Executive Officers of the Company.
The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors"
and "Executive Officers" in the Company's definitive proxy statement for the
1999 Annual Meeting of Stockholders is incorporated herein by reference to such
proxy statement.
Item 11. Executive Compensation.
The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 1999 Annual Meeting of Stockholders is
incorporated herein by reference to such proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 1999
Annual Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
Item 13. Certain Relationships and Related Transactions.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1999 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
-30-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Consolidated Financial Statements
and Schedule on Page F-1.
(2) Financial Statement Schedule. Reference is made to the Index to
Consolidated Financial Statements and Schedule on Page F-1.
(3) Exhibits. Reference is made to the Index to Exhibits on Page 34.
(b) Reports on Form 8-K. No Reports on Form 8-K have been filed during the
quarter ended December 31, 1998. The Company filed a Current Report on
Form 8-K on March 25, 1999 relating to its issuance of a $10.0 million
Senior Secured Convertible Note and its proposed issuance of $20.0
million of Series D Cumulative Convertible Preferred Stock to certain
investors.
-31-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized this
29th day of March, 1999.
COLLAGENEX PHARMACEUTICALS, INC.
By:/s/Brian M. Gallagher
------------------------------------
Brian M. Gallagher, Ph.D., President
and Chief Executive Officer
-32-
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------------------------------- -------------------------- -----------------
/s/ Brian M. Gallagher, Ph.D. President, Chief March 29, 1999
- --------------------------------- Executive Officer and
Brian M. Gallagher, Ph.D. Director (Principal
Executive Officer)
/s/ Nancy C. Broadbent Chief Financial Officer, March 29, 1999
- --------------------------------- Treasurer and Secretary
Nancy C. Broadbent (Principal Financial and
Accounting Officer)
/s/ Helmer P.K. Agersborg, Ph.D. Chairman of the Board and March 29, 1999
- --------------------------------- Director
Helmer P.K. Agersborg, Ph.D.
/s/ James E. Daverman Director March 29, 1999
- ---------------------------------
James E. Daverman
Director
- ---------------------------------
Robert J. Easton
Director
- ---------------------------------
Stephen W. Ritterbush, Ph.D.
/s/ Pieter J. Schiller Director March 29, 1999
- ---------------------------------
Pieter J. Schiller
/s/ Terence E. Winters, Ph.D. Director March 29, 1999
- ---------------------------------
Terence E. Winters, Ph.D.
/s/ Peter R. Barnett Director March 29, 1999
- ---------------------------------
Peter R. Barnett
-33-
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
3.1(a) Amended and Restated Certificate of Incorporation.
3.2(a) Amended and Restated Bylaws.
4.1(a) Registration Rights Agreement dated September 29, 1995 by and
among the Company and certain investors, as supplemented.
4.2(a)(b) Letter dated December 16, 1993 re: certain rights of the Company
with respect to certain securities of the Company owned by Brian
M. Gallagher, Ph.D.
4.3(a) Fourth Investment Agreement as of September 29, 1995 by and among
the Company and certain Investors.
4.4(d) Shareholder Protection Rights Agreement, dated as of September 15,
1997, between the Company and American Stock Transfer & Trust
Company which includes (i) the Form of Rights Certificate and (ii)
the Certificate of Designation of Series A Participating Preferred
Stock of the Company.
4.5(j) Amendment No. 1 to Shareholder Protection Rights Agreement, dated
as of March 16, 1999, between the Company and American Stock
Transfer & Trust Company.
+10.1(a) Assignment of, Amendment to and Restatement of Agreement, with all
exhibits, as amended, and schedules, dated January 13, 1992 by and
among the Company, Johnson & Johnson Consumer Products, Inc. and
Research Foundation of State University of New York.
+10.2(a) Supply Agreement dated January 23, 1995 between the Company and
Hovione International Limited.
+10.3(a) Manufacturing Agreement as of April 12, 1996 by and between the
Company and Applied Analytical Industries, Inc.
10.4(a) Form of Non-Disclosure Agreement executed by all Employees as
employed from time to time.
10.5(a)(b) Form of Non-Competition Agreement executed by each of Brian M.
Gallagher, Ph.D., Nancy C. Broadbent and Robert A. Ashley.
10.6(a) Form of Mutual Non-Disclosure Agreement executed by certain
consultants and research collaborators as retained from time to
time.
10.7(a)(b) Form of Indemnification Agreement executed by each of the
Company's directors and officers.
10.8(a) Forms of Consulting Agreement executed by each of Lorne M. Golub
and Thomas F. McNamara.
10.9(a) Form of Material Transfer Agreement between the Company and
Researchers.
-34-
Exhibit No. Description of Exhibit
----------- ----------------------
10.10(g) Lease Agreement dated September 5, 1995 between the Company and
Stocking Works Associates (incorporated by reference to the
Company's Registration Statement on Form S-1 (File Number
333-3582) which became effective on June 20, 1996), as amended
effective January 1, 1997 (such amendment is incorporated by
reference to the Company's Registration Statement on Form S-1
(File Number 333-24151) which became effective on April 2, 1997),
as amended effective January 1, 1998 (such Amendment is filed
herewith).
