<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 1997
REGISTRATION NO. 333-21941
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CONNETICS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-3173928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3400 WEST BAYSHORE ROAD
PALO ALTO, CA 94303
(415) 843-2800
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
Thomas G. Wiggans
President and Chief Executive Officer
CONNECTIVE THERAPEUTICS, INC.
3400 West Bayshore Road
Palo Alto, CA 94303
(415) 843-2800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPY TO:
Joshua L. Green
Venture Law Group
A Professional Corporation
2800 Sand Hill Road
Menlo Park, California 94025
(415) 854-4488
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. _
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. _
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. _
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=================================================================================================
Title of Shares Proposed Maximum Proposed Maximum
of Securities Amount to be Offering Price Aggregate Amount of
to be Registered Registered Per Share Offering Price Registration Fee
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
$.001 par value per share 972,224 shs $6.625(1) $6,440,984 $1,952
Common Stock,
$.001 par value per share,
issuable upon exercise of
a Warrant 250,000(2) $7.375(3) $1,843,750 $ 559
=================================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee based on the average of the high and low prices of the Common Stock as
reported on the Nasdaq National Market on February 11, 1997 pursuant to Rule
457(c).
(2) Represents the number of shares currently issuable upon the exercise of a
Warrant.
(3) Estimated solely for the purpose of computing the amount of the
registration fee based on the average of the high and low prices of the Common
Stock as reported on the Nasdaq National Market on April 8, 1997 pursuant
to Rule 457(c).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
CONNETICS CORPORATION
1,222,224 SHARES
COMMON STOCK
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF MATERIAL RISKS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN CONNECTION WITH THE PURCHASE OF
THE SECURITIES OFFERED HEREBY.
All references herein to "Connetics," "Connetics Corporation," or the
"Company" mean Connetics Corporation unless otherwise indicated by the context.
On May 15, 1997, the Company changed its name from "Connective Therapeutics,
Inc." to "Connetics Corporation."
The 1,222,224 shares of Connetics Common Stock, $0.001 par value, covered
by this Prospectus (the "Shares") are offered for the account of several
stockholders of Connetics (the "Selling Stockholders"). 972,224 of the Shares
were issued to certain of the Selling Stockholders in connection with a private
placement of Connetics Common Stock on December 4, 1996 (the "Private
Placement"), and 250,000 of the Shares are issuable upon the exercise of a
warrant dated January 2, 1997 (the "Warrant") issued pursuant to a Structured
Equity Line Flexible Financing Agreement of the same date (the "Equity Line
Agreement"). The Warrant is exercisable, in whole or in part, at any time up to
January 2, 2002 at an exercise price of $8.25 per share. For additional
information concerning the Private Placement and the Equity Line Agreement, see
"Issuance of Common Stock to Selling Stockholders." The Selling Stockholders may
sell the Shares from time to time on the over-the-counter market in regular
brokerage transactions, in transactions directly with market makers or in
certain privately negotiated transactions. See "Plan of Distribution." The
Company will not receive any proceeds from the sale of the Shares by the Selling
Stockholders.
The Selling Stockholders may be deemed to be an "Underwriter," as such
term is defined in the Securities Act of 1933, as amended (the "Securities
Act").
On May 21, 1997, the last sale price of the Company's Common Stock on
the Nasdaq National Market was $7.00 per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
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<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Selling Stockholders
Public Commissions(1)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............ See Text Above See Text Above See Text Above
Total................
- ----------------------------------------------------------------------------------
</TABLE>
(1) All expenses of registration of the Shares, estimated to be approximately
$28,000 shall be borne by the Company. Selling commissions, brokerage
fees, any applicable stock transfer taxes and any fees and disbursements
of counsel to the Selling Stockholders are payable by the Selling
Stockholders.
The date of this Prospectus is May 23, 1997
<PAGE> 4
No person is authorized in connection with any offering made hereby to
give any information or to make any representation not contained in or
incorporated by reference in this Prospectus, and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or the Selling Stockholders or any of their respective agents.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the shares of Common Stock offered hereby,
nor does it constitute an offer to sell or a solicitation of an offer to buy any
of the shares offered hereby by an person or to any person in any jurisdiction
in which it is unlawful to make such an offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder shall under any
circumstances create any implication that the information contained herein is
correct as of any time subsequent to the date hereof.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files proxy statements, reports and other information with the
Securities and Exchange Commission (the "Commission"). This filed material can
be inspected and copied at regional offices of the Commission located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048; and
at the Public Reference Office of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. The Commission also maintains a World Wide Web site
on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding Connective and other
companies that file electronically with the Commission.
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "CNCT." Reports, proxy and information statements and other
information about the Company may be inspected at the Nasdaq National Market,
1735 K Street, N.W., Washington, DC 20006-1506.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated by reference in this Prospectus:
1. The Company's Registration Statement on Form S-1, as amended, declared
effective by the Commission on January 31, 1996. (File No. 33-80261).
2. The Company's Current Report on Form 8-K filed January 15, 1997, as
amended (File No. 0-27406).
3. The Company's Current Report on Form 8-K filed January 16, 1997 (File
No. 0-27406).
4. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, and all amendments thereto (File No. 0-27406).
5. The Company's Current Report on Form 8-K filed May 23, 1997 (File No.
0-27406).
6. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1997. (File No. 0-27406).
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<PAGE> 5
7. The description of the Company's Common Stock set forth in the
Company's Registration Statement on Form 8-A filed with the Commission on
December 8, 1995, including any amendment thereto or report filed for the
purpose of updating such description.
8. The description of the Company's Preferred Share Purchase Rights set
forth in the Company's Registration Statement on Form 8-A filed with the
Commission on May 23, 1997, including any amendment thereto or report filed for
the purpose of updating such description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the offering of the Common Stock offered hereby shall be deemed
to be incorporated by reference in this Prospectus. Any statement contained in a
document incorporated by reference herein shall be deemed to be modified or
superseded for purposes hereof to the extent that a statement contained herein
(or in any other subsequently filed document which also is incorporated by
reference herein) modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed to constitute a part hereof, except
as so modified or superseded.
The Company will furnish without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents incorporated by
reference, other than exhibits to such documents. Requests should be directed to
Cynthia Butitta, Connetics Corporation, 3400 West Bayshore Road, Palo Alto, CA
94303, telephone: (415) 843-2800.
The "C with interlocking hemisphere" logo (used alone and with the
Company's name), "Connective", "Connetics", "ConXn" and "Ridaura(R)" are
trademarks of the Company. All other tradenames and trademarks appearing in this
Prospectus are the property of their respective holders.
