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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER: 0-27406
CONNETICS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3173928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3400 WEST BAYSHORE ROAD, PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (650) 843-2800
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
PREFERRED SHARE PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $149,283,077 as of March 23, 2001, based upon
the closing sale price on the Nasdaq National Market reported for that date. The
calculation excludes shares of common stock held by each officer and director
and by each person who owns 5% or more of the outstanding common stock in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
There were 29,761,379 shares of Registrant's Common Stock issued and
outstanding as of March 23, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the extent that it
is not set forth in this Report, is incorporated by reference to the
registrant's definitive proxy statement for the Annual Meeting of Stockholders
to be held on May 17, 2001.
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PART I
ITEM 1. BUSINESS
Special Note: Our disclosure and analysis in this Report, in other reports
that we file with the Securities and Exchange Commission, in our press releases
and in public statements of our officers contain forward-looking statements
within the meaning of Section 27A of the Securities Act, and Section 21E of the
Securities Exchange Act. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current events. They
use words such as "anticipate," "estimate," "expect," "will," "may," "intend,"
"plan," "believe" and similar expressions in connection with discussion of
future operating or financial performance. These include statements relating to
future actions, prospective products or product approvals, future performance or
results of current and anticipated products, sales efforts, expenses, the
outcome of contingencies such as legal proceedings and financial results.
Forward-looking statements may turn out to be wrong. They can be affected
by inaccurate assumptions or by known or unknown risks and uncertainties. Many
factors mentioned in this Report -- for example, governmental regulation and
competition in our industry -- will be important in determining future results.
No forward-looking statement can be guaranteed, and actual results may vary
materially from those anticipated in any forward-looking statement.
Although we believe that our plans, intentions and expectations reflected
in these forward-looking statements are reasonable, we can give no assurance
that these plans, intentions or expectations will be achieved. Forward-looking
statements in this Report include, but are not limited to, those relating to the
commercialization of our currently marketed products, the progress of our
product development programs, developments with respect to clinical trials and
the regulatory approval process, developments related to acquisitions and
clinical development of drug candidates, and developments relating to the growth
of our sales and marketing capabilities. Actual results, performance or
achievements could differ materially from those contemplated, expressed or
implied by the forward-looking statements contained in this Report. Important
factors that could cause actual results to differ materially from our
forward-looking statements are set forth in this Report. These factors are not
intended to represent a complete list of the general or specific factors that
may affect us. It should be recognized that other factors, including general
economic factors and business strategies, and other factors not currently known
to us, may be significant, presently or in the future, and the factors set forth
in this Report may affect us to a greater extent than indicated. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements set forth
in this Report. Except as required by law, we do not undertake any obligation to
update any forward-looking statement, whether as a result of new information,
future events or otherwise.
THE COMPANY
References in this prospectus to "Connetics," "the Company," "we," "our"
and "us" refer to Connetics Corporation, a Delaware corporation. Our principal
executive offices are located at 3400 West Bayshore Road, Palo Alto, CA 94303.
Our telephone number is (650) 843-2800. Connetics(R), Luxiq(R), Ridaura(R), and
the interlocking globe design are registered trademarks of Connetics. We also
own the trademark OLUX(TM). All other trademarks or service marks appearing in
this Report are the property of their respective companies. We disclaim any
proprietary interest in the marks and names of others.
OVERVIEW
We currently market three pharmaceutical products. In May 2000, the United
States Food and Drug Administration, or FDA, granted us clearance to market
OLUX(TM) Foam (clobetasol propionate) 0.05% for the treatment of moderate to
severe scalp dermatoses. We launched OLUX on November 6, 2000. Our commercial
business is focused on the dermatology marketplace, which is characterized by a
large patient population that is served by relatively small, and therefore more
accessible, groups of treating physicians.
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We are offering two dermatology products with clinically proven therapeutic
advantages and are providing quality customer service to physicians through our
experienced sales and marketing staff. We also sell Ridaura, a product to treat
rheumatoid arthritis.
As of the date of this report, we are selling three products targeted at
specialty medical markets, and developing other products.
PRODUCT DISEASE STATUS MARKETING RIGHTS(1)
LUXIQ(R) mild to moderate Marketed North America
scalp dermatoses
OLUX(TM) moderate to severe Marketed Worldwide
scalp dermatoses
KETOCONAZOLE FOAM fungal infections Clinical trials Worldwide
scheduled to begin in
second half of 2001
ANTI-ACNE FOAM acne Clinical trials North America
scheduled to begin in
2001
MINOXIDIL FOAM hair loss Clinical trials North America
scheduled to begin in
2002
LIQUIPATCH various diseases of formulation North America
the skin development
OTHER FOAM various diseases of formulation
FORMULATIONS the skin development North America
RIDAURA rheumatoid arthritis Marketed United States
(1) On March 21, 2001, we entered into an agreement to acquire Soltec Research
Pty Ltd., the licensor of our foam and liquipatch formulations. In the
original license agreements, Soltec reserved rights to certain specific
Liquipatch formulations for North America. Following completion of the
acquisition, we will own worldwide rights to all of the formulations
listed, subject to licenses already granted to certain third parties for
various territories.
In addition, during 2000, we received revenues from the sale of
Actimmune(R) pursuant to our relationship with InterMune Pharmaceuticals, Inc.
In December 1995, we entered into a license agreement with Genentech to acquire
exclusive U.S. development and marketing rights to interferon gamma for
dermatological indications. Subsequent amendments to the original license
agreement expanded the fields of use for which the license applies, and added
Japan and Canada to the licensed territory. We established a subsidiary,
InterMune, in 1998 to develop Actimmune for serious pulmonary and infectious
diseases and congenital disorders. In April 1999, InterMune became an
independent company, and in March 2000, InterMune became a public company. As of
December 31, 2000, we held 149,000 shares of common stock of InterMune.
Effective April 1, 2000 we assigned our remaining revenue rights and obligations
under the license with Genentech and the corresponding supply agreement to
InterMune. We retained the option to purchase the product rights for potential
dermatological applications of Actimmune. We will receive an additional cash
payment in March 2001, and royalties on Actimmune sales after December 31, 2001.
Our dermatology strategy is to maximize product sales by leveraging novel
delivery technologies, accelerating the processes of getting products to market,
and targeting specific market opportunities. Our commercial strategy permits us
to effectively reach the majority of the treating physicians. Our primary
commercial focus is on dermatology. Approximately 6,000 of the 8,500 U.S.
dermatologists account for 92% of the prescriptions written by dermatologists.
Our two marketed foam products, Luxiq(R) (betamethasone valerate) Foam,
0.12%, and OLUX(TM) (clobetasol propionate) Foam, 0.05%, compete in the topical
steroids market. According to IMS Health, in 2000, the low potency steroid
market represented $121 million in retail sales, the mid-potency market in
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which Luxiq competes represented $317 million in retail sales, and the high- and
super-high potency steroid market in which OLUX is positioned represented $457
million in retail sales.
Dermatological diseases often persist for an extended period of time and
are treated with clinically proven drugs that are currently delivered in a
variety of formulations, including solutions, creams, gels and ointments. We
believe that these existing delivery systems often inadequately address a
patient's needs for efficacy and cosmetic elegance, and that the failure to
address those needs may decrease patient compliance. We believe that the
proprietary foam delivery system unique to Luxiq and OLUX has significant
advantages over conventional therapies for scalp dermatoses. The advantages of
foam include higher absorption and more localized delivery of the active agent.
The foam formulation liquefies when applied to the skin, and enables rapid
penetration of the active dermatologic agent. When the foam is applied, it dries
quickly, is not greasy, and does not stain or have any odor. We believe that the
combination of the increased efficacy and the cosmetic elegance of the foam may
actually improve patient compliance and satisfaction.
LUXIQ FOAM
Luxiq is a foam formulation of betamethasone valerate, a mid-potency
topical steroid which is prescribed for the treatment of mild to moderate
steroid responsive scalp dermatoses such as psoriasis, eczema and seborrheic
dermatitis. We licensed the North American rights from Soltec Research Pty Ltd.,
a subsidiary of F.H. Faulding & Co., Ltd., to develop and commercialize Luxiq.
In our pivotal trial, patients treated with Luxiq experienced a statistically
significant improvement over patients treated with placebo or a currently
approved betamethasone valerate lotion. In March 1999, we received FDA clearance
for Luxiq and in April 1999 we initiated commercial sales in the United States.
OLUX FOAM
OLUX is a foam formulation of clobetasol propionate, one of the most widely
prescribed super high-potency topical steroids. In May 2000, we received FDA
clearance to market OLUX. We began selling OLUX in November 2000 for the
treatment of moderate to severe steroid-responsive dermatoses of the scalp. We
have licensed worldwide rights from Soltec to develop and commercialize OLUX. In
our pivotal clinical trial of approximately 190 scalp psoriasis patients,
comparing OLUX to a currently approved clobetasol solution and placebo during a
two week treatment regimen, OLUX showed a 74% improvement in the global response
to treatment as judged by the investigators as opposed to 63% for clobetasol
solution and 8% for placebo.
DERMATOLOGY PRODUCT PIPELINE
We have the rights to a variety of pharmaceutical agents in various stages
of development in multiple novel delivery technologies. Our dermatology strategy
involves the rapid evaluation and formulation of new therapeutics by using
previously approved active ingredients reformulated in our proprietary delivery
system. This product development strategy allows us to conduct limited
preclinical safety trials, and to move rapidly into safety and efficacy testing
in humans with products that offer significant improvements over existing
products.
We are party to four agreements with Soltec, which give us exclusive rights
to specified applications of a broad range of unique topical delivery
technologies, including several distinctive aerosol foams. Our relationship with
Soltec led to our development of Luxiq, which we launched in April 1999, and to
the development of OLUX. Each of those formulations is licensed to us by a
separate agreement with Soltec. In May 2000, the FDA approved our new drug
application, or NDA, for OLUX for the treatment of moderate to severe scalp
dermatoses. We anticipate conducting simultaneous development on several
products over the next several years.
In December 1999, we entered into a comprehensive licensing agreement with
Soltec for exclusive rights to certain applications of a broad range of unique
topical delivery technologies, including aerosol foam formulations and Soltec's
patented Liquipatch technology. Under the agreement, we paid Soltec
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$1 million in cash and stock, and agreed to make future milestone, development
and royalty payments. We have obligations to develop new products incorporating
the licensed technology on timelines agreed to by the parties, and we will pay
royalties on our net sales on those products if and when they are approved for
sale in the licensed territory. We also agreed to pay Soltec an annual fee in
exchange for continuing research and the rights to future product formulations
that Soltec may develop.
