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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-28308
COLLAGENEX PHARMACEUTICALS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1758016
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
41 University Drive, Newtown, Pennsylvania 18940
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (215)579-7388
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
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None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(Title of Class)
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
State the aggregate market value of the voting common stock held by
non-affiliates of the registrant: $40,406,361 at March 15, 2001 based on the
last sales price on that date.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 15, 2001:
Class Number of Shares
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Common Stock, $0.01 par value 10,550,638
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the registrant's definitive Proxy Statement for
its 2001 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
TABLE OF CONTENTS
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Item Page
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PART I 1. Business................................................ 1
2. Properties.............................................. 24
3. Legal Proceedings....................................... 24
4. Submission of Matters to a Vote of Security Holders..... 24
PART II 5. Market for the Company's Common Equity and Related
Stockholder Matters.................................. 25
6. Selected Consolidated Financial Data.................... 25
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 28
7A. Quantitative and Qualitative Disclosures about
Market Risk.......................................... 35
8. Financial Statements and Supplementary Data............. 35
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 35
PART III 10. Directors and Executive Officers of the Company......... 36
11. Executive Compensation.................................. 36
12. Security Ownership of Certain Beneficial Owners and
Management........................................... 36
13. Certain Relationships and Related Transactions.......... 36
PART IV 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................ 37
SIGNATURES............................................................... 38
EXHIBIT INDEX............................................................ 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE.............................................................. F-1
i
PART I
ITEM 1. BUSINESS.
GENERAL
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CollaGenex Pharmaceuticals, Inc. and subsidiaries ("CollaGenex", or the
"Company") is a specialty pharmaceutical company focused on providing innovative
medical therapies to the dental market. The Company's first product,
Periostat(R), is an orally administered, prescription pharmaceutical product
that was approved by the United States Food and Drug Administration (the "FDA")
in September 1998 and is the first and only pharmaceutical to treat adult
periodontitis by inhibiting the enzymes that destroy periodontal support
tissues. In December 2000 and February 2001, the United Kingdom Medicines
Control Agency (the "UK MCA") and the FDA, respectively, granted marketing
approval for a new tablet formulation of Periostat which is smaller, easier to
swallow and offers manufacturing cost advantages. This formulation will replace
the currently marketed capsule formulation during 2001. Periostat is indicated
as an adjunct to scaling and root planing ("SRP"), the most prevalent therapy
for adult periodontitis, to promote attachment level gain and to reduce pocket
depth in patients with adult periodontitis. Adult periodontitis, a chronic
disease characterized by the progressive loss of attachment between the tooth
root and the surrounding periodontal structures, may result in tooth loss if
untreated. See "- Periostat."
The Company believes that it is the only specialty pharmaceutical company
specifically focused on the dental market. There are approximately 120,000
dentists in the United States, who write about 55 million prescriptions per
year. Most of these prescriptions are for drugs that treat the symptoms
associated with dental diseases, such as pain, inflammation and infection.
Periostat is the first orally administered, systemically delivered
pharmaceutical developed and approved specifically to treat a dental disease.
Research has shown that the enzyme-suppression technology underlying
Periostat may also be applicable to other diseases involving destruction of the
body's connective tissues, including cancer metastasis, osteoporosis,
osteoarthritis, rheumatoid arthritis, diabetes and acute lung injury. The
Company is also developing a series of novel, proprietary compounds known as
IMPACS(R) (Inhibitors of Multiple Proteases and Cytokines) to address other
applications. Phase I clinical trials for Metastat(R), the Company's lead
compound for the treatment of metastatic cancer, were initiated in January 1998
under the sponsorship of the National Cancer Institute (the "NCI"). In Phase I
clinical trials, Metastat demonstrated an overall tumor response rate of 44% in
patients with Kaposi's sarcoma, and the NCI has elected to continue testing
Metastat in Phase II clinical trials.
The Company's core technology is licensed on an exclusive basis from the
Research Foundation of the State University of New York at Stony Brook ("SUNY").
SUNY also conducts research and development on other potential applications of
the core technology pursuant to a contract with the Company.
Periostat is marketed to the professional dental community in the United
States through a professional pharmaceutical sales force comprised of
approximately 120 sales representatives
1
and managers. Currently, the Company's sales force is also marketing Vioxx(R), a
prescription non-steroidal anti-inflammatory drug (NSAID) developed by Merck &
Co., Inc. ("Merck") that the Company promotes for the treatment of acute dental
pain, and Denavir(R), a prescription drug owned by Novartis Pharmaceuticals
Corporation ("Novartis") for the treatment of cold sores. Novartis notified the
Company by letter dated March 14, 2001 of its intention to terminate its
co-promotion agreement with the Company with respect to Denavir and the Company
and Novartis are discussing potential alternate partnering arrangements, if any.
The Company recently initiated a direct-to-consumer ("DTC") advertising campaign
to build patient awareness of Periostat and to drive prescription and revenue
growth. The Company is actively pursuing other prescription and non-prescription
products to market to the professional dental community and directly to the
consumer, and may enter directly into manufacturing arrangements for additional
complementary products, such as dental neutraceuticals.
The Company was incorporated in Delaware in January 1992 under the name
CollaGenex, Inc. The Company's name was changed to CollaGenex Pharmaceuticals,
Inc. in April 1996. The Company's executive offices are located at 41 University
Drive, Newtown, Pennsylvania 18940, and its telephone number is (215) 579-7388.
"Periostat(R)", "Metastat(R)" and "IMPACS(R)" are United States trademarks
of the Company. All other trade names, trademarks or service marks appearing in
this Annual Report on Form 10-K are the property of their respective owners and
are not property of the Company.
PERIOSTAT
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Adult periodontitis is a chronic disease characterized by the progressive
loss of attachment between the periodontal ligament and the surrounding alveolar
bone, ultimately resulting in tooth loss. According to industry data, in the
United States alone, an estimated one-third of all adults, or approximately 67
million people, suffer from some form of periodontal disease. Approximately 13
million people seek professional treatment annually for periodontal disease,
resulting in over 15 million periodontal procedures and annual expenditures of
approximately $6 billion, primarily for procedures and surgeries performed by a
periodontist or a dental professional.
The most prevalent therapy for adult periodontitis is SRP, a mechanical
procedure that removes bacteria and bacteria deposits called plaque from tooth
and root surfaces above and below the gum line. Periostat is the first orally
administered, systemically delivered pharmaceutical indicated as an adjunct to
SRP to promote attachment level gain and to reduce pocket depth in patients with
adult periodontitis.
Periostat, a 20 mg dose of doxycycline, is a unique sub-anti-microbial
dosage strength that suppresses the chronic and progressive tissue degradation
characteristic of periodontitis without exerting any anti-microbial effect.
Doxycycline is an active ingredient of several FDA approved drugs and has been
in use for approximately 35 years for the treatment of microbial infections and,
along with other tetracyclines, has a well established safety record.
Periostat's mechanism of action is believed in part to be through the
down-regulation of the activity of collagenases, enzymes which are members of a
broad class of enzymes known as matrix metalloproteinases ("MMPs") that are
excessively produced as a result of inflammation resulting
2
from bacterial infection in the gums. Periostat is intended to be taken orally
by the patient between dental visits. In September 1998, the FDA granted the
Company marketing approval for Periostat as an adjunct to SRP to promote
attachment level gain and reduce pocket depth in patients with adult
periodontitis. Periostat was made available for prescription in November 1998
and was fully launched commercially in January 1999. Since January 1999, more
than 975,000 Periostat prescriptions have been filled and over 34,000 dentists
have written a Periostat prescription.
In December 2000 and February 2001, the UK MCA and the FDA, respectively,
granted marketing approval for the Company's new tablet formulation of
Periostat. Such tablets will be manufactured by Pharmaceutical Manufacturing
Research Services, Inc. ("PMRS") a contract manufacturing company. Tablets will
also be supplied to the Company's foreign marketing partners upon receipt of
requisite regulatory approvals, if at all, which will be applied for in 2001.
VIOXX
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Pursuant to a Co-Promotion Agreement executed with Merck in September
1999, the Company received the exclusive right to co-promote Vioxx to the dental
community. Vioxx is a prescription strength NSAID that was approved by the FDA
on May 20, 1999 for the treatment of osteoarthritis, the management of acute
pain in adults, including dental pain, and the treatment of primary
dysmenorrhea. Merck promotes Vioxx to the general physician community. The
agreement provides for certain payments by Merck to the Company upon sales of
Vioxx to the dental community.
Vioxx belongs to a new class of NSAIDs that are believed to work by
selectively inhibiting the cyclooxygenase-2 (COX-2) enzyme, which plays a role
in pain and inflammation. Vioxx spares a related enzyme (COX-1) that helps
maintain the normal stomach lining and platelet homeostasis. In general, most
NSAIDs block both enzymes. Such medications treat pain and inflammation, but may
damage the stomach lining, potentially leading to ulcers in some patients. In
recent clinical trials, Vioxx was shown to be more effective than acetominophen
plus codeine, a narcotic, in relieving pain, with a much lower risk of the
gastrointestinal side effects and prolonged bleeding commonly associated with
NSAID pain relievers. Vioxx may also now be promoted for osteoarthritis of the
temporomandibular joint ("TMJ"), a painful chronic disorder of the jaw.
Prescribed as a once-a-day dose, Vioxx offers patients a convenient alternative
to the multiple daily doses required for many other NSAIDs.
DENAVIR
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Denavir is an FDA approved topical antiviral cream used for the treatment
of cold sores. It is the first and only prescription-strength medicine for
treating recurrent cold sores in healthy adults. The Company has marketed
Denavir to the dental community under a Co-Promotion Agreement with Novartis,
since October 13, 1998, which agreement provided for certain payments by
Novartis to the Company. Novartis notified the Company by letter dated March 14,
2001 of its intention to terminate its co-promotion agreement with the Company
with respect to Denavir, and the Company and Novartis are discussing potential
alternative partnering arrangements, if any.
