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UNITED STATES
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, 2003
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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)
Preferred Stock Purchase Rights, $0.01 par value
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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 twelve (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 ninety (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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes: X No:
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The aggregate market value of the registrant's voting shares of common
stock held by non-affiliates of the registrant on June 30, 2003, based on $13.26
per share, the last reported sale price on the NASDAQ National Market on that
date, was $130.6 million.
The number of shares outstanding of each of the registrant's classes of
common stock, as of March 11, 2004:
Class Number of Shares
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Common Stock, $0.01 par value 14,121,677
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 2004 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
TABLE OF CONTENTS
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Item Page
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PART I 1. Business....................................................... 1
2. Properties..................................................... 32
3. Legal Proceedings.............................................. 32
4. Submission of Matters to a Vote of Security Holders............ 34
PART II 5. Market for the Company's Common Equity and Related
Stockholder Matters........................................ 35
6. Selected Consolidated Financial Data........................... 36
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 39
7A. Quantitative and Qualitative Disclosures about Market Risk..... 56
8. Financial Statements and Supplementary Data.................... 57
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 57
9A. Controls and Procedures........................................ 57
PART III 10. Directors and Executive Officers of the Registrant............. 58
11. Executive Compensation......................................... 58
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................. 58
13. Certain Relationships and Related Transactions................. 58
14. Principal Accountant Fees and Services......................... 58
PART IV 15. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................... 59
SIGNATURES.................................................................. 60
EXHIBIT INDEX............................................................... 62
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 dental 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, or
SRP, the most prevalent therapy for adult periodontitis, to promote attachment
level gain and to reduce pocket depth in patients with adult periodontitis.
Adult periodontitis, a chronic disease characterized by the progressive loss of
attachment between the tooth root and the surrounding periodontal structures,
may result in tooth loss if untreated.
We currently market Periostat and other pharmaceutical products to the
dental and dermatology communities through our own professional pharmaceutical
sales force of approximately 115 sales representatives and managers. Pursuant to
an exclusive License and Marketing Agreement with Atrix Laboratories, Inc., we
began, in October 2001, to actively market Atrix's proprietary dental products,
Atridox(R) and Atrisorb FreeFlow(R), and Atrisorb-D(R), to the United States
dental market. In May 2002, we executed a sublicense agreement with Altana Inc.
to market and distribute Pandel(R), a prescription mid-potency topical
corticosteroid product developed by Altana Inc. to dermatologists in the United
States and Puerto Rico. We distribute Periostat and Pandel exclusively through
drug wholesalers in the United States. Periostat is also sold through
wholesalers and direct to dentists in the United Kingdom through our
wholly-owned subsidiary, CollaGenex International, Ltd., and by distributors and
licensees in certain other overseas markets. The Atrix dental products are
distributed through a specialty distributor who sells these products directly to
dental practitioners in the United States and Puerto Rico.
Research has shown that certain unique properties of the tetracyclines
discovered during the development of Periostat may be applicable to other
diseases involving inflammation and/or destruction of the body's connective
tissues, including acne, rosacea, meibomianitis and cancer metastasis, among
others. CollaGenex is further evaluating Periostat and a series of novel,
proprietary compounds known as IMPACS(R) (Inhibitors of Multiple Proteases and
Cytokines), to assess whether they are safe and effective in these applications.
Phase I clinical trials for Metastat(R), our lead compound for the treatment of
metastatic cancer, were initiated under the sponsorship of the National Cancer
Institute, or NCI. In Phase I clinical trials, Metastat demonstrated an overall
tumor response rate of 44% in patients with Kaposi's sarcoma, and the NCI is
sponsoring a Phase II clinical trial to continue to evaluate the safety and
efficacy of Metastat in HIV-related Kaposi's sarcoma. We anticipate that the
results of this trial will be available during the second quarter of 2004.
In 2003, we continued to implement our plans to expand into the dermatology
market. A growing number of studies have shown the safety and efficacy of
Periostat to treat
dermatological conditions and diseases, and two of these studies have been
published in peer-reviewed medical journals. There is no FDA or other regulatory
approval for the use of Periostat to treat any dermatological condition or
disease. 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 significant
improvement compared to the patients in the placebo group.
During 2002 and 2003, we conducted a double-blinded, placebo-controlled,
134-patient Phase III clinical trial to evaluate the safety and efficacy of
Periostat in the treatment of rosacea, a dermatological condition that affects
approximately 15 to 20 million patients in the United States. In February 2004,
we announced the positive outcome of that study. Preliminary data analysis
indicated that patients treated with Periostat showed a continuous improvement
during the 16-week course of the study compared to patients on placebo. In the
study, patients on Periostat had a significantly greater reduction in the number
of inflammatory lesions (papules and pustules) compared to patients on placebo.
This improvement was both clinically and statistically highly significant.
Overall clinical disease severity based on the Clinician's Global Severity
Assessment Scale declined significantly in the group of patients treated with
Periostat compared to placebo, with a greater number of patients on Periostat
showing a complete clearing of the disease at 16 weeks compared to those
patients on placebo. In addition, the erythema, or persistent redness of the
skin, in patients in the Periostat group showed a trend towards greater
improvement compared to patients in the placebo group.
In February 2002, we announced that we had licensed a new dermal and
transdermal drug delivery technology called Restoraderm(TM), which we intend to
develop for dermatological applications. Several products based on the
Restoraderm technology have completed preliminary stability studies, and we are
developing plans to launch two products based on this technology by 2007.
Manufacturing arrangements are currently being pursued for the first of these
products, which we expect to launch in 2005. We are actively seeking additional
product licensing opportunities to augment our near-term offerings to the
dermatology market.
In May 2002, we executed a sublicense Agreement with Altana Inc. with
respect to the marketing and distribution of Pandel. Our sales force has been
promoting Pandel to the dermatological community since July 2002.
Our core IMPACS technology is licensed on a perpetual 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.
We are a Delaware corporation. We were incorporated and began operations in
1992 under the name CollaGenex, Inc. and changed our name to CollaGenex
Pharmaceuticals, Inc. in April 1996. Our principal executive offices are located
at 41 University Drive, Suite 200, Newtown, Pennsylvania 18940, and our
telephone number is (215) 579-7388.
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In this Annual Report on Form 10-K, the terms "CollaGenex," "we," "us" and
"our" includes CollaGenex Pharmaceuticals, Inc. and its subsidiaries.
Periostat(R), Metastat(R), Dermostat(R), Nephrostat(R), Osteostat(R),
Arthrostat(R), Rheumastat(R), Corneostat(R), Gingistat(R), IMPACS(TM), PS20(R),
The Whole Mouth Treatment(R), Restoraderm(TM), Dentaplex(R), Lytra(TM),
Periostat-MR(TM) and Xerostat(TM) are United States trademarks of CollaGenex
Pharmaceuticals, Inc. Periostat(R), Nephrostat(R), Optistat(R), Xerostat(R) and
IMPACS(TM) are European Community trademarks of CollaGenex Pharmaceuticals, Inc.