Similar to our foam delivery system for Luxiq and OLUX, the new aerosol
foams, including water-, ethanol- and petrolatum-based foams, may offer improved
efficacy over traditional formulations due to greater absorption of the active
ingredient to the skin. In addition to the potential for improved efficacy, the
foam formulations represent a cosmetically elegant alternative to existing
dermatologic treatments. Liquipatch is a gel-matrix delivery system that applies
to the skin like a normal gel and dries to form a very thin, invisible,
water-resistant film. This film enables a controlled release of the active agent
to provide longer relief, with the potential of being less irritating to the
skin than other delivery systems. We anticipate developing one or more new
products in the aerosol foam or Liquipatch formulations, by incorporating
leading dermatologic agents, in such a way as to deliver formulations that are
tailored to treat specific diseases or different areas of the body. We currently
expect to seek partners for over-the-counter market opportunities worldwide and
for development and commercialization of prescription products outside the
United States.
On March 21, 2001, we entered into an agreement with F.H. Faulding & Co.
Limited to acquire Soltec Research Pty Ltd, a division of Faulding Healthcare.
Under the agreement, which is subject to customary closing conditions and is
expected to close in April 2001, Connetics will acquire all of Soltec's issued
capital for Australian $32 million or approximately U.S. $16.9 million. Faulding
will retain current development projects relating to Faulding's injectable
technologies and injectables product pipeline.
All products and technologies under development require significant
commitments of personnel and financial resources. Several products require
extensive clinical evaluation and clearance by the FDA and comparable agencies
in other countries before we can sell them commercially. If we fail to meet our
obligations under our agreements with Soltec, our rights under such agreements
might be terminated. In addition, we regularly reevaluate our product
development efforts. On the basis of these reevaluations, we have in the past,
and may in the future, abandon development efforts for particular products. We
cannot assure you that any product or technology under development will result
in the successful introduction of any new product.
RIDAURA
Ridaura is an oral formulation of a gold salt for the treatment of
rheumatoid arthritis, a chronic autoimmune disease that results in painful
inflammation and erosion of the joints and loss of mobility. Over two million
individuals in the United States suffer from this disease. Ridaura is currently
indicated for adults with active rheumatoid arthritis who are not responsive to,
or are intolerant of, treatment with non-steroidal anti-inflammatory drugs.
Ridaura competes on the basis of clinical evidence that shows the drug slows the
progression of damage to joint tissue. Our 2000 sales of Ridaura were
approximately $6.0 million, compared to $5.7 million in 1999. We do not actively
promote Ridaura.
ACTIMMUNE
In 1998, we licensed from Genentech exclusive rights to Actimmune,
interferon gamma, for the United States and Japan. Interferon gamma is one of a
family of proteins involved in the regulation of the immune system and has been
shown to reduce the frequency and severity of certain infections. We formed a
subsidiary, InterMune Pharmaceuticals, Inc., to develop Actimmune for various
infections and fungal diseases. In April 1999, InterMune became an independent
company, and in March 2000, InterMune became a public company. Effective April
1, 2000, we assigned to InterMune our remaining rights and obligations under the
license with Genentech and the corresponding supply agreement. In exchange,
InterMune paid us approximately $5.2 million; an additional $0.9 million is
payable to us at the end of March 2001. InterMune will pay us a royalty on
Actimmune sales beginning January 1, 2002. In addition,
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we have retained the product rights for potential dermatological applications.
We recorded sales of Actimmune of approximately $1.8 million during the first
quarter of 2000; commencing in the second quarter, InterMune acquired our
remaining rights to sell Actimmune.
OUR RELAXIN DEVELOPMENT PROGRAM
OVERVIEW
In addition to our commercial business, we are developing a biotechnology
product that has the potential to treat multiple diseases. Our product is a
recombinant form of a natural human hormone called relaxin. Relaxin reduces the
hardening, or fibrosis, of skin and organ tissue, dilates existing blood vessels
and stimulates new blood vessel growth. We manufacture a cloned version of
relaxin. Relaxin circulates in the blood and has a broad spectrum of biological
activities. It plays a role during pregnancy in pelvic remodeling and increasing
blood supply to the fetus. Relaxin may also enhance the kidneys' ability to
remove wastes from the woman's body. In a non-pregnant state, administering
relaxin stimulates blood flow to oxygen-deprived tissue, and has been shown in
pre-clinical tests to increase blood volume and cardiac output.
On October 8, 2000, we announced that in our pivotal trial for scleroderma
there was no statistically significant difference between the response to
relaxin and the response to placebo with respect to the measurement of skin
score. Skin score was defined as the "primary endpoint" of our scleroderma
trial. Based on the result of the pivotal trial, we have discontinued the
relaxin program for scleroderma. There were, however, statistically significant
responses with respect to secondary parameters measured in that trial.
Our strategy has been to retain U.S. rights for all potential indications
for the drug. We maintain North American rights for relaxin and have entered
into collaborative relationships for this program for markets outside of the
United States. We have licensed rights to relaxin development and
commercialization to Paladin Labs, Inc. for Canada, and to F.H. Faulding & Co.
in Australia. In October 2000, our collaborative partners in Japan (Suntory
Ltd.) and Europe (Celltech Medeva PLC) both exercised their rights to terminate
the relationships according to the contracts. The rights to Japan have reverted
to us, and the European rights will revert to us on April 13, 2001, and as of
December 31, 2000 we had no further obligations under either contract.
SCLERODERMA
The first indication for which we developed relaxin was scleroderma, a
serious disease for which there is no known cure involving the excessive
formation of connective tissue. Scleroderma is characterized by thickening and
hardening of the skin and, in severe cases, the internal organs, including the
heart, lungs, kidneys and the organs of the gastrointestinal tract.
We completed enrollment of a 239-patient Phase II/III pivotal clinical
trial of relaxin for the treatment of diffuse scleroderma on December 12, 1999.
As discussed above, because the clinical trial did not meet its primary
endpoint, we withdrew plans to submit a biologics license application to the FDA
requesting approval to market relaxin for the treatment of scleroderma.
OTHER POTENTIAL INDICATIONS
Infertility, peripheral vascular disease, cardiovascular disease, and
kidney disease represent opportunities for relaxin's biologic properties of
enhancing blood flow. There are two ways to increase blood flow to a specific
region. The first is by increasing the diameter of the blood vessel
(vasodilation), and the second is by generating the growth of new blood vessels
(angiogenesis).
Peripheral Arterial Disease. Clinical trials using porcine relaxin for the
treatment of blocked or restricted blood vessels in the extremities, known in
the medical field as peripheral arterial disease, were published prior to the
era of recombinant DNA technology. Those studies reported improved blood flow
and healing of oxygen-deprived ulcers. We have initiated a clinical trial to
determine efficacy of
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recombinant human relaxin for the treatment of peripheral arterial disease.
Peripheral arterial disease, which is characterized by inadequate blood flow to
the extremities, often leads to severe leg pain and debilitating ulcers due to
chronic oxygen deprivation of the lower extremities. In its more serious
manifestations, patients with peripheral arterial disease can develop gangrene,
which may result in amputation of the affected limb. Although there are drugs
currently available for pain due to constricted blood vessels, surgery is the
only option available for more severe incidences.
The promise of relaxin to treat peripheral arterial disease is based on its
ability to increase blood flow to oxygen-deprived tissue through its
vasodilatory and angiogenic activities. Relaxin's angiogenic property relates to
its ability to stimulate the growth of new blood vessels at the site of
oxygen-deprived tissue through a several step process, enhancing the blood flow
to the site of oxygen-deprived tissue. At this site, macrophages, which are
cells that help fight infection and injury, become activated. Relaxin is known
to bind to activated macrophages, which in turn stimulates the production of
vascular endothelial growth factor, or VEGF, and basic fibroblast growth factor,
or bFGF. These two growth factors play a significant role in the growth of new
blood vessels. Because relaxin stimulates the production of VEGF and bFGF only
at the site where the tissue is oxygen-deprived, and not throughout the whole
body, we believe that relaxin may have more potential to treat vascular diseases
than administering VEGF or bFGF directly. Relaxin's vasodilatory property
relates to its ability to stimulate the secretion of nitric oxide into the blood
stream at selective targets without side effects. Nitric oxide is an agent known
to relax and expand blood vessels, which enables the vessels to carry more
blood. There is evidence that the synthesis of nitric oxide is impaired in
patients with peripheral arterial disease, and restoration of nitric oxide
levels in the blood vessels by administering a known nitric oxide stimulator
reduced the severe pain experienced by peripheral arterial disease patients due
to constricted blood vessels.
Infertility. Industry sources estimate that one out of six American
couples is infertile, with 60% of the cases being due to disorders in the woman.
One half of these problems in women are caused by pelvic factors, including how
receptive the endometrium is to implantation of an embryo. Major causes of
infertility include the failure of the embryo to implant in the uterus, and
failure of the embryo and fetus to receive adequate blood flow to develop and
grow.
The promise of relaxin to treat infertility is based on its ability to
stimulate new blood vessel growth in the endometrium. We believe this mechanism
of action is due to relaxin's ability to induce VEGF and bFGF, which are potent
angiogenic agents, locally in the cells of the endometrium. Endometrial blood
flow is believed to be important in determining how receptive the endometrial
lining is to implantation of an embryo. We believe that, by enhancing
endometrial blood flow, relaxin treatment may increase the likelihood that an
embryo will successfully implant in the endometrium, and therefore would
increase pregnancy success rates.
In December 1999, we initiated a clinical trial with relaxin to determine
the safety and efficacy for the treatment of infertility in women who do not
intend to become pregnant. The trial is designed to test relaxin's ability to
cause both increased blood flow to and thickening in the endometrium, which may
enhance implantation of the embryo. We are conducting reproductive toxicology
tests in animals in parallel with the trial in anticipation of evaluating
whether to begin U.S. clinical trials to study relaxin in women trying to get
pregnant.
Kidney and Heart Function. We are also exploring the possibility of using
relaxin to improve kidney function or to treat cardiac diseases, specifically
the scarring of the heart that occurs in heart attacks, atherosclerosis and
hypertension, as well as vessel blockage following angioplasty. During the first
quarter of 2001, we are convening a number of expert panels comprised of medical
doctors who specialize in renal and cardiac function and infertility. We
anticipate using the information developed in these panel discussions to
determine the future direction of clinical research with relaxin.
SALES AND MARKETING
We have an experienced, highly productive sales and marketing organization.
Our sales representatives focus on cultivating relationships of trust and
confidence with the physicians they call upon. We use a
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variety of advertising, promotional material, specialty publications,
participation in educational conferences and product internet sites to achieve
our marketing objectives. In 2000, we supplemented our sales staff with contract
sales representatives to increase the frequency and reach of our sales calls or
to assist with the launch of products. As of March 1, 2001, we had 68 people in
our sales and marketing organization, including 41 sales representatives and
others working outside of our principal offices, and 20 "full time equivalents"
working for us through our contract sales force. In March 2001, we announced our
plans to hire an additional 27 sales representatives, and the field sales team
will cover more dermatologists with increased frequency. We will discontinue our
use of the contract sales force in May 2001.