3
SALES AND MARKETING
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The Company markets and sells its products in the United States through a
dedicated sales force comprised of approximately 120 sales representatives and
managers. The Company intends to market Periostat in foreign markets, upon
receipt of all requisite regulatory approvals, primarily through marketing and
distribution partnerships with companies in these markets. The Company currently
has such agreements with foreign companies, subject to requisite regulatory
approvals, covering Japan, Germany, Italy, Canada, Spain, Portugal, Greece,
Israel, Austria and Switzerland, and has an export marketing agreement for
countries in the Middle East. A capsule formulation of Periostat was approved by
the UK MCA in February 2000, and the Company launched a modest direct marketing
effort in the United Kingdom to dentists through the Company's United Kingdom
subsidiary in September 2000. In December 2000 the UK MCA approved a tablet
formulation of Periostat and during 2001 the Company intends to file for
regulatory approvals in European countries through the Mutual Recognition
Procedure. The Company's foreign marketing and distribution agreements provide
for milestone payments upon the achievement of various regulatory and commercial
events as well as supply agreements for manufactured product. The Company's
Swiss and Israeli distributors will also file for regulatory approval during
2001.
United States
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The field sales organization is currently comprised of two regional
managers, eleven district managers and approximately 105 full-time equivalent
("FTE") sales representatives. Each FTE is responsible for covering a territory
that includes approximately 250 dentists and periodontists that are believed to
be high volume potential prescribers of Periostat based on the estimated number
of SRPs performed in their respective practices.
The Company believes that its sales effort is distinguished from other
dental sales forces by its focus on education and the clinical benefits of
pharmaceutical dentistry, a new approach to treating dental diseases.
Accordingly, the Company produces educational marketing materials, detail aids
and product samples that are used extensively by the representatives in their
presentations to dentists. Clinical reprints and video presentations are also
provided. The Company believes that peer-to-peer communications are vital to
increasing the acceptance of Periostat and arranges speaking engagements and
teleconferences where Periostat advocates share their experiences with other
dental professionals.
Sales training is an important component of the Company's marketing
efforts. New representatives receive four weeks of field training and two weeks
of intensive office training in periodontal disease, host response, pain
management, territory management and selling skills. Training continues at
district-level meetings throughout the year.
In order to provide an integrated dental product line and leverage the
Company's sales and marketing organization, the Company is actively seeking to
in-license or acquire other high-quality therapeutic dental products.
4
United States Direct-to-Consumer Advertising Campaign
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DTC is a relatively new but highly effective marketing tool used by
pharmaceutical companies to build patient awareness of prescription drugs and to
drive prescription and revenue growth. In conducting market research, the
Company learned that there was a greater than 90% awareness of Periostat among
dentists but less than a 10% awareness of Periostat among patients with adult
periodontitis.
In October 2000, the Company initiated a test DTC campaign in Tampa and
St. Louis to evaluate the potential effectiveness of this tool for increasing
Periostat prescription growth. The Company's advertisements were developed by
Bozell Healthcare, the fourth largest healthcare advertising firm in the world,
and were placed in both print and television media in Tampa and St. Louis. The
test campaign was conducted from October 8 through December 11, 2000 and resumed
again in January 2001 for one month.
During the fourth quarter of 2000, new Periostat prescriptions in the test
cities were 48% higher than the third quarter of 2000 compared to a 1.4%
increase in new Periostat prescriptions in the rest of the United States.
Periostat is typically prescribed for 30 days with two or more refills. Total
Periostat prescriptions, which include refills, in the test markets in the
fourth quarter of 2000 increased 32.4% over new prescriptions in the third
quarter compared to a 3.3% increase in the rest of the United States.
Based on these results, in January 2001 the Company expanded its DTC
campaign to include Philadelphia, Washington, Houston and Chicago. The Company
plans a further expansion of the campaign in up to eight additional advertising
markets over the course of 2001.
International
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The Company is establishing relationships with key partners to market and
sell Periostat internationally, upon receipt of the requisite foreign regulatory
approvals. In 1996, the Company executed a manufacturing and distribution
agreement with Roche S.P.A. (formerly Boehringer Mannheim Italia) pursuant to
which Roche S.P.A. has the exclusive right to market Periostat in Italy, San
Marino and The Vatican City pending requisite regulatory approval. In 1997, the
Company announced that a Marketing Authorization for Approval was filed for
Periostat by Roche S.P.A. with the Italian Ministry of Health. Due to delays
incurred in the review of national filings, Roche S.P.A. has agreed to withdraw
the Marketing Authorization for Approval in Italy, and this country will now be
included under the pan-European Mutual Recognition Procedure. Such filing will
take place during 2001.
In July 1998, the Company executed a licensing agreement with Laboratoires
Pharmascience S.A. ("Laboratories Pharmascience") pursuant to which Laboratoires
Pharmascience was to market and distribute Periostat following the requisite
regulatory approval on an exclusive basis in France, Morocco, Algeria, Tunisia
and other countries of French speaking Africa. On March 31, 2000 the Company
received notice from Laboratories Pharmascience terminating the 1998 license
agreement. After negotiation, the parties mutually agreed to discontinue their
relationship. The Company is actively seeking a partner to market and distribute
Periostat in France, upon receipt of requisite regulatory approvals in such
region.
5
In October 1998, the Company announced that a Marketing Authorization
Application ("MAA") had been filed with the UK MCA with respect to Periostat. In
February 2000, the UK MCA granted marketing approval for Periostat for the
adjunctive treatment of chronic adult periodontitis. On May 2, 2000, the Company
announced that it had filed another MAA with the UK MCA seeking marketing
approval of a tablet-formulation of Periostat, which application was
subsequently granted in December 2000. Sales of Periostat capsules commenced in
the United Kingdom in September 2000. A new filing incorporating data from both
the capsule and tablet MAAs was filed with the UK MCA in February 2001 and, when
approved, will form the basis for an application for approval of Periostat under
the European Mutual Recognition Procedure. Such a filing will take place during
2001. There can be no assurance that the Company will achieve other foreign
regulatory approvals or will be successful in marketing Periostat in the United
Kingdom or other European countries.
The Company executed a licensing agreement with Pharmascience Inc.
("Pharmascience") in June 1999 pursuant to which Pharmascience will market and
distribute Periostat in Canada pending requisite regulatory approval. In the
fourth quarter of 1999, Pharmascience submitted an application to the Canadian
Therapeutic Products Program of Health Canada for Canadian marketing approval of
Periostat. This application remains under review by the Canadian authorities.
On May 2, 2000, the Company announced that it had executed an exclusive
marketing and distribution agreement with ISDIN S.A., a joint venture between
the Spanish companies Laboratorios del Dr. Esteve S.A. and Antonio Puig S.A, for
the marketing and distribution of Periostat tablets in Spain and Portugal,
pending requisite regulatory approval. Such agreement was subsequently extended,
granting ISDIN S.A. the right to market and distribute Periostat in Greece,
pending requisite regulatory approval.
On June 9, 2000, the Company announced that it had executed marketing and
distribution agreements with Willvonseder & Marchesani Ges.m.b.H & Co. KG, a
Vienna based company and Karr Dental Ltd., a Zurich based company, with respect
to the marketing and distribution of Periostat tablets in Austria and
Switzerland, respectively, pending requisite regulatory approval.
On August 9, 2000, the Company announced that it had executed an exclusive
marketing and supply agreement with Showa Yakuhin Kako Co. Ltd., a Japanese
company, with respect to the marketing and supply of Periostat tablets in Japan,
pending requisite regulatory approval.
On August 24, 2000, the Company announced that it had executed an
agreement for the marketing and distribution of Periostat in Israel with Taro
International Ltd. ("Taro"), a wholly-owned subsidiary of Taro Pharmaceutical
Industries Limited, an Israeli company, pending requisite regulatory approval.
Such agreement between the Company and Taro provides for the payment of
milestone fees to the Company associated with the regulatory approvals of
Periostat, if any.
On December 5, 2000, the Company announced that it had signed a
Distribution and Marketing Agreement with Hain Diagnostika GmbH ("Hain") for the
distribution and marketing of Periostat in Germany, pending requisite regulatory
approval of Periostat. Hain will pay milestone fees associated with such
regulatory approvals, if any.
6
On January 30, 2001, the Company announced that it had signed an exclusive
Middle East Export Marketing Agreement with Pharma Med Inc. ("Pharma Med") to
distribute and manage the introduction of Periostat in certain Middle Eastern
countries, pending requisite regulatory approval. In return for such services,
Pharma Med will be paid a fee contingent on Periostat sales to the distributors.
MANUFACTURING, DISTRIBUTION AND SUPPLIERS
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The Company has entered into a supply agreement with Hovione International
Limited ("Hovione") pursuant to which the active ingredient in Periostat,
doxycycline, is supplied by Hovione from its offshore facilities. Hovione
supplies a substantial portion of the doxycycline used in the United States from
two independent, FDA-registered and approved facilities, providing for a back-up
supply in the event that one facility is unable to manufacture. The initial term
of the supply agreement expired on January 25, 2000 and thereafter automatically
renewed and will continue to renew for successive two-year periods unless, 90
days prior to the expiration of any such periods, either party gives the other
party written notice of termination. In addition, in the event of a default,
uncured for 90 days, the non-defaulting party can terminate the supply agreement
effective immediately at the end of such 90-day period. The Company relies on
Hovione as its sole supplier of doxycycline.
The Company currently relies on a single third-party contract
manufacturer, Applied Analytical Industries, Inc. ("AAI"), of Wilmington, North
Carolina, for the commercial manufacturing of Periostat in a capsule
formulation. This agreement with AAI, which initially had a three-year term,
will terminate in November 2001 subject to AAI's limited ongoing commitment to
provide product to the Company as discussed below. AAI is required to comply
with Good Manufacturing Practices ("GMP") requirements.
In October 2000, AAI notified the Company of AAI's belief that it was
commercially impracticable for AAI to continue to manufacture Periostat at
current pricing levels as a result of certain manufacturing specifications for
Periostat that were mandated by the FDA. AAI sought to recover certain costs
that AAI claims it incurred since beginning commercial manufacturing of
Periostat in late 1998. The Company resolved this dispute with AAI and agreed to
pay a de minimus amount to AAI and to incur certain price increases on future
quantities of Periostat manufactured for the Company. Concurrent with the
resolution of their dispute, AAI served notice of its intent to terminate the
agreement to supply as of November 2001. The agreement with AAI provides for AAI
to commit to an additional 12 months supply of product at a price premium,
should CollaGenex be unable to qualify an alternative manufacturing source
subsequent to the termination of the AAI Agreement. The Company plans to convert
manufacturing to the tablet formulation prior to the termination of the AAI
Agreement.
The Company also intends to rely on PMRS as its sole manufacturer of
Periostat in a tablet formulation. CollaGenex and PMRS entered into a Service
and Supply Agreement on September 26, 2000 for Periostat with an initial three
year term, during which time CollaGenex has committed to certain minimum needs,
and PMRS has committed to certain guaranteed supply terms. This agreement shall
be automatically extended for consecutive one-year periods unless twelve (12)
months prior to the expiration of any such period, either party gives the other
party written notice of termination. The Company has placed an initial purchase
order with
7
PMRS and committed to certain minimum purchases through 2002 to take advantage
of volume price discounts. PMRS is required to comply with GMP requirements.