Periostat(R), Nephrostat(R), Optistat(R), Xerostat(R), IMPACS(R), Dentaplex(R),
Restoraderm(R), Periocycline(R), Periostatus(R) and Periostat-SR(R) are United
Kingdom trademarks of our wholly-owned subsidiary, CollaGenex International Ltd.
CollaGenex(R), PS20(R), Dermastat(R), Periostan(R), "C" Logo(R) and "The Whole
Mouth Treatment" Logo(R) are European Community and United Kingdom trademarks of
CollaGenex International Ltd. Periocycline(TM), Restoraderm(TM) and
Periostat-SR(TM) are European Community Trademarks of CollaGenex International
Ltd. All other trade names, trademarks or service marks appearing in this Annual
Report are the property of their respective owners and are not property of
CollaGenex Pharmaceuticals, Inc. or any of our subsidiaries.
Products and Product Agreements
Our Current Marketed Products
Our current proprietary and licensed products are summarized below:
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Products Territory Where Marketed Marketing Partner
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Periostat United States and Puerto Rico Not applicable
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Periostat United Kingdom CollaGenex International Ltd.
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Periostat Israel Taro Pharmaceuticals, Inc.
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Periostat Portugal ISDIN S.A.
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Periostat Austria Willovonseder & Marchesani Ges.m.b.H & Co.
KG
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Periostat Switzerland Karr Dental, Inc.
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Periostat Canada Pharmascience, Inc.
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Atridox United States and Puerto Rico Atrix Laboratories, Inc.
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Atrisorb FreeFlow United States and Puerto Rico Atrix Laboratories, Inc.
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Atrisorb-D United States and Puerto Rico Atrix Laboratories, Inc.
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Pandel United States and Puerto Rico Altana, Inc.
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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 $6.0 billion, primarily for procedures and surgeries performed by
a periodontist or a dental professional.
The most prevalent therapy for adult periodontitis is SRP, a mechanical
procedure that removes bacteria deposits called plaque from tooth and root
surfaces above and below the gum line. Periostat is the first orally
administered, systemically delivered pharmaceutical indicated as an adjunct to
SRP to promote attachment level gain and to reduce pocket depth in patients with
adult periodontitis. The Proceedings of the American Academy of Periodontology
2003 Workshop on Contemporary Sciences in Clinical Periodontics, published
January 22, 2004, set forth a detailed report and summary by leading United
States academic and clinical periodontology experts who concluded that the
peer-reviewed scientific evidence strongly supports the use of Periostat as an
adjunct to conventional therapy, such as SRP, in the management of chronic
periodontitis.
Periostat, a 20 mg dose of doxycycline hyclate, 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, at higher dosages, for approximately 35
years, for the treatment of microbial infections and, along with other
tetracyclines, has a well established safety record. Periostat is 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
SRP to promote attachment level gain and reduce pocket depth in patients with
adult periodontitis. Periostat was made available for prescription use in
November 1998 and was fully launched commercially in January 1999. Since January
1999, more than 3.0 million Periostat prescriptions have been filled and over
40,000 dentists have written a Periostat prescription. 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.
We currently actively sell Periostat in the United States and the United
Kingdom and our partners have begun initial sales of Periostat in Israel,
Portugal, Austria, Switzerland and Canada. We also have other marketing and
distribution partnerships for the sale of Periostat in various foreign
countries, subject to regulatory approval.
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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 periodontitis.
Atridox is a locally-applied, anti-microbial therapy for the treatment of
chronic adult periodontitis. Atridox uses Atrix's patented drug delivery
technology, Atrigel(R), for the targeted delivery of 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, or GTR, barrier product
used in the surgical treatment of periodontal defects to help regenerate tissue.
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,
which has been shown to reduce the incidence of infections during GTR
procedures.
Under the terms of our License and Marketing Agreement with Atrix, we
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, during which year we met this requirement; (ii) maintain, for a period
of 24 months, a force of no less than 90 full time dental consultants and
divisional and regional managers to make sales and product recommendation calls
on dental professionals (which requirement we have fulfilled); and (iii) making
the Atrix products the subject of a specific number of detail calls in the
United States during 2002, which we achieved. We are also required to make
certain annual minimum expenditures for advertising and promotional activities
over the term of the agreement beginning January 1, 2003, including: (i) the
lesser of $4.0 million 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 $2.0 million or 30% of our contribution margin, as defined in the
agreement, relating to a separate Atrix product that we market. These annual
requirements were met by us in 2003. In 2003, we and Atrix agreed to share
funding for training and maintaining a corps of dental hygienists who would
serve as part-time, professional sales associates in the dental market, with a
specific focus on the Atrix products. This 2003 addendum will terminate on
December 31, 2004, unless extended by Atrix and us.
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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 twelve (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.
Pandel
On May 24, 2002, we executed a Sublicense Agreement with Altana Inc., the
United States subsidiary of Altana Pharma AG, pursuant to which we were granted
the exclusive right to market, advertise, promote, distribute, offer for sale
and sell, in the United States and Puerto Rico, Pandel Cream, a mid-potency
topical corticosteroid that is indicated for the relief of mild-to-moderate
inflammatory disorders of the skin in adults, such as atopic dermatitis and
psoriasis. We had detailed Pandel on a co-promotional basis with Altana since
October 2001. Altana currently licenses such rights from Taisho Pharmaceutical
Co., Ltd., a company organized and existing under the laws of Japan. Pursuant to
the terms of such agreement, we agreed to pay Altana an aggregate sublicense fee
of $1.7 million, $800,000 of which was paid in June 2002 and $900,000 of which
was paid in May 2003. We purchase from Altana all Pandel products to be sold and
are required to pay Altana a royalty fee equal to a percentage of the net sales
of Pandel.
Vioxx
Pursuant to a Co-Promotion Agreement we executed with Merck in September
1999, we received the exclusive right to co-promote Vioxx, a prescription
strength non-steroidal anti-inflammatory drug that was approved by the FDA on
May 20, 1999 to relieve osteoarthritis and manage acute pain in adults,
including dental pain. The agreement provided for certain payments by Merck to
us upon sales of Vioxx to the dental community. On September 23, 2002, we
executed an amendment, extension and restatement of our Co-Promotion Agreement
with Merck with respect to Vioxx. In accordance with that amendment, extension
and restatement, our agreement with Merck automatically expired on December 31,
2003. We will continue to earn residual contract revenues under the co-promotion
agreement with Merck through December 2005.
