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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED] for the fiscal year ended
December 31, 1996 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED] for the transition period from
________ to ________
COMMISSION FILE NUMBER 0-28748
CLOSURE MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 56-1959623
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5265 Capital Boulevard
Raleigh, North Carolina 27616
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 876-7800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of March 21, 1997, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $62,045,326. Such aggregate market value
was computed by reference to the closing sale price of the Common Stock as
reported on the Nasdaq National Market of The Nasdaq Stock Market on such date.
For purposes of making this calculation only, the registrant has defined
affiliates as including all directors and beneficial owners of more than five
percent of the Common Stock of the Company.
As of March 21, 1997, there were 12,155,029 shares of the registrant's Common
Stock outstanding.
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 the definitive proxy statement incorporated
by reference in Part III of this Annual Report on Form 10-K or any amendment to
this Annual Report on Form 10-K. [ ]
The following documents are incorporated by reference into Part III, Items 10,
11, 12 and 13 of this Annual Report on Form 10-K: the registrant's definitive
proxy materials for its 1997 Annual Meeting of Stockholders.
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TABLE OF CONTENTS
PART I .....................................................................................3
ITEM 1. BUSINESS...........................................................3
ITEM 2. PROPERTIES........................................................24
ITEM 3. LEGAL PROCEEDINGS.................................................24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............24
PART II ....................................................................................25
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...............................................25
ITEM 6. SELECTED FINANCIAL DATA...........................................26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............................27
ITEM 8. FINANCIAL STATEMENTS..............................................31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES..............................31
PART III ....................................................................................32
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................32
ITEM 11. EXECUTIVE COMPENSATION............................................32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................32
PART IV......................................................................................33
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.......................................................33
THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE
FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS REGARDING THE COMPANY'S
DEVELOPMENT, GROWTH AND EXPANSION PLANS AND THE SUFFICIENCY OF THE COMPANY'S
LIQUIDITY AND CAPITAL. SUCH STATEMENTS ARE BASED ON MANAGEMENT'S CURRENT
EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF UNCERTAINTIES AND RISKS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER SIGNIFICANTLY FROM THOSE DESCRIBED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "BUSINESS -- FACTORS AFFECTING THE
COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION," AS WELL AS THOSE
DISCUSSED ELSEWHERE IN THIS REPORT.
UNLESS THE CONTEXT INDICATES OTHERWISE, THE TERMS "CLOSURE" AND
"COMPANY" REFER TO CLOSURE MEDICAL CORPORATION. REFERENCES IN THIS REPORT TO
CLOSURE OR THE COMPANY ALSO INCLUDE, UNLESS THE CONTEXT INDICATES OTHERWISE,
CLOSURE'S PREDECESSOR, TRI-POINT MEDICAL L.P. (THE "PARTNERSHIP"). EFFECTIVE
JANUARY 13, 1997, THE COMPANY CHANGED ITS NAME FROM TRI-POINT MEDICAL
CORPORATION TO CLOSURE MEDICAL CORPORATION. "OCTYLDENT" AND "NEXABAND" ARE
FEDERALLY REGISTERED TRADEMARKS OF THE COMPANY. "TRAUMASEAL," "NEXACRYL,"
"NEXABAND S/C" AND "NEXABAND QUICKSEAL" ARE TRADEMARKS OF THE COMPANY. ALL OTHER
TRADE NAMES AND TRADEMARKS APPEARING IN THIS REPORT ARE THE PROPERTY OF THEIR
RESPECTIVE HOLDERS.
2
PART I
ITEM 1. BUSINESS.
FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING
FACTORS SHOULD BE CAREFULLY CONSIDERED. THESE FACTORS MAY CAUSE ACTUAL RESULTS,
EVENTS OR PERFORMANCE TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY
FORWARD-LOOKING STATEMENTS MADE BY THE COMPANY IN THIS REPORT.
HISTORY OF OPERATING LOSSES. The Company has incurred net losses in
each year since its inception, including net losses of approximately $16.8
million for the year ended December 31, 1996 (including a one-time non-cash
charge of $14.2 million). These losses have resulted primarily from expenses
associated with the Company's research and development activities, including
preclinical and clinical trials and general and administrative expenses. The
Company anticipates that its recurring operating expenses will increase for the
next several years, as it expects its research and development expenses to
increase in order to develop new products and fund additional clinical trials.
The Company expects to continue to incur a loss in 1997 and may incur losses in
subsequent years, although the amount of future net losses and time required by
the Company to reach profitability are highly uncertain. The Company's ability
to generate significant revenue and become profitable is dependent in large part
on its success in obtaining regulatory approvals or clearances for its products,
commercializing the Company's lead product, TRAUMASEAL, expanding its
manufacturing capacity, developing and marketing new products and entering into
additional marketing agreements where appropriate and the ability of its
marketing partners to commercialize successfully products incorporating the
Company's technologies. There can be no assurance that the Company will generate
significant revenue or become profitable on a sustained basis, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EARLY COMMERCIALIZATION; DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES;
UNCERTAINTY OF MARKET ACCEPTANCE. The Company is in the early stage of product
commercialization and has derived only limited revenue from sales of certain
products to its marketing partners. The Company has submitted a premarket
approval ("PMA") application to market TRAUMASEAL in the United States and has
several potential products in development. The Company believes that its
long-term viability and growth will depend in large part on receiving regulatory
clearances or approvals for and the successful commercialization of TRAUMASEAL
and other new products resulting from its research and development activities.
The Company presently is pursuing product opportunities that will require
extensive additional capital investment, research, development, clinical testing
and regulatory clearances or approvals prior to commercialization. There can be
no assurance that the Company's development programs will be successfully
completed or that required regulatory clearances or approvals will be obtained
on a timely basis, if at all. Moreover, commercial applications of the Company's
absorbable formulations are relatively new and evolving. The successful
development and market acceptance of the Company's proposed products are subject
to inherent developmental risks, including ineffectiveness or lack of safety,
unreliability, failure to receive necessary regulatory clearances or approvals,
high commercial cost and preclusion or obsolescence resulting from third
parties' proprietary rights or superior or equivalent products, as well as
general economic conditions affecting purchasing patterns.
There can be no assurance that the Company and its marketing partners
will be able to commercialize successfully or achieve market acceptance of the
Company's technologies or products, or that the Company's competitors will not
develop competing technologies that are less expensive or otherwise superior to
those of the Company. The failure to develop and market successfully new
products would have a material adverse effect on the Company's results of
operations and financial condition. See "-- Products," "-- Sales and Marketing"
and "-- Manufacturing."
UNCERTAINTY OF REGULATORY APPROVAL FOR TRAUMASEAL. The Company recently
completed clinical trials for TRAUMASEAL and submitted a PMA application to the
U.S. Food and Drug Administration (the "FDA"). Although the FDA granted
"expedited processing" of the TRAUMASEAL PMA application, the regulatory process
is lengthy, expensive
3
and uncertain. There can be no assurance that the Company will be able to obtain
the necessary approval from the FDA to market and manufacture TRAUMASEAL in the
United States for its intended use on a timely basis, if at all. A delay in
receipt of or failure to receive such approval would have a material adverse
effect on the Company's results of operations and financial condition. The
Company will similarly require approval in those foreign jurisdictions where
TRAUMASEAL will be marketed. A delay in receipt of or failure to receive such
approvals could have a material adverse effect on the Company's results of
operations and financial condition. See "-- Factors Affecting the Company's
Business, Operating Results and Financial Condition -- Effects of FDA and Other
Government Regulation" and "-- Government Regulations."
DEPENDENCE ON MARKETING PARTNERS. The Company has limited experience in
sales, marketing and distribution. Therefore, the Company's strategy for
commercialization of its nonabsorbable products has included entering into
agreements with other companies to market current and certain future products
incorporating the Company's technology. To date, the Company has entered into
five such agreements, and the Company derived all of its fiscal 1996 revenues
from the receipt of license and product development fees under the supply and
distribution agreement for TRAUMASEAL and the sale of other products to its
marketing partners. The Company intends to establish a sales force to market its
absorbable products as these products progress toward commercialization. There
can be no assurance that the Company will be able to establish marketing,
distribution and sales capabilities or make arrangements with third parties to
perform such activities on acceptable terms, if at all. There can be no
assurance that the Company will be able to enter into additional marketing
agreements on terms favorable to the Company, if at all, or that current or
future agreements will ultimately be beneficial to the Company.
The Company is dependent for product sales revenues for its
nonabsorbable products upon the success of the Company's marketing partners in
performing their responsibilities. The amount and timing of resources which may
be devoted to the performance of their contractual responsibilities by its
marketing partners are not within the control of the Company. There can be no
assurance that such marketing partners will perform their obligations as
expected, pay any additional option or license fees to the Company or market any
products under the marketing agreements, or that the Company will derive any
revenue from such arrangements. Moreover, certain of the agreements provide for
termination under certain circumstances. For example, Ethicon, Inc. ("Ethicon")
may terminate its agreement to purchase TRAUMASEAL from the Company should the
Company be unable to provide an adequate supply, and Ethicon may itself then
manufacture TRAUMASEAL and only pay the Company royalties on sales. The
resulting loss of payments from Ethicon for the purchase of TRAUMASEAL from the
Company would have a material adverse effect on the Company's results of
operations and financial condition. In addition, there can be no assurance that
TRAUMASEAL will be launched in the manner and on the timetable expected by the
Company. Certain agreements also permit the marketing partners to pursue
existing or alternative technologies in preference to the Company's technology.
There can be no assurance that the interests of the Company will continue to
coincide with those of its marketing partners or that the marketing partners
will not develop independently or with third parties products which could
compete with the Company's products, or that disagreements over rights or
technology or other proprietary interests will not occur. To the extent that the
Company chooses not to or is unable to enter into future agreements, it would
experience increased capital requirements to undertake the marketing or sale of
its current and future products. There can be no assurance that the Company will
be able to market or sell its current or future products independently in the
absence of such agreements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "-- Marketing Partners."
POTENTIAL ADVERSE EFFECT OF COMPETITION AND TECHNOLOGICAL CHANGE. The
Company competes with many domestic and foreign competitors in various rapidly
evolving and technologically advanced fields in developing its technology and
products, including medical device, pharmaceutical and biopharmaceutical
companies. For example, in the worldwide wound closure market, the Company's
products will compete with the suture products of Ethicon, the world leader in
the wound closure market, and American Home Products Corporation. In addition,
the Company believes its products will compete with the staple products of
United States Surgical Corporation and Ethicon Endo- Surgery, Inc., a subsidiary
of Johnson & Johnson. The Company's products may also compete with Histoacryl, a
cyanoacrylate-based topical adhesive marketed by B. Braun GmbH, and with a
similar adhesive marketed by Loctite Corporation. In the surgical sealants
market, the Company's products may compete with the fibrin-based sealants of
4
Immuno AG and Behringwerke AG, and most likely with fibrin-based sealants being
developed by Baxter Healthcare Corporation and Bristol-Myers Squibb Company. The
Company's surgical sealants also may compete with collagen- based hemostatic
products of, among others, Collagen Corporation, Fusion Medical Technologies,
Inc. and MedChem Products Inc., a division of C.R. Bard Inc.
