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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, 2001
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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: $102,771,570 at March 15, 2002 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, 2002:
Class Number of Shares
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Common Stock, $0.01 par value 11,110,019
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 2002 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
TABLE OF CONTENTS
Item Page
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PART I 1. Business................................................ 1
2. Properties.............................................. 31
3. Legal Proceedings....................................... 31
4. Submission of Matters to a Vote of Security Holders..... 31
PART II 5. Market for the Company's Common Equity and Related
Stockholder Matters.................................. 32
6. Selected Consolidated Financial Data.................... 32
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 35
7A. Quantitative and Qualitative Disclosures about
Market Risk.......................................... 51
8. Financial Statements and Supplementary Data............. 51
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 52
PART III 10. Directors and Executive Officers of the Registrant...... 53
11. Executive Compensation.................................. 53
12. Security Ownership of Certain Beneficial Owners and
Management........................................... 53
13. Certain Relationships and Related Transactions.......... 53
PART IV 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.......................................... 54
SIGNATURES............................................................... 55
EXHIBIT INDEX............................................................ 57
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE..................................................... F-1
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PART I
ITEM 1 BUSINESS.
GENERAL
CollaGenex Pharmaceuticals, Inc. and subsidiaries is a specialty
pharmaceutical company currently focused on providing innovative medical
therapies to the dental and dermatology markets. Our first product,
Periostat(R), is an orally administered, prescription pharmaceutical product
that was approved by the United States Food and Drug Administration in September
1998 and is the first and only pharmaceutical to treat adult periodontitis by
inhibiting the enzymes that destroy periodontal support tissues. Periostat is
indicated as an adjunct to scaling and root planing, 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."
We market Periostat to the professional dental community in the United
States through our professional pharmaceutical sales force comprised of
approximately 120 sales representatives and managers. Our sales force also
markets Vioxx(R), a prescription non-steroidal anti-inflammatory drug (NSAID)
developed by Merck & Co., Inc. In October 2001, pursuant to an exclusive License
and Marketing Agreement with Atrix Laboratories, Inc., we also began to market
and sell Atridox(R), Atrisorb(R) FreeFlow and Atrisorb(R)-D, Atrix's products
for the treatment of adult periodontitis, to the United States dental market.
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. We are
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), our lead compound for the treatment of
metastatic cancer, were initiated in January 1998 under the sponsorship of the
National Cancer Institute. In Phase I clinical trials, Metastat demonstrated an
overall tumor response rate of 44% in patients with Kaposi's sarcoma, and the
National Cancer Institute has opened enrollment for a Phase II clinical trial to
continue to evaluate the safety and efficacy of Metastat in HIV-related Kaposi's
sarcoma.
In January 2002, we announced our plans to expand into the dermatology
market. In September 2001, we announced the results of a 59-patient,
double-blinded, placebo-controlled clinical trial designed to evaluate the
efficacy of Periostat to treat adult patients with acne. The results from this
trial revealed that the patients who were administered Periostat experienced a
greater than 50% reduction in the number of comedones, inflammatory lesions and
total lesions relative to baseline lesion counts, a statistically greater number
than in the placebo group. During 2002 we intend to continue the clinical
development of Periostat for the treatment of inflammatory acne and to initiate
a pilot clinical trial to evaluate the use of Periostat to treat rosacea, a
related dermatological condition that affects approximately 15 to 20 million
patients in the United States. We are actively seeking product licensing
opportunities to enhance our near-term offerings to the dermatology market and
in February 2002 we announced that we had
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licensed a new dermal and transdermal drug delivery technology called
Restoraderm(TM), which we intend to develop for dermatological applications.
Our core technology is licensed on an exclusive basis from the Research
Foundation of the State University of New York at Stony Brook, or SUNY. SUNY
also conducts research and development on other potential applications of the
core technology on a project basis.
The Company was incorporated in Delaware in January 1992 under the name
CollaGenex, Inc. We changed our name to CollaGenex Pharmaceuticals, Inc. in
April 1996. Our executive offices are located at 41 University Drive, Suite 200,
Newtown, Pennsylvania 18940, and our telephone number is (215) 579-7388.
Periostat(R), Metastat(R), Dermostat(R), Nephrostat(R), Osteostat(R),
Arthrostat(R), Rheumastat(R), Corneostat(R), Gingistat(R), IMPACS(TM), PS20(TM),
The Whole Mouth Treatment(TM), Restoraderm(TM) and Dentaplex(TM) are United
States trademarks of CollaGenex Pharmaceuticals, Inc. Periostat(R),
Nephrostat(R), Optistat(R), and Xerostat(R) are European Community trademarks of
CollaGenex Pharmaceuticals, Inc. Periostat(R), Nephrostat(R), Optistat(R),
Xerostat(R), IMPACS(R) and Dentaplex(R) are United Kingdom trademarks of our
wholly-owned subsidiary, CollaGenex International Limited. CollaGenex(R) and
PS20(R) are both European Community and United Kingdom trademarks of CollaGenex
International Limited. 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 CollaGenex Pharmaceuticals, Inc. or
any of our subsidiaries.
PRODUCTS
Periostat
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 scaling and root
planing, a mechanical procedure that removes 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 scaling and root planing 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
is
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intended to be taken orally by the patient between dental visits. Periostat's
mechanism of action is believed in part to be through the down-regulation of the
activity of collagenases, enzymes that belong to a broad class of enzymes known
as matrix metalloproteinases. Collagenase is excessively produced as a result of
inflammation resulting from bacterial infection in the gums. In September 1998,
the FDA granted United States marketing approval for Periostat as an adjunct to
scaling and root planing 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 1.5 million Periostat prescriptions have
been filled and over 35,000 dentists have written a Periostat prescription.
In December 2000 and February 2001, the United Kingdom Medicines Control
Agency and the FDA, respectively, granted marketing approval for our tablet
formulation of Periostat. In July 2001, we launched a new tablet formulation of
Periostat. The Periostat tablet formulation is easier to swallow and offers
manufacturing cost advantages over our capsule formulation of Periostat, which
has been discontinued. In August 2001, we were advised by the Department of
Health in the United Kingdom that Periostat tablets were placed on the Dental
Practitioners Formulary under the National Health Service, allowing patients in
the United Kingdom to receive Periostat via prescription by contributing only a
modest co-payment, or no co-payment at all.
We have applied for the registration of Periostat tablets with the European
Union Member States and Norway under the Mutual Recognition Procedure, with the
United Kingdom Medicines Control Agency acting as our Reference Member State.
Under the Mutual Recognition Procedure, once marketing approval for a
pharmaceutical is granted by one European Member State, such state then acts as
a Reference Member State and assists in expediting the review and approval of
the pharmaceutical in other European Member States.
In February 2002, we received provisional approval for the marketing of
Periostat from seven European Member States including Austria, Finland, Ireland,
Italy, Luxembourg, the Netherlands and Portugal. We expect to receive final
approval to market Periostat in these countries following our submission of
local language labeling based on the text approved under the Mutual Recognition
Procedure.
Submissions for approval of Periostat have also been made in Switzerland
and Israel. The regulatory authorities in Switzerland have requested additional
information. The regulatory authorities in Israel have approved Periostat for
sale in Israel as of March 2002. A submission was also made in 2001 to the
regulatory authorities in Oman.
Periostat tablets are manufactured for us by Pharmaceutical Manufacturing
Research Services, Inc., a contract manufacturing company. We intend to supply
Periostat tablets to our foreign marketing partners upon receipt of requisite
regulatory approvals, if at all, for distribution in countries other than the
United States and the United Kingdom.
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Vioxx
Pursuant to a Co-Promotion Agreement we executed with Merck in September
1999, we received the exclusive right to co-promote Vioxx to the dental
community. Vioxx is a prescription strength non-steroidal anti-inflammatory drug
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 us
upon sales of Vioxx to the dental community. The existing agreement with Merck
expires in 2002 and is renewable upon mutual agreement. We are currently
evaluating our options with respect to this agreement.