In November 1998, the Company executed a Distribution Services Agreement
with Cord Logistics, Inc. ("Cord"), pursuant to which Cord acts as the Company's
exclusive logistics provider for Periostat in the United States and Puerto Rico.
Cord is a subsidiary of Cardinal Health, Inc., a leading wholesale distributor
of pharmaceutical and related healthcare products. Under this agreement, Cord
warehouses and ships Periostat from its central distribution facility to
wholesalers and large national retail chains which in turn distribute Periostat
to pharmacies throughout the United States for prescription sale to patients.
Cord also provides sample fulfillment services for the Company's sales force and
various customer and financial support services to the Company, including
billing and collections, contract pricing maintenance, cash application,
chargeback processing and related reporting services. The Distribution Services
Agreement has an initial term of three years and will renew automatically for
successive one-year periods unless notice of termination is provided by either
party 90 days prior to expiration.
There can be no assurance that the Company will be able to enter into
additional, or maintain existing manufacturing, distribution or supply
agreements on acceptable terms, if at all. In the event that the Company is
unable to obtain sufficient quantities of doxycycline or Periostat on
commercially reasonable terms, or in a timely manner, or if the Company's
suppliers fail to comply with GMP, or if the Company's distributors are unable
to ship or support the Company's products, the Company's business, financial
condition and results of operations may be materially adversely affected. See
"--Government Regulation."
CUSTOMERS
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During 2000, net product sales to each of McKesson Drug Company, Cardinal
Health, Inc., Bergen Brunswig and Walgreens, Inc. accounted for 31%, 17%, 14%
and 10%, respectively, of the Company's aggregate net product sales.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company's research and development activities are conducted primarily
by third parties, such as contract research organizations, academic and
government institutions. The main focus of these activities is the
identification and development of novel tetracycline-based compounds for
application in a variety of inflammatory and tissue-destructive disorders. Other
than Periostat, the most advanced program involves Metastat, the Company's lead
compound for treating metastatic cancer.
On October 18, 2000, the Company announced that it had received a Phase I
STTR grant from the National Heart, Lung and Blood Institute, a division of the
National Institute of Health. The grant will support the potential development
of one of the Company's compounds known as IMPACS for the prevention and
treatment of acute lung injury.
8
Technology
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The Company's core technology involves the prevention of the destruction
of the connective tissues of the body and the down-regulation of a pathological
host response to a variety of external and internal mediators of inflammation
and tissue destruction.
One manifestation of this technology is the ability of the compounds under
development by CollaGenex to pharmaceutically modulate the activity of MMPs.
MMPs are responsible for the normal turnover of collagen and other proteins that
are integral components of a variety of connective tissues such as skin, bone,
cartilage and ligaments.
Under normal physiological conditions, the natural breakdown of collagen
is in part regulated by the interaction between the degradative properties of
MMPs and a group of naturally occurring biomolecules called tissue inhibitors of
metalloproteinases ("TIMPs"), which modulate the level of MMP activity. In many
pathological conditions, however, the balance between collagen production and
degradation is disrupted resulting in excessive loss of tissue collagen, a
process called collagenolysis. One such example is the progressive destruction
of the periodontal ligament and alveolar bone in adult periodontitis. Similar
degradative activity is associated with other disorders and conditions such as
cancer metastasis, wounds, osteoarthritis, osteoporosis, rheumatoid arthritis
and diabetic nephropathy.
The Company's core technology is licensed on an exclusive basis from SUNY
and results from the research of Drs. Lorne M. Golub and Thomas F. McNamara and
their colleagues at SUNY. These researchers demonstrated that tetracyclines can
significantly reduce the pathologically excessive collagen degradation
associated with periodontitis. They also were able to demonstrate that this
result was unrelated to the antibiotic properties of tetracyclines. Furthermore,
they demonstrated that the administration of doses of antibiotic tetracyclines
well below the dosage levels necessary to destroy microbes (sub-antibiotic
doses) was still effective in preventing the loss of connective tissue in models
of periodontitis. Studies published in scientific journals support the
hypothesis that the mechanism of action for this activity is the result, in
part, of the direct binding of tetracyclines to certain metal binding sites
associated with the MMP structure.
Although commercially available antibiotic tetracyclines show effective
anti-collagenolytic potential, long-term administration of these compounds at
normal antibiotic doses can result in well-known complications of long-term
antibiotic therapy, such as gastrointestinal disturbance, overgrowth of yeast
and fungi, and the emergence of antibiotic-resistant bacteria. The Company's
Phase III clinical trials using Periostat demonstrated that the administration
of sub-antimicrobial doses of doxycycline over a 12-month period exerted no
anti-microbial effects. Thus, the use of this dosage strength provides the
anti-collagenolytic effects without the complications of long-term antibiotic
therapies. The Company has conducted and is currently conducting Phase IV
clinical studies to support future marketing activities of Periostat.
The Company's license from SUNY also covers a broad class of chemically
modified tetracyclines (IMPACS) that have been chemically modified to retain and
enhance their anti-collagenolytic properties but which have had the structural
elements responsible for their antibiotic activity removed. These compounds,
which lack any antibiotic activity, have shown
9
potential in a number of pre-clinical models of excessive connective tissue
breakdown. The Company's current research and development programs focus on the
use of IMPACS in drug therapies for potential applications where more potent
doses of tetracyclines may enhance the efficacy of the treatment as well as on
the Phase IV clinical studies for Periostat.
Periostat
---------
The Company is planning and conducting various Phase IV clinical trials
that evaluate the use of Periostat for other therapeutic indications. Phase IV
studies being conducted at Boston University, SUNY at Stony Brook and the
University of Michigan are evaluating Periostat's ability to promote attachment
level, decrease pocket depth and promote healing in patients undergoing
periodontal flap surgery. Another Phase IV study being conducted at the
University of Southern California was designed to study the use of Periostat to
prevent root resorption during orthodontic tooth movement. Other Phase IV
clinical trials are being conducted or are planned to evaluate the ability of
Periostat to arrest or reverse the degradation of the attachment apparatus that
is sometimes associated with dental implants, the evaluation of Periostat as an
adjunct to SRP in institutionalized geriatric patients, and the evaluation of
Periostat as an adjunct to SRP in patients with Type I and Type II diabetes. To
extend the possible therapeutic use of Periostat beyond the oral cavity, the
Company and its collaborators are planning or conducting clinical trials to
evaluate whether Periostat can manage posterior blepharitis, prevent repeat
heart attack, decrease bone loss in postmenopausal women, prevent the growth and
rupture of aortic aneurysms and prevent or reverse the clinical manifestations
of disease secondary to diabetes.
A Phase IV clinical trial conducted at the University of Pittsburgh Dental
School, the results of which were announced by the Company in October 2000,
demonstrated significant clinical benefit in patients who were administered
Periostat in conjunction with traditional mechanical therapy compared to the
same therapy plus a placebo.
Metastat
--------
Cancer metastasis is the spread of cancer cells from a diseased organ to
the lymphatic or circulatory system, where such cells then migrate throughout
the body causing cancer to develop in other organs. Tumor cell invasion is a
complex process that involves the destruction of the basement membrane, or
structural support tissue, of the lymphatic or circulatory system, and the
migration of tumor cells to secondary sites, followed by proliferation of these
cells. Data from pre-clinical studies sponsored by the Company at two major
universities suggest that several of the Company's IMPACS drug candidates have
potent activity in models of cancer invasion, including prostate, breast, lung,
colon and melanoma.
These studies also demonstrated that the down-regulation of the invasive
phenotype by conventional tetracyclines and IMPACS results in a decreased
ability of tumor cells to invade the lung in models of metastasis. For example,
IMPACS have been shown to modulate the specific type of MMP isolated from human
lung cancer cells, the activity of which has been correlated with the metastatic
potential of tumors. In animal models involving a variety of human cancer cell
types, including prostate, breast, lung, colon and melanoma, IMPACS developed by
the Company exhibited an ability to inhibit metastasis.
10
In October 1996, the Company and the NCI executed a letter of intent to
formalize a collaborative research and development agreement pursuant to which
the NCI agreed to perform pharmacology, toxicology and Phase I clinical trials
using the Company's lead compound for the prevention of cancer metastasis,
Metastat.
In June 1997, the Company announced that it had formally extended its
Collaboration Agreement with the NCI with respect to the development of
Metastat. On December 5, 1997, the Company announced that the NCI had filed an
investigational new drug application ("IND") for Metastat. In January 1998, the
Company initiated Phase I clinical trials with respect to Metastat. Such studies
were sponsored by the NCI pursuant to the Company's Collaboration Agreement with
the NCI. In February 1999, the Company released initial findings related to such
studies. Following oral administration, desired plasma concentrations of the
compound were achieved and no dose-limiting side effects other than manageable
phototoxicity were encountered. In February 1999, the Company also announced the
allowance of a United States patent which provides intellectual property
protection for the use of Metastat for the inhibition of cancer metastasis.
Subsequently, the NCI advised the Company that it believed that the level of
photosensitivity, although manageable, could limit the commercial viability of
Metastat. However, the NCI also advised the Company that it remained interested
in the mechanism of action of this class of compounds and it intended to
complete the current clinical trials to establish "proof of principal" with
respect to a variety of surrogate markers. Two Phase I clinical trials were
completed in 1999, one Phase I clinical trial is ongoing and a fourth is
currently planned to initiate in the first half of 2001.
On May 18, 2000, the Company announced positive findings from an
18-patient, NCI sponsored Phase I dose-escalating study of Metastat,
administered once daily to patients with Kaposi's sarcoma, a disfiguring and
potentially deadly malignancy frequently associated with human immunodeficiency
virus (HIV). In such Phase I clinical trials, Metastat demonstrated an overall
tumor response rate of 44% in patients with Kaposi's sarcoma and the NCI has
elected to continue testing Metastat in Phase II clinical trials.
Preclinical Research and Development Activities
-----------------------------------------------
The Company has an active preclinical program in place to identify and
characterize IMPACS that exhibit enhanced biological activities compared to
Periostat and Metastat. In collaboration with the University of Rochester, the
Company has synthesized over thirty new IMPACS. These are being evaluated in a
variety of in vitro and in vivo assay systems under a three-year research
agreement with SUNY, which will conclude in May 2001.