Many of the Company's competitors and potential competitors have
substantially greater financial, technological, research and development,
marketing and personnel resources than the Company. In addition to those
mentioned above, other recently developed technologies or procedures are, or may
in the future be, the basis of competitive products. There can be no assurance
that the Company's competitors will not succeed in developing alternative
technologies and products that are more effective, easier to use or more
economical than those which have been or are being developed by the Company or
that would render the Company's technology and products obsolete and
non-competitive in these fields. These competitors may also have greater
experience in developing products, conducting clinical trials, obtaining
regulatory clearances or approvals, and manufacturing and marketing such
products. Certain of these competitors may obtain patent protection, approval or
clearance by the FDA or product commercialization earlier than the Company, any
of which could materially adversely affect the Company. Furthermore, if the
Company commences significant commercial sales of its products, it will also be
competing with respect to manufacturing efficiency and marketing capabilities,
areas in which it currently has limited experience. Finally, under the terms of
the Company's marketing agreements, the Company's marketing partners may pursue
parallel development of other technologies or products, which may result in a
marketing partner developing additional products that will compete with the
Company's products. See "-- Competition and Technological Change."
LIMITED MANUFACTURING EXPERIENCE. The Company has limited manufacturing
capacity and has limited experience in manufacturing its products. The Company's
future success is dependent in significant part on its ability to manufacture
its products in commercial quantities, in compliance with regulatory
requirements and in a cost-effective manner. The Company intends to expand its
manufacturing capabilities by acquiring large-scale manufacturing and
formulation equipment by the end of 1997. Production of commercial-scale
quantities may involve technical challenges for the Company and will require
significant scale-up expenses for additions to facilities and personnel. There
can be no assurance that the Company will be able to achieve large-scale
manufacturing capabilities or to manufacture its products in a cost-effective
manner or in quantities necessary to allow the Company to achieve profitability.
If the Company is unable to expand sufficiently its manufacturing capacity to
meet Ethicon's requirements for TRAUMASEAL as set forth under their agreement,
Ethicon may itself then manufacture TRAUMASEAL and only pay the Company
royalties on sales. The resulting loss of payments from Ethicon for the purchase
of TRAUMASEAL from the Company would have a material adverse effect on the
Company's results of operations and financial condition. See "-- Marketing
Partners."
In addition, the manufacture of the Company's products will be subject
to periodic inspection by regulatory authorities and certain marketing partners,
and the Company's manufacture of its products for human use is subject to
regulation and inspection from time to time by the FDA for compliance with Good
Manufacturing Practices ("GMPs"), as well as equivalent requirements and
inspections by state and foreign regulatory authorities. There can be no
assurance that the FDA or other authorities will not, during the course of an
inspection of existing or new facilities, identify what they consider to be
deficiencies in GMPs or other requirements and request, or seek, remedial
action. Failure to comply with such regulations or delay in attaining compliance
may adversely affect the Company's manufacturing activities and could result in,
among other things, Warning Letters, injunctions, civil penalties, FDA refusal
to grant premarket approvals or clearances of future or pending product
submissions, fines, recalls or seizures of products, total or partial
suspensions of production and criminal prosecution. Additionally, certain
modifications of the Company's manufacturing facilities and processes, such as
those made in preparation for commercial-scale production of products, will
subject the Company to further FDA inspections and review prior to final
approval of its products for commercial sale. There can be no assurance that the
Company will be able to obtain necessary regulatory approvals or clearances on a
timely basis, if at all. Delays in receipt of or failure to receive such
approvals or clearances or the loss of previously received approvals or
clearances would have a material adverse effect on the Company's results of
operations and financial condition. See "-- Factors Affecting the Company's
Business, Operating Results and Financial Condition -- Effects of FDA and Other
Government Regulation" and "-- Manufacturing."
5
DEPENDENCE ON SOLE SOURCE SUPPLIER. The Company currently purchases
cyanoacetate, the primary raw material used in manufacturing most of the
Company's products, from a single qualified source. Upon manufacturing scale-up
there can be no assurance that the Company will be able to obtain adequate
increased commercial quantities within a reasonable period of time or at
commercially reasonable rates. Lack of adequate commercial quantities or
inability to develop alternative sources meeting regulatory requirements at
similar prices and terms within a reasonable time or any interruptions in supply
in the future could have a material adverse effect on the Company's ability to
manufacture its products, including TRAUMASEAL, and, consequently, could have a
material adverse effect on the Company's results of operations and financial
condition. See "-- Factors Affecting the Company's Business, Operating Results
and Financial Condition -- Dependence on Marketing Partners," "-- Marketing
Partners" and "-- Manufacturing."
DEPENDENCE ON PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS. The
Company's success depends in large part on whether it can obtain patents,
maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. The Company has nine U.S. patents with
expiration dates ranging from 2004 to 2013 and has filed applications for five
additional U.S. patents, as well as certain corresponding patent applications
outside the United States, relating to the Company's technology. There can be no
assurance that any of the pending patent applications will be approved, that the
Company will develop additional proprietary products that are patentable, that
any patents issued to the Company will provide the Company with competitive
advantages or will not be challenged by any third parties or that the patents of
others will not prevent the commercialization of products incorporating the
Company's technology. Furthermore, there can be no assurance that others will
not independently develop similar products, duplicate any of the Company's
products or design around the Company's patents. Any of the foregoing results
could have a material adverse effect on the Company's results of operations and
financial condition.
The commercial success of the Company also will depend, in part, on its
ability to avoid infringing patents issued to others. If the Company were
determined to be infringing any third party patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses or
cease certain activities. If the Company is required to obtain any licenses,
there can be no assurance that the Company will be able to do so on commercially
favorable terms, if at all. The Company's failure to obtain a license for any
technology that it may require to commercialize its products could have a
material adverse effect on the Company's results of operations and financial
condition.
Litigation, which could result in substantial costs to and diversion of
effort by the Company, may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third party
proprietary rights. If competitors of the Company that claim technology also
claimed by the Company prepare and file patent applications in the United
States, the Company may have to participate in interference proceedings declared
by the U.S. Patent and Trademark Office to determine priority of invention,
which could result in substantial costs to and diversion of effort by the
Company, even if the eventual outcome is favorable to the Company. Any such
litigation or interference proceeding, regardless of outcome, could be expensive
and time consuming. Litigation could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from third
parties or require the Company to cease using certain technology and,
consequently, could have a material adverse effect on the Company's results of
operations and financial condition.
In addition to patent protection, the Company relies on unpatented
trade secrets and proprietary technological expertise. There can be no assurance
that others will not independently develop or otherwise acquire substantially
equivalent techniques, or otherwise gain access to the Company's trade secrets
and proprietary technological expertise or disclose such trade secrets, or that
the Company can ultimately protect its rights to such unpatented trade secrets
and proprietary technological expertise. The Company relies, in part, on
confidentiality agreements with its marketing partners, employees, advisors,
vendors and consultants to protect its trade secrets and proprietary
technological expertise. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach or
that the Company's unpatented trade secrets and proprietary technological
expertise will not otherwise become known or be independently discovered by
competitors. Failure to obtain or maintain patent or trade secret protection,
for any reason, could have a material adverse effect on the Company's results of
operations and financial condition. See "-- Patents, Trade Secrets and
Proprietary Rights."
6
EFFECTS OF FDA AND OTHER GOVERNMENT REGULATION. As newly developed
medical devices, the Company's medical tissue cohesives must receive regulatory
clearances or approvals from the FDA and, in many instances, from foreign and
state governments, prior to their sale. In order to obtain such clearances or
approvals, medical tissue cohesives must be shown to be efficacious and safe for
use in humans. The Company's current and future medical tissue cohesives for
humans are subject to stringent government regulation in the United States by
the FDA under the Federal Food, Drug, and Cosmetic Act, as amended (the "FDC
Act"). The FDA regulates the clinical testing, manufacture, safety, labeling,
sale, distribution and promotion of medical devices. Included among these
regulations are premarket clearance and premarket approval requirements and
GMPs. Other statutory and regulatory requirements govern, among other things,
establishment registration and inspection, medical device listing, prohibitions
against misbranding and adulteration, labeling and postmarket reporting.
The regulatory process is lengthy, expensive and uncertain. Before any
new medical device may be introduced to the market, the manufacturer generally
must obtain FDA approval through either the 510(k) ("510(k)") premarket
notification process or the lengthier PMA approval process. It generally takes
from four to 12 months from submission to obtain 510(k) premarket clearance,
although it may take longer. Approval of a PMA could take two or more years from
the date of submission of the application. In addition, FDA approval of color
additives used to color a medical device, such as the D & C Violet No. 2 in
TRAUMASEAL, often must be obtained through the color additive petition ("CAP")
process. The 510(k), PMA and CAP processes can be expensive, uncertain and
lengthy, and there is no guarantee of ultimate approval. It is expected that
most of the Company's future products under development will be subject to the
lengthier PMA process. There can be no assurance that the Company will obtain
the necessary clearances or approvals to market its products. Securing FDA
clearances and approvals may require the submission of extensive clinical data
and supporting information to the FDA, and there can be no guarantee of ultimate
clearance or approval. Failure to comply with applicable requirements can result
in Warning Letters, application integrity proceedings, fines, recalls or
seizures of products, injunctions, civil penalties, total or partial suspensions
of production, withdrawals of existing product approvals or clearances, refusals
to approve or clear new applications or notifications and criminal prosecution.
Medical devices also are subject to postmarket reporting requirements
for deaths or serious injuries when the device may have caused or contributed to
the death or serious injury, and for certain device malfunctions that would be
likely to cause or contribute to a death or serious injury if the malfunction
were to recur. If safety or efficacy problems occur after the product reaches
the market, the FDA may take steps to prevent or limit further marketing of the
product. Additionally, the FDA actively enforces regulations prohibiting
marketing of devices for indications or uses that have not been cleared or
approved by the FDA.
The Company's current human medical devices are at different stages of
FDA review. There can be no assurance that the Company will be able to obtain
the necessary 510(k) clearances or PMA and CAP approvals to market and
manufacture its products in the United States for their intended use on a timely
basis, if at all, and delays in receipt of or failure to receive such clearances
or approvals, the loss of previously received clearances or approvals, or
failure to comply with existing or future regulatory requirements could have a
material adverse effect on the Company's results of operations and financial
condition. See "-- Factors Affecting the Company's Business, Operating Results
and Financial Condition -- Limited Manufacturing Experience" and "-- Government
Regulations."