Atridox, Atrisorb FreeFlow and Atrisorb-D
Pursuant to the terms of an exclusive License and Marketing Agreement that
we executed with Atrix Laboratories, Inc. in August 2001, we obtained the right
to market, sell and distribute Atrix's proprietary dental products, Atridox,
Atrisorb FreeFlow and Atrisorb-D to the United States dental community. We
believe that these products generally complement Periostat in the treatment of
adult periodontal disease.
Pursuant to the terms of the License and Marketing Agreement, among other
things: Atrix will manufacture the products for us; we paid to Atrix a $1.0
million licensing fee to market such products; we have agreed to pay to Atrix
royalties on future net sales of the products each calendar year; we have
committed to no less than $2.0 million in advertising and selling expenses
related to the products during the fiscal year beginning January 1, 2002; we
have agreed to maintain, for a period of 24 months, a force of no fewer than
ninety (90) fulltime dental consultants, divisional and regional managers to
make sales and product recommendation calls on dental professionals; and we have
agreed that the products will be the subject of a specific number of detail
calls in the United States during 2002. We will also be required to make certain
minimum expenditures for advertising and promotional activities after 2002,
including: (i) the lesser of $4,000,000 or 30% of our contribution margin, as
defined in the agreement, relating to a specific Atrix product that we market,
and (ii) the lesser of $2,000,000 or 30% of our contribution margin, as defined
in the agreement, relating to a separate Atrix product that we market.
In addition, Atrix purchased 330,556 unregistered shares of our common
stock at a price of $9.08 per share.
The License and Marketing Agreement terminates incrementally with respect
to each Atrix product, upon each successive expiration date of the patent
protection afforded to such product. We may terminate the License and Marketing
Agreement at any time, with or without cause, upon 12 months prior written
notice to Atrix. Furthermore, either party may terminate the agreement upon the
occurrence of certain conditions, as more fully set forth in the License and
Marketing Agreement.
Atridox is a locally-applied anti-microbial therapy for the treatment of
adult periodontitis. Atridox uses Atrix's patented drug delivery technology,
Atrigel(R), for the targeted delivery of the
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antibiotic doxycycline, which has been shown to reduce the levels of bacteria in
the periodontal pocket. Atridox is a gel that is placed into affected
periodontal pockets by a dental professional and resorbs over a two week period.
In pivotal double-blinded, placebo-controlled clinical trials conducted by
Atrix, the administration of Atridox was shown to increase attachment level
between the gums and the teeth and decrease periodontal pocket depth in patients
with adult periodontitis.
Atrisorb FreeFlow is a guided tissue regeneration (GTR) barrier product
used in connection with gum surgeries. In periodontal surgery, a section of the
gums called a flap is cut away from the underlying bone structure to allow the
periodontist to repair the periodontal support structure. When the flap is
subsequently repositioned, a membrane barrier product such as Atrisorb FreeFlow
is placed between the flap and the bone to prevent the downgrowth of epithelial
tissues, which interferes with the re-attachment of the gums to the teeth.
Atrisorb-D is the first GTR barrier product to incorporate an antibiotic,
doxycycline, which has been shown to reduce the incidence of infections during
GTR procedures.
Dentaplex
In June 2001, we launched Dentaplex, a nutritional supplement specifically
formulated to help maintain optimal oral health. Based upon a review of the
market acceptance of Dentaplex, by United States retailers, we are currently
evaluating the future marketability of the product.
Denavir
Denavir is an FDA approved topical antiviral cream used for the treatment
of cold sores. We marketed Denavir to the dental community under a Co-Promotion
Agreement that we executed with SmithKline Beecham Consumer Healthcare in
October 1998, which agreement provided for certain payments by SmithKline
Beecham to us. Following the acquisition of SmithKline Beecham by Novartis,
Novartis terminated this Co-Promotion Agreement effective April 13, 2001. We no
longer co-promote Denavir.
SALES AND MARKETING
We market and sell our products in the United States through a dedicated
sales force comprised of approximately 120 sales representatives and managers.
We intend to market Periostat in foreign markets, upon receipt of all requisite
regulatory approvals, primarily through marketing and distribution partnerships
with companies in these markets. We currently have such agreements with foreign
companies, subject to requisite regulatory approvals, covering Japan, Italy,
Canada, Spain, Portugal, Greece, Israel, Austria and Switzerland, and have an
export marketing agreement for countries in the Middle East. In November 2001,
we terminated our distribution and marketing agreement for Germany with Hain
Diognostika GmbH due to Hain's failure to fulfil its obligations under the
agreement. We are seeking compensation from Hain based on the non-payment of
milestone fees due to CollaGenex according to the terms of the agreement. We
will continue to seek requisite regulatory approvals in Germany and another
marketing partner to replace Hain.
A capsule formulation of Periostat was approved by the United Kingdom
Medicines Control Agency in February 2000, and we launched a modest direct
marketing effort in the
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United Kingdom to dentists through our United Kingdom subsidiary, CollaGenex
International Limited. In December 2000 the United Kingdom Medicines Control
Agency approved a tablet formulation of Periostat and in June 2001, we applied
for the registration of Periostat tablets with the European Union Member States
and Norway under the Mutual Recognition Procedure, with the United Kingdom
Medicines Control Agency acting as our Reference Member State.
Under the Mutual Recognition Procedure, once marketing approval for a
pharmaceutical is granted by one European Member State, such state then acts as
a Reference Member State, and assists in expediting the review and approval of
the pharmaceutical in other European Member States.
In February 2002, we received provisional approval for the marketing of
Periostat from seven European Member States including Austria, Finland, Ireland,
Italy, Luxembourg, the Netherlands and Portugal. We expect to receive final
approval to market Periostat in these countries following our submission of
local language labeling based on the text approved under the Mutual Recognition
Procedure.
Submissions for approval of Periostat have also been made in Switzerland
and Israel. The regulatory authorities in Switzerland have requested additional
information. The regulatory authorities in Israel have approved Periostat for
sale in Israel as of March 2002. A submission was also made in 2001 to the
regulatory authorities in Oman.
In February 2002, we announced that we had appointed Dexcel-Dental, a
division of Dexcel-Pharma Limited, to handle the field selling of Periostat to
the dental profession in the United Kingdom and, upon receipt of final
regulatory approval, the Republic of Ireland.
Our 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.
United States
Our field sales organization is currently comprised of two regional
managers, eleven district managers and approximately 105 full-time equivalent
sales representatives. Each full-time equivalent sales representative 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 scaling and root planings performed
in their respective practices.
Our field sales organization currently details Periostat, Atridox, Atrisorb
FreeFlow, Atrisorb-D and Vioxx. Under the terms of our License and Marketing
Agreement with Atrix, we have committed to: (i) expend no less than $2.0 million
in advertising and selling expenses related to the Atrix products during the
fiscal year beginning January 1, 2002; (ii) maintain, for a period of 24 months,
a force of no less than ninety (90) full time dental consultants and divisional
and regional managers to make sales and product recommendation calls on dental
professionals; and (iii) making the Atrix products the subject of a specific
number of detail calls in the United States during 2002. We will also be
required to make certain minimum expenditures for advertising and promotional
activities after 2002, including: (i) the lesser of
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$4,000,000 or 30% of our contribution margin, as defined in the agreement,
relating to a specific Atrix product that we market, and (ii) the lesser of
$2,000,000 or 30% of our contribution margin, as defined in the agreement,
relating to a separate Atrix product that we market.
We believe that our sales effort is distinguished from other dental sales
forces by our focus on education and the clinical benefits of pharmaceutical
dentistry, a new approach to treating dental diseases. Accordingly, we produce
educational marketing materials, detail aids and product samples that are used
extensively by our representatives in their presentations to dentists. Clinical
reprints and video presentations are also provided. We believe that peer-to-peer
communications are vital to increasing the acceptance of Periostat and,
therefore, we arrange speaking engagements and teleconferences where Periostat
advocates share their experiences with other dental professionals.
Sales training is an important component of our 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 and medical product line and
leverage our sales and marketing organization, we are actively seeking to
in-license or acquire other high-quality therapeutic dental and medical
products.