10.11(a) Master Consulting Agreement dated September 19, 1994 between the
Company and Quintiles, Inc.
10.12(a)(b)1992 Stock Option Plan of the Company, as amended to date.
10.13(a)(b)1996 Stock Plan of the Company.
10.14(a)(b)1996 Non-Employee Director Stock Option Plan of the Company.
+10.15(c) License Agreement dated July 18, 1996 by and between the Company
and Boehringer Mannheim Italia.
10.16(e) Letter Agreement dated June 24, 1997 relating to CoreStates Bank
N.A. line of credit, together with Master Commercial Promissory
Note.
10.17(e) Consulting and Contract Service Agreement dated February 1, 1997
by and between the Company and Innovative Customer Solutions, Ltd.
10.18(g) Lease Agreement dated August 22, 1997 between the Company and
Stocking Works Associates which became effective on September 1,
1997.
10.19(h) Contract between Quintiles Scotland Ltd. and the Company, dated
April 28, 1998.
+10.20(i) License Agreement dated as of June 30, 1998 by and between the
Company and Laboratories Pharmascience S.A.
+10.21(i) Exhibit A to the Manufacturing Agreement as of April 12, 1996 by
and between the Company and Applied Analytical Industries, Inc.,
filed with the Company's Registration Statement on Form S-1 (File
Number 333-3582) which became effective on June 20, 1996.
+10.22(i) Co-Promotion Agreement dated October 13, 1998 between SmithKline
Beecham Consumer Healthcare, L.P. and the Company.
+10.23(i) Distribution Services Agreement dated August 15, 1998 between
Cord Logistics, Inc. and the Company.
10.24(j) Convertible Loan and Security Agreement dated as of March 19,
1999, between OCM Principal Opportunities Fund, L.P. and the
Company.
10.25(j) Convertible Note dated March 19, 1999, made by the Company in
favor of OCM Principal Opportunities Fund, L.P.
10.26(j) Stock Purchase Agreement dated March 19, 1999, between the
Company, OCM Principal Opportunities Fund, L.P. and other
Purchasers set forth therein.
21(f) List of subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
-35-
Exhibit No. Description of Exhibit
----------- ----------------------
27 Financial Data Schedule.
- --------------
+ Confidential treatment has been requested and granted for a portion of this
Exhibit.
(a) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File Number 333-3582) which became effective on June 20, 1996.
(b) A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(c) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 which was filed with the
Securities and Exchange Commission on October 29, 1996.
(d) Incorporated by reference to the Company's Current Report on Form 8-K,
dated September 16, 1997, which was filed with the Securities and Exchange
Commission on September 17, 1997.
(e) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, which was filed with the Securities
and Exchange Commission on August 1, 1997.
(f) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, which was filed with the Securities and
Exchange Commission on March 28, 1997.
(g) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, which was filed with the Securities and
Exchange Commission on March 30, 1998.
(h) Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998, which was filed with the Securities and Exchange Commission on August
14, 1998.
(i) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, which was filed with the
Securities and Exchange Commission on November 16, 1998.
(j) Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 19, 1999 which was filed with the Securities and Exchange
Commission on March 25, 1999.
-36-
COLLAGENEX PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
----
Report of Independent Accountants................................ F-2
Consolidated balance sheets as of December 31, 1997 and 1998..... F-3
Consolidated statements of operations for the years ended
December 31, 1996, 1997, and 1998.............................. F-4
Consolidated statements of stockholders' equity (deficit) for
the years ended December 31, 1996, 1997 and 1998............... F-5
Consolidated statements of cash flows for the years ended
December 31, 1996, 1997 and 1998............................... F-6
Notes to consolidated financial statements....................... F-7
Financial Statement Schedule
Schedule of Valuation and Qualifying Accounts.................. F-21
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
CollaGenex Pharmaceuticals, Inc.:
We have audited the consolidated financial statements of CollaGenex
Pharmaceuticals, Inc. and subsidiary as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CollaGenex
Pharmaceuticals, Inc. and subsidiary as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
Princeton, New Jersey
January 29, 1999, except as to note 13, which
is as of March 19, 1999
F-2
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1997 and 1998
(dollars in thousands, except per share data)
Assets 1997 1998
--------- ---------
Current assets:
Cash and cash equivalents................... $ 16,379 $ 3,286
Short term investments...................... 6,392 6,964
Accounts receivable, net of allowance
of $293 in 1998........................... -- 3,045
Inventories (note 3)........................ -- 342
Prepaid expenses and other current assets... 278 823
-------- ---------
Total current assets............... 23,049 14,460
Equipment, net (note 3)......................... 103 267
Other assets.................................... 13 13
-------- ---------
Total assets......................... $ 23,165 $ 14,740
======== =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................. $ 551 $ 2,914
Accrued expenses (note 3).................... 1,906 2,545
-------- --------
Total current liabilities............. 2,457 5,459
-------- --------
Stockholders' equity (notes 6 and 7):
Preferred stock, $0.01 par value, 5,000,000
shares authorized, no shares outstanding in
1997 and 1998.............................. -- --
Common stock, $0.01 par value; 25,000,000
shares authorized, 8,567,579 and 8,587,204
shares issued and outstanding in 1997
and 1998, respectively..................... 86 86
Additional paid in capital................... 47,297 47,317
Deferred compensation (note 7)............... (313) (194)
Accumulated deficit.......................... (26,362) (37,928)
------- -------
Stockholders' equity................. 20,708 9,281
Commitments (notes 5, 9, 10, 12 and 13)
------- -------
Total liabilities and stockholders' $ 23,165 $ 14,740
equity...............................