Our marketing efforts are focused on assessing and meeting the needs of
dermatologists. In 2000, our sales efforts were focused on routinely calling on
the approximately 4,500 dermatologists who are responsible for 85% of all
prescriptions written by dermatologists in the United States. We have created an
incentive program that rewards our sales force for the number of topical steroid
prescriptions actually written by the dermatologists they call on. We focus on
cultivating relationships of trust and confidence with the dermatologists
themselves. We also use a variety of marketing techniques to promote our
products, including journal advertising, promotional materials, rebate coupons,
and product guarantees.
In addition to traditional marketing and field sales approaches, we use
internet marketing to convey basic information about our products and our
company. Our corporate website at http://www.connetics.com includes fundamental
information about the company as well as descriptions of ongoing research,
development and clinical work. Our product websites, at http://www.luxiq.com and
http://www.olux.com, provide information about the products and their approved
indications, as well as copies of the full prescribing information, the patient
information booklet, and rebate coupons.
WAREHOUSING AND DISTRIBUTION
Currently, all of our product distribution activities are handled by CORD
Logistics, Inc., an independent national warehousing corporation. CORD stores
and distributes our products from a regional warehouse in Tennessee. Upon the
receipt of a purchase order through electronic data input, phone, mail or
facsimile, the order is processed into our inventory systems. Upon shipment to
the customer placing the order, usually within 24 hours, the warehouse sends
back to us the necessary information to automatically process the invoice in a
timely manner. Any delay or interruption in the process could have a material
effect on our business.
CUSTOMERS
Our customers include the nation's leading wholesale pharmaceutical
distributors, such as McKesson HBOC, Inc., Cardinal Health, Inc., Bergen
Brunswig Corporation, Bindley Western Industries, Inc., and other major drug
chains. During 2000, McKesson, Cardinal, Bergen Brunswig and Bindley accounted
for 27%, 32%, 15% and 11%, respectively, of our gross product revenues. The
distribution network for pharmaceutical products is subject to increasing
consolidation. As a result, a few large wholesale distributors control a
significant share of the market. In addition, the number of independent drug
stores and small chains has decreased as retail consolidation has occurred.
Further consolidation among, or any financial difficulties of, distributors or
retailers could cause a reduction in the inventory levels of distributors and
retailers, or otherwise result in reductions in purchases of our products, any
of which could have a material adverse impact on our business. If we lose any of
these customer accounts, or our relationship with them were to deteriorate, our
business could also be materially and adversely affected.
RELAXIN ALLIANCES
We have entered into numerous strategic development and commercialization
relationships with a primary goal of gaining access to additional product and
market opportunities and to share the risk and financial cost of developing
relaxin.
Medeva PLC. In January 1999, we entered into a collaboration and exclusive
license agreement with Medeva PLC (now Celltech Group Plc) for the development
and commercialization of relaxin in Europe.
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In October 2000, Medeva notified us that they wished to terminate the agreement.
To date, under the terms of the agreement, Medeva has paid us $20.0 million in
development, milestone and equity payments for the development of relaxin. We
are in the process of winding down the relationship.
Suntory Pharmaceuticals. In April 1998, we entered into a collaboration
and exclusive license agreement with Suntory for the development,
commercialization and supply of relaxin for scleroderma in Japan. In October
2000, Suntory notified us that they were terminating the agreement. To date,
Suntory has paid us $2.5 million in license and development payments.
Paladin Labs, Inc. In July 1999, we entered into a collaboration and
exclusive license agreement with Paladin for the development and
commercialization of relaxin in Canada. Under the terms of the agreement, we may
receive additional milestone payments for the approval of additional indications
for relaxin in Canada. Paladin is responsible for all development and
commercialization activities in Canada, and will pay royalties on all sales of
relaxin in Canada.
F.H. Faulding & Co., Ltd. In April 2000, we entered into a collaboration
and exclusive license agreement with Faulding for the development and
commercialization of relaxin in Australia. Under the terms of the agreement,
Faulding paid $510,000 for the initial license of relaxin for the treatment of
scleroderma. Although we have discontinued our development efforts for relaxin
for scleroderma, Faulding has indicated that it will continue the collaboration
for other indications. We may receive additional milestone payments for the
approval of additional indications for relaxin in Australia. Faulding is
responsible for all development and commercialization activities in Australia,
and will pay royalties on all sales of relaxin in Australia.
Genentech. In September 1993, we entered into an agreement with Genentech,
which was subsequently amended in July 1994 and April 1996. The agreement, as
amended, grants to us exclusive rights, for indications other than reproductive
indications, to make, have made, use, import and sell certain products derived
from recombinant human relaxin. Many of our relaxin patent rights are owned by
The Florey Institute, and we license them through the agreements with Genentech.
Genentech retains co-exclusive rights for reproductive indications. The
agreement also includes technology transfer, supply, and intellectual property
provisions, including a provision requiring us to meet milestones. If we fail to
achieve designated milestones, Genentech may terminate the license. Upon
termination, we could be required to license our relaxin technology to
Genentech, on a non-exclusive basis.
PATENTS AND PROPRIETARY RIGHTS
Our success will depend in part on our ability and our licensors' ability
to obtain and retain patent protection for our products and processes, to
preserve our trade secrets, and to operate without infringing the proprietary
rights of third parties.
We own or are exclusively licensed under pending applications and/or issued
patents worldwide relating to recombinant human relaxin, Luxiq and OLUX, as well
as other technology in the earlier stages of research.
In 2000, a U.S. patent was issued that covers the delivery technology that
is the basis for OLUX and Luxiq. U.S. Patent 6,126,920 is licensed exclusively
to us pursuant to our license agreement with Soltec and covers methods of
treating various skin diseases, and in particular, scalp psoriasis, using a foam
pharmaceutical composition comprising a corticosteroid active substance, a
propellant and a buffering agent. If we finalize our proposed acquisition of
Soltec, we will own a number of other patents and patent applications relating
to the dermatology field, as well as other technology developed by Soltec.
We license many of our relaxin patent rights from The Florey Institute
through a sublicense from Genentech. We provide annual research funding to the
Florey Institute for up to five years or until the date of the first sale of a
relaxin product. We have also agreed to pay the Florey Institute a portion of
revenues we receive from corporate collaborators, and relaxin royalties based on
commercial sales in addition to those royalties payable to Genentech.
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Our relaxin patent portfolio includes pending applications and issued
patents in the United States and various international equivalents. Our relaxin
patent portfolio includes certain claims within the following categories:
- compositions of matter,
- pharmaceutical compositions,
- methods of manufacture, and
- methods of treatment.
The issued patents in our relaxin patent portfolio will expire at various
times between 2002 and 2015. Recently, new biological activities of relaxin have
been elucidated, and we are pursuing methods of treatment patents with our
academic collaborators. The U.S. Patent and Trademark Office does not have a
consistent policy regarding the breadth of claims allowed in biotechnology
patents and the degree of future protection for our proprietary rights is
uncertain. In addition, the patent laws of foreign countries differ from those
of the U.S. and the claims allowed may differ from country to country.
Accordingly, the degree of protection, if any, afforded by foreign patents may
be different from that in the U.S.
One of the European patents licensed to us, which claims gene sequence
encoding human relaxin, was opposed by a third party challenging the ethics of
patents on a human gene sequence. Our licensor successfully defended the
original opposition, resulting in a decision in our favor, but the decision has
been appealed. We may not be successful on appeal. An adverse decision could
result in a requirement that our licensor amend the language of the patent in
ways that we cannot currently predict, and would require us to reassess the
strength of that patent after it was amended.
With respect to patent applications that we or our licensors have filed,
and patents issued to us or our licensors, we cannot assure you that:
- any of our or our licensors' patent applications will issue as patents,
- any such issued patents will provide competitive advantage to us, or
- our competitors will not successfully challenge or circumvent any such
issued patents.
We encourage ongoing scientific research on relaxin by making samples of
recombinant human relaxin available for medical or scientific research studies.
To preserve our rights to the recombinant protein and to the technology in
general, we require each recipient of relaxin samples to sign a materials
transfer agreement. If these agreements are breached, however, remedies may not
be available or adequate and our trade secrets may otherwise become known to
competitors. To the extent that our consultants, employees or other third
parties apply technological information independently developed by them or by
others to our proposed projects, third parties may own all or part of the
proprietary rights to such information, and disputes may arise as to the
ownership of these proprietary rights that may not be resolved in our favor.
Such third parties may attempt to patent their work and, if patents are issued,
they may not be available to license to us.
We rely on and expect to continue to rely on unpatented proprietary
know-how and continuing technological innovation in the development and
manufacture of many of our principal products. Our policy is to require all our
employees, consultants and advisors to enter into confidentiality agreements
with us. We cannot assure you, however, that these agreements will provide
meaningful protection for our trade secrets or proprietary know-how in the event
of any unauthorized use or disclosure of such information. In addition, there
can be no assurance that others will not obtain access to or independently
develop similar or equivalent trade secrets or know-how.
TRADEMARKS
We believe that trademark protection is an important part of establishing
product recognition. We own seven registered trademarks and trademark
applications, and several common law trademarks. United
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States federal registrations for trademarks remain in force for 10 years and may
be renewed every 10 years after issuance, provided the mark is still being used
in commerce. We cannot assure you that any such trademark or service mark
registrations will afford us adequate protection, or that we will have the
financial resources to enforce our rights under any such trademark or service
mark registrations. If we are unable to protect our trademarks or service marks
from infringement, any goodwill developed in such trademarks or service marks
could be impaired.
MANUFACTURING
We contract with independent sources to manufacture our products, which
enables us to focus on product and clinical development strengths, minimize
fixed costs and capital expenditures, and gain access to advanced manufacturing
process capabilities. The FDA requires that we contract only with manufacturers
that comply with current Good Manufacturing Practice (cGMP) regulations and
other applicable laws and regulations. Whether or not we have manufacturing
contracts with third-party manufacturers, we cannot assure you that we will be
able to obtain adequate supplies of our products in a timely fashion, on
acceptable terms, or at all.
CCL Pharmaceuticals manufactures Luxiq and OLUX for us. At the end of 2000,
CCL Pharmaceuticals was in the process of being sold to Miza Pharmaceuticals,
and as of the date of this report the transition has been smooth. Ridaura is
manufactured by GlaxoSmithKline. Our agreement with GlaxoSmithKline expires at
the end of 2001, and we are in discussions with other parties about continuing
manufacturing of Ridaura under new contracts beginning in 2002.
Boehringer Ingelheim manufactures relaxin for us for clinical uses under a
long-term contract. In July 2000, in anticipation of successful results in our
relaxin clinical trial for scleroderma, we submitted a purchase order to
Boehringer Ingelheim for product to be used for commercial supply. The purchase
order was for a price to be negotiated. In view of the failure of the clinical
trial, we have no immediate need for commercial grade relaxin, and we have
agreed with Boehringer Ingelheim that it is premature to set the price for
commercial supply. We are in discussions with Boehringer Ingelheim concerning
the practical effect of the cancellation of the purchase order.