United States Direct-to-Consumer Advertising Campaign
Direct-To-Consumer, or DTC, advertising 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.
When we conducted certain market research during 2000, we 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. Accordingly,
following the successful completion in January 2001 of a three-month, two-city
test to evaluate the impact of DTC advertising on the growth of Periostat
prescriptions, we expanded our DTC campaign to a number of cities across the
country. Approximately 60% of the prescribing base we had at the beginning of
2001 was exposed to between two and six months of DTC advertising during 2001.
Prescription growth in the cities exposed to DTC advertising was markedly higher
than those cities that were not exposed to DTC advertising, and we intend to
continue DTC advertising during 2002.
International
We are establishing relationships with key partners to market and sell
Periostat internationally, upon receipt of the requisite foreign regulatory
approvals. In 1996, we 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, we 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 withdrawn the Marketing Authorization for
Approval in Italy, and Italy was included under the
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pan-European Mutual Recognition Procedure, which we filed in June 2001. In
February 2002, we received provisional approval to market Periostat in Italy. As
with our other marketing and distribution agreements with European partners, it
is our intent to supply Roche with finished product and our existing agreement
with Roche will be modified accordingly.
In July 1998, we executed a licensing agreement with Laboratoires
Pharmascience S.A. 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 we received notice from Laboratories
Pharmascience terminating the 1998 license agreement. After negotiation, the
parties mutually agreed to discontinue their relationship. We are actively
seeking a partner to market and distribute Periostat in France, upon receipt of
requisite regulatory approvals in such region.
In October 1998, we announced that a Marketing Authorization Application
had been filed with the United Kingdom Medicines Control Agency with respect to
Periostat. In February 2000, the United Kingdom Medicines Control Agency granted
marketing approval for Periostat for the adjunctive treatment of chronic adult
periodontitis. On May 2, 2000, we announced that we had filed another Marketing
Authorization Application with the United Kingdom Medicines Control Agency
seeking marketing approval of our 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 Marketing Authorization
Applications was filed with the United Kingdom Medicines Control Agency in
February 2001 and formed the basis for our application for approval of Periostat
under the European Mutual Recognition Procedure, which we filed in June 2001.
In February 2002, we received provisional approval for the marketing of
Periostat from seven European Member States including Austria, Finland, Ireland,
Italy, Luxembourg, the Netherlands and Portugal. We expect to receive final
approval to market Periostat in these countries following our submission of
local language labeling based on the text approved under the Mutual Recognition
Procedure.
We cannot be certain that we will achieve other foreign regulatory
approvals or will be successful in marketing Periostat in the United Kingdom or
other European countries.
We executed a licensing agreement with Pharmascience Inc. 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 active review by the Canadian authorities.
On May 2, 2000, we announced that we 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
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Greece, pending requisite regulatory approval. Following the provisional
approval of Periostat in Portugal, ISDIN S.A. continues to work with the
Portuguese authorities to complete the requisite final regulatory approvals to
launch Periostat during 2002. ISDIN S.A. is also providing assistance in
connection with the refiling of our regulatory submission in Spain.
On June 9, 2000, we announced that we 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. Periostat has
received provisional approval under the Mutual Recognition Procedure for
marketing in Austria, and Willvonseder & Marchesani is working to launch
Periostat in 2002, subject to the receipt of final regulatory approval. In
addition, we are working with Karr Dental to provide additional requested
information to regulatory authorities in Switzerland in connection with our
submission for regulatory approval in Switzerland.
On August 9, 2000, we announced that we 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. Showa continues to work with the regulatory
authorities in Japan to establish the appropriate clinical development program
in order to gain regulatory approval for Periostat in Japan. In connection
therewith, Showa intends to conduct a study during 2002 to establish that the
pharmacokinetics of Periostat are similar in Japanese and Caucasian populations.
On August 24, 2000, we announced that we had executed an agreement for the
marketing and distribution of Periostat in Israel with Taro International Ltd.,
a wholly-owned subsidiary of Taro Pharmaceutical Industries Limited, an Israeli
company, pending requisite regulatory approval. Such agreement provides for the
payment of milestone fees to us associated with the regulatory approvals of
Periostat, if any. In February 2002, the Israeli authorities notified Taro with
respect to the provisional approval of Periostat in Israel. Final confirmation
of approval was obtained in March 2002.
On January 30, 2001, we announced that we had signed an exclusive Middle
East Export Marketing Agreement with Pharma Med Inc. 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. A regulatory
filing has been made with the authorities in Oman.
On February 11, 2002, we announced that we have appointed Dexcel-Dental, a
division of Dexcel-Parma Limited, to handle the field selling of Periostat
tablets to the professional dental market in the United Kingdom and, upon
receipt of final regulatory approval, the Republic of Ireland.
MANUFACTURING, DISTRIBUTION AND SUPPLIERS
In 1995, we entered into a supply agreement with Hovione International
Limited pursuant to which the active ingredient in Periostat, doxycycline, is
supplied to us by Hovione from its offshore facilities. Hovione supplies a
substantial portion of the doxycycline used in the United
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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,
pursuant to an addendum to that agreement, the term was extended to May 14, 2006
and thereafter automatically renews 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. We rely on Hovione as
our sole supplier of doxycycline, and have no back-up supplier at this time.
We historically relied on a single third-party contract manufacturer,
Applied Analytical Industries, Inc., to produce Periostat in a capsule
formulation. AAI served notice of its intent to terminate its agreement to
supply Periostat capsules to us as of November 2001. In an effort to capitalize
on certain manufacturing cost advantages, in July 2001, we launched our new
tablet formulation of Periostat, which has now replaced our capsule formulation
of Periostat.
On September 26, 2000, we entered into a Service and Supply Agreement with
a contract manufacturer, Pharmaceutical Manufacturing Research Services, Inc.,
for such tablet formulation for Periostat, and we are, therefore, no longer
dependent upon, nor do we utilize, AAI. Our agreement with Pharmaceutical
Manufacturing Research Services has an initial term of three years, during which
time we have committed to certain minimum needs, and Pharmaceutical
Manufacturing Research Services 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. We have
fulfilled our initial purchase orders with Pharmaceutical Manufacturing Research
Services and expect to make certain purchases through 2002 to take advantage of
volume price discounts. Pharmaceutical Manufacturing Research Services is
required to comply with good manufacturing practices, or GMP requirements.
In November 1998, we executed a Distribution Services Agreement with Cord
Logistics, Inc., pursuant to which Cord acts as our 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 our sales force and various customer
and financial support services to us, 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. We negotiated a three-year extension of such agreement having
similar terms to the original agreement with an effective date of March 1, 2002.
In February 2002, we executed a Wholesale Service Agreement effective
November 2001 with National Specialty Services, Inc., pursuant to which National
Specialty Services acts as our non-exclusive authorized distributor of Atridox,
Atrisorb FreeFlow and Atrisorb-D. Under this
10
agreement, National Specialty Services will also provide certain additional
services, including marketing, sales detail report production, contract
administration and chargeback processing. The Wholesale Service Agreement has an
initial term of three years and shall renew automatically for successive
one-year periods unless notice of termination is provided by either party ninety
(90) days prior to expiration.
We cannot be certain that we 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 we are unable to obtain sufficient
quantities of doxycycline or Periostat on commercially reasonable terms, or in a
timely manner, or if our suppliers fail to comply with good manufacturing
practices, or GMP, or if our distributors are unable to ship or support our
products, our business, financial condition and results of operations may be
materially adversely affected. See "--Government Regulation."
CUSTOMERS
During 2001, net product sales to each of the McKesson Drug Company, Bergen
Brunswig Drug Company, Cardinal Health, Inc. and Walgreens, Inc. accounted for
28%, 15%, 13% and 10%, respectively, of our aggregate net product sales.
RESEARCH AND DEVELOPMENT
Our research and development activities are conducted primarily by third
parties, such as contract research organizations and 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, our lead compound for treating metastatic
cancer.