======== ========
See accompanying notes to consolidated financial statements.
F-3
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Consolidated Statements of Operations
For the years ended December 31, 1996, 1997 and 1998
(dollars in thousands, except per share data)
1996 1997 1998
--------- ---------- ------------
Revenues:
Product sales...................... $ -- $ -- $ 3,053
License revenues................... 400 325 400
Contract revenues.................. -- 9 8
--------- ---------- ------------
Total revenues................ 400 334 3,461
--------- ---------- ------------
Operating expenses:
Cost of product sales.............. -- -- 745
Research and development
(notes 9 and 12)................. 4,436 4,200 4,670
Selling, general and administrative 2,527 6,096 10,600
--------- ---------- ------------
Total operating expenses...... 6,963 10,296 16,015
--------- ---------- ------------
Operating loss................ (6,563) (9,962) (12,554)
Interest Income.. ..................... 645 1,338 988
--------- ---------- ------------
Net loss...................... $ (5,918) $ (8,624) $ (11,566)
========= ========== ============
Accretion of undeclared
dividends attributable to
mandatorily redeemable
convertible preferred stock........ $ 720 $ -- $ --
========= ========== ============
Net loss allocable to common
stockholders....................... $ (6,638) $ (8,624) $ (11,566)
========= ========== ============
Net loss per share (note 2):
Basic.............................. $ (1.74) $ (1.04) $ (1.35)
Diluted............................ (1.72) (1.04) (1.35)
========= ========== ==========
Shares used in computing net loss
per share (note 2):
Basic............................ 3,808,734 8,291,167 8,579,054
Diluted.......................... 3,863,734 8,291,167 8,579,054
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity (Deficit)
For the years ended December 31, 1996, 1997 and 1998
(dollars in thousands)
Additional Total
Common stock paid-in stockholders'
--------------------
Number of Par capital Deferred Accumulated equity
shares value (deficit) compensation deficit (deficit)
--------- --------- ------------ ------------ ----------- -------------
Balance, December 31, 1995 ........................ 312,659 $ 3 $ (1,744) $ (20) $(11,820) $(13,581)
Exercise of common stock options (note 7) .... 23,750 -- 6 -- -- 6
Issuance of common stock at $10 per share in
conjunction with the Initial Public
Offering, net of issuance costs ............ 2,000,000 20 18,007 -- -- 18,027
Accretion of undeclared dividends on
mandatorily redeemable convertible
preferred stock (note 4) ................... -- -- (720) -- -- (720)
Conversion of mandatorily redeemable
convertible preferred stock into common
stock in conjunction with the Initial
Public Offering ............................ 5,199,124 52 19,576 -- -- 19,628
Deferred compensation resulting from grant
of options (note 7) ........................ -- -- 426 (426) -- --
Amortization of deferred compensation ......... -- -- -- 150 -- 150
Net loss ...................................... -- -- -- -- (5,918) (5,918)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1996 ......................... 7,535,533 75 35,551 (296) (17,738) 17,592
Exercise of common stock options (note 7) ..... 32,046 1 52 -- -- 53
Issuance of common stock at $12.50 per share
in conjunction with follow-on Offering,
net of issuance costs (note 6) ............. 1,000,000 10 11,552 -- -- 11,562
Deferred compensation resulting from
grant of options (note 7) .................. -- -- 142 (142) -- --
Amortization of deferred compensation ......... -- -- -- 125 -- 125
Net loss ...................................... -- -- -- -- (8,624) (8,624)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1997 ......................... 8,567,579 86 47,297 (313) (26,362) 20,708
Exercise of common stock options (note 7) ..... 19,625 -- 20 -- -- 20
Amortization of deferred compensation ......... -- -- -- 119 -- 119
Net loss ...................................... -- -- -- -- (11,566) (11,566)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1998 ......................... 8,587,204 $ 86 $ 47,317 $ (194) $ (37,928) $ 9,281
========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended December 31, 1996, 1997 and 1998
(dollars in thousands)
1996 1997 1998
-------- -------- -------
Cash flows from operating activities:
Net loss..................................... $ (5,918) $ (8,624) $(11,566)
Adjustments to reconcile net loss to net
cash used in operating activities:
Noncash compensation expense.............. 150 125 119
Depreciation and amortization expense..... 17 31 66
Change in assets and liabilities:
Increase in accounts receivable....... -- -- (3,045)
Increase in inventories............... -- -- (342)
Increase in prepaid expenses and
other assets.......................... (148) (125) (545)
Increase in accounts payable.......... 28 505 2,363
Increase in accrued expenses and
other liabilities..................... 304 1,107 639
------- ------- -------
Net cash used in operating
activities........................ (5,567) (6,981) (12,311)
-------- ------- --------
Cash flows from investing activities:
Capital expenditures......................... (57) (78) (230)
Proceeds from the sale of short term
investments................................ 3,923 25,402 6,880
Purchase of short term investments........... (12,290) (23,427) (7,452)
-------- -------- -------
Net cash (used in) provided by
investing activities.............. (8,424) 1,897 (802)
-------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock....... 18,033 11,615 20
-------- -------- -------
Net cash provided by financing
activities....................... 18,033 11,615 20
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents.................................... 4,042 6,531 (13,093)
Cash and cash equivalents at beginning of period 5,806 9,848 16,379
-------- -------- -------
Cash and cash equivalents at end of period...... $ 9,848 $ 16,379 $ 3,286
======== ======== =======
Supplemental schedule of noncash financing
activities:
Deferred compensation........................ $ 426 $ 142 $ --
Accretion of undeclared dividends
attributable to mandatorily redeemable
convertible preferred stock................. 720 -- --
Conversion of mandatorily redeemable
convertible preferred stock to common stock. 19,628 -- --
======== ======== =======
See accompanying notes to consolidated financial statements.