EFFECTS OF INTERNATIONAL SALES. The Company and its marketing partners
intend to market the Company's current and future products outside the United
States as well as domestically. A number of risks are inherent in international
transactions. In order for the Company to market its products in Europe,
Australia, Canada and certain other foreign jurisdictions, the Company must
obtain required regulatory approvals or clearances and otherwise comply with
extensive regulations regarding safety, manufacturing processes and quality.
These regulations, including the requirements for approvals or clearances to
market, may differ from the FDA regulatory scheme. There can be no assurance
that the Company will obtain regulatory approvals or clearances in such
countries or that it will not be required to incur significant costs in
obtaining or maintaining its foreign regulatory approvals or clearances. Delays
in receipt of approvals or clearances to market the Company's products in
foreign countries, failure to receive such approvals or clearances or the future
loss of previously received approvals or clearances could have a material
adverse effect on the Company's
7
results of operations and financial condition. International sales also may be
limited or disrupted by political instability, price controls, trade
restrictions and changes in tariffs. The Company's royalties from international
sales of TRAUMASEAL are based on net sales in foreign currencies, but payable in
U.S. dollars, and thus may be adversely affected by fluctuations in currency
exchange rates. Additionally, fluctuations in currency exchange rates may
adversely affect demand for the Company's products by increasing the price of
the Company's products in the currency of the countries in which the products
are sold. There can be no assurance that the Company will be able to
successfully commercialize its current or future products in any foreign market.
See "-- Government Regulations," "-- Marketing Partners" and "-- Sales and
Marketing."
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING. The
Company has expended and expects to continue to expend substantial funds to
complete the research, development and clinical testing of its products and to
establish commercial-scale manufacturing facilities. The Company believes that
existing cash and cash equivalents and short-term investments, which totaled
$17.7 million as of December 31, 1996, will be sufficient to finance its capital
requirements for at least 18 months. The Company has filed a registration
statement with the Securities and Exchange Commission (the "Commission")
relating to the public offering of 1,500,000 shares of Common Stock, par value
$.01 per share (the "Common Stock"), of the Company, of which 800,000 shares are
to be sold by the Company. There can be no assurance that the Company will be
able to complete successfully this public offering or that the Company will not
be required to seek additional capital to finance its operations in the future.
Other than the Company's equipment financing lines of credit, the Company
currently has no commitments for any additional financing, and there can be no
assurance that adequate funds for the Company's operations from any such
additional financing, the Company's revenues, financial markets, arrangements
with marketing partners or from other sources will be available when needed or
on terms attractive to the Company. The inability to obtain sufficient funds may
require the Company to delay, scale back or eliminate some or all of its
research and product development programs, manufacturing operations, clinical
studies or regulatory activities or to license third parties to commercialize
products or technologies that the Company would otherwise seek to develop
itself, and could have a material adverse effect on the Company's results of
operations and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
DEPENDENCE UPON KEY PERSONNEL. The Company is highly dependent on the
principal members of its management and scientific staff. The Company does not
maintain key person life insurance for any of its employees. In addition, the
Company believes that its future success in developing marketable products and
achieving a competitive position will depend in large part upon whether it can
attract and retain additional qualified management and scientific personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to continue to attract and retain such personnel. The
loss of services of one or more members of the management or scientific staff or
the inability to attract and retain additional personnel and develop expertise
as needed could have a material adverse effect on the Company's results of
operations and financial condition. See "-- Executive Officers of the Company."
PRODUCT LIABILITY EXPOSURE AND POTENTIAL UNAVAILABILITY OF INSURANCE.
The testing, manufacturing, marketing and sale of the products being developed
by the Company involve an inherent risk that product liability claims will be
asserted against the Company, its marketing partners or licensees. There can be
no assurance that the Company's current clinical trial and commercial product
liability insurance in the amount of $3 million per claim with an annual
aggregate limit of $3 million is adequate or will continue to be available in
sufficient amounts or at an acceptable cost, if at all. A product liability
claim, product recall or other claim, as well as any claims for uninsured
liabilities or in excess of insured liabilities, could have a material adverse
effect on the Company's results of operations and financial condition.
See "Legal Proceedings."
THE COMPANY
The Company completed its initial public offering of 3,000,000 shares
of Common Stock, of which 2,550,000 shares were sold by the Company, in
September 1996, raising net proceeds of approximately $17.9 million. Immediately
prior to the initial public offering, the Company consummated an exchange of
obligations of and interests in Tri-Point
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Medical L.P., the Company's predecessor, for 9,600,000 shares of Common Stock
(the "Exchange"). The Company's executive offices are located at 5265 Capital
Boulevard, Raleigh, North Carolina 27616, and its telephone number is (919)
876-7800.
BUSINESS OVERVIEW
Closure develops, commercializes and manufactures medical tissue
cohesive products based on its proprietary cyanoacrylate technology. The
Company's medical tissue cohesives can be used to close and seal wounds and
incisions rapidly and stop leakage of blood and other body fluids from injured
tissue. The Company's nonabsorbable products can be used to replace sutures and
staples for certain topical wound closure applications, while the Company's
absorbable products can potentially be used as surgical sealants and surgical
tissue cohesives for internal wound closure and management. Closure's medical
tissue cohesive products align injured tissue without the trauma caused by
suturing or stapling and allow natural healing to proceed. In addition, Closure
believes that its medical tissue cohesive products result in lower overall
procedure costs and are easier and quicker to prepare and use than sutures or
staples. The worldwide market for sutures and staples for topical and internal
applications is currently estimated to be $2.6 billion annually, and the Company
expects that it will compete for a portion of this market.
The Company has three products for human use and has a product line for
veterinary uses, which are described below:
TRAUMASEAL is a topical tissue cohesive used to close wounds
from skin lacerations and incisions. The Company filed a PMA
application for TRAUMASEAL with the FDA in December 1996,
which application was granted "expedited processing." The
Company has entered into a marketing agreement with Ethicon, a
subsidiary of Johnson & Johnson, for exclusive worldwide
marketing and distribution of TRAUMASEAL. Product launch of
TRAUMASEAL is expected in France, Italy and Australia in
mid-1997 and in Canada in late 1997, subject to receipt of
regulatory approval.
OCTYLDENT is a topical sealant currently used in conjunction
with Actisite(R), a site-specific drug delivery system
manufactured by ALZA Corporation ("ALZA"), to treat adult
periodontal disease. OCTYLDENT received 510(k) clearance for
use as a cohesive for the temporary fixing of periodontal
fibers to teeth or other hard surface abutments from the FDA
in 1990 and is marketed with Actisite(R) in the United States
by Procter & Gamble/ALZA, Partners for Oral Health Care (the
"Procter & Gamble/ALZA Partnership") and outside the United
States by ALZA.
NEXACRYL is a topical sealant to be used in the repair of
corneal ulcers and lacerations. The Company received an FDA
approvable letter for NEXACRYL in January 1996. If approved,
the Company believes NEXACRYL will be the first cyanoacrylate
cohesive product to receive a PMA from the FDA. The Company
has entered into a marketing agreement with Chiron Vision
Corporation ("Chiron") for exclusive worldwide marketing and
distribution of NEXACRYL.
NEXABAND is a product line of five topical tissue cohesives
currently used in veterinary wound closure and management.
NEXABAND products have been marketed by Farnam Companies, Inc.
("Farnam") since 1993.
Closure is also developing absorbable products for internal
applications. The Company has two products in development, a surgical sealant to
be used to control post-surgical leakage from coronary artery bypass graft and
bowel resection procedures and a surgical tissue cohesive to be used to close
internal surgical incisions and traumatic wounds.
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These future products require further development, clinical trials and
regulatory clearance or approval prior to commercialization.
TECHNOLOGY OVERVIEW
Closure's medical tissue cohesive products are based on its proprietary
cyanoacrylate technology. Cyanoacrylates are a family of liquid monomers that
react under a variety of conditions to form polymer films with strong adhesive
properties. Industrial adhesives based on cyanoacrylates were first introduced
in 1958 and are widely used in the aerospace and automotive industries, as well
as in consumer products such as super glue.
Medical tissue cohesives have not been widely used because, unlike
industrial adhesives, medical tissue cohesives must be shown to be safe for use
in humans and approved by regulatory authorities. The major obstacles to
achieving regulatory approval have been meeting biocompatibility standards and
demonstrating sterility. Using its proprietary cyanoacrylate technology, Closure
believes it has demonstrated biocompatibility as defined by ISO Toxicology
Testing Standards for the Biological Evaluation of Medical Devices. A key
element in the Company's compliance with these standards is its ability to
manufacture highly purified base material which allows the Company to satisfy
toxicity tests. In addition, Closure's products are synthetic, thereby
eliminating the risk of contamination inherent in products such as fibrin glues
or collagen-based products, which are derived from human blood or animal tissue.
Closure has also developed novel assays to demonstrate sterility, which is
required for regulatory approval and enhances the safety profile of its
products.
Closure's technology enables it to develop NONABSORBABLE formulations
for topical use and ABSORBABLE formulations for internal use. Nonabsorbable
formulations close and seal skin wounds and incisions for the duration of
healing, then fall off naturally as new skin cells are produced and the wound
bed heals. Absorbable formulations can be used to close or seal internal wounds
and degrade, in a predictable manner, into biocompatible components that are
eliminated from the body naturally. Closure has been able to develop absorbable
formulations by controlling biodegradability of cyanoacrylates.
The key obstacle in developing an absorbable formulation has been that
certain byproducts of the degradation process are toxic. In particular,
degradation of cyanoacrylates produces formaldehyde, which is toxic at
relatively low concentrations in the body. Closure has patented a "scavenger"
process that permits degradation without a cytotoxic reaction. In this process,
the Company adds agents to its formulations that reduce formaldehyde to
biologically acceptable levels.
The Company's proprietary technology allows it to customize the
physical and chemical properties of cyanoacrylates to meet specific market
needs. These properties include viscosity, flexibility, bond strength,
stability, setting time, porosity and biodegradation. For example, TRAUMASEAL
has been formulated with the high bond strength of cyanoacrylates, yet has
enough flexibility to adhere and adjust as needed to the tension of the skin on
different areas of the body. Additional formulations of TRAUMASEAL with higher
viscosity and varied setting times may be developed to enhance ease of use in
specialized procedures in cosmetic and dermatologic surgery. The Company's
products for the treatment of moist areas, such as the eyes, mouth and internal
tissue, may be formulated to have faster setting times to control the flow of
fluids. The Company's absorbable products may be formulated with controlled
biodegradation rates to match the healing rates of various tissues. In addition,
the Company's products perform consistently and reproducibly, do not require
special preparation or refrigeration and have shelf-lives of 18 to 24 months.