On October 18, 2000, we announced that we had received a Phase I Small
Business Technology Transfer 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 our compounds known as IMPACS
(Inhibitors of Multiple Proteases and Cytokines) for the prevention and
treatment of acute lung injury.
Major research programs currently being conducted at CollaGenex include:
(i) the clinical development of the sub-antimicrobial dose of doxycycline
commercialized as Periostat for the treatment of inflammatory acne, rosacea and
ocular rosacea (blepharitis); (ii) the development of a "once-a-day" formulation
of Periostat; and (iii) limited support for the conduct of exploratory studies
in the utility of Metastat (COL-3) as a treatment for soft tissue sarcoma and
periodontitis.
The clinical development of Periostat in acne, rosacea and blepharitis
remains exploratory and programs will be developed during 2002 following
discussions with the FDA regarding the requirements to be fulfilled for the
submission of a supplemental new drug application for any or all of the
potential clinical indications. No trials are presently underway; however,
during 2002, we anticipate that the following activities will be initiated: (i)
a pilot study in rosacea, utilizing approximately 120 patients; (ii) a Phase III
study in inflammatory acne, utilizing approximately 200 patients; and (iii) an
exploratory study in blepharitis, utilizing
11
approximately 60 patients. It is unlikely that these studies will yield
meaningful results until 2003, however, based on anecdotal reports and the
results from the preliminary clinical study in inflammatory acne carried out in
2000 and 2001, we anticipate that Periostat will demonstrate clinical efficacy
for all three indications. It is premature to determine whether such efficacy
will be sufficient to achieve statistical significance or to provide the basis
for a regulatory filing.
The development of the once-a-day formulation of Periostat is being
conducted through a development agreement with an external contractor. We
anticipate that the first formulations arising from this research will be
administered to human volunteers during 2002; however, because little is known
about the absorption of doxycycline from the gastro-intestinal tract, these
studies will be experimental in nature and the results of these studies will
define the next phase of the development program. We do not anticipate that a
final formulation will be available for clinical testing until 2003 or beyond,
if ever.
Metastat, our antiangiogenesis drug, continues development under the
auspices of a cooperative research and development agreement, or CRADA, with the
National Cancer Institute, which was extended in February 2002 for an additional
two years. We are responsible for providing a formulated, encapsulated version
of Metastat to support this clinical study. A sufficient quantity of Metastat
was produced in 2001 to support the National Cancer Institute's development
program as it is currently proposed. Two studies are actively recruiting
patients. A Phase I/II study in astrocytoma and glioblastoma (both brain
cancers) is currently recruiting patients. Such early studies are carried out in
patient populations with severe refractory disease and rarely provide evidence
of efficacy. Based on the positive results from the Phase I study carried out in
Kaposi's sarcoma, the AIDS Malignancy Consortium of the National Cancer
Institute is sponsoring a randomized, two-dose Phase II study in Kaposi's
sarcoma. This study has currently recruited approximately 50% of the
approximately 70 planned patients. Initial indications suggest that the drug is
affording disease modifying efficacy in some patients, with early reports of
both partial and complete responses. However, the study is blinded and it is not
yet possible to determine whether there is a dose response and/or the drug has
sufficient efficacy to justify the conduct of a Phase III clinical study.
During 2001, we submitted two investigational new drug applications to the
FDA for the conduct of exploratory clinical studies with COL-3 (the active
ingredient in Metastat) in the treatment of cardiopulmonary bypass patients and
the treatment of adult periodontitis. Both are on clinical hold pending the
submission to the FDA of additional information. In order to help provide the
requested information, we conducted a Phase I, ascending dose trial with COL-3
in normal human volunteers in order to establish the maximum tolerated dose
which could be supported in the investigational new drug application-based
exploratory studies. While the National Cancer Institute is carrying out studies
with 50 mg and 100 mg of COL-3 per day as the proposed efficacious dose, our
Phase I study suggested that the maximum tolerated dose may be as low as 20 mg
per day. We anticipate that the clinical hold will be released during 2002 and
exploratory clinical studies will be carried out by us with respect to
periodontitis, soft-tissue sarcoma and possibly cardiopulmonary bypass patients.
We do not know whether the drug will exhibit significant efficacy in these
indications to justify further clinical investigation, particularly if the dose
is significantly limited.
12
We have not developed forecasts for the sale of products arising from the
commercialization of COL-3, nor do we anticipate spending significant resources
on the development of COL-3 until it is clear from the studies being carried out
with National Cancer Institute or other sources of external funding that the
drug has a tolerable safety profile and a high likelihood of clinical and
commercial success.
As of December 31, 2001, we had two products or product candidates in
various stages of clinical trials. Completion of clinical trials may take
several years or more, but the length of time can vary substantially according
to the type, complexity, novelty and intended use of a product candidate. In
2001, we completed a pilot trial of Periostat in inflammatory acne, and obtained
significant results, encouraging us to work towards the development of a
definitive clinical trial plan for an indication for Periostat for this
application. We are planning to initiate additional clinical trials for
Periostat in acne patients during 2002, pending FDA review and agreement
regarding protocols and end-points. We also initiated and completed several
Phase IV studies of Periostat in dental applications. Phase IV studies are
designed to help support product marketing and are not typically designed to
provide data suitable for submission to the FDA for a new indication for the
product. We intend to continue the Phase IV development of Periostat in 2002.
Also in 2001, the National Cancer Institute initiated Phase I/II trials of
COL-3 (Metastat) in patients with astrocytoma and glioblastoma and a Phase II
study in patients with HIV-related Kaposi's sarcoma. These studies remain
ongoing in 2002. The clinical component of these studies is completely funded by
National Cancer Institute funds, except for a nominal payment to the
investigators from us to encourage enrollment. The time to completion of these
studies will depend on the rate of patient enrollment, which is difficult to
predict with any certainty. However, it is unlikely that either of these studies
will be completed during 2002.
CMR International estimates that clinical trials in our franchise areas are
typically completed over the following timelines:
ESTIMATED
COMPLETION
CLINICAL PHASE PERIOD
-------------- ------
Phase I 1 - 2 years
Phase II 2 - 3 years
Phase III 2 - 3 years
Upon successful completion of the pilot and Phase II trials we will assess
the data obtained and make a decision on whether to pursue Phase III trials for
any indication studied in Phase II or pilot studies. Upon successful completion
of Phase III trials, we intend to submit the results to the FDA to support
regulatory approval of COL-3. However, we cannot be certain that any of our
products will prove to be safe or effective, will receive regulatory approvals,
or will be successfully commercialized.
The duration and the cost relating to preclinical testing and clinical
trials may vary significantly over the life of a project. Our joint development
arrangement for COL-3 with the
13
National Cancer Institute may also result in variability in our development
costs. We closely monitor our research and development costs in order to ensure
that our investment is consistent with the return we predict from each project.
Technology
Our 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 us to pharmaceutically modulate the activity of matrix
metalloproteinases. Matrix metalloproteinases 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
matrix metalloproteinases and a group of naturally occurring biomolecules called
tissue inhibitors of metalloproteinases, which modulate the level of matrix
metalloproteinase 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.
Our 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 matrix metalloproteinase 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. Our 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. We have conducted, and are currently conducting, Phase IV clinical
studies to support future marketing activities of Periostat.
14
Our 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 potential in a number of pre-clinical models
of excessive connective tissue breakdown. Our 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
We are 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 scaling and root planing in institutionalized geriatric patients, the
evaluation of Periostat as an adjunct to scaling and root planing in patients
with Type I and Type II diabetes and the use of Periostat in a population of
smokers. To extend the possible therapeutic use of Periostat beyond the oral
cavity, we and our 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. Of these studies only the posterior
blepharitis study is being funded by us.
A Phase IV clinical trial conducted at the University of Pittsburgh Dental
School, the results of which were announced by us in October 2000, demonstrated
significant clinical benefit in patients with severe generalized periodontitis
who were administered Periostat in conjunction with a course of repeated dental
cleaning, above and below the gum-line compared to the same therapy plus a
placebo.