F-6
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998
(dollars in thousands, except per share data)
(1) Business
CollaGenex Pharmaceuticals, Inc. ("CollaGenex Pharmaceuticals" or the
"Company") was incorporated in Delaware on January 10, 1992. The Company is
a pharmaceutical enterprise engaged in the development and
commercialization of innovative, proprietary medical therapies for the
treatment of periodontal disease and other pathologies. The Company,
through its own sales and marketing force, is currently marketing
Periostat(R) (doxycycline hyclate), the Company's lead drug for the
treatment of adult periodontal disease which received approval from the
U.S. Food & Drug Administration (the "FDA") in September 1998. The Company
has other compounds in the research and development stage.
The accompanying consolidated financial statements include the results of
operations of the Company and its wholly-owned subsidiary (CollaGenex
International, Ltd.). All intercompany accounts and transactions have been
eliminated in consolidation. As a result of the product approval and
revenues earned on product sales during 1998, the Company is no longer in
the development stage as it was in prior years.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All
cash and cash equivalents are invested in obligations of the U.S.
Government and in commercial paper which bears minimal risk. The carrying
amount of cash and cash equivalents approximates its fair value due to its
short-term nature. To date, the Company has not experienced any significant
losses on its cash equivalents.
Short-Term Investments
Short-term investments consist of U.S. Government obligations and corporate
debt securities with original maturities greater than three months. In
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
company classifies its short-term investments as available for sale.
Available for sale securities are recorded at their fair value, which
approximates cost, of the investments based on quoted market prices at
December 31, 1997 and 1998. The Company considers all of its short-term
investments to be available for sale.
F-7
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998, Continued
(dollars in thousands, except per share data)
Inventories
Inventories are stated at the lower cost or market. Cost is determined
using the first-in, first-out method.
Equipment
Equipment, consisting of computer and office equipment and exhibit
equipment, is recorded at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets,
generally three to five years. Expenditures for repairs and maintenance are
expensed as incurred.
Product Sales
In September 1998, the Company received clearance from the FDA to market
Periostat. The Company has the exclusive right to market Periostat in the
United States. In November, the Company began shipping Periostat to
wholesalers throughout the United States. The Company recognizes sales
revenue upon shipment. Sales are reported net of allowances for discounts,
rebates, chargebacks and product returns.
License Revenues
Revenue from license arrangements is recognized when the related milestones
are met by the Company and when all of the Company's significant
performance obligations under the terms of the arrangement have been
satisfactorily completed.
Contract Revenues
Contract revenues are earned and recognized according to the provisions of
each collaborative agreement. Contract milestone payments are recognized as
revenues upon the completion of the milestone event or requirement and when
the Company's significant performance obligations have been satisfactorily
completed.
Research and Development
Research and product development costs are expensed as incurred.
Accounting for Income Taxes
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be in effect
when such differences are expected to
F-8
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998, Continued
(dollars in thousands, except per share data)
reverse. The measurement of deferred tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits which are not expected to be
realized. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that such tax rate changes are
enacted.
Management Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amount reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Stock-Based Compensation
As described in note 7, Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," encourages but
does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options issued to employees is
measured as the excess, if any, of the market price of the Company's stock
at the date both the number of shares and price per share are known
(measurement date) over the exercise price. Such amounts are amortized over
the respective vesting periods of the option grants.
Concentration of Credit and Other Risks
The company invests its excess cash in deposits with major U.S. financial
institutions, money market funds, U.S. Government obligations and corporate
debt securities. The Company has established guidelines relative to
diversification and maturities that maintain safety and liquidity. To date,
the Company has not experienced any significant losses.
The Company currently contracts with a single source for the domestic
manufacturing of Periostat which is sold throughout the United States
exclusively to wholesale and retail distributors. During 1998, two of these
customers accounted for 28% and 27%, of net product sales, respectively.