AVAR
In March 2003, we executed co-promotion agreements with Sirius
Laboratories, Inc. pursuant to which we jointly marketed Sirius' AVAR(TM)
product line and Pandel to dermatologists in the United States. These agreements
were mutually terminated on December 31, 2003. We do not expect contract
revenues from AVAR beyond this date.
Denavir
Denavir is an FDA-approved topical antiviral cream used for the treatment
of recurrent cold sores in adults. We marketed Denavir to the dental community
under a Co-Promotion Agreement that we executed with SmithKline Beecham Consumer
Healthcare in October 1998, that provided for certain payments by SmithKline
Beecham to us. Following the acquisition of
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SmithKline Beecham by Novartis Consumer Health, Inc., Novartis terminated this
Co-Promotion Agreement effective April 13, 2001.
On October 1, 2002, we entered into a Product Detailing Agreement with
Novartis Consumer Health, Inc. pursuant to which we co-promoted Denavir to our
target dentists in the United States and received detailing fees and performance
incentives from Novartis Consumer Health, Inc. Our agreement with Novartis to
co-promote Denavir expired on September 30, 2003, and we and Novartis decided
not to renew our arrangement with respect to Denavir. We do not expect to earn
contract revenues for Denavir beyond 2003.
Sales and Marketing
We market and sell our dental and dermatological products in the United
States through a dedicated sales force comprised of approximately 115 sales
representatives and managers. We currently market Periostat in certain foreign
markets, either through our wholly-owned subsidiary, CollaGenex International
Ltd., or through marketing and distribution partnerships with companies in these
markets, and we intend to market Periostat in additional foreign markets upon
receipt of all requisite regulatory approvals. We currently actively sell
Periostat in the United States and the United Kingdom and our partners have
begun initial sales of Periostat in Israel, Portugal, Austria, Switzerland and
Canada. We currently have such agreements with foreign companies, subject to
requisite regulatory approvals, covering Japan, Spain and Greece.
Typically, 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 one regional
manager, eleven district managers and approximately 103 full-time equivalent
sales representatives. Each full-time equivalent sales representative is
responsible for covering a territory that includes approximately 100 dentists
and periodontists that are believed to be potential high volume prescribers of
Periostat based on the estimated number of scaling and root planings performed
in their respective practices. Additionally, each representative calls on
approximately 50 dermatology offices that have high potential for prescribing
Pandel. In accordance with legal and regulatory requirements, our
representatives also provide peer-reviewed scientific literature about the
safety and use of Periostat to treat dermatological conditions and diseases.
Our field sales organization currently details Periostat, Atridox, Atrisorb
FreeFlow and Atrisorb-D, to dental professionals, and Pandel to dermatological
professionals.
We believe that our dental sales effort is distinguished from typical
dental promotion 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
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arrange speaking engagements and teleconferences where Periostat advocates share
their experiences with other dental professionals.
Sales training is an important component of our sales and marketing
efforts. New representatives receive four weeks of field training and two weeks
of intensive office training in periodontal disease, host response, dermatology,
territory management and selling skills. Training continues at district-level
meetings throughout the year. In order to provide an integrated dental and
dermatology product line and leverage our sales and marketing organization, we
are actively seeking to in-license or acquire other high-quality therapeutic
dental and dermatology products.
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. had 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. withdrew the Marketing Authorization for Approval
in Italy, and Italy was included under the pan-European Mutual Recognition
Procedure, which we filed in June 2001. In February 2002, we received
provisional approval to market Periostat in Italy. In June 2002, we received
final approval to market Periostat in Italy. Subsequent to this approval, we
were notified by Roche that due to changes in Roche's local market strategy,
Roche was not going to launch Periostat in the Italian market. In January 2003,
we attempted to reach agreement with Roche regarding compensation for
outstanding milestone payments. In March 2003, we terminated our agreement with
Roche and notified them of our intent to take the matter to arbitration as is
provided for in our agreement with Roche. In June 2003 we received $425,000 in
outstanding milestone payments which settled all outstanding obligations due
from Roche. We currently do not have a licensing partner for Periostat in Italy.
In October 1998, we announced that a Marketing Authorization Application
had been filed with the United Kingdom Medicines Control Agency with respect to
Periostat. 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 United Kingdom to dentists through our United Kingdom
subsidiary, CollaGenex International Limited. Sales of Periostat capsules
commenced in the United Kingdom in September 2000. 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.
-8-
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. In April 2002, we announced
that we received the final Marketing Authorizations from the Ministries of
Health in Austria and Finland. In June 2002, we announced that we had received
final Marketing Authorizations from the Ministries of Health in the Netherlands
and Portugal. In June 2002 we received final approval to market Periostat in
Ireland and Italy.
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.
In the fourth quarter of 1999, Pharmascience submitted an application to the
Canadian Therapeutic Products Program of Health Canada for Canadian marketing
approval of a capsule formulation of Periostat which was approved in March 2003.
In August 2003, Pharmascience launched Periostat in Canada and accordingly, we
began recognizing royalty income on Pharmascience net product sales. Future
milestones fees will be due from Pharmascience upon individual provincial
formulary approval expected in 2004.
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, pending requisite
regulatory approval, and Portugal, where we have received such regulatory
approval and began recording sales in June 2003. Such agreement was subsequently
extended, granting ISDIN S.A. the right to market and distribute Periostat in
Greece, pending requisite regulatory approval.
On June 9, 2000, 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. In April 2002, Periostat received regulatory approval
under the Mutual Recognition Procedure for marketing in Austria. In December
2002, we made our first sales of Periostat to Willvonseder & Marchesani
Ges.m.b.H and the product was launched in Austria by them in April 2003. The
regulatory authorities in Switzerland granted final approval for Periostat in
October 2003 and we have made our first shipment of product to Karr Dental in
January 2004.
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.
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. This agreement provides for the
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payment of milestone fees to us associated with the regulatory approvals of
Periostat. In February 2002, the Israeli authorities notified Taro with respect
to the provisional approval of Periostat in Israel. In May 2002, we announced
that the Israeli Ministry of Health had granted a Marketing Authorization to
Taro. In October 2002, we made initial sales of Periostat and Taro formerly
launched the product in Israel in January 2003. We have made additional sales to
Taro in 2003.
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 January 2004, we informed Pharma Med that we
elected not to renew such arrangement.
In November 2001, we terminated our distribution and marketing agreement
for Germany with Hain Diognostika GmbH due to Hain's failure to fulfill its
obligations under the agreement. We signed a settlement agreement with Hain in
November 2002 with respect to Hain's non-payment of milestone fees due to
CollaGenex. We currently do not have a licensing partner for Periostat in
Germany.
