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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No. 0-26224
December 31, 1996
INTEGRA LIFESCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0317849
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
105 Morgan Lane
Plainsboro, New Jersey 08536
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 275-0500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the registrant's Common Stock (its only
voting stock) held by non-affiliates of the registrant as of March 21, 1997 was
approximately $46,900,224. (Reference is made to page 29 herein for a statement
of the assumptions upon which this calculation is based.)
The number of shares of the registrant's Common Stock outstanding as of
March 21, 1997 was 29,630,496.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement
relating to its scheduled May 19, 1997 Annual Meeting of Stockholders are
incorporated by reference in Part III of this report.
1
PART I
ITEM 1. BUSINESS
Summary
Integra LifeSciences Corporation is dedicated to the acquisition,
discovery and development of synergistic technologies for creating and marketing
cost-effective, off-the-shelf, biosmart(TM), absorbable products designed to
target and control cell behavior to regenerate specific body tissues and organs,
or to treat a variety of disease and age-associated conditions. The Company's
INTEGRA(TM) Artificial Skin, Dermal Regeneration Template(TM) Device ("INTEGRA
Artificial Skin") is the first Premarket Approval Application (PMA) approved by
the U.S. Food and Drug Administration (FDA) for a product which is specifically
designed to enable the human body to replace a functional tissue that will not
otherwise regenerate. The Company intends to use its proprietary technologies
and biomaterials expertise to take advantage of the growing need for safe,
cost-effective, and clinically efficacious products designed to control the
behavior of targeted cells in the patient's body in the practice of
Regenerative Medicine.
The tissues of humans and animals are comprised of cells imbedded in an
infrastructure of proteins and other molecules, known as the extracellular
matrix ("ECM"). The ECM provides cells with structural support and biological
signals. Regenerative medicine technologies owned or licensed by the Company are
used to fabricate Regeneration Template(TM) devices ("Regeneration Templates"),
which are devices manufactured by the Company from collagen and other components
of the ECM, using proprietary processes. Once surgically implanted, they serve
as temporary structures that are intended to support regeneration of functional
tissues. Regeneration Templates are precisely engineered for specific tissues
and are designed to be absorbed into the body during the regeneration process.
INTEGRA Artificial Skin is the first in a series of products that the Company is
developing to regenerate a variety of body tissues, including articular
cartilage, peripheral nerve, cardiovascular graft and, in cooperation with
Genetics Institute, a subsidiary of American Home Products Corporation, bone.
The Company develops, sells and has substantial manufacturing
experience with FDA-regulated absorbable medical products in addition to INTEGRA
Artificial Skin, that serve a broad range of applications, including drug
delivery, surgical hemostasis (to control bleeding), infection control,
ophthalmic surgery, dental surgery and wound care. These products are sold
primarily through marketing relationships with a number of established medical
companies, including Alcon Surgical, Inc., Arrow International, Inc., Bard
Access Systems, Inc., the Calcitek Division of Sulzermedica, Johnson & Johnson
Medical Inc. and Sorin Biomedical, Inc. While these commercial products were not
specifically developed using the Company's advanced regenerative medicine
technologies, they utilize many of the same biomaterials, manufacturing
processes and materials engineering techniques.
In addition to the regenerative medicine applications of its
proprietary technologies, the Company intends to further develop and
commercialize pharmacological medical applications of its technologies. The
Company refers to the pharmacological applications of its ECM technologies as
matrix medicine(TM). This technology is directed to the treatment of human
disease characterized by disruption of the normal interactions between cells and
the ECM. Matrix medicine development includes applications for anti-thrombotics,
inhibitors of angiogenesis, prevention of fibrosis and the treatment of cancer.
At present, the Company does not intend to enter human studies with these
applications without development partners.
2
The Company's business strategy has been to selectively acquire and
further develop several platforms of synergistic biomaterials and ECM
technologies. The Company's platform technologies organized into four
overlapping categories -- 1) Bioabsorbable and other materials, 2) ECM and other
specialized materials structures, 3) Materials as delivery vehicles for
peptides, cells, growth factors, drugs and other actives, and 4) Actives
- -- provide support for our critical applications for tissue regeneration, our
developing pharmacological applications, and additional opportunities for
generating near-term and mid-term revenues from medical applications not
associated with our core activity. The Company has been able to identify and
bring together critical platform technology components to create a type of basic
operating system solution to the problem of targeting and controlling selected
cell behavior in the patients' body for both tissue regeneration and
pharmacological application. The Company, possibly in alliance with strategic
partners, intends to further develop those technologies that it believes are
most commercially promising and to bring products to market or to license or
sell such technologies or products to third parties. The Company believes its
management and scientific team, development and manufacturing experience,
proprietary technological position and relationships with established medical
institutions and other organizations help position it to achieve its objectives.
The Company's research implementation has been to maintain a relatively
small core of scientists and researchers within the Company and to conduct a
large portion of its research and product development through arrangements with
independent medical research centers. The Company believes this provides a
cost-effective approach to managing its research and product development
efforts, while maintaining the ability to respond quickly and effectively to
technological changes.
Regenerative Medicine
In many cases, the human body will not regenerate diseased or injured
tissues, such as the dermis. Regeneration Templates, when implanted into a wound
site, provide a biosmart(TM) scaffold to support and guide cellular ingrowth
intended to regenerate functional tissue. The Company uses proprietary
technologies and expertise to develop specialized Regeneration Templates
intended to restore functional skin, articular cartilage, peripheral nerve,
blood vessels, bone and, potentially, other human tissue.
The Company believes that its regenerative medicine technologies may
provide potentially safer, more effective and less expensive methods for
replacing damaged or diseased tissues when compared to other currently available
techniques. For example, the transplantation of tissues from human donors is
restricted by the shortage of such tissues, the difficulty and expense of
transportation, the risk of rejection, the danger of disease transmission and
the requirement, in certain cases, for life-long use of immuno-suppressant
drugs. The autografting of tissue causes damage to the site where the healthy
tissue is harvested and is of limited use for severely wounded patients who have
a minimal amount of healthy tissue for grafting. Currently available
biomaterials (such as metals, ceramics and plastics) used in permanent
implantable devices (such as knee joints or heart valves) have been commonly
used, but tend to degrade after years in the body, compromising long-term
performance.
The Company has several regenerative medicine products in various
stages of development and production. Products sales of the Company's
regenerative medicine products were $4.1 million, $580,000 and zero for the
years ended December 31, 1996, 1995 and 1994. The Company currently has sales
from two regenerative medicine products: INTEGRA Artificial Skin; and
BioMend(TM) Absorbable Collagen Membrane. The following table summarizes the
current status of the Company's regenerative medicine technologies:
3
Status and Target Indications of the Company's
Regenerative Medicine Technologies
- ------------------------- ----------------------------------- -----------------------------------
TARGET CLINICAL
TECHNOLOGY APPLICATIONS STATUS
- ------------------------- ----------------------------------- -----------------------------------
INTEGRA(TM) Postexcisional treatment Approval letter issued
Artificial of life-threatening full-thickness by the FDA in March 1996.
Skin or deep partial-thickness thermal
injury where sufficient autograft Foreign clearance to import to over
is not available at the time of 10 countries.
excision or not desirable due to
the physiological condition of
the patient
Plastic and reconstructive IDE submission planned for 1997
applications
BioMend(TM) Absorbable Guided tissue regeneration in 510(k) clearance to market received
Collagen Membrane periodontal surgery August 1995
Cartilage Regeneration Restoration of functional Expanded preclinical study in progress,
articular cartilage in knee including several enhancements to
and other joints include possible cell behavior
modifications
Peripheral Nerve Regeneration of severed Completed preclinical study establishing
Regeneration peripheral nerves effectiveness of technique; Phase I
clinical trials commenced first quarter
1996 in Denmark
Bone Regeneration Regeneration of bone in Clinical studies conducted by
orthopedic, oral maxillofacial Genetics Institute, Inc.
and spine surgery
Cardiovascular Grafts Regeneration of vascular Preclinical studies underway
grafts
- ------------------------- ----------------------------------- -----------------------------------
INTEGRA(TM) Artificial Skin, Dermal Regeneration Template
INTEGRA Artificial Skin is expected to be the Company's most
significant near-term commercial regenerative product. The INTEGRA Artificial
Skin technology is designed to enable the human body to regenerate functional
dermal tissue. Human skin consists of the epidermis (the thin, outer layer which
serves as a protective seal for the body) and the thicker dermis underneath,
which provides structural strength and flexibility and nourishes the epidermis
through a vascular network. Current medical technology provides several methods
for restoring epidermis on severely burned patients. However, the Company is not
aware of any clinically proven method for regeneration of a functional dermis
for such patients other than INTEGRA Artificial Skin.
4
The body normally responds to severe damage to the dermis by producing
scar tissue in the wound area. This scar tissue formation is accompanied by
contraction that pulls the edges of the wound closer which, while closing the
wound, often permanently reduces flexibility. In severe cases, this contraction
leads to a reduction in the range of motion for the patient, who subsequently
requires extensive physical rehabilitation or reconstructive surgery. Physicians
treating severe wounds, such as full-thickness burns, seek to minimize scarring
and contraction.
INTEGRA Artificial Skin consists of two layers, a thin
collagen/glycosaminoglycan sponge and a silicone membrane. The product is
applied with the sponge layer in contact with the wound. The collagen/
glycosaminoglycan sponge material serves as a template for the growth of new
functional dermal tissue. The outer membrane layer acts as a temporary
substitute for the epidermis to control water vapor transmission, prevent
reinjury and minimize bacterial contamination.
The Company's PMA approval for INTEGRA Artificial Skin is indicated for
the postexcisional treatment of life-threatening full-thickness or deep
partial-thickness thermal injury where sufficient autograft is not available at
the time of excision or not desirable due to the physiological condition of the
patient. On March 1, 1996, the Company received notification from the FDA that
its PMA application seeking permission to market INTEGRA Artificial Skin was
approved. The FDA's approval order includes requirements to provide a
comprehensive practitioners' training program and to conduct a post approval
study at multiple clinical sites.
Potential Market for INTEGRA Artificial Skin. The initial market for
INTEGRA Artificial Skin is the treatment of patients with life-threatening
full-thickness or deep partial-thickness burns where conventional autograft is
not available or not desirable due to the physiological condition of the
patient. The majority of severely burned patients in the United States are
treated in approximately 150 specialized burn care units. The sales of INTEGRA
Artificial Skin are currently subject to a reportedly seasonal effect of burn
incidents, which may be lower in the summer months.