The Company receives certain proprietary rights to inventions or
discoveries that arise as a result of this research. The Company's current
research and development objective is to develop additional products utilizing
its IMPACS technology, preferably in conjunction with development partners.
The Company's research and development expenditures were approximately
$4.7 million, $5.0 million and $3.1 million in 1998, 1999 and 2000,
respectively.
11
PATENTS, TRADE SECRETS AND LICENSES
- -----------------------------------
The Company's success will depend in part on patent and trade secret
protection for its technologies, products and processes, and on its ability to
operate without infringement of proprietary rights of other parties both in the
United States and in foreign countries. Because of the substantial length of
time and expense associated with bringing new products through development to
the marketplace, the pharmaceutical industry places considerable importance on
obtaining and maintaining patent and trade secret protection for new
technologies, products and processes.
The Company depends on the license from the Research Foundation of the
State of New York at Stony Brook for all of its core technology (the "SUNY
License"). The SUNY License grants the Company an exclusive worldwide license to
make and sell products employing tetracyclines that are designed or utilized to
alter a biological process. Twenty-eight (28) United States patents and four (4)
United States patent applications held by SUNY are licensed to the Company under
the SUNY License. Two (2) of the twenty-eight (28) patents have been co-assigned
to the University of Miami, Florida, and another patent has been co-assigned to
Washington University. Other institutions are co-owners with SUNY as follows:
one (1) patent is co-owned with the Hospital for Joint Diseases in New York
City; three (3) patents are co-owned with the University of Helsinki; and one
(1) patent is co-owned with the University of Rochester. The primary United
States patent claims methods of use of conventional tetracyclines to inhibit
pathologically excessive collagenolytic activity (the "Primary Patent"), while a
related United States patent claims methods of use of tetracyclines which have
no antibiotic activity (the "Secondary Patent"). The twenty-six (26) other
United States patents relate to the compositions of certain CMTs with
anti-collagenolytic properties, methods of use of tetracyclines to reduce bone
loss and methods of use of tetracyclines to enhance bone growth and inhibit
protein glycosylation. SUNY did not apply in foreign countries for patents
corresponding to the Primary Patent but has obtained patents that correspond to
the Secondary Patent in Australia, Canada and certain European countries. One of
the Secondary Patents has also been issued in Japan. SUNY also has obtained
patents in certain European countries, Canada and Japan, and has pending patent
applications in certain other foreign countries which correspond to its United
States patents relating to methods of use of tetracyclines to reduce bone loss.
Sixty-nine (69) patents have been issued in foreign countries. All of SUNY's
United States and foreign patents expire between 2004 and 2018. The Company's
rights under the SUNY License are subject to certain statutory rights of the
United States government resulting from federal support of research activities
at SUNY. The failure to obtain and maintain patent protection may mean that the
Company will face increased competition in the United States and in foreign
countries. The SUNY License is terminable by SUNY on 90 days prior notice only
upon the Company's failure to make timely payments, reimbursements or reports,
if the failure is not cured by the Company within 90 days. The termination of
the SUNY License, or the failure to obtain and maintain patent protection for
the Company's technologies, would have a material adverse effect on the
Company's business, financial condition and results of operations.
One of the United States patents and a corresponding Japanese patent
application licensed to the Company under the SUNY License are owned jointly by
SUNY and a Japanese company. These patent rights, which expire in 2012, cover
particular CMTs (the "Jointly Owned CMTs") that were involved in research
activities between SUNY and the Japanese company. The
12
Japanese company may have exclusive rights to these Jointly Owned CMTs in Asia,
Australia and New Zealand and may have a non-exclusive right to exploit these
Jointly Owned CMTs in other territories. These Jointly Owned CMTs are not
involved in the Company's Periostat product but could, in the future, prove to
be important for one or more of the Company's other potential applications of
its technology. If the Company does incorporate the Jointly Owned CMTs in any
future product, it may be precluded from marketing these products in Asia,
Australia and New Zealand and could experience increased competition in other
markets from the joint owner.
In consideration of the license granted to the Company, the Company: (i)
issued to SUNY 78,948 shares of common stock; and (ii) has agreed to pay SUNY
royalties on the net sales of products employing tetracyclines, with minimum
annual royalty payments per year. The term of the license is: (i) until the
expiration of the last to expire of the licensed patents in each country; or
(ii) until November 18, 2018, at which time the Company has a fully paid,
non-exclusive license.
In addition to the patents and patent applications licensed from SUNY
which represent the core technology, the Company owns additional technology for
which applications for United States patents have been filed and have been
issued. In this regard, the Company reports the existence of an issued patent
for a toothpaste/mouthwash formulation for the amelioration of dentin
hypersensitivity. Furthermore, the Company reports pending applications covering
new tetracycline derivatives having increased lipophilicity.
The Company intends to enforce its patent rights against third-party
infringers. Due to the general availability of generic tetracyclines for use as
antibiotics, the Company could become involved in infringement actions, which
could entail substantial costs to the Company. Regardless of the outcome,
defense or prosecution of patent claims is expensive and time consuming, and
results in the diversion of substantial financial, management and other
resources from the Company's other activities.
The patent positions of pharmaceutical firms, including the Company, are
generally uncertain and involve complex legal and factual questions.
Consequently, as to the patent applications licensed to it, even though the
Company currently is prosecuting such patent applications with United States and
foreign patent offices, the Company does not know whether any of such
applications will result in the issuance of any additional patents or, if any
additional patents are issued, whether they will provide significant proprietary
protection or will be circumvented or invalidated. Since patent applications in
the United States are maintained in secrecy until patents issue, and since
publication of discoveries in the scientific and patent literature tends to lag
behind actual discoveries by several months, the Company cannot be certain that
it was the first creator of inventions covered by pending patent applications or
that it was the first to file patent applications for such inventions.
There can be no assurance that patent applications to which the Company
holds rights will result in the issuance of patents, that any patents issued or
licensed to the Company will not be challenged and held to be invalid, or that
any such patents will provide commercially significant protection to the
Company's technology, products and processes. In addition, there can be no
assurance that others will not independently develop substantially equivalent
13
proprietary information not covered by patents to which the Company owns rights
or obtain access to the Company's know-how, or that others will not be issued
patents which may prevent the sale of one or more of the Company's products, or
require licensing and the payment of significant fees or royalties by the
Company to third parties in order to enable the Company to conduct its business.
In the event that any relevant claims of third-party patents are upheld as valid
and enforceable, the Company could be prevented from selling its products or
could be required to obtain licenses from the owners of such patents. There can
be no assurance that such licenses would be available or, if available, would be
on terms acceptable to the Company. The Company's failure to obtain these
licenses would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's success also is dependent upon know-how, trade secrets, and
the skills, knowledge and experience of its scientific and technical personnel.
The Company requires all employees to enter into confidentiality agreements that
prohibit the disclosure of confidential information to anyone outside the
Company. In addition, the Company seeks to obtain such agreements from its
consultants, advisors and research collaborators. There can be no assurance that
adequate protection will be provided for the Company's trade secrets, know-how
or other proprietary information in the event of any unauthorized use or
disclosure. The Company occasionally provides information and chemical compounds
to research collaborators in academic institutions, and requests that the
collaborators conduct tests in order to investigate certain properties of the
compounds. There can be no assurance that the academic institutions will not
assert intellectual property rights in the results of the tests conducted by the
research collaborators, or that the academic institutions will grant licenses
under such intellectual property rights to the Company on acceptable terms. If
the assertion of intellectual property rights by an academic institution can be
substantiated, failure of the academic institution to grant intellectual
property rights to the Company could have a material adverse effect on the
Company's business, financial condition and results of operations.
GOVERNMENT REGULATION
- ---------------------
Government authorities in the United States and other countries
extensively regulate, among other things, the research, development, testing,
manufacture, labeling, promotion, advertising, distribution, and marketing of
the Company's products. In the United States, the FDA regulates our approved
product, Periostat, and our products in development, as drugs under the Federal
Food, Drug, and Cosmetic Act and implementing regulations. Failure to comply
with FDA requirements may subject the Company to administrative or judicial
sanctions, such as the FDA's refusal to approve pending applications or warning
letters, product recalls, product seizures, total or partial suspension of
production or distribution, withdrawal of approvals, import detentions,
injunctions, and/or criminal prosecution.
The steps required before a drug may be marketed in the United States
include:
o pre-clinical laboratory tests, animal studies, and formulation
studies;
o submission to the FDA of an investigational new drug exemption, or
IND, for human clinical testing, which must become effective before
human clinical trials may begin;
14
o adequate and well-controlled clinical trials to establish the safety
and efficacy of the drug for each indication;
o submission to the FDA of a new drug application, or NDA, for
approval;
o satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the drug is produced to assess
compliance with Good Manufacturing Practice, or GMP; and
o FDA review and approval of the NDA.
Pre-clinical tests include laboratory evaluations of product chemistry,
toxicity, and formulation, as well as animal studies. The results of the
pre-clinical tests, together with manufacturing information, analytical data,
and a plan for studying the product in humans, are submitted to the FDA as part
of an IND, which must become effective before human clinical trials may begin.
An IND automatically becomes effective 30 days after receipt by the FDA, unless
before that time the FDA raises concerns or questions about issues such as the
conduct of the trials outlined in the IND. In that case, the IND sponsor and the
FDA must resolve any outstanding FDA concerns or questions before clinical
trials can proceed. Submission of an IND does not always result in the FDA
allowing clinical trials to commence.
Clinical trials involve administration of the investigational drug to
human subjects under the supervision of qualified investigators and are
conducted under protocols detailing the objectives of the study, the parameters
to be used in monitoring safety, and the effectiveness criteria to be evaluated.
Each protocol must be submitted to the FDA as part of the IND process, and must
be reviewed and approved by an independent Institutional Review Board before it
can begin. Clinical trials typically are conducted in three sequential phases,
but the phases may overlap or be combined. Phase 1 usually involves the initial
introduction of the investigational drug into people to evaluate its safety,
dosage tolerance, phamacodynamics, and, if possible, to gain an early indication
of its effectiveness. Phase 2 usually involves trials in a limited patient
population to evaluate dosage tolerance and appropriate dosage, identify
possible adverse effects and safety risks and evaluate preliminarily the
efficacy of the drug for specific indications. Phase 3 trials usually further
evaluate clinical efficacy and test further for safety by using the drug in its
final form in an expanded patient population. The Company cannot guarantee that
Phase 1, Phase 2, or Phase 3 testing for its products in development will be
completed successfully within any specified period of time, if at all. Many
products that initially appear promising are found, after clinical evaluation,
not to be safe and effective. Also, the Company or the FDA may suspend clinical
trials at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.