In January 2002, we announced plans for expansion into the dermatology
market. On October 1, 2001, we announced the clinically and statistically
significant results of a six-month, 59-patient clinical trial designed to
evaluate the efficacy of Periostat for the treatment of patients with moderate
acne.
The results showed that the patients receiving Periostat experienced more
than a 50% mean reduction in comedones and inflammatory lesions from baseline
levels. Patent applications for Periostat to treat acne have been filed with the
U.S. Patent and Trademark Office.
The Periostat acne clinical trial was a multi-center, placebo-controlled,
double-blind study chaired by Dr. Robert Skidmore, Chief of Dermatology at the
University of Florida
15
Medical Center, and was also conducted by Dr. Rodney Kovach, Chief of
Dermatology at West Virginia University Health Sciences Center. The results
revealed statistically and clinically significant benefits to patients receiving
Periostat for all three of the pre-established primary endpoints: change in
total comedones, total inflammatory lesions and total lesion counts.
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 us at two major universities
suggest that several of our 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 matrix
metalloproteinases 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 us exhibited an ability to inhibit
metastasis.
In October 1996, we executed a letter of intent with the National Cancer
Institute to formalize a collaborative research and development agreement
pursuant to which the National Cancer Institute agreed to perform pharmacology,
toxicology and Phase I clinical trials using our lead compound for the
prevention of cancer metastasis, Metastat.
In June 1997, we announced that we had formally extended our Collaboration
Agreement with the National Cancer Institute with respect to the development of
Metastat. On December 5, 1997, we announced that the National Cancer Institute
had filed an investigational new drug application for Metastat. In January 1998,
we initiated Phase I clinical trials with respect to Metastat. Such studies were
sponsored by the National Cancer Institute pursuant to our Collaboration
Agreement with the National Cancer Institute. In February 1999, we 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,
we 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 National Cancer Institute advised us that
it believed that the level of photosensitivity, although manageable, could limit
the commercial viability of Metastat. However, the National Cancer Institute
also advised us 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 was initiated in the first half of 2001. Results from
the two initial Phase I studies of Metastat in refractory solid tumors and
refractory metastatic cancer demonstrated
16
limited disease stabilization, with one patient, suffering from an
hemangioendothelioma (an unusual type of lung tumor), remaining on Metastat for
over two years without progressive disease. The studies established a maximum
tolerated dose, with phototoxicity proving to be the dose-limiting toxicity.
On May 18, 2000, we announced positive findings from an 18-patient,
National Cancer Institute 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 National
Cancer Institute has elected to continue testing Metastat in Phase II clinical
trials. This trial is an open-label, two-dose study to establish clinical
efficacy in patients with HIV-related Kaposi's sarcoma. The trial began
recruitment in summer 2001 and presently is approximately 50% recruited.
Preclinical and Other Research and Development Activities
We have 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, we have 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
concluded in May 2001.
We receive certain proprietary rights to inventions or discoveries that
arise as a result of this research. Our current research and development
objective is to develop additional products utilizing our IMPACS technology,
preferably in conjunction with development partners.
In February 2002 we announced that we had licensed a dermal and transdermal
drug delivery technology, named Restoraderm(TM), from its inventor. Restoraderm
is designed to enhance the dermal delivery of a variety of active ingredients
and we intend that it will form the basis for a portfolio of topical
dermatological pharmaceuticals.
The Restoraderm technology is based on the ability of certain lipid
compositions to enhance the natural skin barrier and facilitate the dermal and
transdermal delivery of known active ingredients. The Restoraderm technology is
currently still under development, and we anticipate that the first products to
be developed using the technology will be available in late 2002. In exchange
for the rights to the technology, we will pay the inventor milestone fees upon
the achievement of certain objectives as well as royalties on future sales of
products based on the technology.
Our research and development expenditures were approximately $5.0 million,
$3.1 million and $3.8 million in 1999, 2000 and 2001, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations."
17
PATENTS, TRADE SECRETS AND LICENSES
Our success will depend in part on patent and trade secret protection for
our technologies, products and processes, and on our 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.
We depend on our license from the Research Foundation of the State of New
York at Stony Brook for all of our core technology. The SUNY License grants us
an exclusive worldwide license to make and sell products employing tetracyclines
that are designed or utilized to alter a biological process. Thirty (30) United
States patents and three (3) United States patent applications held by SUNY are
licensed to us under the SUNY License. Three (3) of the thirty (30) 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-eight (28) other United States patents relate to chemically modified
tetracyclines, or CMTs, and compositions of certain CMTs with anti-proteinase
properties, including anti-gelatinase, anti-membrane-type metalloproteinase,
anti-collagenase, and anti-elastase properties and methods of use of
tetracyclines to reduce bone loss and skeletal muscle wasting; and methods of
use of tetracyclines to enhance bone growth and promote synthesis in skeletal
muscle, inhibit protein glycosylation, inhibit excess phospholipase A2
activity/production, inhibit endogenous production of nitric oxide (NO), enhance
endogenous production of interleukin 10, reduce dental plaque adhesion, and
inhibit or reduce pulmonary neutrophil infiltration (or accumulation). 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. Seventy six (76) patents
have been issued in foreign countries. All of SUNY's United States and foreign
patents expire between 2004 and 2018. Our 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 we 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 our failure to make timely payments,
reimbursements or reports, if the failure is not cured by us within 90 days. The
termination of the SUNY License, or the failure to obtain and maintain patent
protection for our technologies, would have a material adverse effect on our
business, financial condition and results of operations.
18
One of the United States patents and a corresponding Japanese patent
application licensed to us under the SUNY License are owned jointly by SUNY and
a Japanese company. These patent rights, which expire in 2012, cover particular
CMTs (the "Jointly Owned CMTs") that were involved in research activities
between SUNY and the Japanese company. The Japanese company may have exclusive
rights to these Jointly Owned CMTs in Asia, Australia and New Zealand and may
have a non-exclusive right to exploit these Jointly Owned CMTs in other
territories. These Jointly Owned CMTs are not involved in our Periostat product
but could, in the future, prove to be important for one or more of our other
potential applications of its technology. If we 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 us, we: (i) issued to SUNY
78,948 shares of common stock; and (ii) have 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 we have a fully paid, non-exclusive license.
In addition to the patents and patent applications licensed from SUNY which
represent the core technology, we own additional technology for which
applications for United States patents have been filed and have been issued. In
this regard, we report the existence of an issued patent for a
toothpaste/mouthwash formulation for the amelioration of dentin
hypersensitivity. Furthermore, we report pending applications covering: (i) new
tetracycline derivatives having increased lipophilicity; and (ii) methods of
treating acne.
We intend to enforce our patent rights against third-party infringers. Due
to the general availability of generic tetracyclines for use as antibiotics, we
could become involved in infringement actions, which could entail substantial
costs to us. 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 our other activities.
Our patent positions, like those of other pharmaceutical firms, are
generally uncertain and involve complex legal and factual questions.
Consequently, as to the patent applications licensed to us, even though we
currently prosecute such patent applications with United States and foreign
patent offices, we do 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 published or until patents issue, and since
publication of discoveries in the scientific and patent literature tends to lag
behind actual discoveries by several months, we cannot be certain that we were
the first creator of inventions covered by pending patent applications or that
we were the first to file patent applications for such inventions.
There can be no assurance that patent applications to which we hold rights
will result in the issuance of patents, that any patents issued or licensed to
us will not be challenged and held to be invalid, or that any such patents will
provide commercially significant protection to our technology, products and
processes. In addition, there can be no assurance that others will not
19
independently develop substantially equivalent proprietary information not
covered by patents to which we own rights or obtain access to our know-how, or
that others will not be issued patents which may prevent the sale of one or more
of our products, or require licensing and the payment of significant fees or
royalties by us to third parties in order to enable us to conduct our business.
In the event that any relevant claims of third-party patents are upheld as valid
and enforceable, we could be prevented from selling our 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 us. Our failure to obtain these licenses would have a
material adverse effect on our business, financial condition and results of
operations.