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<PAGE> 6
THE COMPANY
Connetics Corporation ("Connetics" or the "Company") is focused
on the development of therapeutics to address serious diseases involving the
connective tissues of the body. Connective tissues are components of the body
that form structural or binding elements such as skin, ligaments and lining of
organs, and form the three-dimensional structure that allows cells to function
normally. The indications or conditions initially addressed by the Company
include atopic dermatitis, keloids, scleroderma, multiple sclerosis, rheumatoid
arthritis, and psoriasis. Patients suffering from these conditions experience a
variety of chronic problems depending on the particular condition, including
excessive uncontrollable itching, extensive rashes and lesions, hardening of the
skin and internal organs, severe scarring and lack of mobility. The most severe
of these diseases cause painful disfigurement, disability and, in certain cases,
death. The Company estimates that over five million Americans suffer from its
targeted diseases in their various forms, with over five billion dollars spent
annually on treatments that are mostly palliative in nature. Although
individually these diseases have been the subject of various independent
research programs, no concentrated effort has been aimed at developing this
market segment as a whole, representing significant and currently underserved
market opportunities. The Company has three products in clinical trials
addressing these disease indications: gamma interferon (1b) ("gamma
interferon"), ConXn(TM) (recombinant human relaxin H2) ("relaxin") and T cell
receptor V beta peptide therapeutic vaccines ("TCR Vaccines"). In addition, in
1996, Connetics acquired exclusive license rights to betamethasone mousse
("Betamousse(TM)") in North America, for which a Phase III clinical trial
commenced in April 1997, and also acquired the exclusive U.S. and Canadian
rights to Ridaura(R) (auranofin), a disease modifying antirheumatic drug, from
SmithKline Beecham Corporation, which is currently distributing the product on
the Company's behalf.
In March 1997, the Company's Board of Directors approved a change in the
Company's name from "Connective Therapeutics, Inc." to "Connetics Corporation,"
which was approved by the Company's stockholders at its annual meeting on May
14, 1997.
Gamma Interferon. Gamma interferon is one of a family of proteins involved
in the regulation of the immune system and has been shown to inhibit the
production of collagen, the primary component of connective tissue. Gamma
interferon is approved by the U.S. Food and Drug Administration (the "FDA") and
marketed by Genentech, Inc. ("Genentech") for a serious immune disease outside
of the Company's therapeutic focus. The Company is developing gamma interferon
for the treatment of atopic dermatitis, an inflammatory skin disease that is
primarily characterized by uncontrollable itching, rashes and lesions. In its
severe form, it afflicts more than 100,000 individuals and can result in
significant quality of life impairment and hospitalization. Results from a Phase
I pilot study involving 22 patients and an 83 patient Phase II
placebo-controlled study conducted by Genentech indicated significant overall
reduction in the severity of atopic dermatitis using gamma interferon, with no
evidence of significant toxicity. In addition, the Company is developing gamma
interferon for the treatment of keloids, which are unsightly, painful, elevated
scars resulting from collagen overproduction. Earlier trials using gamma
interferon in the treatment of keloids have shown clinically significant
responses in reducing the size and/or incidence of recurrence of treated
keloids. Based on these studies, the Company has commenced a Phase III clinical
trial for gamma interferon for the treatment of atopic dermatitis and a Phase II
clinical trial for the treatment of keloids. Patient enrollment has been
completed for both of these trials.
Relaxin. Relaxin is a naturally occurring protein that promotes remodeling
of connective tissues. The Company is developing relaxin for the treatment of
scleroderma, as well as other connective tissue diseases. Scleroderma, a
disorder characterized by thickening and hardening of the skin and internal
organs, generally afflicts women in their child-bearing years. Scleroderma can
cause extensive quality of life impairment, making it impossible for afflicted
patients to participate in daily functions. This disease affects over 300,000
individuals and, in its severe form, has a five year mortality rate of 50%-70%.
Research by two of the Company's founders and their colleagues has shown that
relaxin can inhibit excessive connective tissue formation and promote connective
tissue remodeling. Results from several clinical trials in individuals with
scleroderma, including a 30 patient Company sponsored Phase I clinical
4
<PAGE> 7
trial, indicate that continuous administration of relaxin was well tolerated,
without any serious drug-related adverse effects. The Company has completed
enrollment in a Phase II clinical trial for use of relaxin in patients with
scleroderma. The Company has also conducted a preclinical animal study that
demonstrated relaxin's potential ability to inhibit pulmonary (lung) fibrosis.
TCR Vaccines. The Company is developing TCR Vaccines for the treatment of
autoimmune diseases. Connetics has two TCR Vaccines product programs in
development for rheumatoid arthritis and multiple sclerosis. These diseases
collectively disable over two million people nationwide, with combined annual
treatment costs exceeding two billion dollars in 1994. Results from a physician
sponsored Phase I trial involving 11 patients and a Phase I/II clinical trial
involving 23 patients with chronic progressive multiple sclerosis suggest that a
number of patients achieved the desired immune response to the vaccine, that the
vaccine was well tolerated and that patients who had the desired immune response
experienced a stabilization of disease without side effects during one year of
therapy. In January 1997, the Company initiated a Phase I/II clinical trial for
the use of TCR Vaccines in multiple sclerosis (and has completed patient
enrollment) and also intends to initiate in 1997 a pilot clinical study in the
use of TCR Vaccines for the treatment of rheumatoid arthritis.
Betamousse. In June 1996, the Company signed an agreement with Soltec
Research PTY Ltd. which granted Connetics an exclusive license to develop and
market Betamousse (a foam mousse formulation of the dermatologic drug,
betamethasone valerate) in North America. The product has been approved in the
United Kingdom and is being marketed by Evans Medical Ltd. In April 1997,
Connetics commenced Phase III clinical trials for Betamousse and has completed
patient enrollment.
Ridaura. On December 31, 1996, the Company acquired the exclusive U.S. and
Canadian rights to Ridaura(R) (auranofin), a disease modifying antirheumatic
drug, from SmithKline Beecham Corporation and related entities ("SmithKline").
Ridaura is an established therapy for rheumatoid arthritis, an autoimmune
disease that afflicts one to two percent of adult Americans (approximately three
million people), mostly women. Under its agreement with SmithKline, the Company
acquired all rights, title and interest to SmithKline's U.S. and Canadian
intellectual property rights for Ridaura, along with related assets such as
customer lists, contracts, product files and unfilled customer orders. Although
the primary patents for Ridaura expired in 1989 and 1992, the Company intends to
use the other valuable intellectual property rights and assets acquired to
market the product in the U.S. and Canada. Ridaura is currently being
distributed by SmithKline on behalf of the Company. Connetics expects to begin
marketing Ridaura through in its own sales force by mid-1997. Through agreements
with SmithKline, customer orders and distribution for the product will continue
to be managed by SmithKline through 1997 and SmithKline will manufacture and
supply Ridaura (in final finished package form) to the Company for an initial
term of five years.
The Company's strategy is to: (i) focus on the treatment of serious and
chronic diseases involving connective tissues caused by inflammation, abnormal
remodeling and autoimmune disorders, (ii) target its commercial activities at
rheumatologists and dermatologists, which can be effectively served by focused
and specialized marketing, (iii) expand its existing product portfolio and
pursue early commercialization opportunities by in-licensing other
therapeutically related products in late stage clinical development or
commercialization, (iv) leverage its platform technologies and products by
pursuing multiple disease indications, (v) utilize corporate partnerships to
pursue new business opportunities and overseas licensing of the Company's
products in development and (vi) minimize drug discovery and manufacturing costs
and capital requirements.
The Company's principal executive offices are located at 3400 West
Bayshore Road, Palo Alto, CA 94303, and its telephone number at that location is
(415) 843-2800.
5
<PAGE> 8
RISK FACTORS
This Prospectus (including the documents incorporated by reference herein)
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including, without limitation, statements regarding the Company's expectations,
beliefs, intentions or future strategies. All forward looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors set
forth below and in the documents incorporated by reference herein. In evaluating
the Company's business, prospective investors should carefully consider the
following risk factors in addition to the other information set forth herein or
incorporated herein by reference.