COMPETITION
The pharmaceutical and biotechnology industries are characterized by
intense competition, rapid product development and substantial technological
change. Competition is intense among manufacturers of prescription
pharmaceuticals, such as for our dermatology products as well as other products
that we may develop and market in the future. Most of our competitors are large,
well-established pharmaceutical, chemical, cosmetic or health care companies
with considerably greater financial, marketing, sales and technical resources
than those available to us. Additionally, many of our present and potential
competitors have research and development capabilities that may allow such
competitors to develop new or improved products that may compete with our
product lines. Our products could be rendered obsolete or made uneconomical by
the development of new products to treat the conditions addressed by our
products, technological advances affecting the cost of production, or marketing
or pricing actions by one or more of our competitors. Each of our products
competes for a share of the existing market with numerous products that have
become standard treatments recommended or prescribed by dermatologists.
Luxiq and OLUX compete with a number of corticosteroid brands in the
super-, high- and mid-potency categories for the treatment of inflammatory skin
conditions. Competing brands include Halog(R) and Ultravate(R), marketed by
Bristol-Myers Squibb Company; Elocon(R) and Diprolene(R), marketed by
Schering-Plough Corporation; Cyclocort and Aristocort, marketed by Fujisawa
Healthcare, Inc.; Temovate(R) and Cutivate(R), marketed by GlaxoSmithKline; and
Psorcon(R), marketed by Dermik Laboratories, Inc. In addition, both Luxiq and
OLUX compete with generic (non-branded) pharmaceuticals, which claim to offer
equivalent therapeutic benefits at a lower cost. In some cases, insurers and
other third-party payors seek to encourage the use of generic products making
branded products less attractive, from a cost perspective, to buyers.
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We believe that relaxin provides opportunities for treatment of life
threatening diseases for which there are few or no current alternatives.
Nevertheless, the pharmaceutical and biotechnology industries are highly
competitive, and numerous pharmaceutical and biotechnology companies and
academic research groups throughout the world are engaged in research and
development efforts with respect to therapeutic products targeted at diseases or
conditions that we are also addressing.
Many of our existing or potential competitors, particularly large
pharmaceutical companies, have substantially greater financial, technical and
human resources than we do. In addition, many of these competitors have more
collective experience than we do in undertaking preclinical testing and human
clinical trials of new pharmaceutical products and obtaining regulatory
approvals for therapeutic products. Accordingly, our competitors may succeed in
obtaining FDA approval for products more rapidly than we do.
We intend to compete on the basis of the quality and efficacy of our
products, combined with the effectiveness of our marketing and sales efforts.
Competing successfully will depend on our continued ability to attract and
retain skilled and experienced personnel, to identify, secure the rights to, and
develop pharmaceutical products and compounds, and to exploit these products and
compounds commercially before others are able to develop competitive products.
With regard to Ridaura, there are numerous products on the market, and
under development, for the treatment of rheumatoid arthritis. We believe that
Ridaura competes with other rheumatoid arthritis therapies sold by Aventis,
Immunex Corporation and Monsanto Company.
GOVERNMENT REGULATION
The pharmaceutical and biotechnology industries are subject to regulation
by the FDA under the Food Drug and Cosmetic Act, by the states under state food
and drug laws, and by similar agencies outside of the United States. We expect
that all of our pharmaceutical products will require regulatory approval by
governmental agencies before we can commercialize them. In particular, human
pharmaceutical therapeutic products are subject to rigorous preclinical and
clinical testing and other approval procedures by the FDA in the United States
and similar health authorities in foreign countries. Labeling and promotional
activities are subject to scrutiny by the FDA. Various federal and, in some
cases, state statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of such
pharmaceutical products. Failure to comply with applicable requirements can
result in, among other things, warning letters, fines, injunctions, penalties,
recall or seizure of products, total or partial suspension of production, denial
or withdrawal of approval, and criminal prosecution. Accordingly, ongoing
regulation by governmental entities in the United States and other countries
will be a significant factor in the production and marketing of any
pharmaceutical products that we have or may develop. The process of obtaining
these approvals and the subsequent compliance with appropriate federal and
foreign statutes and regulations are time-consuming and require the expenditure
of substantial resources.
Generally, in order to obtain FDA approval for a new therapeutic agent, a
company first must conduct pre-clinical studies. The basic purpose of
pre-clinical investigation is to gather enough evidence on the potential new
agent through laboratory experimentation and animal testing, to determine if it
is reasonably safe to begin preliminary trials in humans. The results of these
studies are submitted as a part of an investigational new drug application,
which the FDA must review before human clinical trials of an investigational
drug can start. We have filed and will continue to be required to sponsor and
file investigational new drug applications, and will be responsible for
initiating and overseeing the clinical studies to demonstrate the safety and
efficacy that are necessary to obtain FDA approval of our products.
Clinical trials are normally done in phases and generally take two to five
years, but may take longer, to complete. The rate of completion of our clinical
trials depends upon, among other factors, the rate at which patients enroll in
the study. Patient enrollment is a function of many factors, including the size
of the patient population, the nature of the protocol, the proximity of patients
to clinical sites and the eligibility criteria for the study. Delays in planned
patient enrollment may result in increased costs and
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delays, which could have a material adverse effect on our business. Phase I
trials generally involve administration of a product to a small number of
persons to determine safety, tolerance and the metabolic and pharmacologic
actions of the agent in humans and the side effects associated with increasing
doses. Phase II trials generally involve administration of a product to a larger
group of patients with a particular disease to obtain evidence of the agent's
effectiveness against the targeted disease, to further explore risk and side
effect issues, and to confirm preliminary data regarding optimal dosage ranges.
Phase I and Phase II trials can sometimes be combined, with the FDA's
concurrence, into a Phase I/II trial. Phase III trials involve more patients,
and often more locations and clinical investigators than the earlier trials. At
least one such trial is required for FDA approval to market a drug. Phase II and
Phase III trials can sometimes be combined, with the FDA's concurrence, into a
Phase II/III trial, which is an accelerated clinical trial intended to provide
sufficient data for approval.
Section 505(b)(2) of the Food, Drug and Cosmetic Act makes it possible for
a company to possibly accelerate the FDA approval process. A so-called 505(b)(2)
application permits a sponsor of a drug that may differ substantially from any
drug listed in the FDA's list of approved drugs to rely on published studies or
the FDA's findings of safety and effectiveness based on studies in a
previously-approved NDA sponsored by another person, together with the studies
generated on its own drug products, as a way to satisfy the requirements for a
full NDA. The FDA evaluates 505(b)(2) applications using the same standards of
approval for an NDA, but the number of clinical trials required to support a
505(b)(2) application, and the amount of information in the application itself,
may be substantially less than that required to support an NDA application.
Connetics used the 505(b)(2) application process for both Luxiq and OLUX. We
cannot assure you that the 505(b)(2) process will be available for our other
product candidates, and as a result the FDA process may be longer for those
product candidates than it was for Luxiq and OLUX.
After we complete the clinical trials of a product, we must file with the
FDA a new drug application, if the product is classified as a new drug, or a
biologics license application if the product is classified as a biologic. We
must receive FDA clearance before we can commercialize the product. The testing
and approval processes require substantial time and effort, and the FDA may not
grant approval on a timely basis or at all. The FDA can take between one and two
years to review new drug applications and biologics license applications, and
can take longer if significant questions arise during the review process. While
various legislative and regulatory initiatives have focused on the need to
reduce FDA review and approval times, the ultimate impact of such initiatives on
our products cannot be certain. In addition, if there are changes in FDA policy
while we are in product development, we may encounter delays or rejections that
we did not anticipate when we submitted the new drug application or biologics
license application for that product. We could encounter similar delays in other
countries. We may not obtain regulatory approval for any products that we
develop, even after committing such time and expenditures to the process. If
regulatory approval of a product is granted, such approval may entail
limitations on the indicated uses for which the product may be marketed.
The FDA continues to review marketed products even after granting
regulatory clearances, and later discovery of previously unknown problems or
failure to comply with the applicable regulatory requirements may result in
restrictions on the marketing of a product or withdrawal of the product from the
market, recalls, seizures, injunctions or criminal sanctions.
We are required in most states to be licensed with the state pharmacy board
as either a manufacturer, wholesaler, or wholesale distributor. Many of the
states allow exemptions from licensure if our products are distributed through a
licensed wholesale distributor. The regulations of each state are different, and
the fact that we are licensed in one state does not authorize us to sell our
products in other states. Accordingly, we undertake an annual review of our
license status and that of our distributor to ensure continued compliance with
the state pharmacy board requirements.
Our products will also be subject to foreign regulatory requirements
governing human clinical trials, manufacturing and marketing approval for
pharmaceutical products. The requirements governing the
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conduct of clinical trials, product licensing, pricing and reimbursement are
similar, but not identical, to FDA requirements, and they vary widely from
country to country.
MARKETING EXCLUSIVITY
Pharmaceutical companies can petition the FDA to grant new drug product
exclusivity for a drug, independent of any orphan drug or patent term
exclusivity accorded to that drug. The exclusivity granted by the FDA
essentially prevents competition from other manufacturers who wish to put
generic versions of the product into U.S. commerce. The FDA has granted
marketing exclusivity to Connetics for foam-based products incorporating
clobetasol propionate for three years. The exclusivity prevents other parties
from submitting or getting approval for any application before the exclusive
period expires. The FDA determines whether a drug is eligible for exclusivity on
a case-by-case basis. The FDA may grant three-year exclusivity provided that the
application included at least one new clinical investigation other than
bioavailability studies, the investigation was conducted or sponsored by the
drug company, and the reports of the clinical investigation were essential to
the approval of the application.
THIRD PARTY REIMBURSEMENT
Our operating results will depend in part on whether adequate reimbursement
is available for our products from third-party payors, such as government
entities, private health insurers and managed care organizations. Third-party
payors increasingly are seeking to negotiate the pricing of medical services and
products and to promote the use of generic, non-branded pharmaceuticals through
payor-based reimbursement policies designed to encourage their use. In some
cases, third-party payors will pay or reimburse users or suppliers of a
prescription drug product only a portion of the product purchase price. If
government entities or other third-party payors do not provide adequate
reimbursement levels for our products, or if those reimbursement policies
increasingly favor the use of generic products, our business and financial
condition would be materially adversely affected. In addition, managed care
initiatives to control costs have influenced primary-care physicians to refer
fewer patients to dermatologists, resulting in a declining target market for us.
Further reductions in referrals to dermatologists could have a material adverse
effect upon our business.
The commercial success of our products will be substantially dependent upon
the availability of government or private third-party reimbursement for the use
of such products. Medicare, Medicaid, health maintenance organizations and other
third-party payers may not authorize or otherwise budget such reimbursement.
Such governmental and third party payers are increasingly challenging the prices
charged for medical products and services. Consumers and third-party payers may
not view our marketed products as cost-effective, and consumers may not be able
to get reimbursement or reimbursement may be so low that we cannot market our
products on a competitive basis. Furthermore, federal and state regulations
govern or influence the reimbursement to health care providers of fees and
capital equipment costs in connection with medical treatment of certain
patients. We cannot predict the likelihood that federal and state legislatures
will pass laws related to health care reform or lowering pharmaceutical costs.