While the Company believes that its primary market for INTEGRA
Artificial Skin is its current indication, the Company is aware of additional
cases for which INTEGRA Artificial Skin has been used. The Company is currently
seeking to enhance and expand the indicational use of the INTEGRA Artificial
Skin technology and intends to conduct additional clinical trials to demonstrate
the safety and effectiveness of such technology in a broader range of
indications than set forth in its PMA for INTEGRA Artificial Skin. Potential
applications for such technology include reconstructive surgery, wound closure
following excision of skin cancer and other types of wounds.
Market Introduction of INTEGRA Artificial Skin. The Company has
initiated the marketing of INTEGRA Artificial Skin through a direct technical
sales organization in the United States, Canada, and the United Kingdom and
through individual distributors in other foreign markets. The Company's training
program has been offered to all physician members of the American Burns
Association, as well as other physicians throughout the world. To date, over 350
surgeons in the United States and Canada, as well as an additional 300 surgeons
internationally, have been trained in the use of INTEGRA Artificial Skin. The
Company has also offered in-hospital training programs for operating room and
burn unit personnel to further expand on the patient care involving INTEGRA
Artificial Skin. The Company believes that INTEGRA Artificial Skin is not just a
new product but a new way of practicing medicine, and as with many new
technologies, some surgeons have started to use INTEGRA Artificial Skin only on
a limited basis. The Company believes that the initial patient results have been
positive, and as increased positive attention is given to these results further
support for growing usage is expected to follow. In addition, the Company has
been collecting data on the cost effectiveness as well as the clinical results
to present to hospitals and third-party payers.
5
Production of INTEGRA Artificial Skin. The Company has completed
construction and its validation of a commercial-scale manufacturing facility in
Plainsboro, New Jersey to produce INTEGRA Artificial Skin, and the facility
passed an FDA inspection for compliance with cGMP regulations. The shelf life of
the product is currently one year when stored at refrigeration temperatures, and
the Company is performing stability studies to increase its shelf life. The
product is shipped to burn centers in the United States and Canada and is
stored in the United Kingdom for direct United Kingdom sales. The product is
also shipped to international distributors in Europe and the Far East for
distribution through their established channels. The Company is currently
manufacturing INTEGRA Artificial Skin in commercial quantities and believes it
has sufficient capacity to generate significant product sales.
BioMend(TM) Absorbable Collagen Membrane
The Company has also developed BioMend(TM) Absorbable Collagen Membrane
("BioMend") for use in guided tissue regeneration in periodontal surgery.
BioMend is inserted between the gum and the tooth after surgical treatment of
periodontal disease. BioMend prevents the gum tissue from interfering with the
regeneration of the periodontal ligament that holds the tooth in place. BioMend
is intended to be absorbed into the patient after approximately four to seven
weeks, avoiding the requirement for additional surgical procedures to remove a
non-absorbable membrane. FDA clearance to market BioMend under a Section 510(k)
pre-market notification filing was obtained in August 1995. BioMend is marketed
through the Calcitek Division of Sulzermedica. The Company's sales of BioMend
may vary on a quarterly basis depending on the stocking levels at Calcitek.
Cartilage Regeneration
The Company is developing a Cartilage Regeneration Template(TM) to
enable the regeneration of damaged articular cartilage. The Company has
continued its support in the development of a proprietary cartilage regeneration
therapy utilizing the patient's chondrocytes seeded into a collagen regeneration
template. The Company has also expanded its efforts to include development of a
proprietary cartilage collagen regeneration template that would utilize the
Company's peptide technology, an active technology to enhance the regeneration
process and potentially reduce or eliminate the need for chondrocyte seeding.
Normal articular cartilage does not have a vascular nutrient supply,
and, although it is metabolically active tissue, damaged cartilage generally
does not effectively heal. The conventional procedure for treating traumatic
damage to cartilage involves smoothing damaged portions of the tissue and
removing free-floating material from the joint using arthroscopic surgery. While
the objective of this procedure is to reduce pain and restore mobility, the
long-term result of this procedure often is permanent reduction of the
functionality of the joint and an increased risk of developing osteoarthritis.
The Company's objective in developing its technology is to produce a product
that regenerates the patient's cartilage and restores function, thereby
diminishing the risk or delaying the onset of osteoarthritis.
In one clinical protocol under development by the Company, chondrocytes
will be taken from the patient during a diagnostic arthroscopic procedure,
cultured outside the body with nutrients to promote cell proliferation, and then
seeded into Cartilage Regeneration Templates. The Cartilage Regeneration
Templates, bearing the regenerating cartilage, would then be shaped to match the
damaged portion of the joint and implanted into the site using arthroscopic
surgical techniques. After implantation, the Cartilage Regeneration Templates
are intended to support the continued regeneration of the patient's own
articular cartilage tissue. A second protocol under development would utilize
the Company's peptide technology to create enhanced Cartilage Regeneration
Templates that would signal chondrocyte cells to the template once implanted
into the patient. The Cartilage Regeneration Templates employ proprietary
designs using multiple layers of collagen material of varying densities that
provide a scaffold for chondrocyte proliferation and cartilage formation, while
6
preventing the ingrowth of unwanted cells that could lead to scar tissue. It is
anticipated that the collagen will be absorbed into the body over a period of
several weeks. The peptide enhanced Cartilage Regeneration Templates would
include bioactive agents designed to mimic natural ECM proteins to promote
chondrocyte cell adhesion, cell survival and other important cellular functions.
Preclinical studies involving several variations of the above protocols are in
progress.
Peripheral Nerve Regeneration
The Company is developing a Peripheral Nerve Regeneration Template(TM)
to facilitate the regeneration of severed peripheral nerves. Injuries to hands,
arms, feet and legs that sever peripheral nerves result in the loss of sensation
and normal motor control. Currently, there are only limited treatments available
for the repair of damaged peripheral nerves. Short gaps can be repaired by
surgically reconnecting nerve endings. Conventional methods for repair of longer
gaps require grafting nerve tissue that is removed from another part of the
patient's body, resulting in loss of function and sensation in the location from
which the nerve tissue is harvested.
The Company's Peripheral Nerve Regeneration Template is a thin collagen
tube that serves as a conduit to facilitate regeneration of the severed nerve.
The collagen tube is implanted and the severed ends of the nerve are inserted
into the ends of the tube. The tube is intended to support guided regeneration
of the nerve tissue down the length of the tube while being absorbed into the
body.
Scar formation at the nerve repair site is the leading cause of failure
in conventional nerve grafting techniques. The Company's collagen tube appears
to prevent scar formation, to provide guided regeneration of nerve tissue and to
prevent the ingrowth of surrounding tissue. The Company's preclinical studies
have demonstrated the closure of 2cm gaps in peripheral nerves in non-human
primates with restored nerve function. Preliminary results from an additional
preclinical study indicate an ability to close 5cm gaps in peripheral nerves in
non-human primates. The Company initiated Phase I clinical trials in 1996 in
Copenhagen, Denmark and patient enrollment is proceeding. In addition to
applications in hand surgery, the Company is exploring the use of this
technology for the repair of nerve damage resulting from prostate surgery. The
Company is continuing to develop variations of the Nerve Regeneration Template
for enhanced performance. The Company knows of no companies that are currently
conducting clinical studies on peripheral nerve repair.
Bone Regeneration Matrix
The Company supplies Genetics Institute, Inc. ("GI") with a collagen
device that is used by GI in conjunction with GI's recombinant human bone
morphorgenetic protein -2 (rhBMP-2) to stimulate tissue regeneration at bone
defects. Pilot clinical studies conducted by GI have provided evidence of safety
and biological activity of the product in patients. Several larger, multicenter
clinical trials have also been initiated. Presently, the product is being tested
in clinical studies in orthopedic, oral/maxillofacial and spine surgery. The
Company has an exclusive supply agreement with GI to provide commercial
quantities of the collagen device should GI successfully commercialize their
products.
Cardiovascular Graft Matrix
In 1996, the Company formed a wholly-owned subsidiary in the Czech
Republic and acquired rights to several patented processes involving the
development of a cardiovascular graft matrix. The technology uses a
collagen-based matrix structure which is surgically implanted as a vascular
graft. The Company also entered into a consulting agreement with Dr. Milan
Krajicek, who is the inventor of the technology, and will be funding continued
preclinical development efforts.
7
Possible Future Developments
The Company believes that its regenerative medicine technologies may be
applied to restore additional body tissues, and in the future it intends to
explore such applications. The Company also believes that its absorbable
biomaterials technology has significant potential as a vehicle for the delivery
of drugs, peptides (a short chain of amino acids) and therapeutically beneficial
proteins. The Company's scientists have collaborated with others to incorporate
a variety of therapeutic agents, including anti-infectives, ECM components such
as glycosaminoglycan and recombinant growth factors, into the Company's
Regeneration Templates.
The Company is continuing the development of certain of its ECM
technologies for the treatment of chronic wounds, partial-thickness burns and
other applications. The goal is to enhance the rate of wound healing and tissue
regeneration, as well as the quality of the resulting tissue, through the use of
biodegradable scaffolds to direct cell attachment and migration. The Company is
working at developing scaffolds in dry porous forms which can be made to persist
in the tissue for various periods of time.
The Company continues to seek out new biomaterials for the application
of its ECM technologies. To this end, the Company is developing a new class of
polycarbonate created through the polymerization of tyrosine, a
naturally-occurring amino acid. It is believed that this new biomaterial will be
safe when implanted. The Company currently has a preclinical animal study
in-process which has been funded by the National Institute of Science and
Technology program and the Company. Patents covering this technology have been
exclusively licensed from Rutgers University, and the Company works in close
collaboration with the inventor, Joachim Kohn, Ph.D.
The Company's development activities also include the use of
biomaterials for drug delivery applications. These applications are also being
developed for incorporation into other Regeneration Template products
manufactured by the Company. For instance, in surgical hemostasis, ophthalmic
and dental surgery applications, the sustained delivery of antibiotics at the
surgical site could be beneficial. There is also the possibility of delivering
growth factors and other biological response modifiers in a controlled manner in
conjunction with the Company's skin regeneration, cartilage regeneration and
nerve regeneration technologies.