Assuming successful completion of the required clinical testing, the
results of the preclinical studies and of the clinical studies, together with
other detailed information, including information on the manufacture and
composition of the drug, are submitted to the FDA in the form of an NDA
requesting approval to market the product for one or more indications. Before
approving an application, the FDA usually will inspect the facility or the
facilities at which the drug is manufactured, and will not approve the product
unless compliance with GMP is satisfactory. If the FDA determines the
application and the manufacturing facilities are
15
acceptable, the FDA will issue an approval letter. If the FDA determines the
application or manufacturing facilities are not acceptable, the FDA will outline
the deficiencies in the submission and often will request additional testing or
information. Notwithstanding the submission of any requested additional
information, the FDA ultimately may decide that the application does not satisfy
the regulatory criteria for approval. The Company received an NDA for Periostat
in 1998; it cannot be sure that any additional approvals will be granted on a
timely basis, if at all. After approval, certain changes to the approved
product, such as adding new indications, manufacturing changes, or additional
labeling claims are subject to further FDA review and approval. For example,
before the Company can market Periostat for additional indications now being
evaluated, it will be required to obtain an additional FDA approval.
In some circumstances, approved drugs are provided protection from
competitive versions of the approved drug for specified time periods. For
example, the law provides for patent extension or market exclusivity in certain
circumstances. Periostat, however, is not eligible for such protection.
After NDA approval is obtained, the Company is required to comply with a
number of post-approval requirements. For example, as a condition of approval of
an application, the FDA may require postmarketing testing and surveillance to
monitor the drug's safety or efficacy. As part of the NDA for Periostat, the FDA
has requested a postmarket animal study related to long-term dosing and
carcogenicity, which was completed in 2000. It was found that up to 200 mg/kg
per day of doxycycline, the active ingredient in Periostat, produced no evidence
of carcinogenic activity in laboratory rats. In addition, holders of an approved
NDA are required to report certain adverse reactions and production problems, if
any, to the FDA, and to comply with requirements concerning advertising and
promotional labeling for their products. For example, the FDA does not permit a
manufacturer to market or promote an approved drug product for an unapproved
use. Also, quality control and manufacturing procedures must continue to conform
to GMP after approval. Accordingly, manufacturers must continue to expend time,
money, and effort in the area of production and quality control to maintain
compliance with GMP and other aspects of regulatory compliance. The FDA
periodically inspects manufacturers to assess compliance with GMP and other
requirements. The Company buys bulk active ingredient for Periostat and the
Company's products in development from third party suppliers and finishes the
products in third party manufacturing facilities. Failure of either the Company
or its suppliers to comply with FDA requirements could disrupt production and
subject the Company to enforcement sanctions.
In addition to the applicable FDA requirements, the Company is subject to
foreign regulatory authorities governing clinical trials and drug sales. Whether
or not FDA approval has been obtained, approval of a pharmaceutical product by
the comparable regulatory authorities of foreign countries must be obtained
prior to the commencement of marketing of the product in those countries. The
approval process varies from country to country and the time required may be
longer or shorter than that required for FDA approval. The Company has filed for
and subsequently received approval from the UK MCA for the marketing of
Periostat tablets in the United Kingdom. Such application was filed with the
United Kingdom acting as a Reference Member State, thus providing a foundation
for the possible submission of applications, later in 2001, to other European
Union countries through the Mutual Recognition Procedure.
16
COMPETITION
- -----------
The pharmaceutical industry is subject to intense competition as well as
rapid and significant technological change. The Company expects that competition
in the periodontal area will be based on other factors, including product
efficacy, safety, cost-effectiveness, ease of use, patient discomfort,
availability, price, patent position and effective product promotion.
The Company believes that Periostat is distinguished from other existing
and known periodontitis treatments in that it is the only treatment which is
directed to suppression of the enzymes that degrade periodontal support tissues.
The Company believes that all other therapies focus on temporarily removing the
bacteria associated with periodontitis. Periostat is a prescription
pharmaceutical capsule indicated as an adjunct to SRP to promote attachment
level gain and to reduce pocket depth in patients with adult periodontitis that
is taken by the patient between dental visits. The Company believes that the
following chart summarizes the available forms of periodontitis treatment, other
than SRP and resective surgery:
Product Product Dental Delivery Patient Treatment
Name Manufacturer/Marketer Procedure Route Administered Focus
- ------------ --------------------- --------- -------- ------------ ----------
Periostat(R) CollaGenex No Systemic Yes Tissue
Pharmaceuticals, degradation
Inc.
Atridox(TM) Atrix Laboratories/ Yes Local No Bacteria
Glaxo Smith Kline
Beecham
Periochip(TM) Dexxon Ltd. Yes Local No Bacteria
Arestin(TM) Orapharma, Inc. Yes Local No Bacteria
Many of the companies participating in the periodontal area have
substantially greater financial, technical and human resources than the Company
and may be better equipped to develop, manufacture and market products. These
companies may develop and introduce products and processes competitive with or
superior to those of the Company.
EMPLOYEES
- ---------
The Company historically has outsourced its manufacturing, clinical
trials, NDA preparation and other activities. The Company intends to continue to
outsource many of the activities which it historically has outsourced. As of
December 31, 2000, the Company employed 146 persons. Each of its management
personnel has had extensive prior experience with pharmaceutical, biotechnology
or medical products companies. There can be no assurance that the Company will
be able to recruit and retain qualified inside sales and marketing personnel,
additional foreign sub-licensees or distributors or marketing partners or that
the Company's marketing and sales efforts will be successful. Currently, none of
the Company's employees are covered by collective bargaining agreements. In
general, the Company's employees are covered by confidentiality agreements. The
Company considers relations with its employees to be excellent.
17
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
- -------------------------------------------------
IF PERIOSTAT IS NOT ADOPTED ROUTINELY BY DENTAL PROFESSIONALS OR IF
MANAGED CARE PROVIDERS DO NOT CONTINUE TO REIMBURSE PATIENTS, THE COMPANY'S
SALES GROWTH WILL SUFFER.
The Company's growth and success depends in large part on its ability to
continue to demonstrate the safety and effectiveness of Periostat for the
treatment of gum disease to dental practitioners. Periostat is the first
long-term medical therapy for any dental disease, and dentists are not
accustomed to prescribing drugs for a minimum 90-day duration. Periostat works
by suppressing certain enzymes involved in the periodontal disease process,
which is a new concept for many dentists who believe that removing bacterial
plaque is the only way to treat this disease. Accordingly, the Company's sales
efforts are largely focused on educating dental professionals about an entirely
new approach to treating periodontitis. Although over 32,000 dentists in the
United States have written at least one prescription for Periostat, a number of
dentists have not adopted Periostat routinely into their treatment of adult
periodontitis. Other dentists have prescribed Periostat for only a subset of
their eligible patients, typically their most advanced or refractory cases. If
the Company is unable to initiate and/or expand usage of Periostat by dentists,
its sales growth will suffer.
Approximately 65% of the large managed care providers in the United States
(defined as those that cover 100,000 or more lives) reimburse their patients for
Periostat, typically requiring a modest co-payment. The Company's goal is to
achieve reimbursement from approximately 75% of the large managed care
providers, since the remainder have policies that do not reimburse for drugs to
treat dental conditions. Patients who are not reimbursed by managed care
providers may choose not to accept Periostat as a treatment. In addition, the
Company has not yet achieved reimbursement from the largest managed care
provider in California, thus limiting prescription and sales growth in that
state.
THE COMPANY RELIES ON PERIOSTAT FOR MOST OF ITS REVENUE.
During 1999 and 2000, Periostat accounted for 95% and 84%, respectively,
of the Company's total net revenues. Although the Company currently derives
revenues from co-promoting two (2) other products (for one of which the Company
has received a notice of termination effective in April 2001) and from licensing
fees from foreign marketing partners, the Company's revenue and profitability in
the near future will depend on the Company's ability to successfully market and
sell Periostat.
THE COMPANY ANTICIPATES FUTURE LOSSES.
From the Company's founding in 1992 through the commercial launch of
Periostat in November, 1998, the Company had no revenue from sales of its own
products. During the years ended December 31, 1999 and 2000, the Company
incurred net losses of approximately $14.6 million and $8.8 million,
respectively. From inception through December 31, 2000, the Company has incurred
an aggregate net loss of $61.3 million. The Company's historical losses have
resulted primarily from the expenses associated with its pharmaceutical
development program, clinical trials, the regulatory approval process associated
with Periostat and sales and marketing activities relating to Periostat. The
Company expects to incur significant future
18
expenses, particularly with respect to the sales and marketing of Periostat. As
a result, the Company anticipates losses through at least the first nine months
of 2001.
THE COMPANY HAS A LIMITED MARKETING AND SALES HISTORY AND MAY NOT BE ABLE
TO SUCCESSFULLY MARKET ITS PRODUCT CANDIDATES.
The Company has a limited history of marketing, distributing and selling
pharmaceutical products in the dental market. In January 1999, the Company first
trained a sales force of sales representatives and managers and began to promote
Periostat to the dental community. The Company markets and sells its products in
the United States through this direct sales force. Further, the Company has
entered into agreements to market Periostat, upon receipt of the necessary
foreign regulatory approvals, in certain countries in Europe, Israel, Japan and
Canada, and the Company continues to evaluate partnering arrangements in other
countries outside the United States. If the Company is unable to continue to
recruit, train and retain sales and marketing personnel, the Company will be
unable to successfully expand its sales and marketing efforts. Furthermore, if
the Company's foreign partners do not devote sufficient resources to perform
their contractual obligations, the Company may not achieve its foreign sales
goals.
THE COMPANY'S COMPETITIVE POSITION IN THE MARKETPLACE DEPENDS ON ENFORCING
AND SUCCESSFULLY DEFENDING ITS INTELLECTUAL PROPERTY RIGHTS.
In order to be competitive in the pharmaceutical industry, it is important
to establish, enforce, and successfully defend patent and trade secret
protection for the Company's established and new technologies. The Company must
also avoid liability from infringing the proprietary rights of others.