The Company's business of selling, marketing and developing pharmaceutical
products is subject to a number of significant risks, including risks
relating to the implementation of
F-9
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998, Continued
(dollars in thousands, except per share data)
the Company's sales and marketing plans, risks inherent in research and
development activities, risks associated with conducting business in a
highly regulated environment and uncertainties related to clinical trials
of products under development.
Equity Security Transactions
Prior to the Company's initial public offering consummated in June 1996
(the "IPO"), the Board of Directors had established the fair value of
equity securities based upon facts and circumstances existing at the dates
such equity transactions occurred, including the price at which equity
instruments were sold to independent third parties. Subsequent to the IPO,
fair market value is determined based on the quoted market price of the
Company's stock.
Net Loss Per Share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128), was adopted by the Company on December 31, 1997. In accordance
with the pronouncement, all prior year earnings per share data have been
restated upon adoption to conform to the new standards. SFAS 128 simplifies
the calculation of earnings per share data by replacing primary and fully
diluted earnings per share with basic and diluted earnings per share,
respectively. Basic earnings per share excludes potentially dilutive
securities, including stock options, and is calculated by dividing income
(loss) available to common shareholders by the weighted average common
shares outstanding for the period. Diluted earnings per share, reflects the
dilution to earnings that would occur if convertible securities, stock
options and potentially dilutive securities were converted into common
stock resulting in the issuance of common stock.
Pursuant to Securities Exchange Commission Staff Accounting Bulletin
("SAB") No. 98, issued in February 1998, for periods prior to the Company's
IPO, all common stock issued during the periods prior to the IPO for
nominal consideration are to be included in the calculation of basic net
loss per share as if they were outstanding for all periods presented.
Similarly, common stock and potential common stock issued during the
periods prior to the IPO for nominal consideration have been included in
the calculation of diluted net loss per share, even though anti-dilutive,
as if outstanding for all periods presented (55,000 shares for 1996). 1996
per share data reflects this guidance. In the calculation of net loss per
share for 1996, accretion of undeclared dividends attributable to
mandatorily redeemable convertible preferred stock is included as an
increase to the net loss.
Options to purchase 1,016,829 shares of common stock at prices ranging from
$0.20 to $13.50 per share were outstanding at December 31, 1998 but were
not included in the
F-10
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998, Continued
(dollars in thousands, except per share data)
computation of net loss per share because the effect would have been
anti-dilutive for the periods presented. As a result, basic and diluted
loss per share are the same for 1997 and 1998. These options expire through
2008.
Reclassification
Certain amounts in the 1997 consolidated financial statements have been
reclassified to conform to the current year presentation.
(3) Composition of Certain Financial Statement Captions
Inventories
Inventories at December 31, 1997 and 1998 consists of the following:
1997 1998
----------- ----------
Raw materials....................... $ -- $ 124
Finished goods...................... -- 218
----------- ----------
$ -- $ 342
=========== ==========
Equipment
Equipment at December 31, 1997 and 1998 consists of the following:
1997 1998
----------- ----------
Computer and office equipment....... $ 125 $ 198
Exhibit equipment................... 28 185
----------- ----------
153 383
Less accumulated depreciation....... (50) (116)
----------- ----------
$ 103 $ 267
=========== ==========
F-11
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998, Continued
(dollars in thousands, except per share data)
Accrued Expenses
Accrued expenses at December 31, 1997 and 1998 consists of the following:
1997 1998
----------- -----------
Contracted development and
manufacturing costs.............. $ 1,086 $ 984
Sales and marketing costs........... 299 637
Payroll and related costs........... 244 421
Professional and consulting fees.... 212 268
Royalties........................... 12 163
Miscellaneous taxes................. 17 29
Other............................... 36 43
----------- ----------
$ 1,906 $ 2,545
=========== ==========
(4) Mandatorily Redeemable Convertible Preferred Stock
The Company completed the sale of its Series A, Series B and Series C
mandatorily redeemable convertible preferred stock ("Series A, Series B and
Series C", respectively) in 1992, 1993 and 1995 at per share prices of
$1.00, $1.675 and $2.00, respectively. Aggregate net cash proceeds from
such equity transactions totaled $13,508 ($16,533 after conversion of
promissory notes and accrued interest to preferred stock).
During 1995, the Company issued convertible promissory notes in the
principal amount of $3,029 to various Series A and Series B preferred
stockholders. The convertible promissory notes bore interest at 10% per
annum with maturity dates of February and July 1996. Principal plus accrued
interest on the convertible promissory notes totaling $3,025 were converted
into 1,512,344 shares of Series C mandatorily redeemable convertible
preferred stock in September 1995 in accordance with the terms of the
financing agreement upon the closing of the Series C mandatorily redeemable
convertible preferred stock sale. One convertible promissory note
aggregating $132 (principal plus accrued interest) was repaid to the note
holder in September 1995.