Matrix Medicine
The Company's proprietary pharmacological applications of its
technologies are intended to target and control the behavior of human cells
through their interactions with the extracellular matrix. The Company refers to
the clinical applications of these technologies as matrix medicine, and is
developing applications for the pharmacological treatment of serious human
disease conditions, including diseases involving thrombosis, fibrosis and
angiogenesis.
The Company's matrix medicine technologies are based on the interaction
between a family of cell surface proteins called integrins and the
arginine-glycine-aspartic acid peptide sequence found in many extracellular
matrix proteins, including (i) structural molecules, such as collagen, elastin
and proteoglycans, that provide strength, mechanical support and a medium for
diffusion of nutrients and other molecules and (ii) adhesion molecules, such as
fibronectin, vitronectin and laminin, that provide binding sites between cells
and these structural molecules.
8
The Company has in development new pharmacological products based on
the interaction between the extracellular matrix and the integrin family. The
Company believes that many major diseases and disorders throughout the body,
including many that are debilitating, life-threatening, costly and difficult or
impossible to treat satisfactorily with existing therapies, involve the
disruption or abnormality of the matrix function. The Company's matrix medicine
technologies are intended to modify or mimic matrix functions and provide new
treatment strategies for a range of disorders.
The Company is pursuing a strategy to identify clinical and market
leaders in pharmacological areas to co-develop and license the Company's
proprietary technologies and applications. The Company believes that such
development and marketing relationships could result in a greater likelihood of
commercialization of these opportunities by utilizing the skills of partners to
complete clinical trials and market introduction, while allowing the Company to
focus on preclinical development. Many of the Company's technologies are in the
early stages of development and will require the commitment of substantial
additional resources by the Company and its potential strategic partners prior
to commercialization. There can be no assurance that the Company will be able to
form strategic alliances or successfully develop commercial products.
The following table summarizes the current status of three of the
Company's matrix medicine technologies:
Status of Target Indications of Selected
Matrix Medicine Technologies
- ---------------------------------------- ------------------------------------- -------------------------------------
POTENTIAL TARGET CLINICAL
AGENT APPLICATIONS STATUS
- ---------------------------------------- ------------------------------------- -------------------------------------
TP-9201 Platelet Aggregation Inhibitor Acute unstable angina and other Phase I human safety trial completed
acute thrombotic indications, such
as the prevention of abrupt closure
of arteries following angioplasty
or thrombolysis, stroke,
reconstructive surgery, vascular
grafts and organ transplantation,
when they are accompanied by a risk
of bleeding
TGF-(Beta) Antagonists Prevention of scarring following Preclinical development
surgery or trauma and prevention or
limitation of fibrosis of the
kidney, lung, liver, skin, arteries
and the central nervous system
(Alpha)v(Beta)3 Integrin Suppression of tumor growth and the Preclinical development
Specific Peptides spread of cancer through the
blocking of this integrin found
primarily on blood vessel sprouts
- ---------------------------------------- ------------------------------------- -------------------------------------
9
TP-9201 Platelet Aggregation Inhibitor
The Company has developed a platelet aggregation inhibitor which has
been demonstrated to be safe in a Phase I clinical trial and is now ready for
Phase II dose ranging trials in patients. Platelets are small cells that
circulate in the blood and have many important functions, one of which is
related to the control of bleeding. Platelets prevent bleeding by first adhering
to the vessel wall in a process called "platelet adhesion." In a secondary
process of "platelet aggregation," platelets aggregate to form clumps. Without
properly functioning platelets, dangerous bleeding can occur.
In diseased or surgically damaged blood vessels, platelets can
aggregate and restrict the vital supply of blood to the heart, brain and other
organs and tissues. This condition, termed thrombosis, is a common hallmark of
cardiovascular diseases such as heart attack and stroke, and can cause serious
complications during and after surgical procedures. Two kinds of drugs currently
available for the treatment of thrombotic diseases and conditions are
anticoagulants and thrombolytics. Anticoagulants inhibit formation of clots and
have both preventive and therapeutic applications. Thrombolytics function by
dissolving already existing clots. However, when the consequences of bleeding
are severe, neither of these agents are generally recommended.
Current approaches to thrombosis prevention that involve inhibition of
platelet aggregation carry the risk of compromising the body's ability to
control bleeding. Even minor bleeding, if allowed to go unchecked, can lead to
life-threatening events such as stroke and other forms of internal hemorrhage.
The Company is developing a selective platelet aggregation inhibitor
targeting the (Alpha)IIb(Beta)3 integrin receptor that appears on the surface of
activated platelets and mediates their aggregation. A key technical challenge in
the development of a (Alpha)IIb(Beta)3 inhibitor is to provide a molecule
specific enough to allow the beneficial functions of (Alpha)IIb(Beta)3, such as
those responsible for the primary event of platelet adhesion, without
interfering with other platelet receptors. Anti-platelet agents without such
characteristics prevent thrombosis but promote bleeding. ReoPro, an antibody
that blocks the function of (Alpha)IIb(Beta)3 was approved by the FDA in
1996 for use to prevent thrombosis after angioplasty procedures. Eli Lilly, who
markets this product claims that the initial bleeding problems associated with
this product can be controlled by carefully controlling the dosage.
The Company has conducted preclinical studies that demonstrate TP-9201
doses that prevent unwanted platelet aggregation without reducing the platelets'
ability to control capillary bleeding. The unique properties of this molecule
are being developed for application in therapeutic areas where the separation of
bleeding from antithrombotic effect is crucial.
The following table identifies the potential markets that could benefit
from TP-9201:
10
- ---------------------------------------------- ---------------------------------------------------------------------
CLINICAL INDICATION MANIFESTATION
- ---------------------------------------------- ---------------------------------------------------------------------
Unstable Angina Transient blockage of coronary arteries by blood clots, often
preceding complete myocardial infarction
Restenosis Reclosure of arteries, typically after angioplasty
Reocclusion Reclosure of arteries, typically after angioplasty or treatment of
mild myocardial infarction with thrombolytics
Ischemic Stroke Blockage of blood vessels supplying the brain, often resulting in
permanent brain damage
Vascular Synthetic grafts cause thrombosis, but also have a tendency to leak blood.
TP-9201 may be able to prevent thrombosis without increasing risk of bleeding
Reconstructive Surgery Microvascular thrombosis results in surgical failure, as does
excessive bleeding (contraindicating current anticoagulants)
Organ Transplantation Thrombosis after reestablishing blood flow to the organ results in
blockage of the microvascular bed and organ failure
- --------------------------------------------------------------------------------------------------------------------
The Company believes that there are many procedures that may be
addressed with the use of TP-9201 or future products developed from this
technology. The Company intends to seek strategic alliances to further develop
this technology. There can be no assurance that the Company will be able to form
strategic alliances or successfully develop commercial products.
TGF-(Beta) Antagonists
Transforming Growth Factor Beta ("TGF-(Beta)") is a class of growth
factors (cytokines) that has widespread regulatory effects on many processes
that are essential for normal health. Such processes include cell growth and
differentiation, fetal development, immune regulation, inflammation and tissue
repair. The Company believes that the importance of TGF-(Beta) for human
medicine is that an imbalance of TGF-(Beta) underlies chronic autoimmune and
inflammatory disease and fibrotic diseases, and contributes to carcinogenesis.
The Company intends to develop TGF-(Beta) antagonists that correct such
TGF-(Beta) imbalances.
The Company has licensed from the Burnham Institute, as well as from
the University of Utah, patent applications relating to the control of
TGF-(Beta) activity. Potential medical applications of this technology
include prevention of scarring following surgery or trauma and
prevention or limitation of fibrosis of the kidney, lung, liver, skin,
arteries and the central nervous system.
11
The Company has identified three therapeutic approaches to the control
of TGF-(Beta): human antibodies directed against TGF-(Beta); recombinant human
decorin; and gene therapy delivery of human decorin. Decorin is a natural
regulator of TGF-(Beta) activity and suppresses the production of TGF-(Beta) in
injured tissues. The Company's human antibody development program is being
carried out under an agreement with Cambridge Antibody Technology Limited
("CAT"), under which CAT has already developed several human anti-TGF-(Beta)
antibodies that are presently under preclinical investigation. The Company has
the right to market all dermal applications of these antibodies, including the
treatment of dermal scarring. The Company has also developed cell lines
expressing recombinant human decorin and is developing production procedures for
decorin.
(Alpha)v(Beta)3 Integrin Specific Peptides
The Company has developed and licensed patent applications for
technology to make peptides having specific binding affinity to different
classes of integrins. The Company has a program to create integrin specific
peptides and screen them for potential applications. The following integrins are
being studied as potentially useful therapeutic targets in preclinical research:
- ---------------------------------------- ---------------------------- --------------------------------------------
Target Integrin Class Clinical Indications Suggested Mechanism
- ---------------------------------------- ---------------------------- --------------------------------------------
(Alpha)IIb(Beta)3 Thrombosis Platelet aggregation
(Alpha)v(Beta)3 Angiogenesis (Alpha)v(Beta)3-mediated vascular cell
migration
(Alpha)v(Beta)3 Osteoporosis (Alpha)v(Beta)3-mediated adhesion of bone-
resorbing cells to bone
(Alpha)v(Beta)3 and/or Restenosis Smooth muscle cell migration and growth
(Alpha)IIb(Beta)3
(Alpha)v(Beta)3 and/or (Alpha)5(Beta)1 Metastasis Migration of carcinoma cells
(Alpha)5(Beta)1 and/or (Alpha)v(Beta)5 Bone formation Adhesion of bone-producing cells to bone
- ---------------------------------------- ---------------------------- --------------------------------------------
The Company has developed lead compounds targeting (Alpha)v(Beta)3,
(Alpha)v(Beta)5 and (Alpha)5(Beta)1, and is carrying out continuing preclinical
research on these compounds through collaborative arrangements with academic
laboratories experienced in the appropriate disease models. The Company intends
to seek strategic alliances to further develop the application of these
compounds. There can be no assurance that the Company will be able to form
strategic alliances or successfully develop commercial products.
12
Medical Products
In addition to extensive research into extracellular matrix
technologies conducted by the Company, the Company has developed and sells,
either directly or through licensing and distribution arrangements, a variety of
biomaterials-based medical products and devices that are not specifically based
on the Company's regenerative medicine and matrix medicine technologies. These
products are currently manufactured by the Company and are used internationally
in infection control, surgery, ophthalmology, dentistry and wound care. These
products accounted for approximately $7.1 million, $7.8 million and $7.0 million
of revenue for the Company during the years ended December 31, 1996, 1995 and
1994, respectively, representing approximately 54%, 76% and 80%, respectively,
of the Company's consolidated revenue for such periods.