Closure has also developed delivery technology to deliver TRAUMASEAL
and other products to wound sites in order to enhance the utility of its
products. The current TRAUMASEAL applicator is a small, pen-like instrument that
is easy to use and facilitates the application of the product. This applicator
contains a catalyst that controls the polymerization process and allows the
cohesive film to be applied in multiple layers, which enhances bond strength.
The Company has also developed a spray applicator for equine wound management,
which permits fast delivery of the NEXABAND tissue cohesive to a large surface
area of the animal. Closure intends to continue investigating and developing
delivery technologies as various needs arise.
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The Company is building a strong portfolio of patent and trade secret
protection on the basic properties, formulations and medical uses of its
proprietary tissue cohesive and delivery technologies. The Company has been
issued five U.S. patents relating to the Company's scavenger process for its
absorbable formulations. In addition, the Company has four patents directed to
other areas of tissue cohesive and delivery technology. The Company has filed
five U.S. patent applications covering other aspects of the scavenger process,
delivery technology, biodegradation rate control processes, high strength wound
closure tissue cohesives and formulation and delivery additives. Counterparts of
certain of these patents and patent applications have been filed in other
countries. The Company also relies on its trade secrets and technological
expertise in order to protect its proprietary technology.
During the years ended December 31, 1994, 1995 and 1996, the Company
spent $546,000, $652,000 and $861,000, respectively, on Company-sponsored
research and development activities.
PRODUCTS
The Company's medical tissue cohesive products are an alternative to
the traditional method of closing topical and internal wounds and incisions.
Suturing and stapling involve puncturing healthy tissue in order to align and
close the wound, may cause leakage or additional scarring at the small puncture
sites, may require anesthetics, are time-consuming to apply, and often require
return patient visits and physician time to remove the sutures or staples.
Medical tissue cohesives may be applied quickly, may not require anesthetics, do
not induce trauma to surrounding tissues and do not require return visits to the
physician.
PRODUCT MARKET STATUS MARKETING PARTNER
NONABSORBABLE
TRAUMASEAL Topical wound PMA pending (granted Ethicon
closure expedited processing)
OCTYLDENT Periodontal Marketed in U.S. and Procter & Gamble/ALZA
sealant European Union countries in Partnership; ALZA
conjunction with
Actisite(R)
NEXACRYL Corneal repair PMA pending Chiron
NEXABAND (5 products) Veterinary Marketed in U.S. Farnam
ABSORBABLE
SURGICAL SEALANT Coronary Preclinicals None
artery bypass
graft and
bowel
resection
SURGICAL TISSUE Internal wound Preclinicals None
COHESIVES closure
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TRAUMASEAL
The Company's lead product, TRAUMASEAL, is a topical tissue cohesive
used to close wounds from skin lacerations and incisions, minimally invasive
surgery and plastic surgery. The Company believes, based on market research,
that there are approximately 11 million skin lacerations annually in the United
States. In addition, there were an estimated 7.6 million minimally invasive
surgical procedures in 1995 and approximately 1.4 million plastic surgery
procedures in 1994. The Company believes, based on industry sources, that
approximately 25 million other surgical procedures are performed annually in the
United States. The Company expects that TRAUMASEAL will compete for a portion of
these markets as a replacement for, or in conjunction with, sutures or staples.
TRAUMASEAL is intended to be used topically for wound closure where a 5.0 or
smaller diameter suture would normally be used and is not intended for use on
the hands, feet or across joints. TRAUMASEAL can also be used topically for
lacerations or incisions requiring subcutaneous sutures or staples. Although the
purchase cost of TRAUMASEAL will be greater than sutures or staples, the Company
believes that the use of TRAUMASEAL will result in lower overall procedure costs
because of reduced treatment time, elimination of the need for anesthetics,
simplification of post-closure wound care and elimination of suture or staple
removal.
The Company submitted a PMA application for TRAUMASEAL in December
1996. Based on the FDA's initial review, this application was determined to be
suitable for filing and was granted "expedited processing." The Company
completed controlled, randomized clinical trials of TRAUMASEAL at ten sites
throughout the United States with an enrollment of 818 patients. The clinical
trials were conducted by a clinical research organization and compared wound
closure utilizing TRAUMASEAL with wound closure utilizing sutures or staples.
The clinical trials demonstrated TRAUMASEAL to be at least equivalent to
nonabsorbable 5.0 or smaller diameter sutures, staples or adhesive strips/tapes
in wound closure, wound healing, cosmetic outcome and infection rate and also
demonstrated that the use of TRAUMASEAL substantially reduced procedure time. In
February 1997, the Company submitted a CAP to the FDA for use of a color
additive in TRAUMASEAL.
Product launch of TRAUMASEAL is expected in France, Italy and Australia
in mid-1997 and in Canada in late 1997, subject to regulatory approval. A
controlled, randomized 300-patient clinical study of TRAUMASEAL conducted in
Canada in late 1995 and early 1996 similarly demonstrated TRAUMASEAL to be at
least equivalent to nonabsorbable 5.0 or smaller diameter sutures. There were no
reports of unanticipated adverse effects.
In March 1996, the Company entered into an agreement with Ethicon, a
subsidiary of Johnson & Johnson and a world leader in wound closure products, to
market and distribute TRAUMASEAL.
OCTYLDENT
OCTYLDENT, the Company's first human product introduction, is a topical
sealant used in conjunction with site-specific sustained release antibacterial
drug therapy to treat adult periodontal disease. The American Dental Association
estimated that approximately 14 million scaling and planing procedures were
performed in 1990 (the most recent year for which data are available) in the
United States to help prevent the progression of periodontal disease. OCTYLDENT
is currently used to seal the pocket of a diseased gum where Actisite(R), a
therapeutic drug delivery system manufactured by ALZA, has been inserted,
thereby allowing the system to remain in place over a ten-day period.
OCTYLDENT received FDA marketing clearance in August 1990, and the FDA
issued approval to market Actisite(R) in March 1994. The Company entered into
supply agreements in 1991 and 1993 with the Procter & Gamble/ALZA Partnership
and ALZA to market OCTYLDENT with Actisite(R) in the United States and outside
the United States, respectively. The U.S. product launch of OCTYLDENT, sold in
combination with Actisite(R), commenced in July 1994. The Actisite(R)/OCTYLDENT
product is marketed in several European countries, where the first launch
occurred in May 1993, and ALZA is pursuing registration and distribution
arrangements for Actisite(R) in a number of other European markets. The Company
received authorization to display the CE mark for OCTYLDENT in the European
Union in August 1995, which allows OCTYLDENT to be marketed throughout the
European Union.
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The Company entered into an agreement in March 1994 with On-Site
Therapeutics, Inc. ("On-Site") pursuant to which On-Site provides exclusive
services to identify potential purchasers of OCTYLDENT for use in conjunction
with site-specific sustained release antibacterial drug therapy for adult
periodontal disease. Under the agreement, On-Site receives royalties on sales of
OCTYLDENT.
NEXACRYL
NEXACRYL is a topical sealant to be used in the repair of corneal
ulcers and lacerations. NEXACRYL received orphan device status to treat a
condition known as "melting cornea" for which no FDA-approved product is
presently available. NEXACRYL is applied directly to the cornea to seal fluids
and allow the corneal tissue to heal.
A clinical study of NEXACRYL has been completed in which 262 patients
were treated at 23 clinical study sites with no reports of leakage or infections
attributable to NEXACRYL. Based on this study, the Company filed a PMA
application with the FDA and received an approvable letter from the FDA in
January 1996 for the product. A PMA is anticipated following sterilization
validation studies, FDA inspection of the manufacturing site and FDA labeling
review. If approved, the Company believes NEXACRYL will be the first
cyanoacrylate cohesive to obtain a PMA from the FDA.
The Company intends to develop an additional formulation of NEXACRYL
for use in cataract and other related corneal procedures. There are
approximately two million cataract procedures performed in the United States
each year. If NEXACRYL receives marketing approval from the FDA, the Company
intends to broaden the indication for NEXACRYL to cover such procedures. The
Company believes this can be accomplished by submitting a PMA Supplement to the
FDA, which may include clinical data to be generated from a limited clinical
study. There can be no assurance that a limited clinical study will be
acceptable to the FDA or that the Company will be able to obtain FDA approval of
a PMA Supplement for this or any additional indication.
The Company's marketing partner for NEXACRYL is Chiron.
NEXABAND VETERINARY PRODUCTS
The Company has five topical tissue cohesive products sold under the
NEXABAND trade name used in veterinary wound closure and management procedures.
There were an estimated 11 million surgical procedures performed on animals in
the United States in 1990 and for which the Company believes NEXABAND products
could have been used. The Company estimates that NEXABAND products were used in
approximately 1.3 million veterinary procedures in the United States in 1996.
NEXABAND products seal the wound and provide a flexible, waterproof
barrier against dirt, fluids and contaminants. The tissue cohesive falls off as
the wound is healed. The products are differentiated by type of applicator,
setting time, viscosity and packaging. NEXABAND S/C is used for the topical
closure of lacerations and spay and neuter incisions. NEXABAND QUICKSEAL is used
as a sealant for minor grooming cuts. NEXABAND PUMP SPRAY is used as a sealant
for large surface area wounds, particularly equine abrasion wounds. NEXABAND
LIQUID is used for wound closure in cat declawing procedures. NEXABAND
OPHTHALMIC is used as a hemostatic agent and for the protection of damaged
corneas. The NEXABAND products are distributed through Farnam, a leader in large
animal over-the-counter products and small and large animal ethical product
markets.
PRODUCTS IN DEVELOPMENT
The Company has several absorbable products under development which
will require further development, clinical trials and regulatory clearance or
approval prior to commercialization. See "-- Government Regulations."
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SURGICAL SEALANT
The Company is developing an absorbable surgical sealant to be used to
control post-surgical leakage at suture closure sites, a problem that is not
effectively addressed by current medical technology. Closure's surgical sealant
is being developed initially for use in coronary artery bypass graft and bowel
resection surgery, of which approximately 1.2 million procedures were performed
in the United States in 1992. The Company believes its absorbable formulations
could also serve as effective sealants for repairing bladder or spleen defects,
diffusing bleeding from the liver, sealing air leakage from lung defects,
repairing skin graft sites and managing chronic skin ulcers.
The Company is conducting preliminary animal studies to test the
feasibility of using absorbable tissue cohesive sealants to prevent leakage
during coronary artery bypass graft procedures.