DEVELOPMENT STAGE COMPANY; UNCERTAINTY OF PRODUCT DEVELOPMENT AND MARKET
ACCEPTANCE
Since its inception and through its acquisition of Ridaura in December
1996, Connetics has been a development stage company. Except for Ridaura, all
of the Company's products are in clinical or preclinical development, and no
revenues had been generated from products until December 1996, when the Company
recognized $428,000 in December product revenues from Ridaura. To date, the
Company's resources have been primarily dedicated to the research and
development of products that the Company has in-licensed from Genentech and
others. Although the Company believes it has the expertise to develop and
commercialize such products, any or all of the Company's products may fail to be
effective or prove to have undesirable and unintended side effects or other
characteristics that may prevent their development or regulatory approval, or
limit their commercial use. There can be no assurance that the Company, or its
collaborative partners, will be permitted to undertake human clinical trials for
any of their development products not currently in clinical trials or, if
permitted, that such products will be demonstrated to be safe and effective. In
addition, there can be no assurance that any of the Company's products under
development will obtain approval from the FDA or equivalent foreign authorities
for any indication or that an approved compound will be capable of being
produced in commercial quantities at reasonable costs and successfully marketed.
Products, if any, resulting from the Company's research and development programs
are not expected to be commercially available for several years. Even if such
products become commercially available, there can be no assurance that the
Company will be able to gain satisfactory market acceptance for such products.
MANAGEMENT OF RIDAURA ACQUISITION; UNCERTAINTY OF FUTURE RIDAURA REVENUES
The Company's success will depend in part on its ability to manage its
recent acquisition of the exclusive U.S. and Canadian rights to Ridaura.
Although SmithKline is continuing to manage certain sales and distribution
operations through 1997, the Company will be required to recruit a substantial
number of qualified employees to market, sell and distribute Ridaura. If the
Company is unable to hire a sufficient number of employees with the appropriate
levels of experience to build these departments, or if the Company is unable to
effectively manage the integration of its rights to Ridaura into the Company's
product line, the Company's business, financial condition and results of
operations could be materially and adversely affected. In addition, while the
Company believes in the potential of Ridaura, there can be no assurance that the
Company's Ridaura revenues will equal or exceed those achieved by SmithKline
over the last several years. If the Company is not able to market and sell
Ridaura successfully, the Company's business, financial condition and results of
operations could be materially and adversely affected. Furthermore, the primary
patents for Ridaura expired in 1989 and 1992; therefore, the Company will be
unable to assert patent infringement claims against a third party marketing
the same product under a different trade name, which could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
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LIMITED OPERATING HISTORY; HISTORY OF LOSSES; UNCERTAINTY OF FUTURE
PROFITABILITY
Due to its limited operating history, the Company is subject to the
uncertainties and risks associated with any new business. Having no
commercialized products until the recent Ridaura acquisition, the Company has
experienced operating losses every year since its incorporation. Net losses for
the fiscal years ended December 31, 1996 and 1995 were $18.5 million and $10.4
million, respectively, and the Company had an accumulated deficit of $37.8
million at December 31, 1996. The Company expects to incur increasing operating
losses for at least the next several years. The amount of net losses and the
time required by the Company to reach profitability are uncertain. There can be
no assurance that the Company will ever be able to generate revenue from its
products now under development or achieve profitability on a sustained basis.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS
The Company had no revenues from products from its inception until
December 1996, when it recognized $428,000 in December product revenues from
Ridaura. As Ridaura revenues continue, there can be no assurance that growth in
Ridaura revenues will be achieved or that the Company will ever be profitable on
a quarterly or annual basis in the future. As noted above, the Company expects
to incur quarterly and annual operating losses for at least the next several
years. The Company's quarterly and annual operating results may fluctuate
significantly in the future depending on such factors as the timing and shipment
of significant Ridaura orders, if any, changes in pricing policies by the
Company and its competitors, the timing and market acceptance of any new
products introduced by the Company, the mix of distribution channels through
which Ridaura and other products (if any) are sold, and the Company's inability
to obtain sufficient supplies for its products. In response to competitive
pressures or new product introductions, the Company may take certain pricing or
other actions that could materially and adversely affect the Company's operating
results.
FUTURE CAPITAL REQUIREMENTS AND UNCERTAINTY OF FUTURE FUNDING; DILUTIVE AND
OTHER EFFECTS OF EQUITY LINE AGREEMENT
The Company expects that its current cash and cash equivalents and
short-term investments, will be sufficient to fund the Company's operations
through 1997. In addition, the development of the Company's products will
require the commitment of substantial resources to conduct the time-consuming
research and development, clinical studies and regulatory activities necessary
to bring any potential medical product to market and to establish production,
marketing and sales capabilities. The Company may need to raise substantial
additional funds for these purposes. The Company may seek such additional
funding through collaborative arrangements and through public or private
financings, including equity financings. Any additional equity financing, if
available, may be dilutive to stockholders and any debt financing, if available,
may restrict the Company's ability to pay dividends on its capital stock or the
manner in which the Company conducts its business. Under the terms of the
Equity Line Agreement, the Company has secured an equity line that allows the
Company to raise up to $25 million from a certain institutional investor over a
three-year period beginning on or before December 1, 1997. Other than this
equity line, however, the Company currently has no commitments for any
additional financings and there can be no assurance that any such financings
will be available to the Company or that adequate funds for the Company's
operations, whether from financial markets, collaborative or other arrangements
with corporate 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, to limit the marketing of its
products or to license third parties the rights to commercialize products or
technologies that the Company would otherwise seek to develop and market itself.
While the equity line arrangement discussed above will help provide the
Company with additional future financing, the sale of shares thereunder will
have a dilutive impact on other stockholders of the Company. As a result, the
Company net income (loss) per share could be materially decreased (increased) in
future periods, and the market price of the Company's Common Stock could be
materially and adversely affected. In addition, the shares to be issued under
the Equity Line Agreement will be issued at a discount (of up to 15%) to the
then-prevailing market price of the Company's Common Stock. These discounted
sales could have an immediate adverse effect on the market price of the
Company's Common Stock. The Company also has an obligation to register the
shares to be issued under the equity line before the start of the commitment
period; therefore, the shares sold under the Equity Line Agreement will
generally be eligible for immediate resale, which could further adversely affect
the Company's stock price. Finally, the equity line arrangement will not be
available to the Company if its trading price falls below $7.00 per share and
certain other pricing conditions are not met, which could require the Company to
seek funds from other sources (with the attendant risk factors set forth in the
preceding paragraph).
As a commitment fee to the equity line investor, the Company has issued a
five-year warrant exercisable for 250,000 shares of Common Stock at an exercise
price of $8.25 per share (the "Warrant"). The shares issuable upon exercise of
the Warrant are being offered for resale by this Prospectus. On each of the
first, second, and third anniversaries of the beginning of the equity line
commitment period, the Company will issue the equity line investor an
additional five-year warrant exercisable for a number of shares based on the
amount of the equity line unused by the Company in the preceding year (up to a
maximum of $25,000 warrant shares if the Company has not drawn any amount under
the equity line during the year and decreasing to zero to the extent the Company
has drawn down up to $8.33 million during the year). The Company is obligated to
file a registration statement covering the resale of the shares issuable upon
the exercise of such additional warrants. The issuance and exercise of any such
additional warrants would have a dilutive effect on the Company's stockholders
and could have an adverse effect on the Company's stock price, as could the
resale of the shares acquired thereunder.