The Company's core technology is licensed from SUNY and other academic and
research institutions collaborating with SUNY. Under the SUNY License the
Company has an exclusive worldwide license to SUNY's rights in certain patents
and patent applications to make and sell products employing tetracyclines to
treat certain disease conditions. The SUNY License imposes various payment and
reporting obligations on the Company and the Company's failure to comply with
these requirements permits SUNY to terminate the SUNY License. If the SUNY
License is terminated, the Company would lose its right to exclude competitors
from commercializing similar products, and the Company could be excluded from
marketing the same products if SUNY licensed the underlying technology to a
competitor after terminating the SUNY License.
SUNY owns twenty-eight (28) United States patents and four (4) United
States patent applications that are licensed to the Company. The patents
licensed from SUNY expire between 2004 and 2018. Two (2) of the patents are
related to Periostat and expire in 2004 and 2007. Technology covered by these
patents becomes available to competitors as the patents expire.
Since many of the Company's patent rights cover new treatments using
tetracyclines, which are generally available for their known use as antibiotics,
the Company may be required to bring expensive infringement actions to enforce
the Company's patents and protect its technology. Although federal law prohibits
making and selling pharmaceuticals for infringing use, competitors and/or
practitioners may provide generic forms of tetracycline for treatment(s)
19
which infringe the Company's patents, rather than prescribe the Company's
Periostat product. Enforcement of patents can be expensive and time consuming.
The Company's success also depends upon know-how, trade secrets, and the
skills, knowledge and experience of its scientific and technical personnel. To
that end, the Company requires all of its employees and, to the extent possible,
all consultants, advisors and research collaborators, to enter into
confidentiality agreements prohibiting unauthorized disclosure. With respect to
information and chemical compounds the Company provides for testing to
collaborators in academic institutions, the Company cannot guarantee that the
institutions will not assert property rights in the results of such tests nor
that a license can be reasonably obtained from such institutions which assert
such rights. Failure to obtain the benefit of such testing could adversely
affect the Company's commercial position and, consequently, its financial
condition.
IF THE COMPANY LOSES ITS SOLE SUPPLIER OF DOXYCYCLINE OR THE COMPANY'S
CURRENT MANUFACTURER OF PERIOSTAT, THE COMPANY'S COMMERCIALIZATION OF PERIOSTAT
WILL BE INTERRUPTED OR LESS PROFITABLE.
The Company relies on a single supplier for doxycycline, the active
ingredient in Periostat. There are relatively few alternative suppliers of
doxycycline and this supplier produces the majority of the doxycycline used in
the United States. If the Company is unable to procure a commercial quantity of
doxycycline from its current supplier on an ongoing basis at a competitive
price, or if the Company cannot find a replacement supplier in a timely manner
or with favorable pricing terms, the Company's costs may increase significantly
and the Company may experience delays in the supply of Periostat.
The Company has historically relied on a single third-party contract
manufacturer, Applied Analytical Industries, Inc., to produce Periostat in a
capsule formulation. The Company's previously reported dispute with Applied
Analytical has been resolved and the Company has agreed to pay a de minimus
amount to Applied Analytical and to incur certain price increases on future
quantities of Periostat manufactured for the Company. Concurrent with the
resolution of their dispute, AAI served notice of its intent to terminate the
agreement to supply as of November 2001. The agreement with AAI provides for AAI
to commit to an additional twelve (12) months supply of product at a price
premium, should the Company be unable to qualify an alternative manufacturing
source subsequent to the termination of the AAI agreement. An inability to
maintain such arrangements with Applied Analytical could result in delays in the
supply of Periostat. The Company has entered into an agreement with another
contract manufacturer, PMRS, on a tablet formulation for Periostat. The Company
has placed an initial purchase order with PMRS and committed to certain minimum
purchases through 2002. Upon the termination of the Company's current
arrangements with AAI, PMRS will become the sole third-party contract
manufacturer to supply Periostat to the Company. Any inability of PMRS to
produce and supply product on agreed upon terms could result in delays in the
supply of Periostat. The Company also intends to contract with additional
manufacturers for the commercial manufacture of Periostat. The Company believes
that it could take up to one year to successfully transition to a new
manufacturer.
20
THE COMPANY IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION, INCLUDING THE
REQUIREMENT OF APPROVAL BEFORE ITS PRODUCTS MAY BE MARKETED.
The FDA has approved only one of the Company's products, Periostat, for
sale in the United States. The Company's other products are in development, and
will have to be approved by the FDA before they can be marketed in the United
States. If the FDA does not approve the Company's products in a timely fashion,
or does not approve them at all, the Company's business and financial condition
may be adversely affected.
In addition, the Company and its products are subject to comprehensive
regulation by the FDA both before and after products are approved for marketing.
The FDA regulates, for example, research and development, including preclinical
and clinical testing, safety, effectiveness, manufacturing, labeling,
advertising, promotion, export, and marketing of its products. The Company's
failure to comply with regulatory requirements may result in various adverse
consequences, including FDA delay in approving or refusal to approve a product,
recalls, withdrawal of an approved product from the market and/or the imposition
of civil or criminal sanctions.
The Company is, and will increasingly be, subject to a variety of foreign
regulatory regimes governing clinical trials and sales of its products. Other
than Periostat, which has been approved by the Medicines Control Agency for the
marketing in the United Kingdom, the Company's products have not been approved
in any foreign country. Whether or not FDA approval has been obtained, approval
of a product by the comparable regulatory authorities of foreign countries must
be obtained prior to the commencement of marketing of the product in those
countries. The approval process varies from country to country, and other
countries may also impose post-approval requirements.
IF THE COMPANY'S PRODUCTS CAUSE INJURIES, THE COMPANY MAY INCUR
SIGNIFICANT EXPENSE AND LIABILITY.
The Company's business may be adversely affected by potential product
liability risks inherent in the testing, manufacturing and marketing of
Periostat and other products developed by or for us. The Company has $10.0
million in product liability insurance for Periostat. This level of insurance
may not adequately protect the Company against product liability claims.
Insufficient insurance coverage or the failure to obtain indemnification from
third parties for their respective liabilities may expose us to product
liability claims and/or recalls and could cause the Company's business,
financial condition and results of operations to decline.
IF THE COMPANY NEEDS ADDITIONAL FINANCING, AND FINANCING IS UNAVAILABLE,
THE COMPANY'S ABILITY TO DEVELOP AND COMMERCIALIZE PRODUCTS AND ITS OPERATIONS
WILL BE ADVERSELY AFFECTED.
The Company has historically financed its operations through public and
private equity financings. The Company's capital requirements depend on numerous
factors, including its ability to successfully commercialize Periostat,
competing technological and market developments, the Company's ability to enter
into collaborative arrangements for the development, regulatory approval and
commercialization of other products, and the cost of
21
filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights. The Company anticipates that it may be required to
raise additional capital in order to conduct its operations. Additional funding,
if necessary, may not be available on favorable terms, if at all. If adequate
funds are not available, the Company may be required to curtail operations
significantly or to obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates, products or potential markets. At
December 31, 2000, the Company had cash, cash equivalents and short-term
investments of approximately $5.4 million. In March 2001, the Company raised
approximately $6.9 million, net of offering costs, through the sale of its
Common Stock and Warrants to purchase shares of its Common Stock in the future.
The Company anticipates that its existing working capital, including such
additional $6.9 million raised by the Company will be sufficient to fund its
operations through at least the middle of 2002.
DELAWARE LAW, THE COMPANY'S CERTIFICATE OF INCORPORATION AND THE COMPANY'S
BY-LAWS CONTAIN PROVISIONS THAT COULD DISCOURAGE A TAKEOVER OF THE COMPANY.
Anti-takeover provisions of Delaware law, the Company's Certificate of
Incorporation and the Company's By-Laws could make it more difficult for a third
party to acquire control of the Company, even if such change would be beneficial
to the Company's stockholders. The Company's Certificate of Incorporation
provides that the Company's board of directors may issue preferred stock with
superior rights and preferences without common stockholder approval. The
issuance of preferred stock could have the effect of delaying, deterring or
preventing a change in control. The Company's board of directors has also
adopted a "poison pill" rights plan that may further discourage a third party
from making a proposal to acquire the Company. In addition, in connection with
the issuance of the Company's preferred stock, the rights of the Company's
common stockholders may be limited in certain instances with respect to divided
rights, rights on liquidation, winding up and dissolution and certain other
matters submitted to a vote of the Company's common stockholders.
BECAUSE THE COMPANY'S EXECUTIVE OFFICERS, DIRECTORS AND AFFILIATED
ENTITIES OWN APPROXIMATELY 43.1% OF THE COMPANY'S CAPITAL STOCK, SUCH PERSONS
COULD CONTROL THE COMPANY'S ACTIONS IN A MANNER THAT CONFLICTS WITH THE
COMPANY'S INTERESTS AND THE INTERESTS OF THE COMPANY'S OTHER STOCKHOLDERS.
Currently, the Company's executive officers, directors and affiliated
entities together beneficially own approximately 43.1% of the outstanding shares
of common stock or equity securities convertible into common stock. As a result,
these stockholders, acting together, or in the case of the Company's preferred
stockholders, in certain instances, as a class, will be able to exercise control
over corporate actions requiring stockholder approval, including the election of
directors. This concentration of ownership may have the effect of delaying or
preventing a change in control, including transactions in which the Company's
stockholders might otherwise receive a premium for their shares over then
current market prices.
22
THE COMPANY'S STOCK PRICE IS HIGHLY VOLATILE, AND THEREFORE THE VALUE OF
AN INVESTMENT IN THE COMPANY MAY FLUCTUATE SIGNIFICANTLY.
The market price of the Company's common stock has fluctuated and will
continue to fluctuate as a result of variations in the Company's quarterly
operating results. These fluctuations may be exaggerated if the trading volume
of the Company's common stock is low. In addition, the stock market in general
has experienced dramatic price and volume fluctuations from time to time. These
fluctuations may or may not be based upon any business or operating results. The
Company's common stock may experience similar or even more dramatic price and
volume fluctuations which may continue indefinitely.
23
ITEM 2. PROPERTIES.
The Company owns no real property. From January 1995 to May 1999, the
Company leased 3,500 square feet of office space at 301 South State Street,
Newtown, Pennsylvania under two leases. In May 1999, the Company moved its
principal executive offices to 41 University Drive, Newtown, Pennsylvania. The
newly leased premises consist of approximately 14,204 square feet and the term
of the lease is one hundred and twenty-two (122) months.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
24
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to June 1996, there was no established market for the Company's
common stock. Since June 20, 1996, the common stock has traded on the Nasdaq
National Market (the "NNM") under the symbol "CGPI."