A number of major medical firms are seeking to develop blood-based
fibrin products to prevent leakage at suture closure sites. The Company believes
that its surgical sealant has advantages over such products in that it will be
significantly easier to manufacture, control and manipulate than human blood,
which must be harvested, processed and screened for contaminants, and eliminates
the risk of contamination inherent in blood-derived products. In addition,
several companies are seeking to develop collagen-based products, which are
derived from animal tissue, to act as an internal sealant for human tissue. The
Company believes that its surgical sealants have similar advantages over
collagen- based products and that such products will pose many of the same
contamination risks described above. In addition, the Company believes that its
cyanoacrylate-based tissue cohesives have greater bond strength than either
fibrin-based or collagen-based products.
SURGICAL TISSUE COHESIVE
The Company is developing an absorbable surgical tissue cohesive for
the closure of internal surgical incisions and traumatic wounds. There were
approximately 50 million surgical procedures performed globally in 1995, with an
estimated growth rate of 2% to 3% annually. The Company believes that its
absorbable tissue cohesive for surgical closure of soft tissue would be fast,
safe and easy to use, and would provide advantages over sutures and staples such
as cost effectiveness, enhanced wound sealing and closing, maintenance of the
healing environment, reduced trauma, pain and patient discomfort and superior
tissue adherence. In addition, the Company believes that its absorbable surgical
tissue cohesive would be well-suited for internal closure in laparoscopic
procedures.
The Company has initiated preliminary animal studies to test the
feasibility of absorbable formulations to close internal wounds, including soft
tissue wounds.
ADDITIONAL PRODUCT OPPORTUNITIES
The Company believes that there are other potential medical
applications for its proprietary cyanoacrylate technology. The Company has not
yet developed any programs or committed any funds for research and development
of these potential applications. Moreover, any potential products will be
subject to extensive and rigorous regulatory review. There can be no assurance
that any funds will be available for research programs for such potential
products or that any potential products will be successfully developed, be
proven to be safe and efficacious in clinical trials, meet applicable regulatory
standards, be capable of being produced in commercial quantities at acceptable
costs or be successfully marketed.
The Company believes that many consumers of over-the-counter ("OTC")
wound closure products would prefer the sealing and wound protection
characteristics of a cohesive as compared to the wound covering capabilities of
a topical bandage. The Company believes that incorporating its topical wound
closure product, TRAUMASEAL, into an OTC product could provide a fundamental
differentiating characteristic and marketing advantage over products currently
offered in the OTC market. FDA approval of a PMA Supplement would be required
prior to marketing TRAUMASEAL for OTC use.
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The Company also believes that its cohesive technology could be used as
a site-specific drug delivery system to deliver growth factors to stimulate
tissue regeneration, various hormones or pharmaceuticals to promote healing,
antibiotics or antivirals to inhibit infection or chemotherapeutic agents to
slow or stop tumor growth. Based on preliminary analyses, the Company believes
that encapsulations, matrix vehicles, liquids and other formed products may be
developed from its cohesive material.
In addition, the Company believes its technology could be useful for
certain orthopedic repair procedures.
MARKETING PARTNERS
An important element of the Company's strategy for its nonabsorbable
products is to enter into marketing agreements to enable it to take advantage of
the wide range of opportunities created by its technology. To exploit these
opportunities, the Company has entered into the agreements described below for
the supply and distribution of certain products. The Company is dependent on its
marketing partners to market and distribute its products. Although the Company
believes that its marketing partners have an economic motivation to succeed in
performing their contractual responsibilities, the amount and timing of
resources to be devoted to these activities are not within the control of the
Company. See "-- Factors Affecting the Company's Business, Operating Results and
Financial Condition -- Dependence on Marketing Partners."
ETHICON, INC.
In March 1996, the Company entered into a renewable, eight-year supply
and distribution agreement with Ethicon, a subsidiary of Johnson & Johnson,
which provides Ethicon with exclusive worldwide rights to market, distribute and
sell TRAUMASEAL, the Company's nonabsorbable wound closure tissue cohesive. The
agreement provides for certain up-front and milestone payments to the Company,
provides for the reimbursement of certain expenses associated with clinical
trials, requires Ethicon to make minimum purchases that escalate annually after
receipt of FDA or European Community approval and requires Ethicon to pay
royalties based upon net sales.
Ethicon may renew the agreement for additional one-year periods. The
agreement is terminable upon specified events, including (i) material breach by
either party, (ii) insolvency of either party and (iii) failure to obtain
regulatory approval for TRAUMASEAL in the United States within two years from
the date of submission of the Company's 510(k) notification or PMA. The Company
completed human clinical trials of TRAUMASEAL in late 1996 and submitted a PMA
application in December 1996. The Office of Device Evaluations of the FDA
subsequently notified the Company that the PMA was granted "expedited
processing" by the FDA. Upon certain events of default, including failure to
provide an adequate supply of product, Ethicon may terminate its arrangement to
purchase TRAUMASEAL from the Company, and Ethicon may itself then manufacture
TRAUMASEAL and only pay the Company royalties based on sales. See "-- Factors
Affecting the Company's Business, Operating Results and Financial Condition --
Dependence on Marketing Partners," "-- Factors Affecting the Company's Business,
Operating Results and Financial Condition -- Limited Manufacturing Experience"
and "-- Manufacturing."
PROCTER & GAMBLE/ALZA, PARTNERS FOR ORAL HEALTH CARE AND ALZA CORPORATION
The Company entered into a supply agreement with the Procter &
Gamble/ALZA Partnership in March 1991, which was subsequently amended in April
1992. The agreement grants the Procter & Gamble/ALZA Partnership the
non-exclusive worldwide rights to market and distribute OCTYLDENT with
Actisite(R), a product manufactured by ALZA. The first shipment under this
agreement was in May 1994. In March 1993, the Company entered into a supply
agreement with ALZA, which grants ALZA non-exclusive rights to market OCTYLDENT
worldwide, except in the United States, Canada, Mexico and Venezuela, where the
Procter & Gamble/ALZA Partnership has marketing rights. The first shipment under
this agreement was in May 1993. The agreements guarantee the Company minimum
purchases annually and provide for specified prices per unit for OCTYLDENT,
which may be increased annually subject to certain limitations.
15
The agreements each have a term of three years from the first shipment
date, with automatic renewal for additional one-year periods, and each agreement
is terminable upon specified events, including (i) material breach by either
party, (ii) the publication of a scientific study, undertaken or reported by a
nationally recognized health research agency or government body, that links any
component of OCTYLDENT to any health or safety hazard and (iii) any revocation
or suspension of the Company's 510(k) clearance for OCTYLDENT.
CHIRON VISION CORPORATION
The Company entered into a supply and distribution agreement with
Chiron effective July 1992, and amended in April 1995, which provides Chiron
with the exclusive rights to market, sell and distribute certain human
ophthalmic products on a worldwide basis. The agreement provides Chiron with an
option to expand its coverage to include new products. The Company received a
payment upon the execution of the agreement, and will receive a milestone
payment upon FDA marketing approval of its first ophthalmic product, NEXACRYL.
The agreement guarantees the Company minimum purchases that escalate annually.
Pursuant to the agreement, pricing may be adjusted annually to reflect increases
in the U.S. Department of Labor Producer's Price Index. The agreement has a term
of 10 years from the effective date of U.S. regulatory approval of the
last-approved product. The agreement is terminable upon specified events,
including (i) material breach by either party, (ii) Chiron's providing 30 days'
notice as to any product for which FDA clearance or approval is then pending, or
(iii) Chiron's providing 180 days' notice for products for which FDA clearance
or approval is obtained. In certain circumstances, Chiron may terminate its
arrangement to purchase products from the Company, and may itself then
manufacture such products and only pay the Company royalties based on sales.
FARNAM COMPANIES, INC.
In December 1992, the Company entered into a renewable, seven-year
development and distribution agreement with Farnam. The Company granted Farnam
the exclusive rights to market, sell and distribute its NEXABAND line of
veterinary products to the ethical veterinary market in North America. In
addition to the existing nonabsorbable NEXABAND products covered by this
agreement, Farnam has exclusive rights in North America to any absorbable
veterinary cohesive products developed by the Company. Prices and minimum sales
volumes for new products will be negotiated upon product development completion.
Pursuant to the agreement, the Company received a nonrefundable research,
testing and development fee. The agreement also provides for minimum purchases,
which increase annually, and allows the Company to adjust prices annually, but
not in excess of increases in the U.S. Department of Labor Wholesale Price
Index. The agreement is terminable upon specified events, including material
breach by either party. The agreement will automatically renew for successive
one-year periods contingent on Farnam meeting required levels of purchases.
PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
The Company's success depends in large part on its ability to obtain
patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. The Company has nine U.S. patents with
expiration dates ranging from 2004 to 2013 and has filed applications for five
additional U.S. patents, as well as certain patent applications outside the
United States, relating to the Company's technology. Five of the issued U.S.
patents relate to the Company's scavenger process for its absorbable
formulations and pending U.S. patent applications relate to other aspects of the
scavenger process. In addition, the Company has four patents directed to other
areas of tissue cohesive and delivery technology. Other U.S. patent applications
relate to the Company's delivery technology, biodegradation rate control
processes, high strength wound closure tissue cohesives and formulation and
delivery additives.
There can be no assurance that any of the pending patent applications
will be approved, that the Company will develop additional proprietary products
that are patentable, that any patents issued to the Company will provide the
Company with competitive advantages or will not be challenged by any third
parties or that the patents of others will not prevent the commercialization of
products incorporating the Company's technology. Furthermore, there can be no
assurance that others will not independently develop similar products, duplicate
any of the Company's products or design
16
around the Company's patents. Any of the foregoing results could have a material
adverse effect on the Company's results of operations and financial condition.
The commercial success of the Company also will depend, in part, on its
ability to avoid infringing patents issued to others. If the Company were
determined to be infringing any third party patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses or
cease certain activities. If the Company is required to obtain any licenses,
there can be no assurance that the Company will be able to do so on commercially
favorable terms, if at all. The Company's failure to obtain a license for any
technology that it may require to commercialize its products could have a
material adverse impact on the Company's results of operations and financial
condition.
Litigation, which could result in substantial costs to and diversion of
effort by the Company, may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third party
proprietary rights. If competitors of the Company that claim technology also
claimed by the Company prepare and file patent applications in the United
States, the Company may have to participate in interference proceedings declared
by the U.S. Patent and Trademark Office to determine priority of invention,
which could result in substantial costs to and diversion of effort by the
Company, even if the eventual outcome is favorable to the Company. Any such
litigation or interference proceeding, regardless of outcome, could be expensive
and time consuming. Litigation could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from third
parties or require the Company to cease using such technology and, consequently,
could have a material adverse effect on the Company's results of operations and
financial condition.