POSSIBLE FUTURE PRODUCT ACQUISITIONS
A significant part of the Company's overall strategy is to in-license or
acquire additional marketed or late stage development products in its targeted
therapeutic areas. The 1996 acquisitions of rights to Betamousse and Ridaura
reflect this strategy. Future product acquisitions, if any, may require
substantial additional funds (i) for the initial acquisition of rights to these
products and (ii) for the steps necessary to obtain FDA approval for the product
and to market, sell and distribute the products successfully. A portion of the
funds needed to acquire, develop and market any new products may come from the
Company's existing cash and short-term investments; in such case, fewer
resources will be available to the Company's current products and clinical
programs, which could have a material adverse effect on the Company's business,
financial conditions and results of operations. Alternatively, the Company may
seek to raise substantial additional funds for new product acquisitions. As
discussed above under "Future Capital Requirements and Uncertainty of Future
Funding," the Company may seek such additional funding through collaborative
arrangements and through public or private financings, including equity
financings. Any additional equity financing, if available, may be dilutive to
stockholders and any debt financing, if available, may restrict the Company's
ability to pay dividends on its capital stock or the manner in which the Company
conducts business. In addition, any acquisition of rights to additional products
that are not presently approved by the FDA will require the commitment of
substantial resources to conduct the research development, clinical studies and
regulatory activities necessary to bring such potential product to market.
If the newly-acquired product is already approved for sale, the Company
will likely be assuming the marketing, sale and distribution of such product,
which may require the Company to recruit a substantial number of qualified
employees to perform these functions. If the Company is unable to hire a
sufficient number of employees with the appropriate levels of experience, or if
the Company is unable to effectively manage the integration of any
newly-acquired products into the Company's product line, the Company's business,
financial condition and results of operations could be materially and adversely
affected. Finally, any newly-acquired products may not achieve the marketing or
therapeutic success expected of it by the Company, industry analysts or other at
the time of acquisition.
7
<PAGE> 10
UNPREDICTABILITY OF, AND LIMITED EXPERIENCE IN, CONDUCTING PRECLINICAL AND
CLINICAL TRIALS
Although the Company's officers and employees have significant prior
experience in conducting clinical trials, the Company itself has completed only
one clinical trial to date, a Phase I/II clinical trial of relaxin for
scleroderma. In 1996, the Company commenced a Phase III clinical trial of gamma
interferon for the treatment of atopic dermatitis, a Phase II clinical trial of
gamma interferon for the treatment of keloids, a Phase II clinical trial of
relaxin for the treatment of scleroderma, and a Phase I/II clinical trial of TCR
Vaccines for the treatment of multiple sclerosis. In addition, the Company
initiated in April 1997 a Phase III comparison trial of Betamousse for the
treatment of scalp psoriasis and plans to initiate in 1997 a pilot study of TCR
Vaccines for rheumatoid arthritis. There can be no assurance that the Company
will be able to successfully complete its ongoing clinical trials or commence
the study currently planned for 1997. In addition, there can be no assurance
that the Company will meet its development schedule for any of its products in
development. If the Company were unable to commence clinical trials as planned,
complete the clinical trials or demonstrate the safety and efficacy of its
products, the Company's business, financial condition and results of operations
would be materially and adversely affected. There can be no assurance that if a
product from the Company's research and development programs or any other
therapeutic product is successfully developed according to plans, it will be
approved by the FDA on a timely basis or at all.
In addition, because the Company will, in a number of cases, rely on its
contractual rights to access data collected by others in phases of its clinical
trials, the Company is dependent on the continued satisfaction by such parties'
of their contractual obligations to provide such access and cooperate with the
Company in the execution of successful filings with the FDA. There can be no
assurance that the FDA will permit such reliance. If the Company were unable to
rely on clinical data collected by others, the Company may be required to repeat
clinical trials, which could significantly delay commercialization, and require
significantly greater capital.
Before obtaining regulatory approvals for the commercial sale of any of
its products under development, the Company must demonstrate through preclinical
studies and clinical trials that the product is safe and efficacious for use in
the target indication for which approval is sought. The results from preclinical
studies and early clinical trials may not be predictive of results that will be
obtained in later-stage testing and there can be no assurance that the Company's
future clinical trials will demonstrate the safety and efficacy of any products
or will result in approval to market products. A number of companies in the
biotechnology industry have suffered significant setbacks in advanced clinical
trials, even after promising results in earlier trials.
The rate of completion of the Company's clinical trials is dependent upon,
among other factors, the rate of patient enrollment. Patient enrollment is a
function of many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study. Delays in planned patient enrollment may
result in increased costs and delays, which could have a material adverse effect
on the Company.
UNCERTAINTIES OF REGULATORY APPROVAL; GOVERNMENT REGULATION
The production and marketing of the Company's products and its ongoing
research and development activities are subject to regulation by numerous
governmental authorities in the United States and other countries. Prior to
marketing, any drug developed by the Company must undertake rigorous preclinical
and clinical testing and an extensive regulatory approval process mandated by
the FDA and equivalent foreign authorities. These processes can take a number of
years and require the
8
<PAGE> 11
expenditure of substantial resources. The Company is also subject to regulations
under the food and drug statutes and regulations of the State of California.
Obtaining such approvals and completing such testing is a costly and
time-consuming process and approval may not be ultimately obtained. The length
of the FDA review period varies considerably as does the amount of preclinical
and clinical data required to demonstrate the safety and efficacy of a specific
product. The Company may also decide to replace the compounds in testing with
modified or optimized compounds, thus extending the testing process. In
addition, delays or rejections may be encountered based upon changes in FDA
policy during the period of product development and FDA regulatory review of
each submitted new drug application or product license application. Similar
delays may also be encountered in other countries. There can be no assurance
that even after such time and expenditures, regulatory approval will be obtained
for any products developed by the Company. If regulatory approval of a product
is granted, such approval may entail limitations on the indicated uses for which
the product may be marketed. Further, even if such regulatory approval is
obtained, the FDA will require post-marketing reporting and may require
surveillance programs to monitor the usage or side effects of each drug product.
A marketed product, its manufacturer and its manufacturing facilities are
subject to continual review and periodic inspections, and later discovery of
previously unknown problems with a product, manufacturer or facility may result
in restrictions on such product or manufacturer, potentially including
withdrawal of the product from the market.
Government regulation in the United States or in foreign countries may
delay marketing of the Company's potential products for years, may impose costly
procedures upon the Company and may furnish a competitive advantage to larger
companies that may compete with the Company. There can be no assurance that FDA
or other regulatory approval for any products developed by the Company will be
granted on a timely basis or at all. A delay in obtaining or a failure to obtain
such approvals would adversely affect the marketing of any potential products
developed by the Company and the Company's liquidity and capital resources. The
FDA regulatory process is currently under substantial review by the current
presidential administration and the U.S. Congress, and as a result, government
regulation may become more or less restrictive in the future.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on the ability of Connetics and
its licensors to obtain patent protection for the Company's products and
processes, to preserve its trade secrets, and to operate without infringing the
proprietary rights of third parties. The Company owns, controls or has
exclusively licensed pending applications and/or issued patents worldwide
relating to the technology of all three of its major programs as well as
technology in the earlier stages of research.
