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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 12, 1998
REGISTRATION NO. 333-______________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
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
(650) 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
CONNETICS CORPORATION
3400 West Bayshore Road
Palo Alto, CA 94303
(650) 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
2775 Sand Hill Road
Menlo Park, California 94025
(650) 854-4488
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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. [ ]
----------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SHARES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock,
$0.001 par value per share................ 3,299,942 $3.375 $11,137,304 $3,286.00
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</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 June 11, 1998 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.
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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.
SUBJECT TO COMPLETION
CONNETICS CORPORATION
3,299,942 SHARES
COMMON STOCK
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This Prospectus relates to 3,299,942 shares of Connetics Common Stock,
$0.001 par value, (the "Shares") which may be offered for the account of several
stockholders of Connetics (the "Selling Stockholders") and will not be
underwritten. Of the Shares being registered hereby for the Selling
Stockholders, (i) 2,162,163 were issued to Alta BioPharma Partners, L.P. and
certain funds affiliated therewith in a private placement on April 10, 1998 (the
"Private Placement") pursuant to an exemption from the registration requirements
of the Securities Act of 1933, as amended (the "Securities Act"), (ii) 1,037,779
were issued in fulfillment of the Company's obligation to issue equity to
SmithKline Beecham Properties, Inc. in connection with the Company's acquisition
of rights to Ridaura(R) in December 1996, and (iii) 100,000 are being registered
in connection with the Company's obligations under its Structured Equity Line
with Kepler Capital LLC. 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. The Company will not receive any proceeds from the sale of the
Shares by the Selling Stockholders. The Company has agreed to pay certain
expenses of the Selling Stockholders. See "Plan of Distribution."
The Selling Stockholders and any broker-dealers, agents or underwriters
that participate with the Selling Stockholders in the distribution of the Shares
may be deemed to be an "Underwriter" within the meaning of Section 2(11) of the
Securities Act, and any commissions received by them and any profit on the
resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. See "Plan of Distribution"
for a description of indemnification arrangements.
The Common Stock of Connetics is quoted on the Nasdaq National Market
System (the "Nasdaq") under the symbol "CNCT". On June 11, 1998, the last sale
price of the Company's Common Stock on the Nasdaq was $3.375 per share.
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" ON PAGE 8 OF THIS PROSPECTUS FOR A DISCUSSION OF MATERIAL RISKS
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN CONNECTION
WITH THE PURCHASE OF SECURITIES OFFERED HEREBY.
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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.
The date of this Prospectus is June 12, 1998
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TABLE OF CONTENTS
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PAGE
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<S> <C>
Available Information...................................................... 3
Documents Incorporated by Reference........................................ 3
The Company................................................................ 5
Risk Factors............................................................... 8
Use of Proceeds............................................................ 21
Indemnification of Officers and Directors.................................. 21
Issuance of Common Stock to Selling Stockholders........................... 21
Selling Stockholders....................................................... 22
Plan of Distribution....................................................... 23
Legal Matters.............................................................. 24
Experts.................................................................... 24
Additional Information..................................................... 24
</TABLE>
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NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED 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. 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 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 the Company and other
companies that file electronically with the Commission.
INFORMATION INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission File
No. 27406 are incorporated by reference in this Prospectus:
1. The Company's Registration Statement on Form S-1 (Commission File No.
33-80261).
2. The Company's Registration Statement on Form S-1 (Commission File No.
333-41195).
3. The Company's Annual Report on Form 10-K for the year ended December
31, 1997.
4. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
5. The Company's Current Report on Form 8-K filed May 6, 1998.
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5. 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.
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
John Higgins, Connetics Corporation, 3400 West Bayshore Road, Palo Alto, CA
94303, telephone: (650) 843-2800.
The "C with interlocking hemisphere" logo (used alone and with the
Company's name), "Connetics", "ConXn(R)" and "Ridaura(R)" and "Betamousse(TM)"
are trademarks of the Company. All other tradenames and trademarks appearing in
this Prospectus are the property of their respective holders.
Connetics Corporation ("Connetics" or the "Company") was incorporated in
the State of Delaware on February 8, 1993.
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SPECIAL NOTE: THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS
OR EVENTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN SUCH FORWARD-LOOKING
STATEMENTS. POTENTIAL RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION, THOSE
FACTORS BELOW UNDER THE HEADING "ADDITIONAL FACTORS THAT MAY AFFECT FUTURE
RESULTS."
THE COMPANY
The Company is focused on the development and commercialization 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, joints, ligaments and lining of organs, and form
the three-dimensional structure that allows cells to function normally. The
diseases or conditions initially addressed by the Company include scleroderma,
rheumatoid arthritis, psoriasis, multiple sclerosis, and keloids; many of these
fall within the broad category of autoimmune diseases. Patients suffering from
these conditions experience a variety of chronic problems depending on the
particular condition, including hardening of the skin and internal organs,
severe scarring, lack of mobility and extensive rashes and lesions. 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. The Company
has several products in development addressing these disease indications:
ConXn(R) (recombinant human relaxin H2) ("relaxin"), betamethasone valerate 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. quick break foam
("betamethasone mousse"), clobetasol propionate quick break foam ("clobetasol
mousse"), T cell receptor peptide therapeutic vaccines ("TCR vaccines"), and
gamma interferon (1b) ("gamma interferon"). In December 1996, the Company
acquired the exclusive U.S. rights to Ridaura(R) (auranofin), an approved
disease modifying antirheumatic drug approved for sale, from SmithKline Beecham
Corporation and affiliated entities ("SmithKline").