Our success is also dependent upon know-how, trade secrets, and the skills,
knowledge and experience of our scientific and technical personnel. We require
all employees to enter into confidentiality agreements that prohibit the
disclosure of confidential information to anyone outside the Company. In
addition, we seek to obtain such agreements from our consultants, advisors and
research collaborators. There can be no assurance that adequate protection will
be provided for our trade secrets, know-how or other proprietary information in
the event of any unauthorized use or disclosure. We occasionally provide
information and chemical compounds to research collaborators in academic
institutions, and request 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 us 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 us could have a material
adverse effect on our 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 products we
develop and market. In the United States, the FDA regulates Periostat and our
products in development as drugs under the Federal Food, Drug, and Cosmetic Act
and implementing regulations. The FDA regulates Atrisorb FreeFlow and Atrisorb-D
as medical devices under the Food, Drug and Cosmetic Act and implementing
regulations. Failure to comply with FDA requirements may subject us 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.
Our products in development are drugs. The steps required before a drug may
be marketed in the United States include:
o pre-clinical laboratory tests, animal studies, and formulation
studies;
20
o submission to the FDA of an investigational new drug exemption for
human clinical testing, which must become effective before human
clinical trials may begin;
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 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; and
o FDA review and approval of the new drug application.
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 investigational new drug exemption, which must become effective before
human clinical trials may begin. An investigational new drug exemption
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 investigational new drug exemption. In that case,
the investigational new drug exemption sponsor and the FDA must resolve any
outstanding FDA concerns or questions before clinical trials can proceed.
Submission of an investigational new drug exemption 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 investigational new drug
exemption 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. We cannot
guarantee that Phase 1, Phase 2, or Phase 3 testing for our 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, we, 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.
21
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 a new drug
application 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 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 FDA approved our new drug application
for Periostat in 1998; we 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 we can market Periostat for additional indications now being
evaluated, we will be required to obtain an additional FDA approval.
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 new drug application for Periostat, the FDA has requested a
postmarket animal study related to long-term dosing and carcogenicity, which was
completed in 2000.
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.
Approved and cleared drugs and medical devices remain subject to
comprehensive regulation by the FDA while they are being marketed. The drug and
medical device regulatory schemes differ in detail, but they are essentially
similar. For example, marketers of approved and cleared drugs and medical
devices 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. Also, the FDA does not
permit a manufacturer to market or promote an approved or cleared drug product
or medical device for an unapproved or uncleared use. Also, quality control and
manufacturing procedures must continue to conform to the FDA's requirements for
Good Manufacturing Practices (for drugs) or Quality Systems Regulation (for
medical devices) after approval. Accordingly, manufacturers must continue to
expend time, money, and effort in the area of production and quality control to
maintain compliance with these and other aspects of regulatory compliance. The
FDA periodically inspects manufacturers to assess compliance with manufacturing
and other requirements. We buy bulk active ingredient for Periostat and our
products in development from third party suppliers and finish the products in
third party manufacturing facilities. The other products we market, Vioxx,
Atridox, Atrisorb FreeFlow, and Atrisorb-D, are provided by suppliers. Our
failure, or the failure of our suppliers, to comply with FDA requirements could
disrupt production and subject us to administrative or judicial sanctions.
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In addition to the applicable FDA requirements, we are 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. We have filed for and subsequently
received approval from the United Kingdom Medicines Control Agency for the
marketing of Periostat tablets in the United Kingdom. Such application was filed
with the United Kingdom acting as a Reference Member State. In June 2001, our
wholly-owned subsidiary, CollaGenex International Limited, completed the
official filings for the registration of Periostat tablets with the European
Union Member States and Norway. Under the Mutual Recognition Procedure, once
marketing approval for a pharmaceutical is granted by one European Member State,
such state then acts as a Reference Member State, and assists in expediting the
review and approval of the pharmaceutical in other European Member States.
In February 2002, we received provisional approval for the marketing of
Periostat from seven European Member States including Austria, Finland, Ireland,
Italy, Luxembourg, the Netherlands and Portugal. We expect to receive final
approval to market Periostat in these countries following our submission of
local language labeling based on the text approved under the Mutual Recognition
Procedure.
Dentaplex, our nutritional supplement, is specifically formulated to help
maintain oral health, as a dietary supplement. Dietary supplements are regulated
by the FDA under the Food, Drug, and Cosmetic Act and implementing regulations.
Although dietary supplements generally do not require the FDA approval prior to
marketing, the FDA regulates the safety, promotion, and labeling of dietary
supplements. To qualify as a dietary supplement, a product must meet a number of
requirements, e.g., it must contain a dietary ingredient, it must be labeled as
a dietary supplement, and it must meet requirements for safety. Dietary
supplements may be marketed with claims that they are intended to affect the
structure or function of the body, but, with narrow exceptions, they may not be
marketed with claims that they will diagnose, treat, prevent, cure, or mitigate
a disease. The distinction between claims that a product affects the structure
and function of the body and claims that a product diagnoses, treats, cures,
mitigates, or prevents disease can be difficult to apply in practice, and the
FDA has been active in notifying companies that because their claims are not
acceptable, their products are drugs rather than dietary supplement. We can not
be sure that the FDA will not assert that Dentaplex does not meet the
requirements for dietary supplement status, which could result in FDA
enforcement action or in our having to make changes to the product or its
promotion or labeling, or withdraw it from the market.
COMPETITION
The pharmaceutical industry is subject to intense competition as well as
rapid and significant technological change. We expect 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.
23
We believe 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. We believe
that all other therapies focus on temporarily removing the bacteria associated
with periodontitis. Periostat is a prescription pharmaceutical tablet indicated
as an adjunct to scaling and root planing to promote attachment level gain and
to reduce pocket depth in patients with adult periodontitis that is taken by the
patient between dental visits. We believe that the following chart summarizes
the available forms of periodontitis treatment, other than scaling and root
planing and resective surgery:
Product Product Dental Delivery Patient Treatment
Name Manufacturer/Marketer Procedure Route Administered Focus
- ----------- --------------------- --------- ----- ------------ ---------
Periostat CollaGenex No Systemic Yes Tissue
Pharmaceuticals, Inc. degradation
*Atridox Atrix Laboratories/ Yes Local No Bacteria
CollaGenex
Pharmaceuticals, Inc.
Periochip Dexxon Ltd. Yes Local No Bacteria
Arestin Orapharma, Inc. Yes Local No Bacteria
* In August 2001, we entered into a License and Marketing Agreement with
Atrix Laboratories, Inc. pursuant to which we market Atridox, Atrisorb FreeFlow
and Atrisorb-D to the United States dental community. See -- "Item 1. Business"
Many of the companies participating in the periodontal area have
substantially greater financial, technical and human resources than we do, 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 ours.
EMPLOYEES
We have historically outsourced our manufacturing, clinical trials, new
drug application preparation, warehousing, distribution and other activities. We
intend to continue to outsource many of the activities which we have
historically outsourced. As of December 31, 2001, we employed 155 persons. Each
of our management personnel has had extensive prior experience with
pharmaceutical, biotechnology or medical products companies. We cannot be
certain that we will be able to recruit and retain qualified inside sales and
marketing personnel, additional foreign sub-licensees or distributors or
marketing partners or that our marketing and sales efforts will be successful.
Currently, none of our employees are covered by collective bargaining
agreements. In general, our employees are covered by confidentiality agreements.
We consider relations with our employees to be excellent.
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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, OUR SALES GROWTH WILL
SUFFER.
Our growth and success depends in large part on our 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, our sales efforts are largely focused on
educating dental professionals about an entirely new approach to treating
periodontitis. Although over 35,000 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 we are unable to initiate
and/or expand usage of Periostat by dentists, our 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. Our 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.
WE RELY ON PERIOSTAT FOR MOST OF OUR REVENUE.