In addition to patent protection, the Company relies on unpatented
trade secrets and proprietary technological expertise. There can be no assurance
that others will not independently develop or otherwise acquire substantially
equivalent techniques, or otherwise gain access to the Company's trade secrets
and proprietary technological expertise or disclose such trade secrets, or that
the Company can ultimately protect its rights to such unpatented trade secrets
and proprietary technological expertise. The Company relies, in part, on
confidentiality agreements with its marketing partners, employees, advisors,
vendors and consultants to protect its trade secrets and proprietary
technological expertise. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach or
that the Company's unpatented trade secrets and proprietary technological
expertise will not otherwise become known or be independently discovered by
competitors. Failure to obtain or maintain patent and trade secret protection,
for any reason, could have a material adverse effect on the Company's results of
operations and financial condition.
GOVERNMENT REGULATIONS
The Company's products and operations are subject to substantial
government regulation in the United States and foreign countries.
FDA REGULATION
Most medical devices, including the Company's medical tissue cohesives
for humans, are subject to stringent government regulation in the United States
by the FDA under the FDC Act, and, in many instances, by foreign and state
governments. The FDA regulates the clinical testing, manufacture, safety,
labeling, sale, distribution and promotion of medical devices. Included among
these regulations are premarket clearance and premarket approval requirements
and GMPs. Other statutory and regulatory requirements govern, among other
things, establishment registration and inspection, medical device listing,
prohibitions against misbranding and adulteration, labeling and postmarket
reporting. The regulatory process is lengthy, expensive and uncertain. Securing
FDA approvals and clearances may require the submission of extensive clinical
data and supporting information to the FDA. Failure to comply with applicable
requirements can result in Warning Letters, application integrity proceedings,
fines, recalls or seizures of products, injunctions, civil penalties, total or
partial suspensions of production, withdrawals of existing product approvals or
clearances, refusal to approve or clear new applications or notifications and
criminal prosecution. See "-- Factors
17
Affecting the Company's Business, Operating Results and Financial Condition --
FDA and Other Government Regulation."
Under the FDC Act, medical devices are classified into one of three
classes (Class I, II or III) on the basis of the controls necessary to
reasonably ensure their safety and effectiveness. Class I devices are subject to
general controls (e.g., labeling, premarket notification and adherence to GMPs).
Class II devices are subject to general and special controls (e.g., performance
standards, postmarket surveillance and patient registries). Generally, Class III
devices must receive premarket approval from the FDA (e.g., certain
life-sustaining, life-supporting and implantable devices or new devices which
have been found not to be substantially equivalent to certain legally marketed
devices). OCTYLDENT is a Class II medical device and TRAUMASEAL and NEXACRYL are
Class III medical devices.
Before any new medical device may be introduced to the market, the
manufacturer generally must obtain either premarket clearance through the 510(k)
premarket notification process or premarket approval through the lengthier PMA
process. If a color additive is used to color the medical device, the
manufacturer may be required to submit a CAP and obtain FDA approval for use of
the color additive in production of the device. A 510(k) premarket notification
will be granted if the submitted data establish that the proposed device is
"substantially equivalent" to a legally marketed Class I or Class II medical
device, or to a Class III medical device for which the FDA has not called for
PMAs. The FDA may request extensive data, including clinical studies of the
device's safety and effectiveness, before a substantial equivalence
determination can be made. It generally takes from four to 12 months from
submission to obtain 510(k) premarket clearance, although it may take longer. A
PMA application must be filed if a product is found to be not substantially
equivalent to a legally marketed Class I or II device or if it is a Class III
device for which the FDA has called for PMAs. A PMA application must be
supported by extensive data, including laboratory, preclinical and clinical
trial data, to demonstrate the safety and efficacy of the device, as well as
extensive manufacturing information. Similarly, a CAP must be supported with
extensive data and information demonstrating the safety of the color additive
under the conditions of intended use in the device. Before initiating human
clinical trials, the manufacturer often must first obtain an Investigational
Device Exemption ("IDE") for the proposed medical device. Toward the end of the
PMA review process, after issuing a preliminary approvable letter, the FDA will
generally conduct an inspection of the manufacturer's facilities to ensure
compliance with GMPs. Additionally, the FDA requires sterility validation and
that final labeling be reviewed by the FDA prior to granting a PMA. Approval of
a PMA or a CAP could take two or more years from the date of submission of the
application or petition. The PMA and CAP processes can be expensive, uncertain
and lengthy, and there is no guarantee of ultimate approval.
Modifications or enhancements to products that are either cleared
through the 510(k) process or approved through the PMA process that could affect
safety or effectiveness or effect a major change in the intended use of the
device may require further FDA review through new 510(k) or PMA submissions.
Additionally, certain modifications of the Company's manufacturing facilities
and processes, such as those made in preparation for commercial-scale production
of its products, will subject the Company to further FDA inspections and review
prior to final approval of such products for commercial sale.
Medical devices also are subject to postmarket reporting requirements
for deaths or serious injuries when the device may have caused or contributed to
the death or serious injury, and for certain device malfunctions that would be
likely to cause or contribute to a death or serious injury if the malfunction
were to recur. If safety or efficacy problems occur after the product reaches
the market, the FDA may take steps to prevent or limit further marketing of the
product. Additionally, the FDA actively enforces regulations prohibiting
marketing of devices for indications or uses that have not been cleared or
approved by the FDA.
The Company's current human medical devices are at different stages of
FDA review. OCTYLDENT, the Company's product sold to the Proctor & Gamble/ALZA
Partnership and ALZA for use as a cohesive in conjunction with Actisite(R),
received 510(k) clearance in 1990, and is subject to GMP, postmarket reporting
and other FDA requirements. NEXACRYL, the Company's ophthalmic product, has
received an approvable letter from the FDA and is pending FDA review of
sterilization validation studies, FDA inspection of the manufacturing site and
FDA labeling review before the product can receive final FDA approval for
commercialization. Clinical trials for TRAUMASEAL were completed in late 1996.
The
18
Company submitted to the FDA a PMA application in December 1996, which was
granted "expedited processing," and a CAP in February 1997. The Company expects
that it will need to make significant modifications to its manufacturing
facilities and processes in order to manufacture TRAUMASEAL on a commercial
scale, which will subject the Company to an additional FDA inspection of its
manufacturing facility prior to final approval for commercial sales of this
product.
There can be no assurance that the Company will be able to obtain
necessary 510(k) clearances or PMA and CAP approvals to market its products in
the United States for their intended use on a timely basis, if at all, and
delays in receipt of or failure to receive such clearances or approvals, the
loss of previously received clearances or approvals, or failure to comply with
existing or future regulatory requirements could have a material adverse effect
on the Company's results of operations and financial condition. See "-- Factors
Affecting the Company's Business, Operating Results and Financial Condition --
Limited Manufacturing Experience" and "-- Factors Affecting the Company's
Business, Operating Results and Financial Condition -- FDA and Other Government
Regulation."
FOREIGN REGULATORY MATTERS
In order for the Company to market its products in Europe, Canada and
certain other foreign jurisdictions, the Company must obtain required regulatory
approvals or clearances and otherwise comply with extensive regulations
regarding safety and manufacturing processes and quality. These regulations,
including the requirements for approvals or clearances to market, may differ
from the FDA regulatory scheme. The time required to obtain approval or
clearance for sale of the Company's products in foreign countries may be longer
or shorter than that required for FDA clearance or approval, and the
requirements may differ. In addition, there may be foreign regulatory barriers
other than premarket approval or clearance. There can be no assurance that the
Company will obtain regulatory approvals in such countries or that it will not
be required to incur significant costs in obtaining or maintaining its foreign
regulatory approvals. Delays in receipt of approvals to market the Company's
products in foreign countries, failure to receive such approvals or the future
loss of previously received approvals could have a material adverse effect on
the Company's results of operations and financial condition.
Previously, the FDC Act provided that the FDA must grant authorization
to export an unapproved device. In April 1996, the FDC Act was amended to allow
a non-FDA approved medical device to be exported to any country, provided that
the device (i) complies with the laws of that country and (ii) has valid
marketing authorization or the equivalent from the appropriate authority in a
"listed country." The listed countries are Australia, Canada, Israel, Japan, New
Zealand, Switzerland, South Africa and countries in the European Union and the
European Economic Area. Export of unapproved devices that do not have marketing
approval or clearance in a listed country will continue to require FDA export
authorization.
Medical devices that are marketed or put into service within the
European Union are required to comply with Council Directive 93/42/EEC, the
medical devices directive ("MDD"). Compliance with the MDD entitles a device to
make use of the CE mark and allows the device to be marketed, put into service
and circulated freely within the European Union. The Company received
authorization to display the CE mark for OCTYLDENT in the European Union in
August 1995. The Company plans to pursue the right to affix the CE mark on
TRAUMASEAL, as well as on future human products that the Company may develop.
There can be no assurance that the Company will be successful in obtaining the
right to affix the CE mark on any additional medical devices. Failure to obtain
the right to affix the CE mark on its medical devices could have a material
adverse effect on the Company's results of operations and financial condition.
See "-- Factors Affecting the Company's Business, Operating Results and
Financial Condition -- FDA and Other Government Regulation."
ENVIRONMENTAL REGULATIONS
The Company's activities involve the controlled use of hazardous
materials and chemicals. The Company is subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of such material and certain waste products. Although the Company believes that
its safety procedures for handling and disposing of such materials comply in all
material respects with the standards prescribed by such laws and regulations,
19
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and such liability could have a material
adverse effect on the Company's results of operations and financial condition
and potentially could exceed the resources of the Company. Environmental
protection has been an area of substantial concern in recent years, and
regulation of activities involving the use and disposal of potentially hazardous
materials has increased. There can be no assurance that such regulation will not
increase in the future or that the Company will not be required to incur
significant costs to comply with environmental laws and regulations in the
future.
SALES AND MARKETING
Currently, the Company's nonabsorbable cohesive products are marketed
and sold by its marketing partners. The Company has entered into marketing
agreements with Ethicon for worldwide distribution of TRAUMASEAL, the topical
tissue cohesive that seals wounds from skin lacerations and incisions, plastic
surgery and skin puncture sites from minimally invasive surgery such as
laparoscopy; with the Procter & Gamble/ALZA Partnership and ALZA for worldwide
distribution of OCTYLDENT, the topical sealant which is sold in conjunction with
Actisite(R), a site-specific sustained release product for adult periodontal
disease; with Chiron for worldwide distribution of NEXACRYL, the topical sealant
for use in repair of corneal ulcers and abrasions; and with Farnam for
distribution in North America of NEXABAND, the Company's veterinary line of
products.
The Company's future products, which will primarily be absorbable
formulations, will be sold through a direct sales force or additional marketing
partners in the United States and through other distributors outside the United
States. The Company intends to develop its own internal sales capacity as its
absorbable surgical sealant and surgical tissue cohesive progress toward
commercialization.