The Company has pursued a strategy of developing marketing partnerships
with leading medical companies to assist in developing the commercial potential
of its medical products. The Company believes that such marketing partnerships
allow it to concentrate its management and financial resources on the
regenerative and pharmacological applications for its extracellular matrix
technologies, while still realizing the commercial potential of its current
medical products. A substantial portion of the Company's medical products is
sold to customers under the terms of multiple-year marketing and distribution
agreements that provide for purchase and supply commitments on the part of the
customer and the Company, respectively. In many cases marketing customers have
paid license fees to the Company for the marketing and distribution rights. In
the absence of a suitable United States marketing partner for the Company's
hemostasis product line, the Company has elected to sell certain portions of
this product line in the United States through a national network of specialized
distributors. Of the Company's total product sales for the years ended December
31, 1996, 1995 and 1994, three customers accounted for 42%, four customers
accounted for 56% and four customers accounted for 62%, respectively. For the
years ended December 31, 1995, 1994 and 1993, the Company's foreign sales were
16%, 11% and 13% of total product sales, respectively.
The table on the following page lists medical products currently
produced or under development by the Company, clinical applications and
marketing partners, and is followed by descriptions of the products and their
applications:
13
Medical Products, Clinical Applications and Marketing Partners
- ------------------------------- -------------------- ------------------------------------ -------------------------------
PRODUCTS/PRODUCTS IN YEAR CLINICAL MARKETING
DEVELOPMENT INTRODUCED APPLICATIONS PARTNER
- ------------------------------- -------------------- ------------------------------------ -------------------------------
Infection Control
VitaCuff 1987 Implanted percutaneous infection Arrow International, Inc.,
control Bard Access Systems, Inc. and
Quinton Instruments Co.
VitaPatch/BioPatch 1993 Topical percutaneous infection Private label for Johnson &
control Johnson Medical Inc.
Surgical and Hemostasis
Bicol 1978 Neurosurgery Professional Division of
Johnson & Johnson Inc.
Collastat, Instat, 1981, 1983 Surgical hemostasis Various domestic and
Otofoam 1983 international distributors
Helistat, Helitene 1985, 1987 Surgical hemostasis Direct sales in United
States; Selected distributors
in Europe and Japan
NeuroCol 1993 Neurosurgery As immediately above
Collagen coating 1992 Coating for vascular grafts Sorin Biomedical, Inc.
material
Arterial puncture In development Hemostasis of arterial puncture N/A
hemostasis device after arterial catherization
Ophthalmic
Collagen Corneal Shield 1991 Ophthalmic treatment Alcon Surgical, Inc.
Dental Surgery
CollaCote, CollaPlug, 1985 Dental surgery Calcitek Division of
CollaTape Sulzermedica
Wound Care 1990 / In Wound dressing for chronic skin
Chronicure / Viaderm development ulcers Unresolved
Biocompatible Coatings In development Improved biocompatibility of
PepTite implantable materials N/A
Orthopedics In development Improved biocompatibility of
Tyrosine-based orthopedic implants N/A
polycarbonates
Tissue Augmentation In development Improved product for bulking of
Urinary incontinence urinary sphincter N/A
Reproductive Health In development Drug delivery for fertility N/A
control and sexually transmitted
disease prevention
- ------------------------------- -------------------- ------------------------------------ -------------------------------
14
Infection Control Products
The Company's VitaCuff product provides protection against infection
arising from long-term catheters. VitaCuff consists of a silver-impregnated
collagen matrix ring which is positioned on the catheter prior to placement.
Once in place, the collagen forms a seal at the point of entry, mechanically
preventing microbial invasion along the catheter while at the same time
releasing silver into the surrounding area. In this application, silver
functions as a highly effective, broad spectrum antimicrobial agent.
VitaCuff and related products are manufactured by the Company and
marketed through Arrow International, Inc., Bard Access Systems, Inc., Quinton
Instruments Co. and through selected international distributors.
The Company's VitaPatch product is a wound dressing composed of a
synthetic and biopolymer composite foam impregnated with an antimicrobial
compound. The product is applied over the entry point of any percutaneous
device, such as orthopedic traction pins and epidural catheters, and serves to
protect the area from bacterial growth for an extended period of time. There are
no other dressings currently on the market with comparable antimicrobial
protection. VitaPatch is marketed by Johnson & Johnson Medical Inc. under their
trade name of BioPatch.
The Company has also developed a silver-impregnated foam wound dressing
which provides antimicrobial protection to prevent bacterial colonization
leading to infection. The Company is currently evaluating alternative marketing
strategies for this product.
Surgical and Hemostasis Products
The Company's hemostasis products are used in surgical procedures to
help control bleeding. The Company's absorbable collagen hemostatic sponge
products of Helistat, Collastat and related products, have been manufactured for
more than 15 years and are estimated to have been used with several hundred
thousand patients without any severe adverse events being reported.
Products for the surgical hemostasis market are manufactured by the
Company and marketed in the United States through a national network of
specialized distributors and through various international distributors. Current
approved products include Helistat (Absorbable Collagen Hemostatic Sponge) and
Helitene (Absorbable Collagen Hemostatic Agent-Fibrillar Form). The Company
introduced two new products under its Helistat line in 1996, a thicker 3"x4"
sponge (7.0 mm thick for heavier bleeding applications) and a 1" x1 1/2" sponge
(to control smaller bleeding sites for the dialysis market).
The Company's Bicol and NeuroCol collagen sponge products are porous
matrices used in neurosurgery as moistening agents to prevent drying of brain
tissue and as protective devices to buffer the pressure of retractors. The
domestic market for moistening/protective devices is dominated by less
effective, but lower cost gelatin or cellulose pads. Gelatin and cellulose pads
hold less fluid, are more prone to drying and leave behind friable particles
that must be irrigated and aspirated for removal. In contrast, the Company's
collagen sponge provide absorption of fluid, exceptional wet strength and ease
of handling by surgeons. Bicol is manufactured by the Company for the Johnson &
Johnson Professional Division of Johnson & Johnson Inc. NeuroCol is manufactured
by the Company and marketed with the Helistat line.
15
As an extension to the surgical product line, the Company has developed
a collagen vascular graft coating in conjunction with Sorin Biomedical, Inc.
This proprietary collagen coating provides an alternative to fabric vascular
graft products which require pre-clotting before use. The Company's product is
easier to use because it eliminates the need for pre-clotting. The Company has
transferred the coating technology and pilot plant equipment to Sorin
Biomedical, and derives its revenues from royalties and the sale of materials to
the manufacturer.
Ophthalmic Products
The Company's ophthalmic products are used to provide protection and
lubrication of the eye in conjunction with various treatments for eye
conditions. The Collagen Corneal Shield is a thin collagen film that resembles a
contact lens. The Company is also developing a new version of corneal shields
with enhanced performance and a viscoelastic material. These technologies have
further potential to be used for a sustained delivery of various drugs to the
eye. The Company's ophthalmic products are marketed by Alcon Surgical, Inc.
Dental Surgery Products
The Company's dental surgery products are extensions of the Company's
basic absorbable collagen hemostatic sponge technology. Each of the three
products, CollaCote, CollaPlug and CollaTape, has a unique dimension, shape and
density and provides most of the hemostasis requirements encountered in dental
surgery. The Calcitek Division of Sulzermedica markets the Company's dental
surgery products.
Wound Care Products
The Company's Chronicure product is a wound exudate absorbent dressing
used for management of chronic wounds and skin ulcers, such as venous stasis
ulcers, decubitus ulcers (bed sores) and diabetic ulcers. It is purified
protein-hydrolysate of avian collagen. Chronicure is manufactured by the Company
and sold in the United States and selected other countries. The Company is also
developing a commercial-scale manufacturing process for its Viaderm product,
which is also a wound exudate absorbent dressing.
Biocompatible Coatings
The use of prosthetic device implants creates a variety of clinical
problems, including inflammation, encapsulation, thrombosis and infection. These
problems may be overcome by coating the surface of implanted materials with cell
attachment sites which enable the natural development of tissue structure at the
material-tissue interface providing for long-term, stable tissue integration.
The Company is developing PepTite(TM) Biocompatible Coating ("PepTite")
designed to improve the biocompatibility of implantable materials. The coating
contains arginine-glycine-aspartic acid peptide sequence. A number of
preclinical in vivo effectiveness studies were conducted in collaboration with
various implant manufacturers. The Company coated and studied: percutaneous
access catheters to reduce thrombus formation; polyester mesh to enhance
endothelialization of arterial wall defect repairs and reduce inflammation in
hernia and other fascial defects; silicone implants to reduce or eliminate
encapsulation of the implant; and certain polymers utilized in cardiovascular
devices to reduce
16
thrombogenicity and enhance tissue ingrowth. The Company's strategy is to
develop PepTite in collaboration with medical device manufacturers.
Orthopedics
The Company has licensed proprietary technology from Rutgers University
for a new class of polymer derived from tyrosine, a naturally-occurring amino
acid. This material is currently being developed for orthopedic applications as
a pure polymer and in composites with other reinforcing materials. In addition,
the Company has rights to utilize this material in wound closure and related
drug delivery applications. The polymer is presently undergoing animal safety
testing. The Company's strategy is to locate an orthopedic partner to assist in
the further development and commercialization of this technology.
Tissue Augmentation
The Company is developing an injectable biomaterial to augment the
urinary sphincter to address the problem of urinary incontinence. The material
is currently undergoing comparative evaluation with commercially available
injectables in various preclinical in vivo and in vitro models.
Reproductive Health
The Company is working with the Agency for Contraceptive Research and
Development and the Population Council in the development of topical,
transdermal and implantable drug delivery systems to deliver steroids and other
pharmaceuticals for reproductive health applications such as contraception,
fertility enhancement and topical control of sexually transmitted disease.
Products developed through these relationships are intended to be manufactured
exclusively by the Company for worldwide distribution.
Research Strategy
The Company has either acquired or secured the proprietary rights of
several important scientific platforms. These platforms can be organized into
four distinct but complementary technological categories: (1) Bioabsorbable and
other materials, (2) Extracellular matrix and other specialized materials
structures, (3) Materials as delivery vehicles for peptides, cells, growth
factors, drugs and other actives, and (4) Actives. The Company's efforts are
focused on the convergence of these technology categories into a type of "basic
operating system solution" for technology development and product performance.