There has been increasing litigation in the biomedical, biotechnology and
pharmaceutical industries with respect to the manufacture, use and sale of new
therapeutic products that are the subject of conflicting patent rights. The
validity and breadth of claims in biomedical/pharmaceutical/biotechnology
patents involve complex factual and legal issues for which no consistent policy
has emerged, and therefore, are highly uncertain. Moreover, the patent laws of
foreign countries differ from those of the U.S. and the degree of protection, if
any, afforded by foreign patents may, therefore, be different. In Europe, a
third party appeal is pending from an opposition to a patent application
concerning relaxin DNA; the original opposition was successfully defended by the
Company's licensor. No assurance can be given that any of the Company's or its
licensors' patent applications will issue as patents or that any such issued
patents will provide competitive advantage to the Company or will not be
successfully challenged or circumvented by its competitors. In addition,
9
<PAGE> 12
others may hold or receive patents or file patent applications that contain
claims having a scope that covers products or processes made, used or sold by
the Company. In the event that any claims of third-party patents are upheld as
valid and enforceable with respect to a product or process made, used or sold by
the Company, the Company could be prevented from practicing the subject matter
claimed in such patents or could be required to obtain licenses or redesign its
products or processes to avoid infringement and could be liable to pay damages.
There can be no assurance that such licenses would be available or, if
available, would be on commercially reasonable terms, or that the Company would
be successful in any attempt to redesign its products or processes to avoid
infringement.
Connetics has been awarded U.S. Patent No. 5,614,192 covering its
proprietary TCR Vaccines technology. The Company has become aware that third
parties have also obtained patents relating to TCR Vaccines technology,
including a U.S. patent issued to Immune Response Corporation on March 18, 1997.
With regard to such patents as are known to the Company and its patent counsel,
the Company believes such patents' claims would be found either invalid or not
infringed if asserted against the proposed TCR Vaccines. The Company is also
aware of other pending third party patent applications which, if issued, might
be asserted against the Company's TCR Vaccines and products or processes as
planned to be made, used or sold by the Company. If such patents were
successfully asserted, the Company could be required to obtain licenses or
redesign its TCR Vaccines products or processes to avoid infringement and could
be liable to pay damages, or could be prevented from commercializing TCR
Vaccines. There can be no assurance that such licenses would be available or, if
available, would be on commercially reasonable terms, or that the Company would
be successful in any attempt to redesign its products or processes to avoid
infringement. Even if the Company's patent counsel render advice that the
Company's products and processes do not infringe any valid claim under third
party patents relating to the TCR Vaccines technology, neither they nor the
Company can assure that no third party will commence litigation to enforce such
patents, or that the Company will not incur substantial expenses or that it will
prevail in any patent litigation. Moreover, patent applications in the U.S. are
maintained in secrecy until issue, and publication of discoveries in the
scientific or patent literature often lag behind actual discoveries, so the
Company cannot be certain that it is aware of all potentially relevant pending
applications and it is not possible to predict with any certainty the scope of
claims that could issue from such a third party's pending application. The
Company anticipates that an interference will be declared between one or more of
its TCR Peptide technology patent applications and those of one or more of its
competitors including the above-referenced patent to Immune Response Corporation
to determine priority of invention, which could result in substantial cost to
the Company even if the eventual outcome is favorable. It is not possible to
know in advance the invention dates that such other parties may be able to
prove, so the Company cannot know whether its or its licensors' inventors are
the first for inventions covered by their pending patent applications or that it
or its licensors were the first to file patent applications for such inventions.
A judgment adverse to the Company in any such patent interference, litigation or
other proceeding could materially adversely affect the Company's business,
financial condition and results of operation, and its expense may be substantial
whether or not the Company is successful.
Connetics also relies on trade secrets and proprietary know-how. The
Company requires its employees, consultants and advisors to execute a
confidentiality agreement providing that all proprietary information developed
or made known to the individual during the course of the relationship will be
kept confidential and not used or disclosed to third parties except in specified
circumstances. The agreements also provide that all inventions conceived by an
employee (or consultant or advisor to the extent appropriate for the services
provided) during the course of the relationship shall be the exclusive property
of the Company, other than inventions unrelated to the Company and developed
entirely on the individual's own time. There can be no assurance, however, that
these agreements will provide meaningful protection or adequate remedies for
misappropriation of the Company's trade secrets in the event of unauthorized use
or disclosure of such information.
10
<PAGE> 13
DEPENDENCE ON CONTRACT MANUFACTURERS AND SUPPLIERS
The Company currently has no manufacturing facilities for clinical or
commercial production of any of its products, nor does the Company intend to
develop such capabilities in the near future. The Company's products for
research and preclinical testing have been supplied by collaborators and
contract manufacturing companies. Gamma interferon is manufactured by Genentech
in an FDA-licensed manufacturing facility. Relaxin is manufactured for
Connective under contract with four outside vendors: BASF Bioresearch Corp. for
fermentation, Scios, Inc. for purification, Chesapeake Biological Laboratory for
filling and Tektagen, Inc. for testing. The Company is in discussions with
manufacturers who can supply Relaxin and TCR Vaccines for clinical and
commercial uses. Ridaura is manufactured by SmithKline (in final finished
package form) under an agreement with an initial term through December 2001.
Betamousse is manufactured for Connetics by CCL Pharmaceuticals. If the Company
is unable to contract for manufacturing capabilities on acceptable terms, the
Company's ability to conduct preclinical and human clinical testing will be
adversely affected, resulting in the delay of submission of products for
regulatory approval and initiation of new development programs, which in turn
could impair materially the Company's competitive position and the possibility
of the Company achieving profitability. In addition, some materials used in the
Company's products may be available only from sole suppliers. Although neither
the Company nor its contract manufacturers has experienced difficulty acquiring
materials for the manufacture of its products for clinical trials, no assurance
can be given that interruptions in supplies will not occur in the future, which
could have a material adverse effect on the Company's ability to manufacture its
products. There can also be no assurance that the Company will be able to
manufacture any of its products on a commercial scale or at a competitive cost
or in sufficient quantities. The Company currently is seeking additional
clinical and commercial suppliers. There is no assurance that such suppliers
will be located or that the current manufacturers of relaxin can supply
sufficient clinical quantities. Failure to obtain sufficient clinical or
commercial quantities of relaxin or other products at acceptable terms would
have a material adverse impact on the Company's attempts to complete its
clinical trials, and obtain approval for and commercialize its products.
COMPETITION AND TECHNOLOGICAL CHANGE
Other products and therapies currently exist on the market or are under
development that could compete directly with some of the products that the
Company is seeking to develop and market. There can be no assurance that the
Company's products, even if successfully tested and developed, will be adopted
by physicians over such other products, or that the Company's products will
offer an economically feasible alternative to existing modes of therapy where
they exist. In addition, a number of companies are currently seeking to develop
new products and therapies to address diseases involving connective tissue, the
number of the Company's competitors in these markets could increase. The Company
intends to compete on the basis of the effectiveness, quality and exclusivity of
its products, combined with the effectiveness of its marketing and sales
efforts. There can be no assurance that other products and therapies will not be
developed that will either render the Company's proposed products obsolete or
will have advantages outweighing those of the products and therapies that the
Company is seeking to develop.