The holders of Series A, Series B and Series C were originally entitled to
cumulative dividends at an annual rate of 9% of the original purchase price
per share on the date of issuance, if and when declared. Such amounts have
been accreted in the accompanying consolidated financial statements for the
respective historical periods in which they accumulated. In June 1996, upon
the closing of the IPO, all issues of the mandatorily redeemable
convertible preferred stock were converted into 5,199,124 common shares,
F-12
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998, Continued
(dollars in thousands, except per share data)
and all undeclared dividends previously accreted were forfeited. All rights
with respect to the above noted securities ceased.
(5) Line of Credit
On June 26, 1997, the Company entered into a credit arrangement consisting
of a $5,000 line of credit (the "LOC") to support the future working
capital needs of the Company. The LOC will be unsecured as long as the
Company's cash and investment balances maintained with the lender or an
affiliate of the lender equals or exceeds $10,000, which was met at
December 31, 1998. At the Company's option, the LOC will bear interest at
either the prime rate charged by the lender or LIBOR plus 2.15%. The LOC is
terminable by the lender at any time. No balance was outstanding under the
LOC at December 31, 1997 and 1998.
(6) Stockholders' Equity
The Company's Board of Directors may without further action by the
Company's stockholders, from time to time, direct the issuance of shares of
preferred stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. The holders of
preferred stock would normally be entitled to receive a preference payment
in the event of any liquidation, dissolution or winding-up of the Company
before any payment is made to the holders of the common stock.
On June 20, 1996, the Company completed an initial public offering of
2,000,000 shares of its common stock at $10 per share. Net proceeds to the
Company after underwriting fees and all related expenses were $18,027.
On April 8, 1997, the Company completed a follow-on offering of 1,000,000
shares of its common stock at a price of $12.50 per share. The net proceeds
for the offering after underwriting fees and all related expenses was
$11,562.
The Company maintains a Shareholder Rights Plan (the "Rights Plan"). Under
the Rights Plan, each common shareholder receives one "Right" for each
share of common stock held. Each Right, once exercisable, entitles the
holder to purchase from the Company one one-hundredth of a share of the
Company's Series A Participating Preferred Stock at an exercise price of
$65. All Rights expire on September 26, 2007 unless earlier redeemed. At
December 31, 1998, the Rights were neither exercisable nor traded
separately from the Company's common stock, and become exercisable only if
a person or a group of affiliated or associated persons has acquired, or
obtained the right to acquire, beneficial ownership of 20% or more of the
voting power of all outstanding shares of the Company's common stock and in
certain other limited circumstances. Upon
F-13
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998, Continued
(dollars in thousands, except per share data)
separation from the common stock, each Right will entitle the holder, other
than the acquiring person that has triggered such separation, to
effectively purchase certain shares of the Company's common stock equal in
market value to two times the then applicable exercise price of the Right.
If the Company is acquired in a merger or other business combination
transaction, or 50% or more of the Company's assets or earning power are
sold in one or more related transactions, the Rights will entitle holders,
upon exercise of the Rights, to receive shares of common stock of the
acquiring or surviving company with a market value equal to twice the
exercise price of each Right. In March 1999, the Company amended its Rights
Plan to specifically exclude an initial issuance of the Company's Series D
Cumulative Convertible Preferred Stock, to be effected upon the attainment
of requisite stockholder approval.
(7) Stock Option Plans
The Company has three stock-based compensation plans (the "Plans") and has
adopted the disclosure-only provisions of SFAS 123. The Company continues
to apply APB Opinion No. 25 in accounting for its stock option plans and,
accordingly, no compensation expense has been recognized in the
consolidated financial statements for stock options issued to employees at
exercise prices equal to the market value on the measurement date.
Deferred compensation of $426 and $142 was recorded in 1996 and 1997,
respectively, for options granted where the market value of the Company's
stock on the measurement date exceeded the exercise price of such options.
Deferred compensation is being amortized to compensation expense in the
accompanying consolidated statement of operations over the respective
vesting periods of such grants ($150, $125 and $119 in 1996, 1997 and 1998,
respectively).
The 1992 Stock Option Plan, as amended, (the "1992 Plan") provided for the
granting of incentive and nonstatutory options to directors, employees and
consultants to purchase up to 121,228 shares, which was increased to
300,000 and 425,000 in 1993 and 1995, respectively, and reduced to 291,000
in 1996, of the Company's common stock at a price, for the incentive
options, not less than the fair market value on the measurement date. Such
options are exercisable for a period of 10 years and generally vest over a
four year period. All such 291,000 options available under the 1992 Plan
were granted by March 31, 1996.
The 1996 Stock Option Plan (the "1996 Plan") provides for the granting of
incentive and nonstatutory options to employees and consultants to purchase
up to 750,000 options of the Company's common stock at a price, for the
incentive options, not less than the fair market value on the measurement
date. Incentive and nonstatutory options granted to
F-14
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998, Continued
(dollars in thousands, except per share data)
individuals owning more than 10% of the voting power of all classes of
stock at the time of grant must have an exercise price no less than 110% of
the fair market value on the date of grant. Such options are exercisable
for a period of 10 years and generally vest over a two to five year period,
and may be accelerated for certain grants in certain circumstances.