Just as a computer's basic operating system interfaces with its electronic
hardware to direct and control the performance of the computer, specialized
biosmart(TM) absorbable products developed by the Company are intended to
function in the patient's body by directing and controlling targeted cell
behavior to achieve a specified desired medical result. Here, the Company's
technology and product development efforts are principally organized towards
products for two emerging cell-based medical practices: Regenerative Medicine
and Matrix Medicine.
The Company's research implementation is to supplement a relatively
small group of in-house scientists and researchers with collaborative links with
a network of various hospitals and medical organizations which are centers of
research in the Company's technology. The Company believes this is a
cost-effective way of obtaining know-how and expertise in the Company's
technologies while maintaining an ability to respond quickly and effectively to
technological changes.
The Company identifies, develops and combines complimentary
technologies including biomaterials, cell culture, and growth and differentation
factors. To assist the Company in achieving this, it has collaborative,
research and/or licensing arrangements with the following institutions:
17
Summary of Collaborative, Research and/or Licensing Arrangements
- ------------------------------------------------------ ----------------------------------- -------------------------------
Institution Project/Product Sponsor
- ------------------------------------------------------ ----------------------------------- -------------------------------
Brigham & Women's Hospital, Inc. INTEGRA Artificial Skin studies The Company
Boston, MA
Cambridge Antibody Technology Limited Product development of human CAT
Cambridge, UK TGF-(Beta) antibodies
Duke University Medical Center Preclinical studies of collagen National Institutes of
Durham, NC nerve graft tubes Health; The Company
Eastern Virginia Medical School Preclinical Studies on polymers Agency for Contraceptive
Norfolk, VA for topical fertility and Research and Development
sexually transmitted disease
control
Hospital for Joint Diseases Orthopaedic Institute Preclinical studies on cartilage National Institutes of
New York, NY regeneration; preclinical studies Health; National Institute of
on tyrosine polycarbonates for Standards and Technology; The
orthopedic applications Company
The Burnham Institute (formerly La Jolla Cancer License Agreement concerning The Burnham Institute; The
Research Foundation) basic research on extracellular Company
La Jolla, CA matrix
Massachusetts General Hospital INTEGRA Artificial Skin studies The Company
Boston, MA
Massachusetts Institute of Technology INTEGRA Artificial Skin studies The Company
Cambridge, MA
Robert Wood Johnson Medical School Piscataway, NJ Quality control methodology The Company
Rutgers University Tyrosine polycarbonate polymers National Institutes of
Piscataway, NJ for orthopedic applications Health; National Institute of
Standards and Technology
University Hospital Clinical studies of collagen The Company
Copenhagen, Denmark nerve graft tubes
- ------------------------------------------------------ ----------------------------------- -------------------------------
The Company spent approximately $6.3 million, $5.2 million and $3.1
million for the years ended December 31, 1996, 1995 and 1994, respectively, on
research and development activities. Research and development activities funded
by government grants and contract development revenues amounted to $1.1 million,
$1.1 million and $1.3 million for the years ended December 31, 1996, 1995, and
1994, respectively.
18
The Company's research is focused on technology development as opposed
to early stage basic research. Further, the research and development policy of
the Company attempts to ensure that every promising technological concept has
substantive commercial and clinical utility. To promote this, the Company
encourages early and close collaboration with clinicians. An example is INTEGRA
Artificial Skin, which was the result of a collaboration between a surgeon and a
materials scientist. The ability of the surgeon to define the critical
specifications of the product, especially that it be available "off the shelf"
immediately at the time of early wound excision for patients with
life-threatening injury and that it be a permanent wound cover, were essential
prerequisites to the product development and demonstration of clinical utility
in human clinical trials.
Patents and Proprietary Rights
The Company's ability to compete effectively will depend, in part, on
the clinical and commercial success of its development efforts and its ability
to maintain the proprietary nature of its technologies and manufacturing
processes. The Company pursues a policy of seeking patent protection for certain
technology, products and product improvements both in the United States and in
selected foreign countries. When determined appropriate, the Company has and
plans to continue to enforce and defend its patent rights. The Company also
relies upon trade secrets, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position.
As of December 31, 1996, the Company owned or had exclusive license
rights to 107 issued or allowed United States patents and 99 issued or allowed
foreign patents, with pending United States patent applications and related
foreign patent applications describing approximately 300 additional inventions.
These patents and patent applications contain composition of matter, process and
method of use claims for various fields of use, primarily involving regenerative
medicine and related technologies.
The Company files patent applications both in the United States and in
foreign countries in order to protect both its products and technologies. In
addition, the Company has various licenses to technologies patented by others.
The patent position of biotechnology and pharmaceutical firms is highly
uncertain, involves many complex legal, factual and technical issues and has
recently been the subject of much litigation. There is no clear policy involving
the breadth of claims allowed in such cases or the degree of protection afforded
under such patents. As a result, there can be no assurance that patent
applications relating to the Company's products or technologies will result in
patents being issued, that patents issued or licensed to the Company will
provide protection against competitors or that the Company will enjoy patent
protection for any significant period of time. It is possible that patents
issued or licensed to the Company will be successfully challenged, or that
patents issued to others may preclude the Company from commercializing its
products under development. Certain of the patents licensed by the Company for
specific uses are licensed to other parties for use in certain fields or are
sublicensed to other parties. Litigation to establish the validity of patents,
to defend against infringement claims or to assert infringement claims against
others, if required, can be lengthy and expensive. There can be no assurance
that the products currently marketed or under development by the Company will
not be found to infringe patents issued or licensed to others.
In response to a request by the Company, the United States Patent and
Trademark Office ("USPTO") declared an interference on November 15, 1993 to
determine who was first to invent cyclic arginine-glycine-aspartic acid peptides
among several pharmaceutical companies and the Burnham Institute, from whom the
Company received its rights. Based upon the records of the USPTO, the patent
application to which the Company has rights was the first to be filed among
those filed by the parties to the interference. Nevertheless, there can be no
assurance that the discovery in question was made first by
19
scientists at the Burnham Institute. The granting of a patent covering cyclic
arginine-glycine-aspartic acid peptides to a third party would have an adverse
impact on the Company's ability to develop its TP-9201 peptide and other cyclic
arginine-glycine-aspartic acid peptides under development by the Company.
Furthermore, there can be no assurance as to the timing, cost, or outcome of the
pending interference.
The Company's competitive position is also dependent upon unpatented
trade secrets. The Company continues to develop a substantial database of
information concerning its research and development. The Company has taken
security measures to protect its data and is in the process of exploring ways to
enhance further the security for its data. However, trade secrets are difficult
to protect. There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets, that such trade secrets will not be
disclosed or that the Company can effectively protect its rights to unpatented
trade secrets. In an effort to protect its trade secrets, the Company has a
policy of requiring its employees, consultants and advisors to execute
proprietary information and invention assignment agreements upon commencement of
employment or consulting relationships with the Company. These agreements
provide that all confidential information developed or made known to the
individual during the course of their relationship with the Company must be kept
confidential, except in specified circumstances. There can be no assurance,
however, that these agreements will provide meaningful protection for the
Company's trade secrets or other proprietary information in the event of the
unauthorized use or disclosure of confidential information.
Manufacturing
The Company's primary manufacturing facility is located in Plainsboro,
New Jersey. The Company manufactures the majority of its medical products at
this approximately 35,000 square foot FDA-registered and inspected facility
which also serves as the Company's executive offices. The Company has completed
an addition of approximately 10,000 square foot and a commercial-scale
manufacturing facility for INTEGRA Artificial Skin at this location.
The Company also has a lease agreement for a four-building site
consisting of approximately 25,000 square feet in West Chester, Pennsylvania.
The West Chester facility and manufacturing assets were under renovation from
1994 through 1996. The renovation is in its final phase and the Company has
commenced manufacturing commercial medical products at this facility.
The Company has invested approximately $7.8 million in property and
equipment over the last three years, excluding property and equipment acquired
in connection with business acquisitions. A substantial portion of this
investment was in facility and major equipment additions and renovations at the
Company's Plainsboro and West Chester facilities.
The basic material for many of the Company's medical and regenerative
medicine products is principally purified collagen prepared from bovine tendon
in a four-step process; (i) the raw material is processed with various enzymes
and solvents to purify and render it non-immunogenic; (ii) the purified material
is dispersed into suspensions appropriate for the manufacture of the different
forms of collagen material and then dried using freeze drying techniques; (iii)
the fibrous material yielded from the drying step is "cross-linked" through
chemical bonding of overlying fibers, with different types and degrees of
cross-linking being used for different products; and (iv) the bonded material is
sized and packaged.
20
The basic material for the Company's Chronicure and Viaderm wound care
products is hydrolyzed collagen from an avian source. The Company processes this
biomaterial into a gel-like substance for further external processing monitored
by the Company. The Company has installed equipment for the manufacture of
bovine collagen-based products at its Plainsboro facility and avian
collagen-based products at its West Chester, Pennsylvania facility. Certain
spray drying and packaging operations for the Company's avian collagen-based
products are performed by outside contractors.
The Company believes that its existing and renovated manufacturing
facilities are adequate for the foreseeable future and, depending on product mix
and pricing, can support the manufacturing for significant product sales.
Further, the Company believes that suitable additional or alternative space will
be available on commercially reasonable terms when needed in the future.
Competition
In general, the medical technology industry is subject to rapid,
unpredictable and significant technological change. Competition from
universities, research institutions and pharmaceutical, chemical and
biotechnology companies is intense. Many competitors or potential competitors
have greater financial resources, research and development capabilities and
marketing and manufacturing experience than the Company. The Company's
competitive position will depend on its ability to secure regulatory approval
for its products, implement production and marketing plans, obtain patent
protection and secure adequate capital resources.