In February 2002, we announced that we had contracted with Dexcel-Dental, a
division of Dexcel-Pharma Limited, to promote Periostat to the dental profession
in the United Kingdom and, upon receipt of final regulatory approval, the
Republic of Ireland. In October 2002, we provided Dexcel-Dental with a formal
termination notice of our agreement. During 2003, we and Dexcel-Pharma commenced
non-binding mediation to resolve their dispute regarding the termination of the
agreement. In March, 2004, we and Dexcel-Pharma agreed to settle the dispute and
resolve outstanding invoices from Dexcel-Pharma. We continue to market Periostat
in the United Kingdom through our wholly-owned subsidiary, CollaGenex
International Ltd.
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
hyclate, is supplied to us by Hovione from its offshore facilities. Hovione
supplies a substantial portion of the doxycycline used in the United States from
two independent 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 that remains uncured for 90 days, the
non-defaulting party can terminate the supply agreement effective immediately at
the end of such ninety-day period. We rely on Hovione as our sole supplier of
doxycycline, and have no back-up supplier at this time.
On September 26, 2000, we entered into a Service and Supply Agreement with
a contract manufacturer, Pharmaceutical Manufacturing Research Services, Inc.,
for the tablet formulation of Periostat. Our current arrangement with
Pharmaceutical Manufacturing Research Services has been extended until the
earlier of March 30, 2007 or until a generic 20 mg doxycycline hyclate tablet is
available on the market. Currently, Pharmaceutical Manufacturing Research
Services is
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the sole third-party contract manufacturer to supply a tablet formulation of
Periostat to us. We intend to contract with additional manufacturers for the
commercial manufacture of Periostat tablets. Pharmaceutical Manufacturing
Research Services is required to comply with current good manufacturing
practices, or cGMP, requirements.
In November 1998, we executed a Distribution Services Agreement with
Cardinal Health Specialty Pharmaceutical Services, or SPS, pursuant to which SPS
acts as our exclusive logistics provider for Periostat in the United States and
Puerto Rico. Under this agreement, SPS warehouses and ships Periostat and Pandel
from its central distribution facility near Nashville, Tennessee to wholesalers
that distribute our products to pharmacies throughout the United States for
prescription sale to patients. SPS also provides 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 had an initial term of three years
with automatic renewal for successive one-year periods unless notice of
termination was 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., now known as Cardinal
Health Specialty Pharmaceutical Distribution, or SPD, pursuant to which SPD acts
as our non-exclusive authorized distributor of Atridox, Atrisorb FreeFlow and
Atrisorb-D. Under this agreement, SPD 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 90
days prior to expiration.
We do not have the resources, facilities or capabilities to manufacture any
of our products or product candidates. We have no current plans to establish a
manufacturing facility. We expect that we will be dependent, to a significant
extent, on contract manufacturers for commercial scale manufacturing of our
products or product candidates in accordance with regulatory standards.
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 hyclate or Periostat on commercially reasonable terms,
or in a timely manner, or if our suppliers fail to comply with cGMP 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.
Customers/Backlog
During 2003, net product sales to each of Cardinal Health, Inc., McKesson
Corporation and Amerisource-Bergen Corporation accounted for 43%, 31% and 20%,
respectively, of our aggregate net product sales. As is common practice in the
pharmaceutical industry, wholesalers may become very speculative in their
purchasing practices in anticipation of product price increases. Accordingly, we
may limit, fulfill or delay shipment of customer purchase orders
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depending on the availability of product and other factors necessary to operate
our business efficiently. At December 31, 2003, there were open customer
purchase orders with an aggregate value of approximately $800,000. These orders
were shipped complete during January 2004.
Research and Development
Overview
Our research and development activities are conducted primarily by third
parties including 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.
Major research programs currently being conducted by us include: (i) the
clinical development of the sub-antimicrobial dose of doxycycline for the
treatment of rosacea, perioral dermatitis (a skin condition characterized by
inflammatory lesions and redness around the mouth frequently associated with the
use of topical steriods) and meibomianitis (a disorder characterized by "dry
eye"); (ii) the development of a "once-a-day" formulation of Periostat
(Periostat MR); and (iii) limited support for the conduct of exploratory studies
in the utility of Metastat (COL-3) as a treatment for soft tissue sarcoma,
periodontitis and rosacea.
As of December 31, 2003, we had five 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.
Because of this, it is very difficult to estimate the cost of completing these
trials. We continue to study Periostat in a series of clinical studies in order
to determine its usefulness in certain patient types or in conjunction with
procedures other than SRP. For example, data on the use of Periostat in diabetic
patients was published in 2003 and suggested that the drug may provide benefits
not only in improved periodontal outcomes but also in improved diabetic control.
Extensive additional studies are required before this finding can be confirmed,
if at all. We intend to continue the Phase IV development of Periostat in 2004.
If a particular indication proves promising during early stage clinical
development, and the commercial opportunity justifies the investment, the next
stage of development typically involves more extensive Phase II trials to
determine the appropriate dose and dosing regimen. Based on our assessment of
the data obtained, we may then decide to conduct Phase III clinical trials
involving the indication and use positive results from the Phase III trials, if
any, to support a New Drug Application, or NDA, to the FDA. 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 Metastat with the NCI may also result in variability in our
development costs. We closely monitor our research
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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 use of pharmaceutical products to inhibit
the destruction of the connective tissues of the body and to down-regulate the
pathological host response to a variety of external and internal mediators of
inflammation and tissue destruction.
The technology works in part by modulating 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.
Elements of our core technology are 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-antimicrobial
doses) was 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.
Additional research suggests that tetracyclines also have the ability to
stimulate new bone protein synthesis by a variety of mechanisms. These
properties, which are independent from the anticollagenoyltic properties of the
compounds, are particularly important during the development of certain types of
bone deficiency disorders, including periodontitis. Particularly in patients
with concomitant disorders, such as diabetic osteopenia and peri- or
post-menopausal osteoporosis, periodontitis can occur in the absence of
inflammatory-mediated elevated collagenolytic activity and is primarily a
function of alterations in the balance of osteoblast and osteoclast mediated
resorption and bone formation (in particular a reduction of bone formation). In
these and other circumstances during development of the bony lesion
characterizing adult periodontitis, the property of tetracyclines to stimulate
new bone formation is the means by which the compounds are able to effectively
treat periodontitis.
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Other commercially available antibiotic tetracyclines show effective
anti-collagenolytic and independent bone protein synthesis stimulating
potential. Long-term administration of these compounds at normal antibiotic
doses, however, can result in well-known complications of antibiotic therapy,
such as gastrointestinal disturbance, overgrowth of yeast and fungi, and the
emergence of antibiotic-resistant bacteria. Our Phase III clinical trials with
Periostat demonstrated that the administration of sub-antimicrobial doses of
doxycycline over a twelve-month period exerted no anti-microbial effects. Thus,
the use of this dosage strength provides the anti-collagenolytic and bone
protein synthesis effects without the complications of long-term antibiotic
therapies. In pharmacokinetic studies, Periostat MR, our once-daily, modified
release formulation of Periostat, showed similar blood concentration levels (bio
availability) as Periostat, and we believe Periostat MR will show similar safety
and efficacy as Periostat.