In March 1996, the Board of Directors approved a nonqualified plan for the
issuance of stock options to non-employee directors under the Non-Employee
Director Stock Option Plan (the "Non-Employee Director Plan"). Under this
plan, 300,000 shares on May 8, 1997, of common stock are reserved for
issuance at an exercise price equal to the fair market value on the date of
grant. Such options vest 20% per annum commencing one year from the grant
date.
In May and June of 1996, 11,000 options were granted to employees at an
exercise price of $2.00 per share. These grants were not issued under the
terms of any of the above Plans. All options granted to employees
subsequent to the IPO were granted under the 1996 Plan.
At December 31, 1998, there were 111,250 shares available for grant under
the 1996 Plan and 150,000 under the Non-Employee Director Plan.
The following table summarizes stock option activity for 1996 through 1998:
Exercise price
Shares per share
----------- --------------
Balance, December 31, 1995.......... 233,500 $ 0.20 - 1.20
Granted........................... 200,500 2.00 - 10.00
Exercised......................... (23,750) 0.20 - 0.355
-----------
Balance, December 31, 1996.......... 410,250 0.20 - 10.00
Granted........................... 348,750 9.00 - 13.50
Exercised......................... (32,046) 0.20 - 2.00
Cancelled......................... (1,000) 0.355 - 1.20
-----------
Balance, December 31, 1997.......... 725,954 0.20 - 13.50
Granted........................... 313,500 6.25 - 13.25
Exercised......................... (19,625) 0.355 - 2.00
Cancelled......................... (3,000) 6.75
-----------
Balance, December 31, 1998.......... 1,016,829 $ 0.20 - 13.50
=========== ==============
F-15
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998, Continued
(dollars in thousands, except per share data)
As of December 31, 1998, the Plans had the following options outstanding
and exercisable by price range as follows:
Outstanding Exercisable
----------------------------------- ----------------------
Weighted Weighted Weighted
average average average
Range of remaining exercise exercise
exercise Number of contractual price per Number of price per
prices shares life share shares share
--------------- --------- ----------- --------- -------- ---------
$0.20 - 2.00 228,079 6.7 years $ 1.01 174,204 $ 0.81
6.25 - 10.00 517,000 8.6 years 8.32 92,075 9.49
10.25 - 13.50 271,750 8.9 years 11.35 84,512 11.21
--------- -------- ------- --------
1,016,829 $ 7.49 350,791 $ 5.59
========= ======== ======= ========
Had the Company determined compensation cost for options granted during
1995, 1996, 1997 and 1998 under SFAS 123 based on the fair value at the
measurement date, the Company's net loss would have been increased to the
pro forma amounts shown below:
1996 1997 1998
------------ ------------- -------------
Net loss allocable to common
stockholders:
As reported.............. $ 6,638 $ 8,624 $ 11,566
Pro forma................ 6,730 9,267 12,487
Net loss per basic share:
As reported............. $ 1.74 $ 1.04 $ 1.35
Pro forma............... 1.77 1.12 1.46
Net loss per diluted share:
As reported............. $ 1.72 $ 1.04 $ 1.35
Pro forma................ 1.74 1.12 1.46
Pro forma net loss reflects only options granted in 1995, 1996, 1997 and
1998. Consequently, the full impact of calculating compensation cost for
stock options under SFAS 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is incurred under SFAS
123 over the respective vesting period of such options, and options granted
by the Company prior to January 1, 1995 are not reflected in the pro forma
net loss figures above.
F-16
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998, Continued
(dollars in thousands, except per share data)
The weighted average fair values of stock options granted during 1996, 1997
and 1998 were $7.00, $5.93 and $4.64 per share, respectively, on the date
of grant. Such fair values were determined using the Black-Scholes option
pricing model and are based on the following assumptions:
1996 1997 1998
------------ ------------ -------------
Expected life in years.. 7 5 5
Risk-free interest rate. 7.5% 6.25% 6.25%
Volatility.............. 60% 60% 60%
Dividend yield.......... 0% 0% 0%
(8) Income Taxes
As of December 31, 1998, the Company has approximately $35,300 of Federal
and $29,571 of state net operating loss carryforwards available to offset
future taxable income. The Federal and state net operating loss
carryforwards will begin expiring in the year 2007 and 2005, respectively,
if not utilized. In addition, the utilization of the state net operating
loss carryforwards is subject to a $1 million annual limitation. The
Company also has research and development tax credit carryforwards of
approximately $500, which begin expiring in 2007, and are available to
reduce Federal income taxes.
The Tax Reform Act of 1986 (the "Act") provides for a limitation on the
annual use of NOL and research and development tax credit carryforwards
(following certain ownership changes, as defined by the Act) that could
significantly limit the Company's ability to utilize these carryforwards.
The Company has experienced various ownership changes, as defined by the
Act, as a result of past financings and the IPO. Accordingly, the Company's
ability to utilize the aforementioned carryforwards may be limited.