The Company is aware of several companies seeking to develop dermal
replacement and other products that could, if successfully developed,
potentially compete with the regenerative medicine technologies being developed
by the Company. A number of biotechnology, pharmaceutical and chemical companies
are developing various types of wound healing treatments which are alternatives
to tissue regeneration for some conditions, including chronic skin ulcers. These
treatments employ a variety of approaches such as growth factors, tripeptides
and wound dressings. The Company believes that some of these alternatives could
be used in conjunction with the Company's products. The following table presents
the status of products known to the Company which are on the market or under
development that might compete with INTEGRA Artificial Skin:
21
Competition for INTEGRA Artificial Skin
- ------------------------------------- ------------------------------------- ---------------------- ---------------------
CURRENTLY SUBJECT
TO FDA
COMPANY TECHNOLOGY/PRODUCT STATUS REGULATION
- ------------------------------------- ------------------------------------- ---------------------- ---------------------
LifeCell Corporation Processed cadaver skin On market No
Genzyme Tissue Repair Cultured epidermal autograft On market No
Division of Genzyme
Corporation
Cell Culture Technology Cultured epidermal autograft On market No
Advanced Tissue Sciences, Inc. Polymer mesh temporary dressing On market Yes
with cultured cells
Organogenesis, Inc. Cultured cells in collagen matrix PMA submitted for Yes
venous stasis ulcers
Ortec International, Inc. Cell-seeded collagen matrix In IDE clinical Yes
phase evaluation
- ------------------------------------- ------------------------------------- ---------------------- ---------------------
Certain of the Company's competitors, such as LifeCell Corporation,
Genzyme Tissue Repair and Cell Culture Technology, have developed technologies
involving processed cadaver skin or cultured epidermal autograft that are
currently not subject to FDA regulation because they involve the processing of
human cells and tissues and, therefore, are not currently subject to the costs
and expenses and the potential delays associated with the FDA approval process.
Two other companies, Advanced Tissue Sciences, Inc. and Organogenesis, Inc.,
have been granted expedited FDA review for their skin substitutes, Dermagraft-TC
and Graftskin, respectively. Dermagraft-TC is a synthetic polymer mesh with
cultured human cells that can be used as a temporary dressing until a graft of
the patient's own skin can be used. Dermagraft-TC received FDA approval during
the first quarter of 1997. Graftskin is composed of donor human cells, bovine
collagen and other ingredients. A number of other biotechnology companies are
also developing wound-healing factors to speed the rate of healing of chronic
skin ulcers. These products may be competitive or complementary to INTEGRA
Artificial Skin.
The Company competes primarily on the uniqueness of its technology and
product features, and on the quality and cost-effectiveness of its products and
development effort. The Company believes that the first dermal replacement
product to reach the United States market benefits from a competitive advantage
over later entrants in the market. The Company believes that INTEGRA Artificial
Skin is the first dermal replacement product for severe burns approved by the
FDA.
There can be no assurance that developments by the Company's
competitors or potential competitors will not render the Company's technology or
proposed applications of its technology obsolete.
22
Government Regulation
The Company's research and development activities and the manufacturing
and marketing of the Company's existing and future products are subject to
regulation by numerous governmental agencies in the United States and in other
countries. The FDA and comparable agencies in other countries impose mandatory
procedures and standards for the conduct of clinical trials and the production
and marketing of products for diagnostic and human therapeutic use. The FDA
product approval process has different regulations for drugs, biologics, and
medical devices. The FDA currently classifies the Company's proposed
regenerative medicine products as medical devices.
Review Process For Medical Devices
There are two types of FDA review/approval procedures for medical
devices: a Premarket Notification Section 510(k) ("510(k)") and a PMA
application. A 510(k) requires submission of sufficient data to demonstrate
substantial equivalence to a device marketed prior to May 28, 1976, or to a
device marketed after that date which has been classified into Class I or Class
II. Although the mandated time frame for FDA review is 90 days, actual review
times can be substantially longer, and the sponsor cannot market the device
until FDA clearance is obtained. For those devices that involve new technology
and/or that present significant safety and effectiveness issues, 510(k)
submissions may require significantly more time for FDA review and may require
submission of more extensive safety and effectiveness data, including clinical
trial data.
Among the conditions for clearance to market of a 510(k) submission is
the requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to the FDA's current Good Manufacturing
Practice ("cGMP") regulations. In complying with standards set forth in these
regulations, manufacturers must expend time, money and effort for production and
quality control to ensure full technical compliance at all times. Manufacturing
establishments, both foreign and domestic, are also subject to inspections by or
under the authority of the FDA. Although, at present, the FDA generally does not
inspect such establishments prior to clearance of a 510(k) submission, it is
establishing a program of conducting cGMP inspections for new devices in the
future as a standard practice.
The Medical Device Amendments of 1976 amended the Federal Food, Drug
and Cosmetics Act to establish three regulatory classes for medical devices,
based on the level of control required to assure safety and effectiveness. Class
III Devices are defined as life-supporting and life-sustaining devices, devices
of substantial importance in preventing impairment of human health or devices
that present potentially unreasonable risk of illness or injury. Class III
devices are those for which there is insufficient information to show that Class
I or Class II controls can provide a reasonable assurance of safety or
effectiveness. The PMA application review process for Class III devices was
established to evaluate the safety and effectiveness of these devices on a
product by product basis. Manufacturers that wish to market Class III devices
must submit and receive approval of a PMA application from the FDA.
The FDA has substantial content and format requirements for PMA
applications, which include clinical and non-clinical safety and effectiveness
data, labeling, manufacturing processes and quality assurance programs. As part
of the PMA application process, the PMA application may be referred to an FDA
Advisory Panel for review. Additionally, final approval of the product is
dependent on an inspection of the manufacturing facility for compliance with FDA
cGMP regulations.
23
All studies in humans for the purpose of investigating the safety and
effectiveness of an investigational medical device must be conducted under the
IDE regulations. An IDE application to the FDA includes all preclinical
biocompatibility testing, investigational protocol, patient informed consent
forms, reports of all prior investigations, manufacturing and quality control
information. It takes a number of years from initiation of the project until
submission of a PMA application to the FDA, and requires the expenditure of
substantial resources. If a PMA application is submitted, however, there can be
no assurance on the length of time for the review process at the FDA or that the
FDA will approve the PMA application. Under either the 510(k) submission or PMA
application process, manufacturing establishments, foreign and domestic, are
subject to periodic inspections by the FDA for compliance with cGMP regulations.
The Company and each of its operating subsidiaries are subject to such
inspections.
To gain approval for the use of a product for clinical indications
other than those for which the product was initially evaluated or for
significant changes to the product, further studies, including clinical trials
and FDA approvals are required. In addition, for products with an approved PMA
application, the FDA requires post-approval reporting and may require
post-approval surveillance programs to monitor the product's safety and
effectiveness. Results of post-approval programs may limit or expand the further
marketing of the product.
International Regulatory Requirements
The Company is preparing for the changing international regulatory
environment. "ISO 9000" is an international recognized set of guidelines that
are aimed at ensuring the manufacture and development of quality products. The
Company is scheduled to be audited under ISO standards during the first half of
1997. Companies that meet ISO standards are internationally recognized as
functioning under a quality system. Seventeen countries have adopted ISO 9000
for medical products. Approval of a product by regulatory authorities in foreign
countries must be obtained prior to the commencement of marketing of the product
in such countries. The requirements governing the conduct of clinical trials and
product approvals vary widely from country to country, and the time required for
approval may be longer or shorter than that required for FDA approval of the PMA
application. In addition to the Company's efforts to become ISO 9000 certified,
the Company has obtained or is actively pursuing foreign registrations in
selected markets for the majority of its product lines. The Company has numerous
certificates of export for its complete line of medical products.
Other United States Regulatory Requirements
In addition to the regulatory framework for product approvals, the
Company is and may be subject to regulation under federal and state laws,
including requirements regarding occupational health and safety; laboratory
practices; and the use, handling and disposal of toxic or hazardous substances.
The Company may also be subject to other present and possible future local,
state, federal and foreign regulations.
The Company's research, development and manufacturing processes involve
the controlled use of certain hazardous materials. The Company is subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of such materials and certain waste products.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standards prescribed by such laws
and regulations, the risk of accidental contamination or injury from these
materials cannot be completely eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any such liability
could exceed the resources of the Company. Although the Company believes that it
is in compliance in all material
24
respects with applicable environmental laws and regulations, there can be no
assurance that the Company will not incur significant costs to comply with
environmental laws and regulations in the future, nor that the operations,
business or assets of the Company will not be materially adversely affected by
current or future environmental laws or regulations.
Employees
The Company believes that its employees are one of its most important
assets. The competitive advantage of life sciences companies depends on a
committed workforce, sound management processes and systems which maximize
utilization of each employee's technical knowledge. The Company has developed
such systems and processes in order to allow it to manage and market effectively
its intellectual capital. The investment in such systems makes the Company less
vulnerable if and when specific employees leave. To foster employee commitment
the Company has implemented incentive plans so that employees have an important
stake in the Company's shares and benefit from the Company's success. The
Company is dedicated to building on these principles as it moves forward.
At December 31, 1996, the Company employed 129 people, of which 52 are
engaged in production and production support, 14 in quality assurance/quality
control, 21 in research and development, four in regulatory and clinical
affairs, 17 in sales/marketing and 21 in administration and finance. None of the
Company's employees are subject to a collective bargaining agreement.
ITEM 2. PROPERTIES
The Company has a lease for approximately 35,000 square feet for its
principal administrative, marketing, manufacturing and product development
activities in Plainsboro, New Jersey which expires in October 2012, and a lease
for approximately 25,000 square feet of production, administration and warehouse
space in West Chester, Pennsylvania which expires in April 1999, with three
five-year renewal options. In 1996, the Company entered into a five year lease
for approximately 7,400 square feet of administrative and laboratory space
located in San Diego, California.
ITEM 3. LEGAL PROCEEDINGS
In January 1994, ABS LifeSciences, Inc., a wholly-owned subsidiary of
the Company, entered into a five-year distribution agreement with the
distributor of the Company's Chronicure product pursuant to which the
distributor is obligated to purchase certain minimum quantities of wound care
products. In October 1995, the Company's subsidiary filed a complaint in the
United States District Court for the District of New Jersey claiming the
distributor breached the distribution agreement by, among other things, not
paying the subsidiary for certain products delivered. In November 1995, the
distributor filed an affirmative defense and counterclaim alleging, among other
things, fraudulent misrepresentation and breach of contract and seeking damages
of approximately $1.2 million plus unspecified punitive damages. The Company
intends to defend the counterclaim vigorously.