Our license from SUNY also covers the uses of a broad class of compounds
(IMPACS) that have been chemically modified to retain and enhance their
anti-collagenolytic and other properties but which may have the structural
elements responsible for their antibiotic activity removed. These compounds have
shown potential in a number of pre-clinical models of excessive connective
tissue breakdown. Our current research and development programs focus on the
potential use of Periostat as well as the use of IMPACS for a variety of
disorders characterized by inflammation and connective tissue destruction.
Additional research has been conducted to identify, synthesize and
characterize a new generation of IMPACS compounds, and we have filed patent
applications on these compounds. The first of these compounds, called COL-1002,
recently issued in the United States. We have also filed patent applications on
other IMPACS compounds, which are pending.
Periostat
We have completed various clinical trials that evaluate the use of
Periostat for other therapeutic indications. Studies that evaluated Periostat's
ability to promote attachment level, decrease pocket depth and promote healing
in patients undergoing periodontal flap surgery are complete and data are
awaiting final analysis, which is expected to be completed during the first half
of 2004. Preliminary data from this study were presented at the American Academy
of Periodontology meeting in 2002 and suggested that Periostat significantly
improved certain clinical and biochemical parameters that are key to the
successful outcome of periodontal surgery. Other Phase IV clinical trials are
being conducted or are planned to evaluate Periostat as an adjunct to SRP in
institutionalized geriatric patients, in patients with Type I and Type II
diabetes and in a population of smokers. Two of the studies in diabetic patients
reported encouraging preliminary data at the American Association for Dental
Research meeting in March 2003, suggesting that Periostat had the potential to
improve periodontal clinical outcomes and possibly contribute to improvements in
diabetic control in these patients. In January 2003, we announced that the first
patients had entered a multi-center, double-blinded, placebo-controlled Phase IV
clinical study to evaluate the combined efficacy of Periostat and Atridox
(doxycycline hyclate) 10%, a locally-applied antimicrobial gel, in the treatment
of adult periodontitis. This study is fully enrolled and results are expected to
be reported during 2004. We have incurred approximately $300,000 in expenses to
date for this project and expect to incur approximately $100,000 in 2004 to
complete the study.
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To extend the possible therapeutic use of Periostat beyond the oral cavity,
we and our collaborators are planning, conducting or have completed clinical
trials in other indications. Of these studies, only the study in meibomianitis
(dry eye) is being fully funded by us, although we support additional studies
through the provision of active drug and placebo without charge.
A study carried out in 2002 focused on the use of Periostat to treat
moderate acne. 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 Medical 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.
Rosacea
In May 2003, we announced the results of a double-blinded,
placebo-controlled clinical study designed to evaluate the efficacy of Periostat
when combined with MetroLotion(R) (metronidazole) Topical Lotion, 0.75%, for the
treatment of rosacea. The study was conducted by Jorge Sanchez, M.D., Professor
of Dermatology at the University of Puerto Rico. Forty patients were randomized
to receive either MetroLotion and Periostat tablets or MetroLotion and placebo
tablets for 12 weeks. After week 12, patients discontinued the use of
MetroLotion and were maintained on either Periostat or placebo for an additional
4 weeks. Lesion counts, along with an assessment of erythema, or persistent
redness, and overall clinical disease severity were recorded. The project was
completed in 2003 at a total cost of approximately $50,000.
At all points during the course of the study, patients receiving Periostat
had significantly fewer inflammatory lesions than those on placebo. At week 12
there was a 59% reduction in lesion count in the group receiving MetroLotion and
Periostat, compared with a 34% reduction in the group receiving MetroLotion and
placebo, a clinically significant difference. The Clinician's Global Severity
Assessment Scale, which is a numerical scoring system that evaluates a patient's
overall disease severity, was also significantly improved in the Periostat
group, and there was a trend towards improvement in the erythema scores.
Patients who were maintained on Periostat for an additional four weeks
maintained the improvements observed at week 12, which was not true for those
patients on placebo.
In July 2003, we announced that the July/August issue of the peer-reviewed
dermatology journal, Skin Med, featured an article describing the positive
outcome of a physician-sponsored clinical study of Periostat in the treatment of
rosacea. This open-label, 50-patient study was designed to determine whether
monotherapy with Periostat improved the symptoms associated with various stages
of rosacea. Joseph B. Bikowski, M.D., Department of Dermatology, University of
Pittsburgh School of Medicine, and author of the article, concluded that
treatment with Periostat resulted in a significant clearing of inflammatory
lesions as well as a reduction in erythema and telangiectatic vessels. Patients
were treated for up to eight weeks with Periostat. After an average of four
weeks treatment, patients experienced an 80% to 100% clearing of inflammatory
lesions and a 50% reduction in erythema. Periostat was well tolerated by the
patients in the study, with no reports of nausea, vomiting, headache, diarrhea,
vaginitis or photosensitivity, effects often observed with the chronic use of
higher doses of tetracycline antibiotics.
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In February 2004, we announced the positive outcome of a Phase 3
double-blinded, placebo-controlled clinical study designed to evaluate the
safety and efficacy of Periostat for the treatment of rosacea. The study
enrolled 134 patients and is the largest clinical trial ever conducted to
evaluate a systemic therapy for rosacea. The detailed study data will be
presented at the Skin Disease Education Foundation's Dermatology Open Seminar on
March 21, 2004.
Preliminary data analysis indicated that patients treated with Periostat
showed a continuous improvement during the 16-week course of the study compared
to patients on placebo. In the study, patients that were administered Periostat
had a significantly greater reduction in the number of inflammatory lesions
(papules and pustules) compared to patients on placebo. This improvement was
both clinically and statistically significant.
Overall clinical disease severity based on the Clinician's Global Severity
Assessment Scale declined significantly in the group of patients treated with
Periostat compared to placebo, with a greater number of patients on Periostat
showing a complete clearing of the disease at 16 weeks compared to those
patients on placebo. The erythema in patients in the Periostat group showed a
trend toward greater improvement compared to patients in the placebo group. The
total expenses incurred to date on this project were $880,000. We expect to
incur an additional $500,000 in 2004 to complete this trial.
Periostat MR Once-A-Day Formulation
The development of a once-a-day formulation, Periostat MR, is being
conducted through a development agreement with Shire Laboratories. Formulations
arising from this research were administered to human volunteers during 2002 and
exhibited promising results, leading to the selection of a formulation for more
complete clinical testing in 2003. In October 2003, we announced that these
tests had shown that we had a suitable formulation and planned to enter Phase
III clinical trials with this new once-a-day formulation in the second quarter
of 2004. We also expect to launch a Phase III clinical trial in periodontitis
patients and two Phase III clinical trials in roseacea patients by mid-2004. We
have incurred approximately $3.3 million in expenses through December 31, 2003.