Additionally, because U.S. tax laws limit the time during which these
carryforwards may be applied against future taxes, the Company may not be
able to take full advantage of these attributes for Federal income tax
purposes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at December
31, 1997 and 1998 are presented below:
F-17
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998, Continued
(dollars in thousands, except per share data)
1997 1998
----------- -----------
Deferred tax assets:
Capitalized start up costs........ $ 931 $ 677
Net operating loss carryforwards.. 8,078 14,145
Tax credit carryforward........... 206 500
Accrued expenses.................. 170 134
----------- -----------
Total gross deferred tax assets. 9,385 15,456
Less valuation allowance.......... (9,383) (15,450)
----------- -----------
Total deferred tax assets....... 2 6
Deferred tax liability:
Depreciation...................... (2) (6)
----------- -----------
Total gross deferred tax liability (2) (6)
----------- -----------
Net deferred taxes.............. $ -- $ --
=========== ===========
The net change in the valuation allowance for the years ended December 31,
1997 and 1998 were increases of approximately $1,878 and $6,067
respectively, related primarily to additional net operating losses incurred
by the Company.
(9) Technology License
At the time of its formation in 1992, the Company entered into an agreement
with SUNY whereby the Company received an option to acquire a certain
technology license. The Company's option to acquire the license was
exercised in 1995 and remains in effect for a period not to exceed 20 years
from the date of the first sale of product incorporating the technology
under license or the last to expire of the licensed patents in each
country. The Company is liable to SUNY for annual royalty fees based on net
sales, if any, as defined in the agreement. A minimum annual royalty is
required for the duration of the technology license. The Company incurred
royalties of $50 in 1996 and 1997, respectively, and $200 in 1998.
In addition, the Company is required to reimburse SUNY for certain patent
related costs, as well as to support certain additional research efforts.
F-18
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998, Continued
(dollars in thousands, except per share data)
(10) Commitments and Contingencies
The Company maintains various operating leases, primarily for office space.
As of December 31, 1998, future minimum rent payments under noncancellable
leases are as follows:
1999......... $ 82
2000......... 82
-----
Total...... $ 164
=====
Rent expense for the years ended December 31, 1996, 1997 and 1998 totaled
$63, $70 and $86, respectively.
(11) 401(k) Salary Reduction Plan
In January 1995, the Company adopted a 401(k) Salary Reduction Plan (the
"401(k) Plan") available to all employees meeting certain eligibility
requirements. The 401(k) Plan permits participants to contribute up to 15%
of their annual salary not to exceed the limits established by the Internal
Revenue Code. All contributions made by participants vest immediately in
the participant's account. The Company did not make any "matching
contributions" in 1996, 1997 or 1998 in accordance with the terms of the
401(k) Plan.
(12) Contract Research Agreement
In May 1998, the Company entered into a three year evaluation testing
agreement with SUNY pursuant to which SUNY will evaluate certain compounds
supplied by the Company under which the Company will pay SUNY up to $1,570.
Either party may terminate the agreement at any time. Costs incurred during
1998 were $333.
The Company has entered into several contract research agreement with
another research company to provide certain clinical monitoring, data
management, statistical analysis and regulatory services on behalf of the
Company. The Company is billed as research services are performed. Costs
incurred under this agreement aggregated approximately $1,766, $1,064 and
$1,837 for 1996, 1997 and 1998, respectively.
(13) Subsequent Event
On March 19, 1999, the Company received $10 million in proceeds from the
issuance of a Senior Secured Convertible Note (the "Note") to OCM Principal
Opportunities Fund, L.P. ("OCM"). The Note bears interest at a rate of 12%
per annum, is due one year from
F-19
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1997 and 1998, Continued
(dollars in thousands, except per share data)
the date of issuance and is secured by certain intellectual property of the
Company. The Note must be repaid with the proceeds from the issuance of
Series D Cumulative Convertible Preferred Stock (the "Preferred Stock")
prior to June 30, 1999 (see below). If the Note has not been repaid with
the proceeds of the Preferred Stock financing by June 30, 1999, the Note is
convertible, at the holder's option, into 1,538,462 shares of the Company's
common stock. In addition, any interest due on the Note would also be
convertible into shares of common stock at a conversion price of $6.50 per
share.
Simultaneous with the execution of the Note, the Company entered into an
agreement to issue $20 million in Preferred Stock at a purchase price of
$100 per share to OCM and other investors contingent upon and as soon as
practicable following stockholder approval at the Annual Meeting on May 11,
1999. During the first three years following issuance, the Preferred Stock
would pay dividends in common stock at a rate of 8.4% per annum.
Thereafter, the Preferred Stock would pay dividends in cash at a rate of
8.0% per annum. The Preferred Stock would be convertible by the holder into
common shares of the Company at an initial conversion price of $11.00 per
share, subject to adjustment, at any time.
F-20
SCHEDULE II
CollaGenex Pharmaceuticals, Inc. and Subsidiary
Financial Statement Schedule
Valuation and Qualifying Accounts
Year Ended December 31, 1998
(in thousands)
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Col A Col B Col C Col D Col E
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Description Balance 1/1/98 Additions Deductions Balance 12/31/98
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Charged to Other
Costs and
Expenses or
Accounts Revenues
Receivable
Allowance -- $293 -- -- $293
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F-21