The following table sets forth the high and low bid information for the
common stock for each of the quarters in the period beginning January 1, 1999
through December 31, 2000 as reported on the NNM. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
Quarter Ended High Low
------------------------ ------ ------
March 31, 1999.......... $12.44 $8.00
June 30, 1999........... $11.25 $7.50
September 30, 1999...... $23.94 $9.13
December 31, 1999....... $24.56 $16.19
March 31, 2000.......... $30.38 $11.88
June 30, 2000........... $16.06 $7.50
September 30, 2000...... $9.91 $6.44
December 31, 2000....... $8.00 $2.75
As of March 15, 2001, the approximate number of holders of record of the
common stock was 119 and the approximate number of beneficial holders of the
common stock was 3,800.
The Company has never declared or paid any cash dividends on its common
stock. Except as set forth below, the Company intends to retain earnings, if
any, to fund future growth and the operation of its business. On May 12, 1999,
the Company consummated a $20.0 million financing through the issuance of its
Series D Cumulative Convertible Preferred Stock. As a result of such financing,
the Company has cumulative cash and common stock dividend obligations to the
holders of the Series D Cumulative Convertible Preferred Stock. Such financing
arrangement also limits the Company's ability to generally declare dividends to
its common stockholders. In addition, the Company's ability to generally declare
dividends to its common stockholders is further limited by the terms of its
credit facility with Silicon Valley Bank. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data set forth below with respect to
the Company's statement of operations data for each of the years in the
three-year period ended December 31, 2000, and with respect to the consolidated
balance sheet data at December 31, 1999 and 2000 are derived from and are
qualified by reference to the audited consolidated financial statements and the
related notes thereto of the Company found at "Item 14. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K" herein. The consolidated statement
of operations data for
25
the years ended December 31, 1996 and 1997 and with respect to the consolidated
balance sheet data as of December 31, 1996, 1997 and 1998 are derived from
consolidated audited financial statements not included in this Annual Report on
Form 10-K. The selected consolidated financial data set forth below should be
read in conjunction with and is qualified in its entirety by, the Company's
audited consolidated financial statements and related notes thereto found at
"Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K" and
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" which are included elsewhere in this Annual Report on Form 10-K.
Years Ended December 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Consolidated Statement (in thousands except for per share data)
of Operations Data: --------------------------------------------------------
Revenues:
Product sales ........................... $ -- $ -- $ 3,053 $ 15,211 $ 20,501
License revenues ........................ 400 325 400 100 530
Contract revenues ....................... -- 9 8 770 3,240
-------- -------- -------- -------- --------
Total revenues ............................. 400 334 3,461 16,081 24,271
Operating expenses:
Cost of product sales ................... -- -- 745 3,139 4,070
Research and development ................ 4,436 4,200 4,670 5,005 3,128
Selling, general and administrative ..... 2,527 6,096 10,600 23,180 25,746
-------- -------- -------- -------- --------
Operating loss ............................. (6,563) (9,962) (12,554) (15,243) (8,673)
Interest income ............................ 645 1,338 988 851 613
Interest expense ........................... -- -- -- (197) (15)
Other income (expense) ..................... -- -- -- (2) 9
-------- -------- -------- -------- --------
Loss before cumulative effect of
change in accounting principle .......... (5,918) (8,624) (11,566) (14,591) (8,066)
Cumulative effect of change in
accounting principle(1) ................. -- -- -- -- (764)
Net loss ................................... (5,918) (8,624) (11,566) (14,591) (8,830)
Net loss allocable to common
stockholders ............................ $ (6,638) $ (8,624) $(11,566) $(15,683) $(10,519)
Netloss per share allocable to common
stockholders before cumulative effect
of change in accounting principle:
Basic ................................... $ (1.74) $ (1.04) $ (1.35) $ (1.82) $ (1.12)
Diluted ................................. (1.72) (1.04) (1.35) (1.82) (1.12)
Net loss per share allocable to common
stockholders(2):
Basic ................................... $ (1.74) $ (1.04) $ (1.35) $ (1.82) $ (1.21)
Diluted ................................. (1.72) (1.04) (1.35) (1.82) (1.21)
Shares used in computing per share
amounts(2):
Basic ................................... 3,809 8,291 8,579 8,598 8,712
Diluted ................................. 3,864 8,291 8,579 8,598 8,712
- --------------------------------------------------------------------------------------------------------
26
As of December 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Balance Sheet Data: (in thousands)
--------------------------------------------------------
Cash, cash equivalents and short-term
investments ............................ $ 18,215 $ 22,771 $ 10,250 $ 14,367 $ 5,448
Total assets .............................. 18,437 23,165 14,740 18,563 10,431
Note payable, less current portion ........ -- -- -- 116 47
Accumulated deficit ....................... (17,739) (26,362) (37,928) (53,611) (64,130)
Total stockholders' equity ................ 17,592 20,708 9,281 13,607 5,264
(1) See Note 7 of Notes to Consolidated Financial Statements for information
concerning the cumulative effect of change in accounting principle.
(2) See Note 2 of Notes to Consolidated Financial Statements for information
concerning computation of net loss per share.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
- --------
The Company is a specialty pharmaceutical company focused on providing
innovative medical therapies to the dental market. The Company's first product,
Periostat, is a prescription pharmaceutical capsule that was approved by the FDA
in September 1998 as an adjunct to scaling and root planing, the most prevalent
therapy for periodontitis, to promote attachment level gain and to reduce pocket
depth in patients with adult periodontitis. The Company is marketing Periostat
to the dental community through its own professional dental pharmaceutical sales
force of approximately 120 sales representatives and managers. This sales force
also co-promotes Vioxx, a prescription non-sterodial anti-inflammatory drug
developed by Merck and Denavir, a prescription cold sore medication owned by
Novartis, although Novartis has terminated its co-promotion agreement with the
Company effective in April 2001, and the Company is actively seeking other
products to market to the dental community or directly to consumers.
The Company began operations in January 1992 and functioned primarily as a
research and development company until 1998. During this period, the Company
operated with a minimal number of employees, and substantially all
pharmaceutical development activities were contracted to independent contract
research and other organizations. Following FDA approval of Periostat in
September 1998, the Company significantly increased its number of employees,
primarily in the areas of sales and marketing. The Company continues to
outsource its research and development activities as well as its manufacturing
and distribution functions.
The Company has incurred losses each year since inception and had an
accumulated deficit of $64.1 million at December 31, 2000. The Company expects
to continue to incur losses in the foreseeable future from expenditures on drug
development, marketing, manufacturing and administrative activities.
Statements contained or incorporated by reference in this Annual Report on
Form 10-K that are not based on historical fact are "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements may be identified by the use of
forward-looking terminology such as "may," "will," "expect," "estimate,"
"anticipate," "continue," or similar terms, variations of such terms or the
negative of those terms. This Form 10-K contains forward-looking statements that
involve risks and uncertainties. The Company's business of selling, marketing
and developing pharmaceutical products is subject to a number of significant
risks, including risks relating to the implementation of the Company's sales and
marketing plans for Periostat, risks inherent in research and development
activities, risks associated with conducting business in a highly regulated
environment and uncertainty relating to clinical trials of products under
development. The success of the Company depends to a large degree upon the
market acceptance of Periostat by periodontists, dental practitioners, other
health care providers, patients and insurance companies. Other than Periostat,
which has been FDA approved for marketing in the United States and approved by
the Medicines Control Agency for marketing in the United Kingdom, there can be
no assurance that any of the Company's other product candidates will be approved
by any
28
regulatory authority for marketing in any jurisdiction or, if approved, that any
such products or Vioxx will be successfully commercialized by the Company. As a
result of these risks, and others expressed from time to time in CollaGenex's
filings with the Securities and Exchange Commission, the Company's actual
results may differ materially from the results discussed in or implied by the
forward-looking statements contained herein.
Results of Operations
- ---------------------
From its founding through the quarter ended September 30, 1998, the
Company had no revenues from sales of its own products. During the fourth
quarter of 1998, the Company achieved net product sales of $3.1 million
following the commercial launch of Periostat in November 1998. Most of the 1998
sales represented initial wholesale and retail stocking. During the year ended
December 31, 1999, the Company achieved net product sales of $15.2 million from
sales of Periostat. In addition, the Company generated $770,000 in contract
revenues from its two (2) co-promotion agreements (one (1) of which shall
terminate in April 2001) and $100,000 in license fees relating to the signing of
a distribution agreement for Periostat in Canada. During the year ended December
31, 2000, the Company achieved net product sales of $20.5 million from sales of
Periostat. In addition, in 2000 the Company generated $3.2 million in contract
revenues from its two (2) co-promotion agreements (one (1) of which shall
terminate in April 2001) and $530,000 in license and milestone fees from various
foreign distribution and marketing agreements for Periostat. This amount
included $397,000 of license revenues that were deferred upon the implementation
of Staff Accounting Bulletin ("SAB") 101, effective January 1, 2000. These
amounts were previously recognized as license revenues in prior years under the
historical revenue recognition policy prior to the adoption of SAB 101.
The Company realized a net loss in 2000 resulting primarily from higher
revenue offset by higher planned sales, marketing and administrative expenses
incurred during such period. Total operating expenses consist of the cost of
product sales, research and development expenses and selling, general and
administrative expenses. Cost of product sales consists primarily of direct
manufacturing expenses and royalties. Research and development expenses consist
primarily of funds paid to contract research organizations for the provision of
services and materials for drug development, ongoing manufacturing and
formulation enhancements and clinical trials. Selling, general and
administrative expenses consist primarily of personnel salaries and benefits,
direct marketing costs, professional and consulting fees, insurance and general
office expenses.
Years Ended December 31, 2000 and December 31, 1999
---------------------------------------------------
Revenues. The Company realized $24.3 million in net revenues during 2000
compared to $16.1 million during 1999. Revenues in 2000 included $20.5 million
in net sales of Periostat, $3.2 million in contract revenues, which were derived
from the Company's co-promotion of Vioxx and Denavir, and $530,000 in foreign
license and milestone revenues for Periostat. Revenues from Denavir accounted
for approximately $700,000 of such contract revenues. The Company has received a
thirty (30) day termination notice by letter dated March 14, 2001 from Novartis
Pharmaceuticals Corporation, the owner of Denavir, with respect to the Company's
co-promotion agreement with Novartis for Denavir. In accordance with SAB 101,
which was adopted in 2000, the 2000 licensing revenues of $530,000 were
attributable, in part, to the
29
recognition of up-front license fees received for various agreements which are
being recognized over the expected term of these agreements. License revenues in
2000 also included $397,000 that were recorded in earlier years prior to the
adoption of SAB 101 which were deferred as a result of the cumulative effect of
a change in accounting principle as of January 1, 2000. Licensing revenues in
1999 included $100,000 in connection with an agreement with Pharmascience, Inc.
pursuant to which Pharmascience Inc. will market Periostat in Canada pending
requisite regulatory approval. However, under SAB 101, licensing revenues
recognized in 1999 would have been $58,000.