MANUFACTURING
The Company has devoted considerable resources to the development of
manufacturing processes and technologies capable of providing its products with
clinical efficacy, ease of use and suitable shelf life. The Company has
developed a manufacturing process designed to produce a highly purified base
material which is not achievable by other existing methodologies. The Company
relies heavily on internal trade secrets and technological expertise and expects
to keep aspects of its manufacturing process in-house and, where applicable,
seek patent protection for specific manufacturing applications.
The Company currently manufactures all of its products in a 15,000
square foot facility located adjacent to its corporate offices in Raleigh, North
Carolina. This facility integrates production, bottling, labeling and packaging
capabilities for products currently being marketed. The Company recently entered
into a new lease for up to 50,000 square foot facility in Raleigh for, among
other things, the expansion of manufacturing capacity. Upon completion of this
facility in the second half of 1997, the Company will relocate its manufacturing
and other operations. See "Properties."
As production requirements increase with the receipt of additional
product approvals and clearances and the initiation of new clinical trials,
additional personnel, equipment and space will be necessary in virtually all
phases of the production process. The Company is formulating plans for a
significant expansion of its manufacturing capabilities in conjunction with the
anticipated future launch of TRAUMASEAL in France, Italy, Australia and Canada
and, eventually, the remainder of Europe and the United States, as well as for
the manufacture of additional products which may be commercialized in the future
by the Company. Such expansion and scale-up is expected to occur over the next
two years. The Company expects to invest resources in chemical manufacturing
equipment and packaging machinery. Production of commercial-scale quantities may
involve technical challenges for the Company and will require significant
scale-up expenses for additions to facilities and personnel. There can be no
assurance that the Company will be able to achieve large-scale manufacturing
capabilities or to manufacture its products in a cost-effective manner or in
quantities necessary to allow the Company to achieve profitability. If the
Company is unable to expand sufficiently its manufacturing capacity to meet
Ethicon's requirements for TRAUMASEAL as set forth under their agreement,
Ethicon
20
may itself then manufacture TRAUMASEAL and only pay the Company royalties based
on sales. See "-- Marketing Partners."
The Company presently purchases cyanoacetate, the primary raw material
used in the manufacture of the Company's medical cohesives, from one source. The
Company has the capability of manufacturing cyanoacetate if necessary, and
cyanoacetate may be available from a second supplier. The Company would be
required to qualify the quality assurance systems of an additional supplier
prior to its use as a source of supply. The other raw materials used in
manufacturing and packaging the Company's products are readily available from
multiple sources, as are its process equipment and controls.
The Company presently hires filling and packaging employees on a
temporary basis, and the Company expects that a significant portion of the
Company's future packaging requirements will be completed by outside providers.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company competes with many domestic and foreign competitors in
various rapidly evolving and technologically advanced fields in developing its
technology and products, including medical device, pharmaceutical and
biopharmaceutical companies. In the worldwide wound closure market, the
Company's products will compete with the suture products of Ethicon, the world
leader in the wound closure market, and American Home Products Corporation. The
Company also believes its products will compete with the staple products of
United States Surgical Corporation and Ethicon Endo-Surgery, Inc., a subsidiary
of Johnson & Johnson. In addition, there are two other cyanoacrylate-based
topical adhesives with which the Company's products may compete, neither of
which is approved for sale in the United States. B. Braun GmbH markets
Histoacryl(R) as a topical closure adhesive for small lacerations and incisions
in low skin tension areas of the body. Loctite Corporation has recently test
marketed a similar adhesive in the United Kingdom. In the surgical sealants
market, the Company's products may compete with the fibrin-based sealants of
Immuno AG and Behringwerke AG, and most likely with fibrin-based sealants being
developed by Baxter Healthcare Corporation and Bristol-Myers Squibb Company. The
Company's surgical sealants also may compete with collagen-based hemostatic
products of, among others, Collagen Corporation, Fusion Medical Technologies,
Inc. and MedChem Products Inc., a division of C.R. Bard Inc. In addition, the
Company's surgical sealants may compete with synthetic products being developed
by such biotechnology companies as Protein Polymer Technologies, Inc. and Focal,
Inc. Many of the Company's competitors and potential competitors have
substantially greater financial, technological, research and development,
marketing and personnel resources than the Company. In addition to those
mentioned above, other recently developed technologies or procedures are, or may
in the future be, the basis of competitive products.
There can be no assurance that the Company's competitors will not
succeed in developing alternative technologies and products that are more
effective, easier to use or more economical than those which have been or are
being developed by the Company or that would render the Company's technology and
products obsolete and noncompetitive in these fields. These competitors may also
have greater experience in developing products, conducting clinical trials,
obtaining regulatory approvals, and manufacturing and marketing such products.
Certain of these competitors may obtain patent protection, approval or clearance
by the FDA or foreign countries or product commercialization earlier than the
Company, any of which could materially adversely affect the Company.
Furthermore, if the Company commences significant commercial sales of its
products, it will also be competing with respect to manufacturing efficiency and
marketing capabilities, areas in which it currently has limited experience.
Finally, under the terms of the Company's marketing agreements, the Company's
marketing partners may pursue parallel development of other technologies or
products, which may result in a marketing partner developing additional products
that will compete with the Company's products.
21
SCIENTIFIC ADVISORS
The Company has established a team of scientific advisors (the
"Scientific Advisors") who provide consulting services to the Company. The
Scientific Advisors consist of independent professionals who meet on an
individual basis with management when so requested. The Scientific Advisors have
recognized expertise in relevant sciences or clinical medicine and advise the
Company about present and long-term scientific planning, research and
development.
There is no fixed term of service for the Scientific Advisors. Current
members may resign or be removed at any time, and additional members may be
appointed. Members do not serve on an exclusive basis with the Company, are not
under contract (other than with respect to confidentiality obligations) and are
not obligated to present corporate opportunities to the Company. To management's
knowledge, none of the members is working on the development of competitive
products. Inventions or products developed by a Scientific Advisor who is not
otherwise affiliated with the Company will not become the Company's property,
but will remain the Scientific Advisor's property.
EMPLOYEES
As of March 21, 1997, the Company had 40 full-time employees, of whom
31 were dedicated to research, development, manufacturing, quality control and
regulatory affairs and nine were dedicated to administrative activities. Five
members of the Company's research and development staff have doctoral or
advanced degrees. The Company intends to recruit additional personnel in
connection with the research, development and manufacturing of its products.
None of the Company's employees is represented by a union, and the Company
believes relationships with its employees are good.
EXECUTIVE OFFICERS OF THE COMPANY
The table below sets forth the names, ages and titles of the persons
who are the executive officers of the Company as of March 21, 1997.
NAME AGE POSITION
Robert V. Toni 56 President and Chief Executive Officer
J. Blount Swain 40 Vice President of Finance and Chief Financial Officer
Jeffrey G. Clark 43 Vice President of Research and Development
Joe B. Barefoot 46 Vice President of Regulatory Affairs and Quality Assurance
ROBERT V. TONI has served as President and Chief Executive Officer of
the Company since June 1994 and as a director of the Company since February
1996. From 1989 to 1994, Mr. Toni was General Manager and Vice President of
Sales and Marketing for IOLAB Corporation, a Johnson & Johnson company that
marketed and manufactured surgical devices, equipment and pharmaceuticals for
the ophthalmic market. From 1987 to 1989, he served as President of Cooper
Vision-CILCO, and also served as its Executive Vice President of Operations and
Chief Financial Officer from 1984 to 1987. Mr. Toni holds a B.S. degree in
Finance from Iona College.
J. BLOUNT SWAIN has served as Vice President of Finance and Chief
Financial Officer of the Company since September 1992. From 1983 until 1992, Mr.
Swain was Chief Financial Officer and Treasurer of The Record Bar, Inc., a
national music retailing entity. Prior to 1983, Mr. Swain served as a Senior
Accountant with Price Waterhouse in Raleigh, North Carolina. Mr. Swain holds a
B.S. degree from the University of North Carolina at Chapel Hill and is a
certified public accountant.
JEFFREY G. CLARK has served as Vice President of Research and
Development of the Company since 1990. Prior to that time, Mr. Clark spent seven
years at Sharpoint, Inc. and its successor where he developed bioabsorbable and
22
polypropylene suture technology. From 1977 to 1983, Mr. Clark worked at
Extracorporeal Inc., a division of Johnson & Johnson. Mr. Clark holds a M.S.
degree in Organic Chemistry from Drexel University.
JOE B. BAREFOOT has served as Vice President of Regulatory Affairs and
Quality Assurance of the Company since 1990. From 1986 to 1990, Mr. Barefoot
managed the quality assurance program and regulatory submissions for Sharpoint,
Inc. and its successor. From 1982 to 1986, he was a member of the quality
assurance staff at C.R. Bard Inc. Prior to that time, he was a member of the
quality assurance staff at Becton, Dickinson & Co. Mr. Barefoot holds a B.S.
degree in Microbiology from Emporia State University.
23
ITEM 2. PROPERTIES.
The Company leases and occupies approximately 15,000 square feet of
office, laboratory and manufacturing space in Raleigh, North Carolina. This
facility integrates production, bottling, labeling and packaging capabilities
for products currently being marketed. In addition, the Company leases a 5,800
square foot facility that serves as the Company's research and development
laboratory. These facilities are leased through August 1998 and September 1997,
respectively.
On February 14, 1997, the Company entered into a new ten-year lease for
approximately 50,000 square feet of office, laboratory and manufacturing space
for, among other things, the expansion of manufacturing capacity. Upon
completion, all of the Company's operations will be relocated to and maintained
at this location. The term of this lease will begin upon the Company's occupancy
of the facility, estimated to be September 1997.
ITEM 3. LEGAL PROCEEDINGS.
In March 1997, the Company was served with a complaint filed in the
Superior Court Department of the Trial Court of the Commonwealth of
Massachusetts alleging personal injury as a result of negligence by the Company
in the design, testing and distribution of AVACRYL, an n-butyl cyanoacrylate
used in a medical procedure in 1993 as part of a clinical trial conducted by the
Company pursuant to an IDE. The Company's insurer has assumed the defense of
this lawsuit. The Company has not yet answered the complaint, and discovery in
the case has not yet commenced. Accordingly, the Company is not yet able to
assess its potential exposure in this case. However, based on the limited
information available to it, the Company intends to vigorously defend the
lawsuit and management believes the outcome of this case will not have a
material adverse effect on the Company.
The Company is currently not a party to any other legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders
during the fourth quarter of fiscal year 1996.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "CLSR." Prior to the change of the Company's name on January
13, 1997, the Common Stock was traded under the symbol "TPMC." The following
table sets forth, for the periods indicated, the high and low sales price per
share of the Common Stock, as reported on the Nasdaq National Market, commencing
with the Company's initial public offering on September 25, 1996. Prior to that
date, there was no public market for the Common Stock.