In certain foreign markets pricing of prescription pharmaceuticals is already
subject to government control. Continued significant changes in the U.S. or
foreign health care systems could have a material adverse effect on our
business.
ENVIRONMENTAL REGULATION
Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive materials. We are subject
to federal, state and local laws and regulations governing the use, storage,
handling and disposal of such materials and certain waste products. Although we
believe that our safety procedures for handling and disposing of such materials
comply with the standards prescribed by state, federal, and local laws and
regulations, we cannot completely eliminate the risk of accidental contamination
or injury from these materials.
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DEVELOPMENT
Our products require clinical and manufacturing development. Our
development activities involve work related to product formulation, preclinical
and clinical study coordination, regulatory administration, manufacturing, and
quality control and assurance. While many other pharmaceutical and biotechnology
companies conduct earlier stage research and drug discovery, our focus is on
later-stage development to minimize the risk and time requirements for us to get
a product on the market.
In addition to our in-house staff and resources, we contract a substantial
portion of development work to outside parties. For example, we typically engage
contract research organizations to manage our clinical trials. We have contracts
with vendors to conduct product analysis and stability studies, and we outsource
all of our manufacturing scale-up and production activities.
We also use collaborative relationships with pharmaceutical partners and
academic researchers to augment our product development activities, and from
time to time we enter agreements with academic or university-based researchers
to conduct various studies for us.
EMPLOYEES
As of March 1, 2001, we had 136 full-time employees. Of the full-time
employees, 51 were engaged in sales and marketing, 61 were in research and
development and 24 were in general and administrative positions. We believe our
relations with our employees are good.
FACTORS AFFECTING OUR BUSINESS AND PROSPECTS
Our results of operation have varied widely in the past, and they could
continue to vary significantly from quarter to quarter due to a number of
factors, including those listed below. Any shortfall in revenues would have an
immediate impact on our earnings per share, which could adversely affect the
market price of our common stock. Our operating expenses, which include sales
and marketing, research and development and general and administrative expenses,
are based on our expectations of future revenues and are relatively fixed in the
short term. Accordingly, if revenues fall below our expectations, we will not be
able to reduce our spending rapidly in response to such a shortfall. Due to the
foregoing factors, we believe that quarter-to-quarter comparisons of our results
of operations are not a good indication of our future performance.
RISKS RELATED TO OUR BUSINESS
IF WE DO NOT SUSTAIN PROFITABILITY, STOCKHOLDERS MAY LOSE THEIR INVESTMENT.
Until the first quarter of fiscal year 2000, we lost money every year since
our inception. We had net losses of $27.3 million in 1999 and net income of
$27.0 million in 2000. If we exclude a gain of $43.0 million on sales of stock
we held in InterMune, and the associated income tax, our net loss for 2000 would
have been $15.0 million. Our accumulated deficit was $92.8 million at December
31, 2000. We may incur additional losses during the next few years. If we do not
sustain the profitability we achieved in 2000, our stock price may decline.
IF WE DO NOT OBTAIN THE CAPITAL NECESSARY TO FUND OUR OPERATIONS, WE WILL BE
UNABLE TO DEVELOP OR MARKET OUR PRODUCTS.
We currently believe that our available cash resources will be sufficient
to fund our operating and working capital requirements for the next 18 months.
Accordingly, we may need to raise additional funds through public or private
financings, strategic relationships or other arrangements. If we are unable to
raise additional funds when needed, we may not be able to market our products as
planned or continue development of our other products. If we are unable to
successfully complete development and commercialization of relaxin, we may never
achieve profitability.
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IF WE FAIL TO PROTECT OUR PROPRIETARY RIGHTS, COMPETITORS MAY BE ABLE TO USE OUR
TECHNOLOGIES, WHICH WOULD WEAKEN OUR COMPETITIVE POSITION, REDUCE OUR REVENUES
AND INCREASE OUR COSTS.
Our commercial success depends in part on our ability and the ability of
our licensors to protect our technology and processes. The foam technology used
in our Luxiq(R) and OLUX(TM) products is covered by one issued patent. In
addition, the patents in our relaxin patent portfolio begin to expire in 2002 in
foreign countries and 2005 in the United States. Patent expiration dates range
from 2002 to 2017.
We are pursuing several U. S. patent applications, although we cannot be
sure that any of these patents will ever be issued. We also have acquired rights
under certain patents and patent applications in connection with our licenses to
distribute products and from the assignment of rights to patents and patent
applications from certain of our consultants and officers. These patents and
patent applications may be subject to claims of rights by third parties. If
there are conflicting claims to the same patent or patent application, we may
not prevail and, even if we do have some rights in a patent or application,
those rights may not be sufficient for the marketing and distribution of
products covered by the patent or application.
The patents and applications in which we have an interest may be challenged
as to their validity or enforceability. Challenges may result in potentially
significant harm to our business. The cost of responding to these challenges and
the inherent costs to defend the validity of our patents, including the
prosecution of infringements and the related litigation, could be substantial
whether or not we are successful. Such litigation also could require a
substantial commitment of management's time. A judgment adverse to us in any
patent interference, litigation or other proceeding arising in connection with
these patent applications could materially harm our business.
The ownership of a patent or an interest in a patent does not always
provide significant protection. Others may independently develop similar
technologies or design around the patented aspects of our technology. We only
conduct patent searches to determine whether our products infringe upon any
existing patents, when we think such searches are appropriate. As a result, the
products and technologies we currently market, and those we may market in the
future, may infringe on patents and other rights owned by others. If we are
unsuccessful in any challenge to the marketing and sale of our products or
technologies, we may be required to license the disputed rights, if the holder
of those rights is willing, or to cease marketing the challenged products, or to
modify our products to avoid infringing upon those rights. Under these
circumstances, we may not be able to obtain a license to such intellectual
property on favorable terms, if at all. We may not succeed in any attempt to
redesign our products or processes to avoid infringement.
OUR CURRENT PRODUCT REVENUE WILL NOT COVER THE COST OF FULLY DEVELOPING AND
COMMERCIALIZING RELAXIN.
Product revenue from sales of our marketed products does not cover the full
cost of developing relaxin and other products in our pipeline. Historically, we
have depended on licensing agreements with our corporate partners to
successfully develop and commercialize our products. We also generate revenue by
licensing our products to third parties for specific territories and
indications. Our reliance on licensing arrangements with third parties carries
several risks, including the possibilities that:
- a product development contract may expire or a relationship may be
terminated, and we will not be able to attract a satisfactory
alternative corporate partner within a reasonable time;
- a corporate partner involved in the development of our products does not
commit sufficient capital to successfully develop our products; and
- we may be contractually bound to terms that, in the future, are not
commercially favorable to us.
If any of these risks occurs, we may not be able to successfully develop our
products.
WE DEPEND ON THIRD PARTIES TO PROTECT AND MAINTAIN OUR PATENT PORTFOLIO.
Nearly our entire patent portfolio is licensed from third parties, who are
responsible to varying degrees for the prosecution and maintenance of those
patents. Our success will depend on our ability, or the ability
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of our licensors, to obtain and maintain patent protection on technologies, to
preserve trade secrets, and to operate without infringing the proprietary rights
of others. It is possible that before any of our products in development can be
commercialized, the related patents may have expired or be close to expiration,
thus reducing any advantage of the patent. Moreover, composition of matter
patent protection, which gives patent protection for a compound or a
composition, may not be available for some of our product candidates.
IF WE DO NOT SUCCESSFULLY COMMERCIALIZE RELAXIN, WE MAY LOSE FUNDAMENTAL
INTELLECTUAL PROPERTY RIGHTS TO THE PRODUCT.
Licenses with Genentech, Inc. and The Howard Florey Institute of
Experimental Physiology and Medicine require us to use our best efforts to
commercialize relaxin. Our failure to successfully commercialize relaxin may
result in the reversion of our rights under these licenses to Genentech and the
Florey Institute. The termination of these agreements and subsequent reversion
of rights could cause us to lose fundamental intellectual property rights to
relaxin. This would prohibit us from continuing our relaxin development
programs.
WE ARE SUBJECT TO FOREIGN EXCHANGE RISKS WHICH MAY INCREASE OUR OPERATIONAL
EXPENSES.
We make payments to Boehringer Ingelheim for the production of relaxin in
Austrian schillings, and to CCL Pharmaceuticals for the production of Luxiq and
OLUX in pounds sterling. If the U.S. dollar depreciates against the schilling or
the pound, the payments that we must make will increase, which will increase our
expenses. We do not currently hedge our foreign currency exposure related to
these Agreements.
WE RELY ON OUR EMPLOYEES AND CONSULTANTS TO KEEP OUR TRADE SECRETS CONFIDENTIAL.
We rely on trade secrets and unpatented proprietary know-how and continuing
technological innovation in developing and manufacturing our products. We
require each of our employees, consultants and advisors to enter into
confidentiality agreements prohibiting them from taking our proprietary
information and technology or from using or disclosing proprietary information
to third parties except in specified circumstances. The agreements also provide
that all inventions conceived by an employee, consultant or advisor, to the
extent appropriate for the services provided during the course of the
relationship, shall be our exclusive property, other than inventions unrelated
to us and developed entirely on the individual's own time. Nevertheless, these
agreements may not provide meaningful protection of our trade secrets and
proprietary know-how if they are used or disclosed. Despite all of the
precautions we may take, people who are not parties to confidentiality
agreements may obtain access to our trade secrets or know-how. In addition,
others may independently develop similar or equivalent trade secrets or
know-how.
OUR USE OF HAZARDOUS MATERIALS EXPOSES US TO THE RISK OF ENVIRONMENTAL
LIABILITIES, AND WE MAY INCUR SUBSTANTIAL ADDITIONAL COSTS TO COMPLY WITH
ENVIRONMENTAL LAWS.
Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive materials. We are subject
to laws and regulations governing the use, storage, handling and disposal of
these materials and certain waste products. In the event of accidental
contamination or injury from these materials, we could be liable for any damages
that result and any liability could exceed our resources. We may also be
required to incur significant costs to comply with environmental laws and
regulations as our research activities increase.
RISKS RELATED TO OUR PRODUCTS
MANUFACTURING DIFFICULTIES COULD DELAY COMMERCIALIZATION OF OUR PRODUCTS OR
FUTURE REVENUES FROM PRODUCT SALES.
We depend on third parties to manufacture our products, and each product is
manufactured by a sole source manufacturer. Boehringer Ingelheim Austria GmbH,
GlaxoSmithKline, and CCL Pharmaceuticals
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are our sole source manufacturers for our products. All of our contractors must
comply with the applicable FDA good manufacturing practice regulations, which
include quality control and quality assurance requirements as well as the
corresponding maintenance of records and documentation. Manufacturing facilities
are subject to ongoing periodic inspection by the FDA and corresponding state
agencies, including unannounced inspections, and must be licensed before they
can be used in commercial manufacturing of our products. If our sole source
manufacturers cannot provide us with our product requirements in a timely and
cost-effective manner, if the product they are able to supply cannot meet
commercial requirements for shelf life, or if they are not able to comply with
the applicable good manufacturing practice regulations and other FDA regulatory
requirements, our sales of marketed products could be reduced and we could
suffer delays in the progress of clinical trials for products under development.