Cost of product sales. Cost of product sales were $4.1 million, or 19.9%
of net product sales in 2000 compared to $3.1 million, or 20.6% of net product
sales in 1999. This decrease in costs of product sales as a percentage of net
product sales resulted primarily from the absence of trade allowances and price
increases for Periostat during 2000.
Research and development expenses. Research and development expenses
decreased to $3.1 million in 2000 from $5.0 million in 1999. This decrease
resulted primarily from fewer expenses related to Phase 3b clinical studies to
support future marketing activities for Periostat, decreased manufacturing and
formulation development work for Periostat tablets and reduced research and
development activities. Such decreases were partially offset by a $324,000
non-cash compensation charge incurred during the year ended December 31, 2000
related to accelerating the vesting on stock options granted to certain
non-employees in 1999. In 2000, the Company's expenditures for research and
development included, among other things, regulatory and consulting fees
associated with the Company's NDA for Periostat tablets submitted to the FDA as
well as applications submitted to the UK MCA for marketing approval of the
tablet formulation of Periostat in the United Kingdom, expenditures relating to
the ongoing Phase IV marketing studies of Periostat, as well as expenditures
incurred relating to a Phase I study of Metastat. Research and development
expenses for 1999 were primarily for Phase IV clinical studies to support the
future marketing activities of Periostat, ongoing manufacturing and formulation
development work for Periostat and research and development activities funded by
the Company at SUNY.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $25.7 million in 2000 from $23.2 million in
1999. This increase was mainly due to higher advertising and promotional
expenses for Vioxx pursuant to the Company's co-promotion agreement with Merck
and the initiation of a direct-to-consumer advertising test campaign for
Periostat which commenced in October 2000.
Other income/expenses. Interest income decreased from $851,000 for the
year ended December 31, 1999 compared to $613,000 for the year ended December
31, 2000. This decrease was due to lower balances in cash and short-term
investments during the year December 31, 2000. Interest expense for the year
ended December 31, 2000 was $15,000, compared to $197,000 for the year ended
December 31, 1999. This decrease was primarily due to the repayment of a $10.0
million short term note executed in connection with the Company's Financing (as
hereinafter defined) in May 1999. Such decrease for 2000 was offset by interest
expense related to the $219,000 note payable executed by the Company in April
1999.
30
Change in accounting principle. The Company recognized a $764,000 charge
during the year ended December 31, 2000 from the cumulative effect of a change
in accounting principle, effective as of January 1, 2000, upon the adoption of
SAB 101. This change in accounting principle primarily reflected the deferral of
up-front licensing revenues recognized in prior years. Under SAB 101, up-front
licensing fees must be recognized over the expected performance period of the
relevant agreements. Accordingly, at December 31, 2000, the Company has recorded
approximately $739,000 in deferred revenue which will recognized over the
expected performance period of each respective agreement.
Preferred stock dividend. Preferred stock dividends increased from $1.1
million during the year ended December 31, 1999 to $1.7 million during the year
ended December 31, 2000. Such preferred stock dividends, paid in shares of the
Company's Common Stock, were the result of the Company's obligations in
connection with the issuance of its Series D Stock (as hereinafter defined) in
May 1999.
Years Ended December 31, 1999 and December 31, 1998
---------------------------------------------------
Revenues. The Company realized $16.1 million in net revenues during 1999
compared to $3.5 million during 1998. Revenues in 1999 included $15.2 million in
net sales of Periostat and $870,000 in licensing and contract revenues. Revenues
from Denavir accounted for approximately $511,000 of such contract revenues. The
Company has received a thirty (30) day termination notice by letter dated March
14, 2001 from Novartis with respect to the Company's co-promotion agreement with
Novartis for Denavir. The 1999 licensing revenues of $100,000 were attributable
to a licensing agreement with Pharmascience, Inc. pursuant to which
Pharmascience, Inc., will market Periostat in Canada pending requisite
regulatory approval. Revenues in 1998 included a non-refundable $400,000
licensing fee from Laboratories Pharmascience under a licensing agreement
pursuant to which Laboratories Pharmascience was to market Periostat in France
pending requisite regulatory approval. Such agreement was subsequently
terminated.
Cost of product sales. Cost of product sales were $3.1 million or 20.6% of
net product sales in 1999, compared to $745,000 or 24.4% of net product sales in
1998. This improvement in gross margin resulted from the absence of launch trade
allowances in 1999 and lower royalty rates applicable to the higher sales
achieved in 1999 compared to 1998.
Research and development expenses. Research and development expenses
increased to $5.0 million in 1999 from $4.7 million in 1998. In 1999, research
and development expenses were primarily for Phase IV clinical studies to support
the future marketing activities of Periostat, ongoing manufacturing and
formulation development work for Periostat and research and development
activities funded by the Company at SUNY. Research and development expenses for
1998 consisted primarily of costs associated with the Company's amendment to its
NDA for Periostat, a Phase III clinical trial intended to support future
marketing activities for Periostat and certain pre-clinical studies for other
potential compounds under development.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $23.2 million in 1999 from $10.6 million in
1998. This increase was due primarily to higher selling and marketing expenses
for a full year of commercial activities in
31
Periostat in 1999 and the hiring of additional sales personnel as Periostat
sales commenced in the fourth quarter of 1998.
Other income/expenses. Interest income decreased from $988,000 in 1998 to
$851,000 in 1999. This decrease was due to lower balances in cash and short-term
investments as a result of normal operating activities. Interest expense for the
year ended December 31, 1999 was $197,000. This expense was primarily due to the
interest on the $10.0 million short term note executed by the Company in March
1999 which was repaid in connection with the Company's Financing (as hereinafter
defined) in May 1999.
Preferred stock dividend. Preferred stock dividends, paid in shares of the
Company's Common Stock, increased to $1.1 million during the year ended December
31, 1999 as a result of the Company's obligations in connection with the
issuance of its Series D Stock (as hereinafter defined) in May 1999.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Since its origin in January 1992, the Company has financed its operations
through private placements of preferred stock and common stock, an initial
public offering of 2,000,000 shares of common stock, which generated net
proceeds to the Company of approximately $18.0 million after underwriting fees
and related expenses, and a subsequent public offering of 1,000,000 shares of
common stock, which generated net proceeds to the Company of approximately $11.6
million after underwriting fees and related expenses. On May 12, 1999, the
Company consummated a $20.0 million financing (the "Financing") through the
issuance of its Series D Cumulative Convertible Preferred Stock (the "Series D
Stock"), which generated net proceeds to the Company of $18.5 million. The
issuance of the Series D Stock was approved by a majority of the Company's
stockholders at the Company's Annual Meeting of Stockholders on May 11, 1999. A
portion of the proceeds of such Financing were used to repay a $10.0 million
Senior Secured Convertible Note provided by one of the investors on March 19,
1999 in connection with the Financing. The remaining proceeds have been and will
be used for general working capital purposes.
The Series D Stock is convertible at any time into shares of common stock
of the Company at a current conversion price of $9.94 per common share, which
conversion price reflects a decrease from the initial conversion price of $11.00
per share as a result of the Company's Common Stock financing consummated on
March 12, 2001. The conversion price is not subject to reset except in the event
that the Company should fail to declare and pay dividends when due or the
Company should issue new equity securities or convertible securities at a price
per share or having a conversion price per share lower than the then applicable
conversion price of the Series D Stock. During the first three years following
issuance, holders of the Series D Stock will be entitled to receive dividends
payable in shares of fully registered common stock at a rate of 8.4% per annum.
Thereafter, dividends will be payable in cash at a rate of 8.0% per annum.
All or a portion of the shares of Series D Stock shall, at the option of
the Company (as determined by the Board of Directors), automatically be
converted into fully paid, registered and non-assessable shares of common stock,
if the following two conditions are met: (i) the last sale
32
price, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices on the Nasdaq is at least 200% of the conversion
price then in effect (as of March 15, 2001, $9.94 per share) for forty
consecutive trading days; and (ii) a shelf registration is in effect for the
shares of common stock to be issued upon conversion of the Series D Stock.
Without written approval of a majority of the holders of record of the Series D
Stock, the Company, among other things, shall not: (i) declare or pay any
dividend or distribution on any shares of capital stock of the Company other
than dividends on the Series D Stock; (ii) make any loans, incur any
indebtedness or guarantee any indebtedness, advance capital contributions to, or
investments in any person, issue or sell any securities or warrants or other
rights to acquire debt securities of the Company, except that the Company may
incur such indebtedness in any amount not to exceed $10.0 million in the
aggregate outstanding at any time for working capital requirements in the
ordinary course of business; or (iii) make research and development expenditures
in excess of $7.0 million in any continuous twelve month period, unless the
Company has reported positive net income for four consecutive quarters
immediately prior to such twelve month period.
At December 31, 2000, the Company had cash, cash equivalents and
short-term investments of approximately $5.4 million, a decrease of $9.0 million
from the $14.4 million balance at December 31, 1999. This decrease was primarily
attributable to the cash used to fund operations during 2000. In accordance with
investment guidelines approved by the Company's Board of Directors, cash
balances in excess of those required to fund operations have been invested in
short-term United States Treasury securities and commercial paper with a credit
rating no lower than A1/P1. The Company's working capital at December 31, 2000
was $5.3 million, a decrease of $7.7 million from December 31, 1999. This
decrease was primarily attributable to the cash used to fund operations during
2000.
In April 1999, the Company received $219,000 in proceeds from the issuance
of a note payable. The proceeds of such note were used to fund the purchase of
equipment, fixtures and furniture for the Company's newly leased corporate
offices in Newtown, Pennsylvania. The term of the note is three years at 9.54%
per annum, with monthly minimum payments of principal and interest.
On March 12, 2001, the Company consummated a private equity offering of
1,500,000 shares of Common Stock for an aggregate purchase price of $7.5
million, which generated net proceeds to the Company of approximately $6.9
million. Such proceeds will be used primarily for the Company's
direct-to-consumer advertising campaign and for general working capital
purposes. In addition, the investors in such financing were also issued a