The total anticipated expenses, through commercialization, including various
milestones to Shire, is estimated to be between $16.0 million and $18.0 million.
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 tumor growth 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
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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 2001, at their cost, the NCI initiated an open-label, two-dose study to
establish clinical efficacy of Metastat in patients with HIV-related Kaposi's
sarcoma. This multi-center Phase 2 study enrolled 77 patients with HIV-related
Kaposi's sarcoma by March 2003. Patients received one of two different doses of
Metastat for six months. The primary objectives of the study were to evaluate
the tumor response rate and duration as well as to evaluate the biologic
activity of Metastat by measuring serum levels of pro-angiogenic mediators.
Due to the unexpected finding that patients on Metastat continued to
improve over the course of their therapy, the AIDS Malignancy Consortium and the
NCI did not undertake an interim analysis of this database until January 2004.
We believe the analysis will be finalized in the second quarter of 2004. Early
reports of this open-label study suggest that certain patients obtained
significant relief (both partial responses and complete responses) of their
clinical symptoms during the course of the study, but we cannot be certain until
the data is formally analyzed.
COL-3
A Phase I, ascending dose trial with COL-3 in normal human volunteers
succeeded in establishing the maximum tolerated dose that could be supported in
investigational new drug, or IND-based, exploratory studies. During 2003, we set
up clinical studies with COL-3, the active ingredient in Metastat, in the
treatment of adult periodontitis and rosacea. The rosacea study began recruiting
patients in 2003 and the periodontitis study will begin recruiting patients
during 2004. However, we do not know whether the drug will exhibit sufficient
efficacy in the treatment of rosacea or periodontitis to justify further
clinical investigation.
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 currently conducted
studies with the NCI or other sources of external funding that the drug has a
tolerable safety profile and a high likelihood of clinical and commercial
success.
Preclinical and Other Research and Development Activities
A preclinical program has identified and characterized IMPACS that exhibit
the potential for enhanced biological activities compared to Periostat and
Metastat. In collaboration with the University of Rochester, we have synthesized
a number of new IMPACS. These novel compounds underwent preliminary evaluation
in a variety of in vitro and in vivo assay systems. In March 2003, we announced
the issuance of the first United States patent claiming a compound that was
discovered as a result of these efforts. Further patents for other compounds in
the series have issued in 2003, and we anticipate that others will issue in 2004
and beyond.
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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 October 2002, we announced with Discovery Laboratories, Inc. the
formation of a research collaboration to evaluate the combination of Discovery's
platform technologies for the development of novel respiratory disease
therapeutics. Due to changed priorities at Discovery, this agreement was
terminated in September 2003.
In October 2002, we also announced the execution of a license agreement
with Medtronic, Inc. involving our IMPACS compounds, pursuant to which Medtronic
obtained an exclusive, worldwide license to technology relating to the use of
the compounds to treat aortic aneurysms and other forms of vascular disease with
medical devices. This program is still underway.
In February 2002 we announced that we had licensed a dermal and transdermal
drug delivery technology named Restoraderm from its inventor. Restoraderm is
designed to enhance the dermal delivery of a variety of active ingredients and
we intend to develop it into 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 therapeutic 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 early
2005. We have acquired exclusive rights to the technology and 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. To date, we have
spent $1.2 million in development costs for the Restoraderm technology. This
amount includes $930,000 in milestone payments to the inventor. We anticipate
spending approximately $8.2 million in development expenses through
commercialization.
Our research and development expenditures were approximately $5.5 million,
$4.4 million and $3.8 million in 2003, 2002 and 2001, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations." We expect to significantly increase our
investment in research and development in 2004.
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 SUNY for all of our core technology. The SUNY
License grants us an exclusive worldwide license to make and sell products
employing
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tetracyclines that are designed or utilized to alter a biological process.
Thirty one United States patents and five United States patent applications held
by SUNY are licensed to us under the SUNY License. Three of the 31 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 patent is co-owned with the Hospital for Joint Diseases in
New York City; three patents are co-owned with the University of Helsinki; and
one 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 29
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, or 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. Eighty seven
patents have been issued in foreign countries. All of SUNY's United States and
foreign patents expire between 2004 and 2019. 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.
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, we 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.
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In consideration of the license granted to us, we: (i) issued to SUNY
78,948 shares of common stock in 1992; and (ii) have agreed to pay SUNY
royalties on the net sales of products employing tetracyclines, with minimum
annual royalty payments of $50,000 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. A second patent was issued which covers one of the novel
compounds discovered by us and its use to treat abdominal aortic aneurysm,
ulceration of the cornea, periodontal disease, diabetes, diabetes mellitus,
scleroderma, progeria, lung disease (such as ARDS, cystic fibrosis, emphysema or
acute lung injury resulting from inhalation of toxicants), cancer, graft versus
host disease, disease of depressed bone marrow function, thrombocytopenia,
prosthetic joint loosening, spondyloarthropathies, osteoporosis, Paget's
disease, autoimmune disease, systemic lupus erythematosus, acute or chronic
inflammatory condition (such as inflammatory bowel disease, arthritis,
osteoarthritis, rheumatoid arthritis, pancreatitis, nephritis,
glomerulongephritis, sepsis, septic shock, lipopolysaccharide endotoxin shock,
multisystem organ failure or psoriasis), renal disease (such as chronic renal
failure, acute renal failure, nephritis or glomerulonephritis), connective
tissue disease, and neurological or neurodegenerative condition (such as
Alzheimer's disease, Guillain-Barre Syndrome, Krabbe's disease,
adrenoleukodystrophy, Parkinson's disease, Huntington's disease, multiple
sclerosis, amyotrophic lateral sclerosis or an encephalopathy, e.g., spongiform
encephalopathy). Furthermore, we report pending applications covering other new
tetracycline derivatives, and, among other things, methods of treating acne,
rosacea, meibomianitis and Kaposi's sarcoma.
On June 10, 2002, we executed a Development and Licensing Agreement with
Shire Laboratories, Inc. pursuant to which we were granted an exclusive
worldwide license (including the right to sublicense) to develop, make, have
made, use, supply, export, import, register and sell products for the treatment
of various inflammatory disorders. In addition, under the agreement, certain
product development functions shall be performed for us. Also under the
agreement, we have committed to payments, in cash or at our option, a
combination of cash and our common stock, upon the achievement of certain
clinical and regulatory milestones in the event we pursue certain applications
of the technology which could total up to $7.9 million in the aggregate.
Pursuant to the terms of such agreement, we shall also pay a percentage of
certain net sales of products, if any, utilizing any part of the technology. We
may terminate the agreement upon sixty days notice.
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.