We do not have control over our third-party manufacturers' compliance with these
regulations and standards. In addition, any commercial dispute with any of our
sole source suppliers could result in delays in the manufacture of product, and
affect our ability to commercialize our products.
IF WE ARE UNABLE TO CONTRACT WITH THIRD PARTIES TO MANUFACTURE AND DISTRIBUTE
OUR PRODUCTS IN SUFFICIENT QUANTITIES, ON A TIMELY BASIS, OR AT AN ACCEPTABLE
COST, WE MAY BE UNABLE TO MEET DEMAND FOR OUR PRODUCTS AND MAY LOSE POTENTIAL
REVENUES.
We have no manufacturing or distribution facilities for any of our
products. Instead, we contract with third parties to manufacture our products
for us. We have manufacturing agreements with the following companies:
- CCL Pharmaceuticals, a Division of CCL Industries Limited, a U.K.
corporation, for Luxiq and OLUX;
- Boehringer Ingelheim Austria GmbH for relaxin; and
- GlaxoSmithKline for Ridaura.
Typically, these manufacturing contracts are short-term. We are dependent
upon renewing agreements with our existing manufacturers or finding replacement
manufacturers to satisfy our requirements. As a result, we cannot be certain
that manufacturing sources will continue to be available or that we can continue
to out-source the manufacturing of our products on reasonable or acceptable
terms.
Any loss of a manufacturer or any difficulties which could arise in the
manufacturing process could significantly affect our inventories and supply of
products available for sale. In each case, our products are made by a sole
source of supply. If these third parties are unable or unwilling to produce our
products in sufficient quantities, with appropriate quality, and under
commercially reasonably terms, it could have a negative effect on our sales
margins and market share, as well as our overall business and financial results.
If we are unable to supply sufficient amounts of our products on a timely basis,
our market share could decrease and, correspondingly, our profitability could
decrease.
IF OUR CONTRACT MANUFACTURERS FAIL TO COMPLY WITH CGMP REGULATIONS, WE MAY BE
UNABLE TO MEET DEMAND FOR OUR PRODUCTS AND MAY LOSE POTENTIAL REVENUE.
The FDA requires that all manufacturers used by pharmaceutical companies
comply with the FDA's regulations, including those cGMP regulations applicable
to manufacturing processes. The cGMP validation of a new facility and the
approval of that manufacturer for a new drug product may take a year or more
before manufacture can begin at the facility. Delays in obtaining FDA validation
of a replacement manufacturing facility could cause an interruption in the
supply of our products. Although we have business interruption insurance
covering the loss of income for up to $6.0 million, which may mitigate the harm
to our business from the interruption of the manufacturing of products caused by
certain events, the loss of a manufacturer could still have a negative effect on
our sales, margins and market share, as well as our overall business and
financial results.
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IF OUR SUPPLY OF FINISHED PRODUCTS IS INTERRUPTED, OUR ABILITY TO MAINTAIN OUR
INVENTORY LEVELS COULD SUFFER.
We try to maintain inventory levels that are no greater than necessary to
meet our current projections. Any interruption in the supply of finished
products could hinder our ability to timely distribute finished products. If we
are unable to obtain adequate product supplies to satisfy our customers' orders,
we may lose those orders and our customers may cancel other orders and stock and
sell competing products. This in turn could cause a loss of our market share and
negatively affect our revenues.
We cannot be certain that supply interruptions will not occur or that our
inventory will always be adequate. Numerous factors could cause interruptions in
the supply of our finished products including shortages in raw material required
by our manufacturers, changes in our sources for manufacturing, our failure to
timely locate and obtain replacement manufacturers as needed and conditions
effecting the cost and availability of raw materials.
IF WE DO NOT OBTAIN AND MAINTAIN GOVERNMENTAL APPROVALS FOR OUR PRODUCTS, WE
CANNOT SELL THESE PRODUCTS FOR THEIR INTENDED DISEASES.
Pharmaceutical companies are subject to heavy regulation by a number of
national, state and local agencies. Of particular importance is the FDA in the
United States. It has jurisdiction over all of our business and administers
requirements covering testing, manufacture, safety, effectiveness, labeling,
storage, record keeping, approval, advertising and promotion of our products.
Failure to comply with applicable regulatory requirements could, among other
things, result in fines; suspensions of regulatory approvals of products;
product recalls; delays in product distribution, marketing and sale; and civil
or criminal sanctions.
The process of obtaining and maintaining regulatory approvals for
pharmaceutical and biological drug products, and obtaining and maintaining
regulatory approvals to market these products for new indications, is lengthy,
expensive and uncertain. The manufacturing and marketing of drugs are subject to
continuing FDA and foreign regulatory review, and later discovery of previously
unknown problems with a product, manufacturing process or facility may result in
restrictions, including withdrawal of the product from the market. Our products
receive FDA review regarding their safety and effectiveness. However, the FDA is
permitted to revisit and change its prior determinations and we cannot be sure
that the FDA will not change its position with regard to the safety or
effectiveness of our products. If the FDA's position changes, we may be required
to change our labeling or formulations, or cease to manufacture and market the
challenged products. Even before any formal regulatory action, we could
voluntarily decide to cease distribution and sale or recall any of our products
if concerns about the safety or effectiveness develop.
To market our products in countries outside of the United States, we and
our partners must obtain similar approvals from foreign regulatory bodies. The
foreign regulatory approval process includes all of the risks associated with
obtaining FDA approval, and approval by the FDA does not ensure approval by the
regulatory authorities of any other country. The process of obtaining these
approvals is time consuming and requires the expenditure of substantial
resources.
In recent years, various legislative proposals have been offered in
Congress and in some state legislatures that include major changes in the health
care system. These proposals have included price or patient reimbursement
constraints on medicines and restrictions on access to certain products. We
cannot predict the outcome of such initiatives, and it is difficult to predict
the future impact of the broad and expanding legislative and regulatory
requirements affecting us.
WE MAY SPEND A SIGNIFICANT AMOUNT OF MONEY TO OBTAIN FDA AND OTHER REGULATORY
APPROVALS, WHICH MAY NEVER BE GRANTED.
The process of obtaining FDA and other regulatory approvals is lengthy and
expensive. To obtain approval, we must show in preclinical and clinical trials
that our products are safe and effective, and the marketing and manufacturing of
pharmaceutical products are subject to rigorous testing procedures. The FDA
approval processes require substantial time and effort, the FDA continues to
modify product development guidelines, and the FDA may not grant approval on a
timely basis or at all. Clinical trial data
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can be the subject of differing interpretation, and the FDA has substantial
discretion in the approval process. The FDA may not interpret our clinical data
the way we do. The FDA may also require additional clinical data to support
approval. The FDA can take between one and two years to review new drug
applications and biologics license applications, or longer if significant
questions arise during the review process. We may not be able to obtain FDA
approval to conduct clinical trials or to manufacture and market any of the
products we develop, acquire or license. Moreover, the costs to obtain approvals
could be considerable and the failure to obtain or delays in obtaining an
approval could have a significant negative effect on our business performance
and financial results. Even if we obtain approval from the FDA, the FDA is
authorized to impose post-marketing requirements such as:
- testing and surveillance to monitor the product and its continued
compliance with regulatory requirements;
- submitting products for inspection and, if any inspection reveals that
the product is not in compliance, the prohibition of the sale of all
products from the same lot;
- suspending manufacturing;
- recalling products; and
- withdrawing marketing clearance.
In its regulation of advertising, the FDA from time to time issues
correspondence to pharmaceutical companies alleging that some advertising or
promotional practices are false, misleading or deceptive. The FDA has the power
to impose a wide array of sanctions on companies for such advertising practices,
and the receipt of correspondence from the FDA alleging these practices can
result in the following:
- incurring substantial expenses, including fines, penalties, legal fees
and costs to comply with the FDA's requirements;
- changes in the methods of marketing and selling products;
- taking FDA-mandated corrective action, which may include placing
advertisements or sending letters to physicians rescinding previous
advertisements or promotion; and
- disruption in the distribution of products and loss of sales until
compliance with the FDA's position is obtained.
IF LUXIQ AND OLUX DO NOT ACHIEVE OR SUSTAIN MARKET ACCEPTANCE, OUR REVENUES WILL
NOT INCREASE AND MAY NOT COVER OUR OPERATING EXPENSES.
Our future revenues will depend upon dermatologist and patient acceptance
of Luxiq and OLUX. Factors that could affect acceptance of Luxiq and OLUX
include:
- satisfaction with existing alternative therapies;
- the effectiveness of our sales and marketing efforts;
- undesirable and unforeseeable side effects; and
- the cost of the product as compared with alternative therapies.
Since we have only had approval to sell Luxiq for two years, and we only
began selling OLUX in November 2000, we cannot predict the potential long-term
patient acceptance of either product.
IF WE ARE UNABLE TO DEVELOP ALTERNATIVE DELIVERY SYSTEMS FOR RELAXIN, PATIENTS
THAT DO NOT SUFFER FROM SEVERE DISEASES MAY NOT BE WILLING TO USE THE CURRENT
DRUG DELIVERY SYSTEM.
In addition to demonstrating that relaxin is safe and effective in our
current clinical trials, we must meet several additional major development
objectives for relaxin. In particular, we may need to develop an alternative
means of delivering the drug. In our current clinical trials, relaxin is being
delivered through the
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use of an infusion pump. For a serious and life threatening condition, this
method of delivery may be acceptable. However, for the indications we are
studying, such as treatment of infertility and peripheral arterial disease, we
may need to develop an alternative delivery system. The known biological
properties of the relaxin molecule may decrease the availability of certain
delivery systems. If we are not able to develop a suitable alternative delivery
system for relaxin, we may be unable to market relaxin effectively for
indications that are not life threatening, such as infertility, and the
commercial potential of relaxin would be seriously harmed. Our inability to
develop relaxin to its full commercial potential would harm our future prospects
and revenue growth and our stock price would likely decline.
WE RELY ON THIRD PARTIES TO CONDUCT CLINICAL TRIALS FOR OUR PRODUCTS, AND THOSE
THIRD PARTIES MAY NOT PERFORM SATISFACTORILY.
We do not have the ability to independently conduct clinical studies, and
we rely on third parties to perform this function. If these third parties do not
perform satisfactorily, we may not be able to locate acceptable replacements or
enter into favorable agreements with them, if at all. If we are unable to rely
on clinical data collected by others, we could be required to repeat clinical
trials, which could significantly delay commercialization and require
significantly greater capital.