25
On or about July 18, 1996, Telios Pharmaceuticals, Inc.("Telios"), a
wholly-owned subsidiary of Company, filed a patent infringement lawsuit against
three parties: Merck KGaA, a German corporation, Scripps Research Institute, a
California nonprofit corporation, and David A. Cheresh, Ph.D., a research
scientist with Scripps. The lawsuit was filed in the U.S. District Court for the
Southern District of California. The complaint charges, among other things, that
the defendant Merck KGaA "willfully and deliberately induced, and continues to
willfully and deliberately induce, defendants Scripps Research Institute and Dr.
David A. Cheresh to infringe United States Letters Patent No. 4,729,255." This
patent is one of a group of five patents granted to the Burnham Institute and
licensed by Telios that are based on the interaction between a family of cell
surface proteins called integrins and the arginine-glycine-aspartic acid (known
as "RGD") peptide sequence found in many extracellular matrix proteins. The
Company is pursuing numerous medical applications of the RGD technology in the
fields of anti-thrombic agents, cancer, osteoporosis, and a cell adhesive
coating designed to improve the performance of implantable devices and their
acceptance by the body. The defendants have filed a counter suit asking for an
award of defendants' reasonable attorney fees.
On March 27, 1996, Telios filed a motion in the United State Bankruptcy
Court for the Southern District of California, in the Telios chapter 11 case,
No. 95-00770-H11, regarding "cure" requirements for assumed executory contracts
with The University of Utah and The University of Utah Research Foundation
(collectively, the "University"). The motion seeks to resolve certain disputes
concerning Telios' licensing rights under a certain License Agreement and
Research Agreement entered into between Telios and the University. In addition,
on March 22, 1996, the University filed a complaint against Telios in the United
States District Court for the District of Utah, styled as Case No. 2:96CV-0262W,
seeking a declaration that the Research Agreement and License Agreement were
terminated or terminable. In January 1997, the parties stipulated to the court
to postpone the any trial pending continued settlement discussions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
26
Additional Information
The following information is furnished in this Part I
pursuant to Instruction 3 to Item 401(b) of Regulation S-K:
Executive Officers of the Company
The executive officers of the Company serve at the
discretion of the Board of Directors. The only family relationship
between any of the executive officers of the Company is between Dr.
Caruso and Mr. Holtz. Mr. Holtz is the nephew of Dr. Caruso. The
following information indicates the position and age of the Company's
executive officers as of the date of this report and their previous
business experience.
Name Age Position
Richard E. Caruso, Ph.D. 53 Chairman, President and Chief Executive
Officer
Frederick Cahn, Ph.D. 54 Senior Vice President, Technology
Andre P. Decarie 51 Senior Vice President, Marketing and Sales
Michael D.
Pierschbacher, Ph.D. 45 Senior Vice President, Research and
Development
David B. Holtz 30 Vice President, Treasurer
Donald Nociolo 34 Vice President, Operations
Judith E. O'Grady 46 Vice President, Regulatory Affairs
Executive Officers
Richard E. Caruso, Ph.D. founded the Company and is the
Chairman, President and Chief Executive Officer. From 1969 to 1992,
Dr. Caruso was a principal of LFC Financial Corporation, a major
entrepreneurial financing company located in Radnor, Pennsylvania.
When he left in 1992, he was a director of the company and held the
position of Executive Vice President. He has 25 years experience in
finance and entrepreneurial ventures. Prior to joining LFC Financial
Corporation, Dr. Caruso was associated with Price Waterhouse & Co. in
Philadelphia, Pa. Dr. Caruso has served as a director or trustee of the
following organizations: American Capital Open End Mutual Funds, LFC
Financial Corporation, 202 Data Systems, Tenley Enterprises, Inc.,
and London School of Economics Business Performance Group. He is
currently a director of Susquehanna University, The Baum School of
Art, Uncommon Individual Foundation (Founder) and the Company. He
received a BS degree from Susquehanna University, an MSBA degree from
Bucknell University, and a Ph.D. degree from the London School of
Economics, University of London (UK). Dr. Caruso is also a certified
public accountant.
Frederick Cahn, Ph.D. has served the Company as Vice President
for Technology from 1993 to September 1995, and as Senior Vice President
of Technology since September 1995. Between 1987 and 1993, Dr. Cahn was
President and Founder of Biomat Corporation. He was appointed to his
current position after the acquisition of Biomat by the Company in April
1993. Prior to founding Biomat, Dr. Cahn served as Senior Scientist at
Digilab Division of Bio-Rad Laboratories developing software and methods
for chemical analysis and quality control for semiconductor and medical
diagnostic applications. From 1980 to 1984, Dr. Cahn was Senior
Scientist for New England Digital Corporation developing acoustic
research and digital signal processing products. From 1988 to the
present, he carried out various research duties as a Research Affiliate
with the Massachusetts Institute of Technology, including a project to
demonstrate the feasibility of porous microcarriers for mass culture of
mammalian cells. Dr. Cahn received a BA degree in Physics and Biology
from the University of California at Berkeley, and a Ph.D. degree in
Biophysics from the Massachusetts Institute of Technology.
27
Andre P. Decarie, Senior Vice President, Marketing and Sales,
joined the Company as Vice President of Marketing in 1993. Mr. Decarie
has been active in the medical industry for over 20 years, both in
senior management positions and in private consulting. He was Vice
President of Sales for Surgical Laser Technologies and Vice President of
Marketing for Hemostatic Surgery Corporation. He spent over 14 years at
United States Surgical corporation in a variety of national and
international assignments, including sales, marketing and product
development. In 1990, as Director of Continuing Medical Education for
USSC, he led the group which guided the training of over 15,000 surgeons
in the US and hundreds of international surgeons, in techniques of
Minimally Invasive Surgery. He is a member of the ASCRS Research
Foundation, and a member of their Gold Eagle Society. Mr. Decarie holds
a BBA degree in Marketing from the University of Miami.
Michael D. Pierschbacher, Ph.D. joined the Company in October 1995
as Senior Vice President, Research and Development. Dr. Pierschbacher served
Telios, which was acquired by the Company in connection with the
reorganization of Telios under Chapter 11 of the Bankruptcy Code, as Senior
Vice President and Scientific Director from October 1988 to September 1995.
He was a co-founder of Telios in May 1987 and is the co-discoverer and
developer of Telios' matrix peptide technology. Prior to joining Telios as a
full-time employee in October 1988, he was a staff scientist at the Burnham
Institute for five years. Dr. Pierschbacher is a member of the adjunct staff
of the Burnham Institute. He received his post-doctoral training at Scripps
Clinical and Research Foundation and at the Burnham Institute. Dr.
Pierschbacher received his Ph.D. in Biochemistry from the University of
Missouri.
David B. Holtz joined the Company as the Controller in 1993 and
has served as Vice President, Treasurer since March 1997. His
responsibilities include managing all accounting and information systems
functions. He is also responsible for the preparation of the Company's
Securities and Exchange Commission filings and federal and state tax
returns. Prior to joining the Company, Mr. Holtz was an associate with
Coopers & Lybrand in Philadelphia, and Cono Leasing Corporation, a
private leasing company. He received a BS degree in Business
Administration from Susquehanna University in 1989 and is a certified public
accountant.
Donald Nociolo joined the Company as Director, Manufacturing in 1994
and has served as Vice President, Operations since March 1997. His
responsibilities include managing all manufacturing operations to ensure
on-time shipment of GMP produced and high quality product to all of our
customers. Mr. Nociolo has seven years experience working in engineering
and manufacturing in the medical device industry. Six of those years
were spent working at Ethicon, Inc., Johnson & Johnson's suture
division. Mr. Nociolo received a BS degree in Industrial Engineering
from Rutgers University and an MBA in Industrial Management from
Fairleigh Dickinson University.
Judith E. O'Grady has served as Vice President of Regulatory
Affairs for the Company, or a predecessor company, since 1988. Included
in her responsibilities are clinical research and quality assurance
functions. Ms. O'Grady has worked in the areas of medical devices and
collagen technology for the past 15 years. Between 1988 and 1992, she
held the position of Vice President of Regulatory Affairs with
Colla-Tec, Inc., a predecessor to the Company, and from 1981 to 1988
with American Biomaterials Company and American Medical Products/Delmed.
Earlier in her career she served as a Clinical Research Associate with
Surgikos, a Johnson and Johnson subsidiary. Ms. O'Grady received a BS
degree in Nursing from Marquette University and an MS degree in Nursing
from Boston University. Ms. O'Grady is a member of the Board of
Directors of the State of New Jersey League for Nursing.
28
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock began trading on The Nasdaq National
Market on August 16, 1995 under the symbol IART. The following table represents
the high and low sales prices for the Company's Common Stock for each quarter
since its initial trading date.
HIGH LOW
1995
Third Quarter $10.00 $4.50
Fourth Quarter $ 8.75 $6.00
1996
First Quarter $13.50 $6.375
Second Quarter $13.00 $8.75
Third Quarter $11.75 $4.125
Fourth Quarter $ 7.00 $4.25
The closing price for the Common Stock on March 21, 1997 was $4.00.
For purposes of calculating the aggregate market value of the shares of Common
Stock of the Company held by nonaffiliates, as shown on the cover page of this
report, it has been assumed that all the outstanding shares were held by
nonaffiliates except for the shares held by directors and executive officers of
the Company and stockholders owning 10% or more of outstanding shares. However,
this should not be deemed to constitute an admission that all such persons are,
in fact, affiliates of the Company. Further information concerning ownership of
the Company's Common Stock by executive officers, directors and principal
stockholders will be included in the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission.
The Company does not currently pay any cash dividends on its Common
Stock and does not anticipate paying dividends in the foreseeable future.
The number of stockholders of record as of March 21, 1997 was
approximately 729, which includes stockholders whose shares were held in nominee
name. The number of beneficial stockholders at that date was over 7,600.
29
ITEM 6. SELECTED FINANCIAL DATA
The following data has been selected by the Company and derived from
consolidated financial statements that have been audited by Coopers & Lybrand
LLP, independent accountants. The information set forth below is not necessarily
indicative of the results of future operations and should be read in conjunction
with the Company's consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this report. The nine month period ended
December 31, 1992 reflects the period subsequent to the March 31, 1992 purchase
of all of the Company's common stock by an affiliate of Dr. Richard E. Caruso,
the controlling stockholder of the Company.