Many of the Company's existing or potential competitors, particularly
large pharmaceutical companies, have substantially greater financial, technical
and human resources than the Company. In addition, many of these competitors
have more collective experience than the Company in undertaking preclinical
testing and human clinical trials of new pharmaceutical products and obtaining
regulatory approvals for therapeutic products. Accordingly, the Company's
competitors may succeed in obtaining FDA approval for products more rapidly than
the Company.
POTENTIAL EFFECTS OF OFFERING ON THE COMPANY'S STOCK PRICE
The Common Stock offered hereby represents approximately 13.5% of the
Company's total outstanding Common Stock as of April 2, 1997. While the Company
has the right to delay a sale of any Shares sold in the Private Placement by a
Selling Stockholder for up to thirty days in the event that such sale could
constitute a violation of the federal securities laws, the Company has no other
ability to control the timing or volume of resales of the Shares. If all or a
substantial portion of the Shares offered hereby are sold by the Selling
Stockholders within a short period of time, the market price for the Company's
Common Stock could be materially and adversely affected.
11
<PAGE> 14
POTENTIAL EFFECTS OF GUARANTEE OF VALUE OF SHARES ISSUED TO SMITHKLINE
In connection with its acquisition of U.S. and Canadian rights to Ridaura
in December 1996, the Company issued 637,733 shares of Common Stock to
SmithKline Beecham Properties, Inc. ("SBP"). The total value of the shares
issued to SBP is required to be $9.0 million on December 31, 1997; to achieve
such value, the Company may be obligated to issue additional shares to SBP on
such date, or may repurchase a portion of the originally-issued shares to
reduce the market value of the remaining shares to $9.0 million. In the event
the Company is required to issue a substantial number of additional shares to
SBP, such issuance will have a dilutive impact on the other stockholders of the
Company. As a result, the Company net income (loss) per share could be
materially decreased (increased) in future periods, and the market price of the
Company's Common Stock could be materially and adversely affected. In addition,
SBP currently owns approximately 7.0% of the Company's outstanding shares of
Common Stock. An additional issuance of a substantial number of shares to SBP
would increase SBP's ownership percentage and give SBP increased influence in
matters requiring a stockholder vote, such as electing directors or approving a
merger or sale of the Company.
Under the rules of the Nasdaq Stock Market, in the event that a second
issuance to SBP would result in SBP receiving more than 19.9% of more of the
Company's outstanding Common Stock as of December 30, 1996, the Company would
be required to obtain approval of the Company's stockholders for the overall
issuance of shares to SBP. If such approval is not obtained by the Company, SBP
has the right to receive the cash value of the required second issuance. Such a
cash payment would divert the Company's available liquid resources away from
the Company's operations and development programs, which could have a material
adverse effect on the Company's business and its results of operations.
PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE
The Company faces an inherent business risk of exposure to product
liability claims in the event that the use of its technology or potential
products is alleged to have resulted in adverse effects. Such claims, even if
successfully defended by the Company, could injure the Company's reputation.
While the Company has taken, and intends to continue to take, what it believes
are appropriate precautions to minimize exposure to product liability claims,
there can be no assurance that it will avoid liability. The Company believes
that it possesses product liability and general liability and certain other
types of insurance customarily obtained by business organizations of its type.
The Company intends to maintain insurance against product liability risks
associated with the testing, manufacturing and marketing of its products.
However, there can be no assurance that it will be able to obtain such insurance
in the future, or that if obtained, such insurance will be sufficient.
Consequently, a product liability claim or other claims with respect to
uninsured liabilities or in excess of insured liabilities could have a material
adverse effect on the business or financial condition of the Company.
ABSENCE OF SALES AND MARKETING EXPERIENCE
Although the Company's officers and employees have significant previous
experience in the industry, the Company itself has no history or experience in
sales, marketing or distribution. As the Company begins to sell Ridaura and if
it obtains government approval to commence commercial sales of any other
products, the Company will be competing with established pharmaceutical and
biotechnology companies with respect to marketing capabilities, an area in which
the Company has no history. To market its products directly (in particular,
Ridaura), the Company must either establish a marketing and sales force with
technical expertise and distribution capability or obtain the assistance of a
pharmaceutical company with a large distribution system and sales force. There
can be no assurance that the Company will be able to establish sales and
distribution capabilities or be successful in gaining market acceptance for its
products. If the Company enters into co-promotion or other licensing
arrangements, the Company's revenues will be subject to the payment provisions
of such arrangements and dependent on the efforts of third parties, and there
can be no assurance that such efforts will be successful.
DEPENDENCE ON AND NEED FOR ADDITIONAL KEY PERSONNEL
The Company is dependent on the principal members of its scientific and
management staffs (including Thomas G. Wiggans, its President and Chief
Executive Officer), the loss of whose services might impede the achievement of
development objectives. The Company does not maintain "key person" insurance on
any of these individuals. In addition, the Company's potentially rapid growth
and expansion into areas and activities requiring additional expertise, such as
clinical trials, governmental approvals, manufacturing, sales and marketing,
will increase burdens on the Company's management, operational and financial
resources. These demands are expected to require an increase in management and
scientific personnel and the development of additional expertise by existing
management personnel. Recruiting and retaining management, operational personnel
and qualified scientific personnel to perform research and development work in
the future will be critical to the Company's success. Although the Company
believes it will continue to be successful in attracting and retaining skilled
and experienced management and operational and scientific personnel, there can
be no assurance that the Company will be able to attract and retain such
personnel on acceptable terms given the competition for such personnel among
numerous pharmaceutical and biotechnology companies, universities and other
institutions.
12
<PAGE> 15
UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT; HEALTH CARE REFORM AND
RELATED MATTERS
The levels of revenues and profitability of pharmaceutical companies may
be affected by the continuing efforts of governmental and third party payers to
contain or reduce the costs of health care through various means. In both the
United States and elsewhere, sales of prescription pharmaceuticals are dependent
in part on the availability of reimbursement to the consumer from third party
payers, such as government, employers and private insurance plans. Third party
payers are increasingly seeking to reduce the costs of medical products and
services and looking for improved cost/benefit relationships from the products
and services they buy. If the Company or one of its potential marketing or
strategic alliance partners succeeds in bringing one or more products based upon
the Company's technology to the market, there can be no assurance of market
acceptance of the Company's products or that these products will be considered
cost-effective and that reimbursement to the consumer will be available or will
be sufficient to allow the Company or its partner to sell such products on a
competitive basis. Any inability of the Company or its potential partners to
sell products developed using the Company's technology or in-licensed by the
Company on a competitive basis would have a material adverse effect on the
Company's business.
ENVIRONMENT AND CONTROLLED USE OF HAZARDOUS MATERIALS
The Company is subject to federal, state and local laws and regulations
governing the use, generation, manufacture, storage, discharge, handling and
disposal of certain materials and wastes used in its operations, some of which
are classified as "hazardous." There can be no assurance that the Company will
not be required to incur significant costs to comply with environmental laws and
regulations as its research activities are increased or that the operations,
business and future profitability of the Company will not be adversely affected
by current or future environmental laws and regulations. Although the Company
believes that its safety procedures for handling and disposing materials comply
with such laws and regulations, the risk of accidental contamination or injury
from these materials cannot be eliminated. In the event of such an accident, the
Company could be held liable for any damages that result and any such liability
could exceed the resources of the Company.