During 1999, Periostat accounted for 95% of our total net revenues. During
2000, Periostat accounted for 84% of our total net revenues. During 2001,
Periostat accounted for approximately 87% of our total net revenues. Although we
currently derive additional revenue from marketing and/or selling other products
(Vioxx(R), Atridox, Atrisorb FreeFlow and Atrisorb-D) and from licensing fees
from foreign marketing partners, our revenue and profitability in the near
future will depend on our ability to successfully market and sell Periostat.
WE ANTICIPATE FUTURE LOSSES.
From our founding in 1992 through the commercial launch of Periostat in
November, 1998, we had no revenue from sales of our own products. During the
year ended December 31, 2000, we experienced a net loss of approximately $8.8
million. During the year ended December 31, 2001, we experienced a net loss of
approximately $8.1 million. From inception through December 31, 2001, we have
experienced an aggregate net loss of $69.5 million. Our historical losses have
resulted primarily from the expenses associated with our pharmaceutical
development program, clinical trials, the regulatory approval process associated
with Periostat and sales and marketing activities relating to Periostat. We
expect to incur significant future expenses, particularly with respect to the
sales and marketing of Periostat. As a result, we anticipate losses at least
through the second quarter of 2002.
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WE HAVE A LIMITED MARKETING AND SALES HISTORY AND MAY NOT BE ABLE TO
SUCCESSFULLY MARKET OUR PRODUCT CANDIDATES.
We have a limited history of marketing, distributing and selling
pharmaceutical products in the dental market. In January 1999, we first trained
a sales force of sales representatives and managers and began to promote
Periostat to the dental community. We market and sell our products in the United
States through this direct sales force. Furthermore, we have entered into
agreements to market Periostat, upon receipt of the necessary foreign regulatory
approvals, in certain countries in Europe, Israel, Japan, Canada and the Middle
East, and we continue to evaluate partnering arrangements in other countries
outside the United States. If we are unable to continue to recruit, train and
retain sales and marketing personnel, we will be unable to successfully expand
our sales and marketing efforts. Furthermore, if our foreign partners do not
devote sufficient resources to perform their contractual obligations with us, we
may not achieve our foreign sales goals. Pursuant to an exclusive Licensing and
Marketing Agreement with Atrix Laboratories, Inc., we began marketing Atrix's
proprietary dental products, Atridox(R), Atrisorb(R) FreeFlow and Atrisorb(R)-D,
to the United States dental market in October 2001. It is too early to determine
whether there will be sufficient acceptance of these products to achieve or
maintain profitability.
OUR COMPETITIVE POSITION IN THE MARKETPLACE DEPENDS ON ENFORCING AND
SUCCESSFULLY DEFENDING OUR 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 our established and new technologies. We must also avoid
liability from infringing the proprietary rights of others.
Our core technology is licensed from The Research Foundation of the State
University of New York ("SUNY"), and other academic and research institutions
collaborating with SUNY. Under the license agreement with SUNY (the "SUNY
License") we have 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 us and our failure to comply with
these requirements permits SUNY to terminate the SUNY License. If the SUNY
License is terminated, we would lose our right to exclude competitors from
commercializing similar products, and we could be excluded from marketing the
same products if SUNY licensed the underlying technology to a competitor after
terminating the SUNY License.
SUNY owns thirty (30) United States patents and three (3) United States
patent applications that are licensed to us. The patents licensed from SUNY
expire between 2004 and 2018. Two 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 our patent rights cover new treatments using tetracyclines,
which are generally available for their known use as antibiotics, we may be
required to bring expensive infringement actions to enforce our patents and
protect our technology. Although federal law prohibits making and selling
pharmaceuticals for infringing use, competitors and/or practitioners
26
may provide generic forms of tetracycline for treatment(s) which infringe our
patents, rather than prescribe our Periostat product. Enforcement of patents can
be expensive and time consuming.
Our success also depends upon know-how, trade secrets, and the skills,
knowledge and experience of our scientific and technical personnel. To that end,
we require all of our 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 we provide for testing to collaborators in academic institutions, we
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 our commercial position and, consequently, our
financial condition.
IF WE LOSE OUR SOLE SUPPLIER OF DOXYCYCLINE OR OUR CURRENT MANUFACTURER OF
PERIOSTAT, OUR COMMERCIALIZATION OF PERIOSTAT WILL BE INTERRUPTED OR LESS
PROFITABLE.
We rely on a single supplier, Hovione International Limited ("Hovione"),
for doxycycline, the active ingredient in Periostat. There are relatively few
alternative suppliers of doxycycline and Hovione produces the majority of the
doxycycline used in the United States. Our current supply agreement with Hovione
expires on May 14, 2006 and thereafter automatically renews for successive
two-year periods unless, ninety (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 ninety (90) days, the
non-defaulting party can terminate the supply agreement effective immediately at
the end of such 90-day period. We rely on Hovione as our sole supplier of
doxycycline and have no back-up supplier at this time. If we are unable to
procure a commercial quantity of doxycycline from Hovione on an ongoing basis at
a competitive price, or if we cannot find a replacement supplier in a timely
manner or with favorable pricing terms, our costs may increase significantly and
we may experience delays in the supply of Periostat.
We historically relied on a single third-party contract manufacturer,
Applied Analytical Industries, Inc., ("AAI") to produce Periostat in a capsule
formulation. AAI served notice of its intent to terminate its agreement to
supply Periostat capsules to us as of November 2001. The agreement with AAI
provided for AAI to commit to an additional twelve (12) months supply of product
at a price premium, should we be unable to qualify an alternative manufacturing
source subsequent to the termination of the AAI agreement. As an alternative,
and in an effort to capitalize on certain manufacturing cost advantages, in July
2001, we launched our new tablet formulation of Periostat which has now replaced
our capsule formulation of Periostat. We believe that the change to a tablet
formulation will positively impact our results of operations by improving our
gross margin on Periostat sales from approximately 79% to approximately 88% of
Periostat net sales. We have entered into an agreement with a contract
manufacturer, Pharmaceutical Manufacturing Research Services, Inc. ("PMRS"), for
such tablet formulation for Periostat, and we are, therefore, no longer
dependent upon, nor do we utilize, AAI. We have fulfilled our initial purchase
orders with PMRS and expect to make certain purchases from PMRS through 2002.
Currently, PMRS is the sole third-party contract manufacturer to supply a tablet
formulation of Periostat to us. Any inability of PMRS to produce and supply
product on agreed upon terms could result in delays in the supply of Periostat.
We also intend to contract
27
with additional manufacturers for the commercial manufacture of Periostat
tablets. We believe, however, that it could take up to one (1) year to
successfully transition from PMRS to a new manufacturer.
OUR PRODUCTS ARE SUBJECT TO EXTENSIVE REGULATION BY THE FDA.
Drugs and medical devices generally require approval or clearance from the
FDA before they can be marketed in the United States. Periostat, Vioxx(R), and
Atridox(R) have been approved by the FDA as drugs. Atrisorb(R) FreeFlow and
Atrisorb(R)-D have been cleared by the FDA as medical devices. Our drug products
under development, however, will have to be approved by the FDA before they can
be marketed in the United States. If the FDA does not approve our products in a
timely fashion, or does not approve them at all, our financial condition may be
adversely affected.
In addition, drug and medical device products remain subject to
comprehensive regulation by the FDA while they are being marketed. The drug and
medical device regulatory schemes differ in detail, but they are essentially
similar. The FDA regulates, for example, the safety, manufacturing, labeling,
and promotion of both drug and medical device products. Although Dentaplex, a
dietary supplement, did not require FDA approval prior to marketing, it is also
subject to regulation while it is being marketed. If we or our partners who
manufacture our products fail to comply with regulatory requirements, various
adverse consequences can result, including recalls, civil penalties, withdrawal
of the product from the market and/or the imposition of civil or criminal
sanctions.
We are, and will increasingly be, subject to a variety of foreign
regulatory regimes governing clinical trials and sales of our products. Other
than Periostat, which has been approved by the Medicines Control Agency for
marketing in the United Kingdom, our products in development have not been
approved in any foreign country. Whether or not FDA approval has been obtained,
approval of drug products by the comparable regulatory authorities of foreign
countries must be obtained prior to the commencement of marketing of those
products in those countries. The approval process varies from country to country
and other countries may also impose post-approval requirements. Other countries
may also impose regulatory requirements on dietary supplements.