IF WE ARE UNABLE TO DEVELOP NEW PRODUCTS, OUR EXPENSES MAY INCREASE WITHOUT ANY
IMMEDIATE RETURN ON THE INVESTMENT.
We currently have a variety of new products in various stages of research
and development and are working on possible improvements, extensions and
reformulations of some existing products. These research and development
activities, as well as the clinical testing and regulatory approval process,
which must be completed before commercial quantities of these developments can
be sold, will require significant commitments of personnel and financial
resources. Delays in the research, development, testing or approval processes
will cause a corresponding delay in revenue generation from those products.
Regardless of whether they are ever released to the market, the expense of such
processes will have already been incurred.
We reevaluate our research and development efforts regularly to assess
whether our efforts to develop a particular product or technology are
progressing at a rate that justifies our continued expenditures. On the basis of
these reevaluations, we have abandoned in the past, and may abandon in the
future, our efforts on a particular product or technology. There can be no
certainty that any product we are researching or developing will ever be
successfully released to the market. If we fail to take a product or technology
from the development stage to market on a timely basis, we may incur significant
expenses without a near-term financial return.
IF WE DO NOT SUCCESSFULLY INTEGRATE NEW PRODUCTS, WE MAY NOT BE ABLE TO SUSTAIN
REVENUE GROWTH AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
When we acquire or develop new products and product lines, we must be able
to integrate those products and product lines into our systems for marketing,
sales and distribution. If these products or product lines are not integrated
successfully, the potential for growth is limited. The new products we acquire
or develop could have channels of distribution, competition, price limitations
or marketing acceptance different from our current products. As a result, we do
not know whether we will be able to compete effectively and obtain market
acceptance in any new product categories. After acquiring or developing a new
product, we may need to significantly increase our sales force and incur
additional marketing, distribution and other operational expenses. These
additional expenses could negatively affect our gross margins and operating
results. In addition, many of these expenses could be incurred prior to the
actual distribution of new products. Because of this timing, if the new products
are not accepted by the market or if they are not competitive with similar
products distributed by others, the ultimate success of the acquisition or
development could be substantially diminished.
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RISKS RELATED TO OUR INDUSTRY
WE FACE INTENSE COMPETITION, WHICH MAY LIMIT OUR COMMERCIAL OPPORTUNITIES AND
OUR ABILITY TO BECOME PROFITABLE.
The pharmaceutical and biotechnology industries are highly competitive.
Competition in our industry occurs on a variety of fronts, including developing
and bringing new products to market before others, developing new technologies
to improve existing products, developing new products to provide the same
benefits as existing products at less cost and developing new products to
provide benefits superior to those of existing products.
Most of our competitors are large, well-established companies in the fields
of pharmaceuticals and health care. Many of these companies have substantially
greater financial, technical and human resources than we have to devote to
marketing, sales, research and development and acquisitions. Some of these
competitors have more collective experience than we do in undertaking
preclinical testing and human clinical trials of new pharmaceutical products and
obtaining regulatory approvals for therapeutic products. As a result, they have
a greater ability to undertake more extensive research and development,
marketing and pricing policy programs. It is possible that our competitors may
develop new or improved products to treat the same conditions as our products
treat or make technological advances reducing their cost of production so that
they may engage in price competition through aggressive pricing policies to
secure a greater market share to our detriment. Our commercial opportunities
will be reduced or eliminated if our competitors develop and market products
that are more effective, have fewer or less severe adverse side effects or are
less expensive than our products. These competitors also may develop products
that make our current or future products obsolete. Any of these events could
have a significant negative impact on our business and financial results,
including reductions in our market share and gross margins.
Physicians may not adopt our products over competing products, and our
products may not offer an economically feasible alternative to existing modes of
therapy.
Our products compete with generic pharmaceuticals, which claim to offer
equivalent benefit at a lower cost. In some cases, insurers and other health
care payment organizations try to encourage the use of these less expensive
generic brands through their prescription benefits coverages and reimbursement
policies. These organizations may make the generic alternative more attractive
to the patient by providing different amounts of reimbursement so that the net
cost of the generic product to the patient is less than the net cost of our
prescription brand product. Aggressive pricing policies by our generic product
competitors and the prescription benefits policies of insurers could cause us to
lose market share or force us to reduce our margins in response.
IF THIRD PARTY PAYORS WILL NOT PROVIDE COVERAGE OR REIMBURSE PATIENTS FOR THE
USE OF OUR PRODUCTS, OUR REVENUES AND PROFITABILITY WILL SUFFER.
Our products' commercial success is substantially dependent on whether
third-party reimbursement is available for the use of our products by hospitals,
clinics and doctors. Medicare, Medicaid, health maintenance organizations and
other third-party payers may not authorize or otherwise budget for the
reimbursement of our products. In addition, they may not view our products as
cost-effective and reimbursement may not be available to consumers or may not be
sufficient to allow our products to be marketed on a competitive basis.
Likewise, legislative proposals to reform health care or reduce government
programs could result in lower prices for or rejection of our products. Changes
in reimbursement policies or health care cost containment initiatives that limit
or restrict reimbursement for our products may cause our revenues to decline.
IF MANAGED CARE ORGANIZATIONS AND OTHER THIRD-PARTY REIMBURSEMENT POLICIES DO
NOT COVER OUR PRODUCTS, WE MAY NOT INCREASE OUR MARKET SHARE AND OUR REVENUES
AND PROFITABILITY WILL SUFFER.
Our operating results and business success depends in large part on the
availability of adequate third-party payor reimbursement to patients for our
prescription-brand products. These third-party payors
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include governmental entities (such as Medicaid), private health insurers and
managed care organizations. Over 70% of the U.S. population now participates in
some version of managed care. Because of the size of the patient population
covered by managed care organizations, marketing of prescription drugs to them
and the pharmacy benefit managers that serve many of these organizations has
become important to our business. Managed care organizations and other
third-party payors try to negotiate the pricing of medical services and products
to control their costs. Managed care organizations and pharmacy benefit managers
typically develop formularies to reduce their cost for medications. Formularies
can be based on the prices and therapeutic benefits of the available products.
Due to their lower costs, generics are often favored. The breadth of the
products covered by formularies varies considerably from one managed care
organization to another, and many formularies include alternative and
competitive products for treatment of particular medical conditions. Exclusion
of a product from a formulary can lead to its sharply reduced usage in the
managed care organization patient population. Payment or reimbursement of only a
portion of the cost of our prescription products could make our products less
attractive, from a net-cost perspective, to patients, suppliers and prescribing
physicians. We cannot be certain that the reimbursement policies of these
entities will be adequate for our products to compete on a price basis. If our
products are not included within an adequate number of formularies or adequate
reimbursement levels are not provided, or if those policies increasingly favor
generic products, our market share and gross margins could be negatively
affected, as could our overall business and financial condition.
IF PRODUCT LIABILITY LAWSUITS ARE BROUGHT AGAINST US, WE MAY INCUR SUBSTANTIAL
COSTS.
Our industry faces and inherent risk of product liability claims from
allegations that our products resulted in adverse effects to the patient or
others. These risks exist even with respect to those products that are approved
for commercial sale by the FDA and manufactured in facilities licensed and
regulated by the FDA. Our insurance may not provide adequate coverage against
potential product liability claims or losses. We also cannot be certain that our
current coverage will continue to be available in the future on reasonable
terms, if at all. Even if we are ultimately successful in product liability
litigation, the litigation would consume substantial amounts of our financial
and managerial resources, and might create adverse publicity, all of which would
impair our ability to generate sales. If we were found liable for any product
liability claims in excess of our coverage or outside of our coverage, the cost
and expense of such liability could severely damage our business, financial
condition and profitability.
RISKS RELATED TO OUR STOCK
OUR STOCK PRICE IS VOLATILE AND THE VALUE OF YOUR INVESTMENT IN OUR STOCK COULD
DECLINE IN VALUE.
The market prices for securities of biotechnology companies like our
company have been and are likely to continue to be highly volatile. As a result,
investors in these companies often buy at very high prices only to see the price
drop substantially a short time later, resulting in an extreme drop in value in
the stock holdings of these investors. In addition, the volatility could result
in securities class action litigation. Any litigation would likely result in
substantial costs, and divert our management's attention and resources.
IF OUR OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS ACT TOGETHER, THEY MAY BE
ABLE TO CONTROL OUR MANAGEMENT AND OPERATIONS AND THEY MAY MAKE DECISIONS THAT
ARE NOT IN THE BEST INTERESTS OF OTHER STOCKHOLDERS.
Our directors, executive officers and principal stockholders and their
affiliates currently beneficially own in the aggregate approximately 43% of our
outstanding common stock. Accordingly, they collectively have the ability to
substantially influence the outcome of all matters requiring stockholder
approval, including the election of directors, and any merger, consolidation, or
sale of all or substantially all of our assets. They may exercise this ability
in a manner that advances their best interests and not necessarily those of
other stockholders. This concentration of ownership may also have the effect of
delaying, deferring or preventing a change in control of our company, even if
the change in control would be beneficial to other stockholders.
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OUR CHARTER DOCUMENTS AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD DELAY OR
PREVENT AN ACQUISITION OF US, EVEN IF THE ACQUISITION WOULD BE BENEFICIAL TO OUR
STOCKHOLDERS.
Our certificate of incorporation authorizes our board of directors to issue
undesignated preferred stock and to determine the rights, preferences,
privileges and restrictions of the preferred stock without further vote or
action by our stockholders. The issuance of preferred stock could make it more
difficult for third parties to acquire a majority of our outstanding voting
stock. We also have a stockholder rights plan, which entitles existing
stockholders to rights, including the right to purchase shares of preferred
stock, in the event of an acquisition of 15% or more of our outstanding common
stock, or an unsolicited tender offer for such shares. The existence of the
rights plan could delay, prevent, or make more difficult a merger or tender
offer or proxy contest involving us. Other provisions of Delaware law and of our
charter documents, including a provision eliminating the ability of stockholders
to take actions by written consent, could also delay or make difficult a merger,
tender offer or proxy contest involving us. Further, our stock option and
purchase plans generally provide for the assumption of such plans or
substitution of an equivalent option of a successor corporation or,
alternatively, at the discretion of the board of directors, exercise of some or
all of the option stock, including non-vested shares, or acceleration of vesting
of shares issued pursuant to stock grants, upon a change of control or similar
event.
ITEM 2. PROPERTIES
We currently lease 36,964 square feet of laboratory and office space at
3400 and 3294 West Bayshore Road in Palo Alto, California. We lease this space
under two lease agreements that will expire in January 2002 and January 2003. We
believe that our existing facilities are adequate to meet our requirements for
the near term and that additional space will be available on commercially
reasonable terms if needed.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"CNCT." The following table sets forth for the periods indicated the low and
high closing prices for our common stock.