SIGNIFICANT CONTROL BY EXISTING STOCKHOLDERS
Officers and directors of the Company, together with entities affiliated
with them, beneficially own approximately 37% of the Common Stock of the
Company. These stockholders currently are able to exercise significant influence
over the election of members of the Company's Board of Directors and therefore
to influence all corporate actions.
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to
5,000,000 shares of undesignated Preferred Stock and to determine the rights,
preferences, privileges and restrictions of such shares without further vote or
action by the Company's stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely effected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock could have the effect of making it more difficult for third
parties to acquire a majority of the outstanding voting stock of the Company. In
addition, certain provisions of the Company's charter documents, including a
provision eliminating the ability of stockholders to take actions by written
consent, and of Delaware law could delay or make difficult a merger, tender
offer or proxy contest involving the Company. Further, the
13
<PAGE> 16
Company's stock option and purchase plans generally provide for the assumption
of such plans or substitution of an equivalent option of a successor corporation
or, alternatively, at the discretion of the Board of Directors, exercise of some
or all of the option stock, including non-vested shares, or acceleration of
vesting of shares issued pursuant to stock grants, upon a change of control or
similar event.
POSSIBLE VOLATILITY OF STOCK PRICE; LACK OF DIVIDENDS
Prior to February 1996 there was no public market for the Common Stock of
the Company. There can be no assurance that an active trading market will
continue to be sustained or that the market price of the Common Stock will not
decline below the its present market price. The market prices for securities of
biotechnology companies have been highly volatile. Announcements regarding the
results of regulatory approval filings, clinical studies or other testing,
technological innovations or new commercial products by the Company or its
competitors, government regulations, developments concerning proprietary rights
or public concern as to safety of technology have historically had, and are
expected to continue to have, a significant impact on the market prices of the
stocks of biotechnology companies. The trading price of the Common Stock could
also be subject to significant fluctuations in response to variations in
operating results. In addition, the Company has never paid cash dividends on its
capital stock and does not anticipate paying cash dividends in the foreseeable
future, but instead intends to retain future earnings for reinvestment in its
business. The Company's credit agreement requires the approval of the Company's
bank to declare or pay cash dividends.
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<PAGE> 17
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of common stock
by the Selling Stockholders in the offering. If the Warrant is exercised, the
Company would receive proceeds of up to $2,062,500 from the issuance of shares
of Common Stock to Kepler and the Company expects to use any such proceeds for
the Company's product development programs, working capital and/or general
corporate purposes.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act"). Article IX of the Company's Amended and Restated Certificate of
Incorporation and Article VII, Section 6 of the Company's Bylaws provide for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by law. In addition, the Company has entered into
Indemnification Agreements with its officers and directors and maintains
director and officer liability insurance.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referred to in Item 15 above or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
ISSUANCE OF COMMON STOCK AND WARRANT TO SELLING STOCKHOLDERS
On December 4, 1996, Connetics privately placed 972,224 shares of its
Common Stock to certain of the Selling Stockholders for an aggregate purchase
price of $5,999,983 ($6.1714 per share) pursuant to the terms of a Common Stock
Purchase Agreement dated as of December 4, 1996 by and between Connetics and
such Selling Stockholders. On January 2, 1997, the Company issued a five-year
warrant (the "Warrant") to purchase 250,000 shares of its Common Stock at an
exercise price of $8.25 per share (subject to adjustment pursuant to the terms
thereof) to Kepler Capital LLC ("Kepler") pursuant to the Equity Line Agreement.
This Prospectus covers the 1,222,224 shares of Connetics Common Stock issued in
the Private Placement and issuable under the Warrant.
SELLING STOCKHOLDERS
The following table sets forth certain information as of April 2, 1997
with respect to each Selling Stockholder. Except as otherwise indicated, the
Company believes, based on information furnished by the Selling Stockholders,
that no natural persons exercise sole or shared voting or dispositive powers
over the Shares held by the Selling Stockholders.
<TABLE>
<CAPTION>
Shares Beneficially Shares of Common Shares Beneficially
Owned Prior Stock Owned After
Name Of Selling Stockholders to the Offering(1) Offered Hereby(1) the Offering(1)(2)
---------------------------- ------------------ ----------------- ------------------
Number Percent Number Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Integral Capital Partners III, L.P.(3) 261,820 2.9% 261,820 -- *
Integral Capital Partners International 62,255 * 62,255 -- *
III, L.P.(3)
New York Life Insurance Company 324,075 3.6% 324,075 -- *
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
Shares Beneficially Shares of Common Shares Beneficially
Owned Prior Stock Owned After
Name Of Selling Stockholders to the Offering(1) Offered Hereby(1) the Offering(1)(2)
---------------------------- ------------------ ----------------- ------------------
Number Percent Number Percent
------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
WPG Life Sciences Fund, L.P. 121,528 1.3% 121,528 -- *
WPG Institutional Life Sciences Fund, 40,509 * 40,509 -- *
L.P.
GIMV(4) 366,432 4.0% 162,037 204,395 2.2%
Kepler Capital LLC(5) 250,000 2.8% 250,000 -- *
TOTAL 1,222,224 13.5% 1,222,224 204,395 2.2%
</TABLE>
- ------------------------------
* Less than 1%
(1) Information with respect to beneficial ownership is based upon
information obtained from the Company's transfer agent and the Selling
Stockholders.
(2) Assumes sale of all Shares offered hereby and no other purchases or
sales of Connective Common Stock. See "Plan of Distribution."
(3) Roger B. McNamee, John A. Powell and Pamela K. Hagenah are the general
partners of Integral Capital Management III, L.P., which is the
general partner of Integral Capital Partners III, L.P. and Integral
Capital Partners International III, L.P. As general partners, they
share voting and dispositive powers over the Shares held by such
entities.
(4) GIMV is the Investment Company for Flanders Ltd., Belgium.
(5) These shares are issuable upon exercise of the Warrant. Kepler has
not had a material relationship with the Company within the last three years
other than as a result of entering into the Equity Line Agreement and related
agreements. As of the date of this Prospectus, Kepler owns no shares of the
Company's Common Stock and is offering for resale all of the Shares it may
acquire upon exercise of the Warrant.
PLAN OF DISTRIBUTION
The Selling Stockholders may sell the Shares in whole or in part, from
time to time on the over-the-counter market at prices and on terms prevailing at
the time of any such sale. Any such sale may be made in broker's transactions
through broker-dealers acting as agents, in transactions directly with market
makers or in privately negotiated transactions where no broker or other third
party (other than the purchaser) is involved. The Selling Stockholders will pay
selling commissions or brokerage fees, if any, with respect to the sale of the
Shares in amounts customary for the type of transaction effected. The Selling
Stockholders will also pay all applicable transfer taxes and all fees and
disbursements of counsel for the Selling Stockholders incurred in connection
with the sale of shares.
The Selling Stockholders has advised the Company that during such time as
the Selling Stockholders may be engaged in the attempt to sell Shares registered
hereunder, it will:
(i) not engage in any stabilization activity in connection with any of the
Company's securities;
(ii) cause to be furnished to each person to whom Shares included herein
may be offered, and to each broker-dealer, if any, through whom Shares are
offered, such copies of this Prospectus, as supplemented or amended, as may be
required by such person; and
(iii) not bid for or purchase any of the Company's securities or any
rights to acquire the Company's securities, or attempt to induce any person to
purchase any of the Company's securities or rights to acquire the Company's
securities other than as permitted under the Exchange Act.