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During 2003, we announced that we had settled all pending litigations
between CollaGenex and West-ward Pharmaceutical Corporation, or West-ward, a
generic pharmaceutical company that had filed an ANDA for a generic version of
Periostat. We sued West-ward and other defendants in the United States District
Court for the Eastern District of New York, alleging that West-ward infringes
our patents for Periostat for the treatment of adult periodontitis. Our
complaint also alleged that West-ward infringed our patent rights under the
Hatch-Waxman act by submitting an ANDA with the FDA, seeking FDA approval to
market a generic capsule version of Periostat.
In a separate action in the United States District Court for the District
of Columbia, we sought and, on July 23, 2003, were granted a preliminary
injunction preventing the FDA from approving generic versions of Periostat,
including West-ward's version. West-ward intervened in that case.
In the settlement, West-ward agreed and confessed to judgment that our
Periostat patents are valid and infringed by the filing of West-ward's ANDA.
West-ward also agreed and confessed to judgment that our Periostat patents would
be infringed by the manufacture and sale of a generic version of Periostat.
West-ward consented to a judgment enjoining West-ward and any party acting in
concert with West-ward from making and selling a generic version of Periostat
until our patents expire or are declared invalid or unenforceable by a court of
competent jurisdiction. Finally, West-ward agreed to withdraw from the FDA case
in the District of Columbia. We agreed to pay a portion of West-ward's actual
legal expenses in the amount of $700,000.
In a related case, we have separately sued United Research
Laboratories/Mutual Pharmaceutical Company, or Mutual, in the United States
District Court for the Eastern District of New York, claiming that Mutual
infringes the claims of our Periostat patents. Mutual has sued us in the United
States District Court for the Eastern District of Pennsylvania, alleging that we
engaged in tortious and anticompetitive behavior to prevent Mutual from
commercializing a generic version of Periostat. Mutual has also intervened in
the FDA action in the United States District Court for the District of Columbia.
In addition, on July 14, 2003 we submitted a Citizen Petition to the FDA
requesting that it refuse to approve any generic version of Periostat, submitted
by Mutual on the ground that the bioequivalence studies Mutual submitted are
insufficient to show that the Mutual product is bioequivalent to Periostat. The
FDA has not reached a decision on our Citizen Petition. The resolution of the
West-ward cases does not resolve any of the pending Mutual litigations or
administrative proceedings. We cannot predict the outcome of these matters.
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
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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
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 CollaGenex. 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 Atridox, Pandel,
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.
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Our products in development are drugs. The steps required before a drug may
be marketed in the United States include:
- pre-clinical laboratory tests, animal studies, and formulation
studies;
- submission to the FDA of an investigational new drug exemption
for human clinical testing, which must become effective before
human clinical trials may begin;
- adequate and well-controlled clinical trials to establish the
safety and efficacy of the drug for each indication;
- submission to the FDA of an NDA for approval;
- satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the drug is produced to assess
compliance with cGMP; and
- FDA review and approval of the NDA.
Pre-clinical tests include laboratory evaluations of product chemistry,
toxicity, and formulation, as well as animal studies. The results of the
pre-clinical tests, together with manufacturing information, analytical data,
and a plan for studying the product in humans, are submitted to the FDA as part
of an 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 is placed on clinical hold and the
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 I 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 II 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
III 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 I, Phase II, or Phase III 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
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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.
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 cGMP 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 NDA for Periostat in
1998, however, 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 NDA 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. The FDA has not provided such protection to Periostat.
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
current 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
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products we market, Atridox, Atrisorb FreeFlow, Atrisorb-D and Pandel 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.
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.
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 a
variety of factors, including product efficacy, safety, cost-effectiveness, ease
of use, patient discomfort, availability, price, patent position and effective
product promotion. We believe that Periostat is distinguished from other
existing and known periodontitis treatments in that it is the only treatment
that is directed to suppression of the enzymes that degrade periodontal support
tissues. We believe that all other therapies of which we are aware focus on
temporarily removing the bacteria associated with periodontitis. Periostat is a
prescription pharmaceutical tablet indicated as an adjunct to SRP to promote
attachment level gain and to reduce pocket depth in patients with adult
periodontitis that is taken by the patient between dental visits. We believe
that the following chart summarizes the pharmacotherapies available in the
United States and indicated for the treatment of adult periodontitis:
Product Patient
Product Manufacturer/ Dental Delivery Adminis- Treatment
Name Marketer Procedure Route tered Focus Indication
- ----------- ---------------- --------- ---------- --------- ------------ -------------
Periostat CollaGenex No Systemic Yes Tissue As an adjunct to SRP
Pharmaceuticals, degradation to promote
Inc. attachment level gain
and to reduce pocket
depth in patients with
adult periodontitis
*Atridox Atrix Laboratories/ Yes Local No Bacteria For treatment of
CollaGenex chronic adult
Pharmaceuticals, Inc. periodontitis for a
gain in clinical
attachment, reduction
in probing depth and
reduction in bleeding
on probing
-25-
Periochip Vendent on behalf of Yes Local No Bacteria As an adjunct to SRP
Dexcel procedures for
reduction of pocket
depth in patients with
adult periodontitis
Arestin Orapharma, a Yes Local No Bacteria As an adjunct to SRP
Division of Johnson procedures for
reduction of pocket
depth in patients with
adult periodontitis
* 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.
In addition, we may face competition from generic competitors. If one or
more generic versions of Periostat are approved and marketed, our revenues from
Periostat would significantly decrease. We cannot be certain that parties will
not receive FDA approval to introduce a competitive generic version of
Periostat.
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, 2003, we employed 156 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.
Additional Factors That May Affect Future Results
We Rely on Periostat for Most of Our Revenue.
During the years ended December 31, 2003, 2002 and 2001, Periostat
accounted for approximately 82%, 82% and 87% of our total net revenues,
respectively. Although we currently derive additional revenue from marketing
and/or selling other products (Atridox, Atrisorb FreeFlow, Atrisorb-D and
Pandel) and from licensing fees from foreign marketing
-26-
partners, our revenue and profitability in the near future will depend on our
ability to successfully market and sell Periostat.
Although we recently settled our litigation with West-ward, Mutual
submitted an application to the FDA for approval of a generic version of
Periostat. Other companies may also have submitted applications for approval of
generic versions of Periostat. We have filed suits to enforce our patent rights
and to compel the FDA to award patent and exclusivity protections that would
prevent a generic drug application from being approved now. On July 23, 2003, we
announced that the United States District Court for the District of Columbia had
granted a preliminary injunction temporarily restraining the FDA from approving
any ANDAs submitted for any generic version of Periostat. Until the Court has
made a final ruling on our complaint, the FDA cannot approve the ANDAs on file
for Mutual's 20 mg. doxycycline hyclate tablet or any other ANDA for a generic
version of Periostat. The Court could make a final ruling at any time. If the
Court decides in favor of the FDA, the FDA could begin to approve generic drugs
immediately thereafter.