- -----------------------------------------------------
HIGH LOW
- -----------------------------------------------------
1999
First Quarter $ 9.13 $ 4.75
Second Quarter 7.56 6.00
Third Quarter 7.50 5.00
Fourth Quarter 10.50 4.13
2000
First Quarter $15.13 $ 7.69
Second Quarter 14.69 6.13
Third Quarter 24.31 14.75
Fourth Quarter 26.88 4.13
- -----------------------------------------------------
On March 23, 2001, the last reported sale price of the common stock on the
Nasdaq National Market was $5.02 per share. As of that date, we had
approximately 195 stockholders of record of our common stock.
We have never declared or paid cash dividends on our common stock. We
currently intend to retain all available funds for use in our business, and do
not anticipate paying any cash dividends in the foreseeable future.
SALES OF UNREGISTERED SECURITIES.
On June 20, 2000, we sold 2,010,000 shares of our common stock to new and
existing investors for a total purchase price of approximately $20.1 million.
This transaction was exempt from registration under Section 4(2) of the
Securities Act of 1933. The transaction was privately negotiated and each
purchaser was an accredited investor. We made no public solicitation in the
placement of these securities. In July 2000, we registered the shares of common
stock issued in this transaction under the Securities Act of 1933 on a Form S-3
registration statement (File No. 333-41048).
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data has been derived from
our audited consolidated financial statements. This historical data should be
read in conjunction with our consolidated Financial Statements and the related
Notes to Consolidated Financial Statements, and with the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing in Item 7 of this Report.
- ---------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Revenues:
Product $ 20,095 $ 16,595 $ 7,473 $ 6,803 $ 428
License 20,679 10,311 1,648 -- --
- ---------------------------------------------------------------------------------------------------------------------
Total revenues 40,774 26,906 9,121 6,803 428
Operating costs and expenses:
Cost of product revenues 3,868 5,229 1,374 1,149 --
License amortization -- 6,160 6,720 7,124 594
Research and development 21,875 21,309 11,446 17,162 13,161
Selling, general and administrative 26,673 20,834 11,680 8,966 5,434
Charge for in process research and development -- 1,000 4,000 -- --
- ---------------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 52,416 54,532 35,220 34,401 19,189
Loss from operations (11,642) (27,626) (26,099) (27,598) (18,761)
Gain on sale of investment 42,967 -- -- -- --
Gain on sale of license rights -- -- -- 525 --
Interest income (expense), net 1,873 343 (496) (862) 247
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative effect
of a change in accounting 33,198 (27,283) (26,595) (27,935) (18,154)
Income tax (1,010) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change in
accounting principal 32,188 (27,283) (26,595) (27,935) (18,514)
Cumulative effect of change in accounting principal(1) (5,192) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 26,996 $(27,283) $(26,595) $(27,935) $(18,514)
- ---------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE --
Income (loss) per share before cumulative effect of
change in accounting principle $ 1.13 $ (1.21) $ (1.61) $ (2.69) $ (2.71)
Cumulative effect of change in accounting principle $ (0.18) -- -- -- --
Net income (loss) per share $ 0.95 $ (1.21) $ (1.61) $ (2.69) $ (2.71)
DILUTED EARNINGS PER SHARE --
Income (loss) per share before cumulative effect of
change in accounting principle $ 1.07 $ (1.21) $ (1.61) $ (2.69) $ (2.71)
Cumulative effect of change in accounting principle $ (0.17) -- -- -- --
Net income (loss) per share $ 0.90 $ (1.21) $ (1.61) $ (2.69) $ (2.71)
Shares used to calculate basic net earnings (loss) per
share(2) 28,447 22,619 16,533 10,412 6,825
Shares used to calculate diluted net earnings per
share(2) 30,086 22,619 16,533 10,412 6,825
Pro forma amounts assuming the accounting change was
applied retroactively
Net income (loss) $ 32,188 $(30,968) $(28,102) $(27,935) $(18,514)
Earnings per share
Basic $ 1.13 $ (1.37) $ (1.70) $ (2.69) $ (2.71)
Diluted $ 1.07 $ (1.37) $ (1.70) $ (2.69) $ (2.71)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $ 80,184 $ 26,299 $ 23,020 $ 14,346 $ 24,554
Working capital 71,030 13,401 12,464 6,687 14,904
Total assets 85,713 30,410 31,394 31,068 47,922
Current portion of capital lease obligations, capital
loans and long-term debt 37 47 582 2,746 2,408
Current portion of notes payable, deferred revenue and
other liabilities 1,399 3,594 6,822 2,884 --
Non-current portion of capital lease obligations and
long-term debt -- 799 4,002 649 3,062
Other long-term liabilities, deferred revenue and notes
payable 659 -- 3,781 9,666 10,858
Redeemable convertible preferred stock -- -- -- 600 2,000
Total stockholders' equity 72,606 14,288 12,452 10,809 21,800
- ---------------------------------------------------------------------------------------------------------------------
(1) Effective January 1, 2000, we changed our method of accounting for
non-refundable license fees in accordance with Staff Accounting Bulletin
101, "Revenue Recognition in Financial Statements."
(2) Earnings per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" and Staff Accounting Bulletin No. 98, "Earnings Per Share."
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes filed with this Report.
OVERVIEW
We currently market three pharmaceutical products. In May 2000, the FDA
granted us clearance to market OLUX(TM) Foam (clobetasol propionate), 0.05% for
the treatment of moderate to severe scalp dermatoses. We launched OLUX on
November 6, 2000. Our commercial business is focused on the dermatology
marketplace, which is characterized by a large patient population that is served
by relatively small, and therefore more accessible, groups of treating
physicians. We are offering two dermatology products with clinically proven
therapeutic advantages and are providing quality customer service to physicians
through our experienced sales and marketing staff. We also sell Ridaura, a
product to treat rheumatoid arthritis.
In addition to our commercial business, we are developing a biotechnology
product that has the potential to treat multiple diseases. Our product is a
recombinant form of a natural hormone called relaxin. Relaxin reduces the
hardening, or fibrosis, of skin and organ tissue, dilates existing blood vessels
and stimulates new blood vessel growth. We currently have clinical trials
underway with relaxin for infertility. We intend to develop relaxin for other
indications.
On October 8, 2000, we announced that our pivotal trial for relaxin for the
treatment of scleroderma failed to reach its primary endpoint. We have
discontinued our development program related to relaxin for scleroderma. We are
in earlier stage clinical trials of relaxin for the treatment of infertility and
peripheral arterial disease. We maintain North American rights for relaxin and
have entered into collaborative relationships for this program for markets
outside of the United States. In October 2000, our partners in Japan and Europe
notified us that they would terminate our relaxin development agreements with
them in accordance with the termination provisions of the respective agreements
and as of December 31, 2000, we have no further development obligations under
either agreement. Consequently, the rights for relaxin in Japan have reverted to
us, and the European rights will revert to us in April 2001.
RESULTS OF OPERATIONS
REVENUES
- -------------------------------------------------------------------------------------
Years Ended December 31,
----------------------------
(IN THOUSANDS) 2000 1999 1998
- -------------------------------------------------------------------------------------
Product:
Luxiq $10,973 $ 6,025 $ --
Ridaura 6,013 5,737 7,473
Actimmune 1,898 4,833 --
OLUX 1,211 -- --
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Total product revenues 20,095 16,595 7,473
License:
Medeva/Celltech 11,500 8,000 --
InterMune 6,768 500 --
Suntory 1,319 879 1,648
Paladin Labs 703 400 --
Immune Response 350 532 --
Faulding 39 -- --
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Total license revenues 20,679 10,311 1,648
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Total revenues $40,774 $26,906 $9,121
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26
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Our product revenues in 2000 were $20.1 million compared to $16.6 million
in 1999 and $7.5 million in 1998. The increase in total product sales in 2000
was due to continued sales growth of Luxiq(R) Foam (betamethasone valerate),
0.12%, which we began marketing in April 1999, and the launch of OLUX in
November 2000. Although Ridaura sales increased year to year, we believe that
Ridaura will experience decreased sales due to competition from new and existing
products. Beginning with the second quarter of 2000, in connection with our
agreement with InterMune, we sold our remaining Actimmune product rights,
effective April 1, 2000. The increase in total product sales in 1999 over 1998
was due to sales of Actimmune, which we began shipping in February 1999, and
Luxiq, which we launched in April 1999. This increase was partially offset by
lower sales of Ridaura.
License revenues were $20.7 million in 2000 compared to $10.3 million in
1999 and $1.6 million in 1998. The increase in license revenues for 2000 over
1999 includes $1.5 million paid by InterMune in connection with our sublicense
agreement, $5.2 million in connection with the sale of Actimmune product rights
to InterMune, $4.4 million related to revenue recognized in 2000 which had been
deferred January 1, 2000 in connection with the change in accounting principle
in accordance with SAB 101, and a one-time $5.0 million milestone payment from
Celltech in connection with our collaboration agreement for the development of
relaxin before Medeva gave notice of termination of the contract in October
2000. In 1999, we recorded $8.0 million in license revenue ($4.0 million of a
license fee and $4.0 million for quarterly reimbursements of product development
costs) in connection with our agreement with Medeva in relation to the
development of relaxin. In addition, we recorded $0.9 million for a milestone
payment made by Suntory, and $0.4 million for a license fee paid by Paladin
Labs. Payments made by Suntory and Paladin Labs are associated with
collaboration agreements for relaxin. The $1.6 million license revenue recorded
in 1998 was for a license fee paid by Suntory under the collaboration agreement
for relaxin. Also in 1999, we recorded $0.5 million for a license fee associated
with InterMune and $0.5 million license fee for the assignment of patent rights
to The Immune Response Corporation. We expect license revenue to fluctuate
significantly depending on when and whether we or our partners achieve
milestones under existing agreements, and on new business opportunities that we
may identify.
InterMune purchased the remaining United States commercial rights and
revenue rights to Actimmune effective April 1, 2000. As part of the transaction,
InterMune paid $5.2 million which included the prepayment of a $1.0 million
obligation owed in 2002. Prior to this transaction, Connetics had retained
rights to Actimmune revenue based on a fixed amount of unit sales in the years
1999, 2000 and 2001. Beginning with the quarter ended June 30, 2000, InterMune
has purchased all of our remaining product rights to Actimmune.
COST OF PRODUCT REVENUES
Our cost of product revenues includes the costs of Luxiq, Ridaura,
Actimmune (until April 1, 2000) and OLUX, royalty payments on these products
based on a percentage of our product revenues and product freight and
distribution costs from CORD. We recorded cost of product revenues of $3.9
million compared to $5.2 million in 1999 and $1.4 million in 1998. The decrease
in cost of product revenues from 1999 to 2000 is primarily due to discontinued
sales of Actimmune effective April 1, 2000. Actimmune cost more to manufacture
and produce than our other products do. The increase in cost of product revenues
in 1999 over 1998 was primarily due to costs associated with the sales of Luxiq
and Actimmune, which we began marketing in 1999, and higher product and royalty
costs.
LICENSE AMORTIZATION
The expenses associated with the acquisition of product rights to Ridaura
were fully amortized by December 31, 1999. Accordingly, we did not record any
amortization expense in 2000. We recorded amortization expens