The Selling Stockholders, and any other persons who participate in the
sale of the Shares, may be deemed to be "Underwriters" as defined in the
Securities Act. Any commissions paid or any discounts or concessions allowed to
any such persons, and any profits received on resale of the Shares, may be
deemed to be underwriting discounts and commissions under the Securities Act.
With regard to the Shares issued in the Private Placement, the Company has
agreed to maintain the effectiveness of this Registration Statement until
December 4, 1999. With regard to the Shares issuable upon exercise of the
Warrant, the Company has agreed to maintain the effectiveness of this
Registration Statement until all such Shares have been disposed of or until such
Shares may be sold under Rule 144 under the Securities Act. No sales may be
made pursuant to this Prospectus after such dates unless the
16
<PAGE> 19
Company amends or supplements this Prospectus to indicate that it has agreed to
extend such period of effectiveness.
The Company has agreed to indemnify the Selling Stockholders against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
Common Stock offered hereby will be passed upon for the Company by Venture Law
Group, A Professional Corporation, 2800 Sand Hill Road, Menlo Park, California
94025. Joshua L. Green, a director of Venture Law Group, is Secretary of the
Company.
EXPERTS
The financial statements of Connetics Corporation (formerly Connective
Therapeutics, Inc.) as of December 31, 1996 and 1995, and for the years ended
December 31, 1996, 1995 and 1994 appearing in the Company's Annual Report on
Form 10-K, as amended (No. 0-27406) have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein, and
are incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of a Registration Statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the shares
of Common Stock offered hereby, reference is hereby made to the Registration
Statement. Statements contained herein concerning the provisions of any document
are not necessarily complete, and each such statement is qualified in its
entirety by reference to the copy of such document filed with the Commission.
17
<PAGE> 20
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the
Registrant in connection with the sale and distribution of the Common Stock
being registered. Selling commissions and brokerage fees and any applicable
transfer taxes and fees and disbursements of counsel for the Selling
Stockholders are payable by the Selling Stockholders. All amounts are estimates
except the registration fee.
<TABLE>
<CAPTION>
Amount
To be Paid
----------
<S> <C>
Registration Fee ....................................... 2,511
Legal Fees and Expenses ................................ 15,000
Accounting Fees and Expenses ........................... 8,000
Miscellaneous .......................................... 2,489
-------
Total .............................................. $28,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. Article IX of the
Registrant's Amended and Restated Certificate of Incorporation and Article VII,
Section 6 of the Registrant's Bylaws provide for indemnification of its
directors, officers, employees and other agents to the maximum extent permitted
by law. In addition, the Registrant has entered into Indemnification Agreements
with its officers and directors and maintains director and officer liability
insurance.
II-1
<PAGE> 21
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
10.1(1) Common Stock Purchase Agreement dated December 4, 1996 by and
among the Registrant and certain investors
10.2(1) Registration Rights Agreement dated December 4, 1996 by and
among the Registrant and certain investors
10.3(2) Structured Equity Line Flexible Financing Agreement between
Kepler Capital LLC and the Company dated January 2, 1997
10.4(2) Registration Rights Agreement dated January 2, 1997 between
Kepler and the Company
5.1(3) Opinion of Venture Law Group, A Professional Corporation
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page
II-6)
23.2 Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-5 of originally-filed
Registration Statement)
</TABLE>
- ---------------------
(1) Incorporated by reference to the identically numbered exhibit filed with
the Registrant's Current Report on Form 8-K (File No. 0-27406), filed
with the Commission on December 19, 1996.
(2) Incorporated by reference from an exhibit filed with the Registrant's
Annual Report on Form 10-K (File No. 0-27406) for the fiscal year ended
December 31, 1996.
(3) Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to include any material
information with respect to the plan of distribution not previously disclosed in
the Registration Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referred to in Item 15 above or
otherwise, the Registrant has been advised that in the opinion of the
II-2
<PAGE> 22
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
II-3
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Palo Alto, State of California, on the 23rd day of
May 1997.
CONNECTIVE THERAPEUTICS, INC.
By: /s/ CYNTHIA M. BUTITTA
-------------------------------------
Cynthia M. Butitta
Vice President of Finance and
Administration
and Chief Financial Officer
II-4
<PAGE> 24
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ THOMAS G. WIGGANS* President, Chief Executive May 23, 1997
------------------------- Officer and Director
Thomas G. Wiggans (Principal Executive
Officer)
/s/ CYNTHIA M. BUTITTA* Vice President of Finance May 23, 1997
------------------------- and Administration and Chief
Cynthia M. Butitta Financial Officer (Principal
Financial and Accounting
Officer)
/s/ G. KIRK RAAB* Chairman of the Board of May 23, 1997
-------------------------
G. Kirk Raab Directors
/s/ ALEXANDER E. BARKAS* Director May 23, 1997
-------------------------
Alexander E. Barkas
Director --, 1997
-------------------------
Eugene A. Bauer
Director --, 1997
-------------------------
Brian H. Dovey
/s/ THOMAS D. KILEY* Director May 23, 1997
-------------------------
Thomas D. Kiley
/s/ KENNETH B. PLUMLEE* Director May 23, 1997
-------------------------
Kenneth B. Plumlee
/s/ JOSEPH J. RUVANE, JR.* Director May 23, 1997
-------------------------
Joseph J. Ruvane, Jr.
*By: /s/ CYNTHIA M. BUTITTA
-------------------------
Attorney-in-fact
</TABLE>
II-5
<PAGE> 25
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) of Connetics Corporation (formerly Connective
Therapeutics, Inc.) for the registration of 1,222,224 shares of its common
stock, and to the incorporation by reference therein of our report dated January
13, 1997, with respect to the financial statements of Connective Therapeutics,
Inc. included in its Annual Report (Form 10-K) for the year ended December 31,
1996 filed with the Securities and Exchange Commission.
Palo Alto, California ERNST & YOUNG LLP
May 23, 1997
II-6
<PAGE> 26
CONNETICS CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
10.1(1) Common Stock Purchase Agreement dated December 4, 1996
by and among the Registrant and certain investors
10.2(1) Registration Rights Agreement dated December 4, 1996 by
and among the Registrant and certain investors
10.3(2) Structured Equity Line Flexible Financing Agreement between
Kepler Capital LLC and the Company dated January 2, 1997\
10.4(2) Registration Rights Agreement dated January 2, 1997 between
Kepler and the Company
5.1(3) Opinion of Venture Law Group, A Professional Corporation
23.1 Consent of Ernst & Young LLP, Independent Auditors (see
page II-6)
23.2 Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-5 of originally filed
Registration Statement)
</TABLE>
- ---------------------
(1) Incorporated by reference to the identically numbered exhibit filed with
the Registrant's Current Report on Form 8-K (File No. 0-27406), filed with
the Commission on December 19, 1996.
(2) Incorporated by reference from an exhibit filed with the Registrant's
Annual Report on Form 10-K (File No. 0-27406) for the fiscal year ended
December 31, 1996.
(3) Previously filed.
II-7