As a result of the ruling in the District Court of the District of
Columbia, we have withdrawn our motion for a temporary restraining order and
preliminary injunction in our patent infringement suit against Mutual, which was
filed in the District Court of the Eastern District of New York. Our suit
against Mutual, however, remains on file and a motion for injunctive relief can
be filed immediately if required. We cannot predict the outcome of these
matters. In addition, we cannot be sure that one or more generic versions of
Periostat will not be approved and marketed. If one or more generic versions of
Periostat are approved and marketed, our revenues from Periostat would
significantly decrease and, as a result, our business, financial condition, cash
flows and results of operations would be materially adversely affected.
We May Not Be Able to Maintain Profitability.
From our founding in 1992 through the commercial launch of Periostat in
November, 1998, we had no revenue from sales of our own products. As of December
31, 2003, we have an accumulated deficit of $69.9 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 and our
other products. Although we achieved net income of $6.4 million and $902,000 for
the years ended December 31, 2003 and 2002, respectively, we expect to incur
significant future expenses, particularly with respect to the sales and
marketing of our existing products, new products and continuing clinical and
manufacturing development for other indications and formulations of Periostat,
and therefore, we cannot be certain that we will be able to maintain our
profitability in the future, if at all.
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.
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Our core technology is licensed from SUNY, and other academic and research
institutions collaborating with SUNY. Under the license agreement with SUNY, or
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 31 United States patents and six United States patent
applications that are licensed to us. The patents licensed from SUNY expire
between 2004 and 2019. 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,
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 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.
We are currently enforcing our patent rights against Mutual, a generic drug
company. Mutual has submitted a request for listing a generic tablet replacement
for Periostat on the New Jersey Formulary. In keeping with our patent
enforcement policy, we have initiated a patent infringement action in the
Eastern District of New York to prevent Mutual from introducing a generic
version of Periostat. A motion for preliminary injunction was filed and served
to prevent Mutual from introducing a generic version of Periostat to the
marketplace. As a result of our litigation against the FDA, we have withdrawn
our motion for a temporary restraining order and preliminary injunction in our
patent infringement suit against Mutual, although our complaint against Mutual
remains outstanding. Mutual has filed various claims against us relating to
these matters. We cannot be certain that Mutual or other third parties will not
receive FDA approval and introduce a competitive generic version of Periostat.
Any infringement or related action involving Mutual or any third party will
likely result in significant expenditures, even if such actions are settled,
require substantial management time and may not be resolved in our favor.
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.
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If We Lose Our Sole Supplier of Doxycycline Hyclate or Our Current
Manufacturer of Periostat, Our Commercialization of Periostat Will be
Interrupted, Halted or Less Profitable.
We rely on a single supplier, Hovione International Limited, or 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, 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
ninety-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 have entered into an agreement with a contract manufacturer,
Pharmaceutical Manufacturing Research Services, Inc., or PMRS, for our tablet
formulation for Periostat. Our current arrangement with PMRS has been extended
until the earlier of March 30, 2007 or until a generic 20 mg doxycycline hyclate
tablet is available on the market. 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. The introduction of a generic 20 mg
doxycycline hyclate tablet could leave us without a manufacturer or force us to
negotiate a new arrangement, possibly on less favorable terms. We intend to
contract with additional manufacturers for the commercial manufacture of
Periostat tablets. We believe, however, that it could take up to one 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, Pandel and
Atridox have been approved by the FDA as drugs. Atrisorb FreeFlow and Atrisorb-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. Also, we cannot market our approved products for
new indications until FDA approves the product for that indication. If the FDA
does not approve our products under development or additional indications for
marketed 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. If we or our partners
who manufacture our products fail to comply with regulatory requirements,
-29-
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 and approved for marketing in Austria, Finland,
Switzerland, Ireland, Israel, Italy, Luxembourg, the Netherlands, Portugal and
Canada, 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.
A Small Number of Wholesale Customers Account for the Majority of Our
Sales, and the Loss of One of Them, or Changes in Their Purchasing Patterns,
Could Result in Reduced Sales, Thereby Adversely Affecting Our Operating
Results.
We sell most of our products to a small number of wholesale drug
distributors. For the year ended December 31, 2003, sales to Cardinal Health,
Inc., McKesson Corporation and Amerisource-Bergen Corporation, represented
approximately 43%, 31% and 20%, respectively, of our aggregate net product
sales. The small number of wholesale drug distributors, consolidation in this
industry or financial difficulties of these distributors could result in the
combination or elimination of warehouses, which could temporarily increase
returns of our products or, as a result of distributors reducing inventory
levels, delay the purchase of our products. In addition, wholesalers may
increase purchase levels in anticipation of future price increases or may
capitalize on volume discounts to acquire inventory. This may cause an
unexpected increase in the level of trade inventories normally maintained by
wholesalers. Although we have developed a plan to manage our products trade
inventory level, this plan may not be effective. If trade inventory levels
become too high, or if prescription growth of our products are lower than
expected by the trade, wholesalers and large retail chains could reduce their
orders for our products, which could result in reduced sales of our products and
adversely affect our operating results.
We Cannot Assure You that Our Pursuit of Business in the Dermatology Market
will be Successful.
During 2003, we began to implement our plans to expand into the dermatology
market. We have completed and announced the preliminary results of a
double-blind, placebo-controlled 134-patient Phase III clinical trial to
evaluate the safety and efficacy of Periostat to treat rosacea, we have licensed
a new dermal and transdermal drug delivery technology called Restoraderm and we
executed a sublicense Agreement with Altana Inc. with respect to the marketing
and distribution of Pandel. In addition, we continue to actively seek product
licensing opportunities to enhance our near-term offerings to the dermatology
market. Our future success will depend on, among other things, our ability to:
(i) achieve market acceptance for any of these or future dermatological
offerings; (ii) hire and retain personnel with experience in the dermatology
market; (iii) execute our business plan with respect to this market segment; and
(iv) adapt to technical or regulatory changes once operational. Furthermore,
while we have experience in the
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sales and marketing of dental products, we have limited experience in this
market. This market is very competitive and some of our competitors have
substantially greater resources than we have. New product development is a
lengthy, complex and uncertain process that will require significant attention
and resources from management. A product candidate can fail at any stage of the
development process due to, among other things, efficacy or safety concerns, the
inability to obtain necessary regulatory approvals, the difficulty or excessive
cost to manufacture and/or the infringement of patents or intellectual property
rights of others. Furthermore, the sales of new products may prove to be
disappointing and fail to reach anticipated levels. We therefore cannot assure
you that we will be successful in our pursuit of business in the dermatology
market, or that we can sustain any business in which we achieve initial success.
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 an aggregate of $10.0 million in product liabi