Years Ended December 31, Nine Months Ended
-------------------------------------------------
1996 1995 1994 1993 December 31,1992
---- ---- ---- ---- -----------------
(In thousands, except per share data)
Statement of Operations Data (1)
Product sales.............................. $11,210 $ 8,356 $ 6,958 $ 3,950 $ 1,352
Research grants............................ 1,072 1,064 912 300 90
Product license fees....................... 500 520 200 300 ----
Royalty income............................. 290 239 174 125 4
Contract product development............... 76 50 417 101 31
-------- -------- ------- ------- ---------
Total revenue.......................... 13,148 10,229 8,661 4,776 1,477
Cost of product sales...................... 6,671 4,850 4,402 2,535 940
Research and development................... 6,294 5,191 3,085 2,170 282
Selling, general and administrative........ 9,630 6,097 3,505 2,576 992
Acquired in-process research and
development (2).......................... ---- 19,593 (275) 20,642 ----
----- -------- ------- ------- ---------
Total costs and expenses................. 22,595 35,731 10,717 27,923 2,214
------- -------- ------- ------- ---------
Operating loss............................. (9,447) (25,502) (2,056) (23,147) (737)
Interest income............................ 1,799 283 221 12 39
Interest expense........................... ---- (188) (64) (218) (135)
Other income (expense) .................... 120 5 (1) 19 15
------- -------- -------- ------- --------
Net loss................................... $(7,528) $(25,402) $(1,900) $(23,334) $ (818)
======== ========= ======== ========= =========
Net loss per share......................... $ (.27) $ (1.21) $ (.10) $ (1.41) $ (.06)
======== ======== ======== ======== =========
Weighted average number of common
shares outstanding...................... 28,114 21,073 19,035 16,583 14,450
======= ======== ======= ======= =========
December 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data (1)
Cash, cash equivalents and short-term
investments............................... $ 34,276 $ 5,710 $ 3,331 $ 5,066 $ 1,213
Working capital............................ 37,936 7,476 3,610 3,488 1,340
Total assets............................... 48,741 19,378 13,703 10,043 2,442
Long-term debt............................. ---- ---- 1,754 3,224 1,635
Accumulated deficit (2).................... (58,981) (51,454) (26,052) (24,152) (818)
Total stockholders' equity................. 46,384 17,427 9,275 3,559 92
- -----------------------------
(1) As the result of the Company's acquisitions of Vitaphore Corporation in
April 1993, Biomat Corporation in June 1993, another company's 50%
interest in a joint venture with Vitaphore Corporation in December 1993
and Telios Pharmaceuticals, Inc. in August 1995, the consolidated
financial results from these periods are not directly comparable. See
Notes 1 and 12 of the Company's consolidated financial statements included
elsewhere in this Report.
(2) As a result of the required use of purchase accounting, the 1993 loss
included $20.6 million of acquired in-process research and development
which was charged to expense at the date of the Company's acquisitions in
1993, and the 1995 loss included $19.6 million of acquired in-process
research and development which was charged to expense at the date of the
Company's acquisition of Telios Pharmaceuticals, Inc.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's consolidated financial statements, the notes thereto and the other
financial information included elsewhere in this report.
General
The Company is dedicated to the acquisition, discovery and development
of synergistic technologies for creating and marketing cost-effective,
off-the-shelf, bio-absorbable products designed to regenerate specific body
tissues and organs, or treat many cell-based diseases or age-associated
conditions. The Company has developed principally by combining existing
businesses, acquiring synergistic technologies and forming strategic business
and technological alliances. As a result of the Company's acquisition of Telios
Pharmaceuticals, Inc. ("Telios") in August 1995, the consolidated financial
results for the years presented below may not be directly comparable.
The following discussion contains trend information and other
forward-looking statements related to the future use and sales of the Company's
products, anticipated expenditure levels compared to historical amounts and the
Company's plans for its research and development efforts. Such statements are
made pursuant to the safe harbor provisions of the Securities Litigation Reform
Act of 1995 and involve risks and uncertainties which may cause results to
differ materially from those set forth in these statements. Potential risks and
uncertainties include, without limitation, those mentioned in this report and,
in particular, those mentioned under "Factors That May Affect Future Results of
Operations" below.
Results of Operations
1996 Compared to 1995
The Company's net loss decreased from $25.4 million in 1995 to $7.5
million in 1996. As a result of the required use of purchase accounting, the
Company's 1995 loss included approximately $19.6 million of acquired in-process
research and development that was charged to expense at the date of the
Company's acquisition of Telios.
Total revenues increased 28% from $10.2 million in 1995 to $13.1
million in 1996 primarily as a result of an increase in product sales. Product
sales increased 34% from $8.4 million to $11.2 million due to $3.1 million in
sales of INTEGRA(TM) Artificial Skin ("INTEGRA") in 1996 compared to minimal
sales in the prior year. Approximately 71% of INTEGRA sales in 1996 were in the
United States following the product's marketing approval from the FDA in March,
1996. During 1996, 65 burn centers and hospitals throughout the United States
and Canada purchased INTEGRA. INTEGRA export sales were to 13 countries in
Europe and Asia. The Company believes that the primary application of INTEGRA
has been for patients with severe life-threatening burns, but is aware of its
application in reconstructive procedures. The continued growth of INTEGRA sales
will depend on the Company's ability to increase its customer base (primarily
burns centers and hospital burn units) as well as increase the number of
patients treated and the amount of product used per patient. Factors that the
Company believes affect this growth include continued physician training prior
to product use, the continued collection of pharma-economic data to address
product reimbursement issues and the publication and discussion of positive
clinical results within the physician community.
Product sales of the Company's other medical devices decreased from
$8.4 million in 1995 to $8.1 million in 1996. Decreases in the Company's
ophthalmic and surgical and hemostasis product lines were partially offset by
increases in its infection control and dental product lines. The ophthalmic
product line decrease was due to production difficulties, which delayed product
shipments during the second half of 1996. The decrease in the surgical and
hemostasis product line, which includes products sold to marketing partners and
products marketed directly, was due to lower unit volumes as well as lower unit
pricing on the products marketed directly. The
31
infection control and dental product line increases were the result of
increases in orders from marketing partners for the Company's BioPatch
and BioMend products. The Company has resolved the production
difficulties in the ophthalmic product line and began shipping product
to its marketing partner in the first quarter of 1997. Approximately 42%
and 56% of the Company's product sales were to three customers in 1996
and four customers in 1995, respectively. Because a significant portion
of the Company's products (other than INTEGRA) are sold to marketing
partners, quarter-to-quarter sales in medical products can vary
significantly. The Company's export sales (including INTEGRA) increased
98% from $945,000 to $1.9 million as INTEGRA export sales increased by
$860,000.
Other revenue, which includes grant revenue, license fees, contract
development revenue and royalties, was $1.9 million in 1996 and 1995. Grant
revenue in both periods was approximately $1.1 million, the largest portion of
which came from a three year $2.0 million National Institute of Science and
Technology (NIST) grant. The NIST grant was completed as of December 31, 1996.
Grant revenue is expected to be lower in 1997 unless additional grants are
awarded to the Company. The Company received a $500,000 license fee in 1996 as
part of an agreement with Cambridge Antibody Technology Limited involving a
human antibody development program. The Company also received a $500,000 license
fee in 1995 from the Calcitek Division of Sulzermedica when the Company's
BioMend product receieved FDA marketing clearance. The Company continues to seek
research grants, licensing arrangements and development funding for several of
its technologies, although the timing and amount of such revenue, if any, can
not be predicted.
Cost of product sales increased 38% from $4.9 million (58% of product
sales) in 1995 to $6.7 million (60% of product sales) in 1996. The dollar
increase in cost of product sales is due to higher product sales and an increase
in manufacturing capacity associated with INTEGRA and with the Company's West
Chester, Pennsylvania facility. The INTEGRA production facility and additional
capacity at the West Chester facility came on-line during the last quarter of
1995. Cost of product sales as a percentage of sales increased due to inventory
write-offs related to certain medical product production difficulties and lower
capacity utilization for INTEGRA product during different periods of 1996. Due
to the high fixed costs of the manufacturing facility for INTEGRA, the Company
is anticipating higher unit costs until there is a requirement for higher
production volume. The Company believes its current capacity to produce INTEGRA
and its other medical products is sufficient to support significant growth, and
the utilization of this capacity will affect its gross margin on product sales.
The Company continues to seek contract manufacturing opportunities to increase
utilization of its capacity.
Research and development expense increased 21% from $5.2 million in
1995 to $6.3 million in 1996, due to an increase of $1.4 million in research and
development expenses incurred by the Company's Telios operation. Research and
development expenditures at Telios include costs associated with efforts
focusing on combining the Company's existing technologies with those acquired in
the acquisition. The Company's research and development efforts involving
INTEGRA decreased significantly from 1995 to 1996 as a result of the transfer of
the product to manufacturing. Additional increases in other research and
development projects partially offset the decrease related to the INTEGRA
transfer. These increases included costs associated with the addition of
full-time and part-time research and development staff and increased
expenditures for outside contract activities. The Company expects the level of
research and development expenditures in 1997 to be higher than in 1996 as
expenditures related to the post-approval study for INTEGRA and other clinical
and pre-clinical trials expand. These trials are expected to focus on additional
clinical indications for INTEGRA and on the Company's other regenerative and
matrix medicine technologies. The amount of resources allocated to fund
particular research and development efforts will vary depending upon a number of
factors, including the progress of development of the Company's technologies,
changing competitive conditions and determinations with respect to the
commercial potential of the Company's technologies.
32
Selling, general and administrative expense increased 58% from $6.1 million
in 1995 to $9.6 million in 1996 due in part to an increase of $1.6 million in
general and administrative expense incurred by the Company's Telios operation.
Sales and marketing expenses increased by $1.8 million as a result of the
domestic and international market introduction of INTEGRA. The Company was
required by the FDA to train all surgeons prior to their use of INTEGRA, and as
of December 31, 1996 the Company has trained approximately 600 surgeons
worldwide. During 1996, the Company also established a network of domestic and
international regional managers for the sales of INTEGRA. INTEGRA training and
selling cost increases were partially offset by a decrease in costs resulting
from a reduction in the size of the Company's direct sales force for certain
other medical product lines. A significant portion of Telios' administrative
expense involves the maintainance of its intellectual property and expenditures
related to patent infringement litigation. The Company is involved in an
infringement litigation case that is in its early stages, and the Company
anticipates incurring continued significant expenditures during 1997 related to
this matter. The Company is anticipating selling, general and administrative
expense to remain higher than 1996 levels due to the ongoing introduction and
marketing of INTEGRA and Telios' patent infringement litigation.
Other income, ne