HIGH LOW
1996
Third Quarter (from September 25, 1996)........... $ 8.13 $ 8.00
Fourth Quarter.................................... 17.75 5.75
As of March 21, 1997, there were approximately 125 holders of record of
the Company's Common Stock. The Company has never declared or paid cash
dividends on its Common Stock and does not anticipate paying any cash dividends
in the foreseeable future. The Company currently intends to retain future
earnings, if any, to fund the development and growth of its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition,
operating results, capital requirements and such other factors as the Board of
Directors deems relevant.
25
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial data set forth below for each year in the five
year period ended December 31, 1996 have been derived from financial statements
audited by Price Waterhouse LLP, independent accountants. The balance sheets as
of December 31, 1995 and 1996 and the related statements of operations and of
cash flows for the years ended December 31, 1994, 1995 and 1996 and notes
thereto appear elsewhere in this Report. This data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's financial statements, including the notes thereto,
and the other financial information included elsewhere in this Report.
Year ended December 31,
1992 1993 1994 1995 1996
-------- ------- ------ ------ ------
(In thousands, except per share data)
Statement of Operations Data:
Product sales........................................ $ 648 $ 1,048 $ 1,478 $ 1,380 $ 496
License and product development revenues............. 230 162 25 -- 3.500
---------- --------- ------- ------- ---------
Total revenues.................................. 878 1,210 1,503 1,380 3,996
Cost of products sold................................ 386 366 528 531 460
---------- --------- ------- ------- --------
Gross profit and license and product development revenues 492 844 975 849 3,536
Research, development and regulatory affairs expenses 895 863 1,231 1,637 3,167
Selling and administrative expenses.................. 912 1,037 1,366 1,589 2,879
Charges related to Partnership capital changes(1).... -- -- -- 3,500 14,210
Payments to CRX Medical, Inc. and Caratec, L.L.C..... 150 150 150 250 293
---------- --------- ------- ------- --------
Total operating expenses........................ 1,957 2,050 2,747 6,976 20,549
--------- --------- ------- ------- --------
Loss from operations................................. (1,465) (1,206) (1,772) (6,127) (17,013)
Interest expense to Sharpoint Development Corporation (235) (342) (445) (847) (138)
Investment and interest income....................... 1 -- 2 2 337
----------- ----------------------------------- ----------
Net loss............................................. $(1,699) $(1,548) $(2,215) $(6,972) $(16,814)
======= ======= ======= ======= ========
Pro forma net loss per common share(2)............... $ (.69) $ (1.59)
========= ==========
Shares used in computation of pro forma net loss per
common share(2)................................... 10,150 10,545
========= =========
As of December 31,
1992 1993 1994 1995 1996
------- ------ ------ ------ ------
(In thousands)
Balance Sheet Data:
Cash and cash equivalents and short-term investments $ 26 $ 11 $ 30 $ 20 $17,651
Working capital (deficit)........................... (181) (392) (10) (395) 15,175
Total assets......................................... 750 764 784 908 19,512
Long-term debt and capital lease obligations, less
current portion................................... 3,942 5,232 7,851 10,088 14
Total partners' capital (deficit) and stockholders' equity (3,615) (5,163) (7,378) (10,850) 16,455
(1) Includes for 1995 a one-time non-cash charge of $3,500,000 which
represented the estimated fair value of the limited partnership interests
of certain employee limited partners admitted to the Partnership on
December 31, 1995. In connection with the Exchange on September 25, 1996,
Caratec, L.L.C. exchanged its right to receive various payments from the
Partnership and its limited partnership interest for 1,776,250 shares of
Common Stock. This transaction resulted in a non-cash expense for 1996 of
$14,210,000 which equaled the difference between the value of the Common
Stock issued to Caratec, L.L.C. and its basis in the Partnership. The
resulting charge to accumulated deficit was offset by a credit to
additional paid-in capital. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview" and Note 1 to
Notes to Financial Statements.
(2) See Note 2 to Notes to Financial Statements for a discussion of the basis
for reported pro forma net loss per share.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the
Company's financial statements, including the notes thereto, included elsewhere
in this Report.
OVERVIEW
Since its inception in May 1990, the Company has been developing,
commercializing and manufacturing medical tissue cohesive products for use in
wound closure on humans and animals. The Company's products are based on its
proprietary cyanoacrylate technology, and a substantial portion of the Company's
historical expenses has consisted of research and development and clinical trial
expenses. Through the closing of the Company's initial public offering of Common
Stock on September 30, 1996, the Company funded its operations with cash
borrowed from Sharpoint Development Corporation ("Sharpoint"), sales of the
Company's OCTYLDENT and NEXABAND products and license and product development
revenues from marketing partners. On September 30, 1996, the Company completed
its initial public offering, issuing 2,550,000 shares of Common Stock and
generating net proceeds of approximately $17,926,000.
The Company has been unprofitable since its inception and has incurred
net losses in each year, including a net loss of approximately $16,814,000 for
the year ended December 31, 1996, or $2,604,000 excluding a one-time non-cash
charge of $14,210,000. The Company anticipates that its recurring operating
expenses will increase for the next several years, as it expects its research
and development expenses to increase in order to develop new products and fund
additional clinical trials. The Company also expects to incur additional capital
expenditures to expand its manufacturing capabilities. The Company expects to
continue to incur a loss in 1997 and may incur losses in subsequent years,
although the amount of future net losses and time required by the Company to
reach profitability are highly uncertain. The Company's ability to generate
significant revenue and become profitable will depend on its success in
commercializing TRAUMASEAL, including the receipt of all regulatory clearances
and approvals, expanding its manufacturing capabilities, developing new products
and entering into additional marketing agreements and the ability of its
marketing partners to commercialize successfully products incorporating the
Company's technologies. No assurance can be given that the Company will generate
significant revenue or become profitable on a sustained basis, if at all.
In connection with the Exchange on September 25, 1996, obligations of
and interests in the Partnership were contributed to the Company in exchange for
an aggregate of 9,600,000 shares of Common Stock. As of March 29, 1996, the
long-term debt of the Partnership held by Sharpoint, including accrued interest,
was contributed to the Partnership as $11,483,000 of partners' capital. During
the period from May 1990 through the consummation of the Exchange on September
25, 1996, CRX Medical, Inc. ("CRX") and its successor, Caratec, L.L.C.
("Caratec"), as limited partners of the Partnership, received payments of
approximately $993,000 based on net revenues pursuant to the partnership
agreement. These payment obligations ceased upon the consummation of the
Exchange. As part of the Exchange, Caratec exchanged its right to receive
payments based on net revenues and its right to receive, as a limited partner in
the Partnership, a percentage of the proceeds of a sale of all or substantially
all of the assets of the Partnership for 1,776,250 shares of Common Stock. This
transaction resulted in a one-time non-cash charge of $14,210,000 which equaled
the difference between the value of the Common Stock issued to Caratec and its
basis in the Partnership. The resulting charge to accumulated deficit was offset
by a credit to additional paid-in capital.
Historically, there was no provision for federal or state income taxes
in the financial statements of the Company's predecessor, Tri-Point Medical
L.P., because income or loss generated by the Partnership was included by the
partners in their personal income tax returns. Since the Company's incorporation
on February 20, 1996, the Company has been subject to federal and state
corporate income taxes.
The Company was formed on February 20, 1996 and substantially all of
the assets of the Partnership were transferred to the Company as of March 1,
1996. The net operating losses to March 1, 1996 will not be available to the
27
Company to offset any future taxable income for federal income tax purposes
because it was a partnership for that period.
The Company incurred compensation expense of $500,000 for the year
ended December 31, 1996 in connection with options for Common Stock granted to
employees, consultants and directors because such options had a weighted average
exercise price of $2.73 per share below the fair market value of the Common
Stock. Such expense will be approximately $300,000 per year in the next three
years and $120,000 in the subsequent year as the options vest. Such expense
could increase during a given year if the vesting of options were to accelerate
upon the occurrence of certain events.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues for 1996 increased 189% to $3,996,000 from $1,380,000
for 1995. This increase was primarily the result of the receipt of $3,500,000 in
license and product development revenues under the supply and distribution
agreement for TRAUMASEAL entered into with Ethicon in March 1996. This increase
was partially offset by a decrease in product sales from $1,380,000 for 1995 to
$496,000 for 1996. This decrease was attributable to decreased sales volume of
OCTYLDENT as a result of the inventory build-up by the Company's marketing
partner during 1995. The Company is unable to predict future prospects for this
product with the current marketing partner.
Cost of products sold decreased 13% to $460,000 for 1996 as compared to
$531,000 for 1995. This decrease was primarily a result of decreased sales
volume of OCTYLDENT, as discussed above. Cost of products sold as a percentage
of product sales increased to 93% for 1996 from 38% for 1995. This increase was
primarily a result of the decreased sales volume of OCTYLDENT, resulting in the
fixed portion of production costs being allocated over a lower volume of units
produced.
Operating expenses for 1996 increased 195% to $20,549,000 from
$6,976,000 for 1995. Included in operating expenses for 1996 was a one-time
non-cash charge of $14,210,000 related to the exchange by Caratec, a former
limited partner of the Company's predecessor, Tri-Point Medical L.P., of its
right to receive various payments from the Partnership and its limited
partnership interest for Common Stock of the Company. Included in operating
expenses for 1995 was a one-time non-cash charge of $3,500,000 representing the
estimated fair value of the limited partnership interests of certain employee
limited partners admitted into the Partnership on December 31, 1995. Excluding
these non-cash charges, total operating expenses for 1996 increased 82% to
$6,339,000 from $3,476,000 for 1995. This increase was primarily related to
costs associated with the conduct of clinical trials for TRAUMASEAL, as well as
financial advisory and professional fees and the amortization of deferred
compensation related to employee and director stock options.
Interest expense for 1996 decreased 84% to $138,000 from $847,000 for
1995. This decrease was a result of the related debt being converted into
capital as of March 29, 1996.
Investment and interest income for 1996 increased to $337,000 from
$2,000 for 1995. This increase resulted from interest earned from higher average
cash and investment balances resulting from the Company's receipt of the net
proceeds of its initial public offering.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues for 1995 decreased 8% to $1,380,000 from $1,503,000 for
1994. This decrease in total revenues was the result of a decrease in product
sales revenues, which was primarily due to decreased sales volume of OCTYLDENT
as a result of the initial product launch and the related inventory build-up by
the Company's marketing partner during the year ended December 31, 1994.
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Cost of products sold increased 1% to $531,000 for 1995 as compared to
$528,000 for 1994. This increase was primarily a result of decreased
efficiencies and related costs associated with the expansion of the Company's
manufacturing capabilities.
Operating expenses for 1995 increased 154% to $6,976,000 from
$2,747,000 for 19