IF OUR PRODUCTS CAUSE INJURIES, WE MAY INCUR SIGNIFICANT EXPENSE AND
LIABILITY.
Our 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 or for which we have licensing or co-promotion
rights. We have $10.0 million in product liability insurance for Periostat. This
level of insurance may not adequately protect us 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 our business, financial
condition and results of operations to decline.
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IF WE NEED ADDITIONAL FINANCING, AND FINANCING IS UNAVAILABLE, OUR ABILITY
TO DEVELOP AND COMMERCIALIZE PRODUCTS AND OUR OPERATIONS WILL BE ADVERSELY
AFFECTED.
We have historically financed our operations through public and private
equity financings. Our capital requirements depend on numerous factors,
including our ability to successfully commercialize Periostat, competing
technological and market developments, our ability to enter into collaborative
arrangements for the development, regulatory approval and commercialization of
other products, and the cost of filing, prosecuting, defending and enforcing
patent claims and other intellectual property rights. We anticipate that we may
be required to raise additional capital in order to conduct our operations.
Additional funding, if necessary, may not be available on favorable terms, if at
all. If adequate funds are not available, we may be required to curtail
operations significantly or to obtain funds through arrangements with
collaborative partners or others that may require us to relinquish rights to
certain of our technologies, product candidates, products or potential markets.
At December 31, 2001 we had cash, cash equivalents and short-term investments of
approximately $6.2 million. In March 2001, we raised approximately $6.8 million,
net of offering costs, through the sale of our common stock and warrants to
purchase shares of our common stock. In August 2001, we raised approximately
$3.0 million through the sale of unregistered shares of our common stock to
Atrix Laboratories, Inc. in connection with our entering into certain licensing
arrangements with Atrix. We anticipate that our existing working capital will be
sufficient to fund our current operations through at least the end of 2002.
However, we may seek additional funding to expand our current operations through
the acquisition of additional products or by investing in the development of our
research and development pipeline.
BECAUSE OUR EXECUTIVE OFFICERS, DIRECTORS AND AFFILIATED ENTITIES OWN
APPROXIMATELY 34.5% OF OUR CAPITAL STOCK, THEY COULD CONTROL OUR ACTIONS IN A
MANNER THAT CONFLICTS WITH OUR INTERESTS AND THE INTERESTS OF OUR OTHER
STOCKHOLDERS.
Currently, our executive officers, directors and affiliated entities
together beneficially own approximately 34.5% of the outstanding shares of our
common stock or equity securities convertible into common stock. As a result,
these stockholders, acting together, or in the case of our 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 our stockholders
might otherwise receive a premium for their shares over then current market
prices.
WE EXPECT TO SELL SHARES OF OUR COMMON STOCK IN THE FUTURE, INCLUDING
SHARES ISSUED UNDER OUR EQUITY LINE WITH KINGSBRIDGE CAPITAL LIMITED AND THESE
SALES WILL DILUTE THE INTERESTS OF SECURITY HOLDERS AND DEPRESS THE PRICE OF OUR
COMMON STOCK.
As of December 31, 2001, there were 10,999,573 shares of our common stock
outstanding, options to purchase approximately 2,452,609 shares of our common
stock outstanding, and there were outstanding warrants to purchase approximately
550,000 shares of our common stock outstanding. There are also 924,880 shares of
common stock which, upon effectiveness of our shelf registration statement, are
issuable under the equity line with Kingsbridge and 40,000 shares issuable under
the warrants which we granted to Kingsbridge in
29
connection with the equity line arrangement. We may also issue additional shares
in acquisitions, financings or in connection with the grant of additional stock
options to our employees, officers, directors or consultants under our stock
option plans.
The issuance or even the potential issuance of shares under the equity
line, in connection with any other additional financing, and upon exercise of
warrants, options or rights will have a dilutive impact on other stockholders
and could have a negative effect on the market price of our common stock. In
addition, if we draw down under the equity line, we will issue shares to
Kingsbridge at a discount to the daily volume weighted average prices of our
common stock during the fifteen (15) trading days after notification of a
drawdown. This will further dilute the interests of the other stockholders.
If we draw down on the equity line when share prices are decreasing, we
will need to issue more shares, which will lead to dilution and potentially
further price decrease.
As we sell shares of our common stock to Kingsbridge under the equity line
and then Kingsbridge sells the common stock to third parties, our common stock
price may decrease due to the additional shares in the market. If we decide to
draw down on the equity line as the price of our common stock decreases, we will
need to issue more shares of our common stock for any given dollar amount that
Kingsbridge invests, subject to the minimum selling price we specify. The
perceived risk of dilution from sales of stock to Kingsbridge may cause holders
of our common stock to sell their shares, or it may encourage short sales. This
could contribute to a decline in our share price. Kingsbridge has covenanted in
the equity line arrangement that neither Kingsbridge nor any of its affiliates
nor any entity managed by Kingsbridge will ever be in a net short position with
respect to shares of our common stock in any accounts directly or indirectly
managed by any such person or entity. The more shares that we issue under the
equity line of credit, the more diluted our shares will be and the more our
stock price may decrease. This may encourage short sales, which could place
further downward pressure on the price of our common stock.
OUR STOCK PRICE IS HIGHLY VOLATILE, AND THEREFORE THE VALUE OF YOUR
INVESTMENT MAY FLUCTUATE SIGNIFICANTLY.
The market price of our common stock has fluctuated and may continue to
fluctuate as a result of variations in our quarterly operating results. These
fluctuations may be exaggerated if the trading volume of our 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. Our common stock may experience
similar or even more dramatic price and volume fluctuations which may continue
indefinitely.
30
The following table sets forth the high and low closing market price for
our common stock for each of the quarters in the period beginning January 1,
1999 through December 31, 2001 as reported on the Nasdaq National Market:
QUARTER ENDED HIGH LOW
March 31, 1999............... $12.19 $8.25
June 30, 1999................ $11.25 $8.25
September 30, 1999........... $22.38 $9.50
December 31, 1999............ $25.00 $15.75
March 31, 2000............... $27.13 $12.63
June 30, 2000................ $15.50 $8.25
September 30, 2000........... $9.88 $8.06
December 31, 2000............ $7.88 $3.13
March 31, 2001............... $6.00 $4.47
June 30, 2001................ $8.80 $5.06
September 30, 2001........... $10.00 $7.25
December 31, 2001............ $9.50 $7.50
ITEM 2. PROPERTIES.
We own no real property. Our principal executive offices, located at 41
University Drive, Suite 200, Newtown, Pennsylvania, consist of approximately
14,204 square feet. Our lease for such premises continues through April 2009.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
31
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 our common stock.
Since June 20, 1996, our common stock has traded on the Nasdaq National Market
under the symbol "CGPI."
The following table sets forth the high and low bid information for our
common stock for each of the quarters in the period beginning January 1, 2000
through December 31, 2001 as reported on the Nasdaq National Market. 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, 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
March 31, 2001............... $5.99 $4.00
June 30, 2001................ $9.00 $4.88
September 30, 2001........... $10.40 $6.49
December 31, 2001............ $9.49 $7.26
As of March 15, 2002, the approximate number of holders of record of our
common stock was 116 and the approximate number of beneficial holders of our
common stock was 3,466.
We have never declared or paid any cash dividends on our common stock.
Except as set forth below, we intend to retain earnings, if any, to fund future
growth and the operation of our business. On May 12, 1999, we consummated a
$20.0 million financing through the issuance of our Series D cumulative
convertible preferred stock. As a result of such financing, we have cumulative
cash and common stock dividend obligations to the holders of the Series D
preferred stock. Such financing arrangement also limits our ability to generally
declare dividends to our common stockholders. In addition, our ability to
generally declare dividends to our common stockholders is further limited by the
terms of our credit facility with Silicon Valley Bank. See "Management's
Discussion and Analysis of Financial Condition and Results of
Oper