Relaxin. Relaxin is a naturally occurring protein that is known to
promote 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 disfigurement and quality of life impairment,
making it impossible for afflicted patients to carry out the most routine daily
functions. This disease affects over 300,000 individuals in the United States
and, in its severe form (known as systemic sclerosis, which affects
approximately 70,000 individuals in the U.S.), 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 systemic sclerosis indicated that continuous administration of
relaxin was well tolerated, without any serious drug-related adverse effects. In
June 1997, the Company announced results of a 64 patient Phase II clinical trial
which showed that administration of relaxin caused a statistically significant
reduction in skin score (a measure of disease progression) and a trend toward
improvement in eleven other disease parameters. Thus, relaxin may have a
beneficial effect on connective tissue turnover and may provide a treatment for
scleroderma. The Company has met with the U.S. Food and Drug Administration (the
"FDA"), and based on that meeting, plans to begin a pivotal trial of relaxin in
1998. The Company has also conducted a preclinical animal study that
demonstrated Relaxin's
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potential ability to inhibit pulmonary (lung) fibrosis and is conducting
preclinical studies with relaxin in liver and cardiac fibrosis, and infertility.
Betamethasone Mousse. The Company has an exclusive license to develop
and market betamethasone mousse (a quick break foam formulation of the
dermatologic drug, betamethasone valerate) in North America. The product has
been approved for sale in the United Kingdom and is being marketed in the U.K.
by Evans Medical Ltd. In August 1997, the Company announced that results from
its Phase III clinical trial with betamethasone mousse demonstrated
statistically significant improvement over both placebo and betamethasone lotion
for the treatment of scalp psoriasis, a condition that affects over three
million persons in the United States. In December 1997, the Company submitted a
New Drug Application (an "NDA") with the FDA to market the product for use in
all steroid-responsive dermatoses, including psoriasis. The NDA has been
accepted for filing by the FDA.
Clobetasol Mousse. Following its development progress with betamethasone
mousse, the Company is now developing a second mousse product, clobetasol
mousse. Clobetasol mousse is a quick break foam formulation of clobetasol
propionate, a super high potency corticosteriod. In January 1998, the Company
acquired exclusive rights to develop and market the drug in North America. The
Company intends to initiate a Phase III trial for the treatment of severe
psoriasis and skin dermatoses during 1998.
TCR Vaccines. The Company is developing TCR vaccines for the treatment
of autoimmune diseases. Connetics has two TCR vaccines product programs in
development for multiple sclerosis and rheumatoid arthritis. These diseases
collectively disable over two million people nationwide, with combined annual
treatment costs exceeding two billion dollars. Results from early clinical
trials designed to assess the immunogenicity of TCR vaccines in multiple
sclerosis suggest that a number of patients achieved the desired immune response
to the vaccine and that the vaccine was well tolerated. The Company is also
conducting a pilot clinical study using TCR vaccines for the treatment of
rheumatoid arthritis.
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. In
addition, gamma interferon is a potent modulator of the immune system, and is
approved by the FDA for a rare, serious immune disease, known as chronic
granulomatous disease ("CGD"). In May 1998, the Company entered into a license
agreement with Genentech under which the Company received an exclusive license
under certain patent rights and know-how to Actimmune(R) (gamma interferon) for
the treatment of CGD and several additional indications (non-cancer
dermatological diseases, infectious diseases, osteopetrosis, pulmonary fibrosis
and asthma) in the United States. The parties also entered into a Supply
Agreement under which Genentech will manufacture and supply gamma interferon, in
bulk product or finished product form. The Company expects to form a new
subsidiary corporation to further develop and market gamma interferon for
infectious diseases. Clinical studies are underway evaluating gamma interferon's
role as a potential treatment for multiple-drug resistant tuberculosis.
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The Company is currently conducting a Phase II clinical trial for the
treatment of keloids, which are unslightly, painful, elevated scars resulting
from Collagen overproduction . In August 1997, the Company also announced
results from a Phase III trial of gamma interferon for the treatment of atopic
dermatitis that indicated that the product did not show an acceptable
therapeutic response with respect to the primary clinical endpoint. As a result,
the Company suspended plans to submit a biological license application for gamma
interferon for the treatment of atopic dermatitis. Full analysis of the data
from the trial suggests areas of drug activity and, as a result, the Company may
in the future evaluate further development of gamma interferon for
dermatological indications.
Ridaura(R). In December 1996, the Company acquired the exclusive U.S.
and Canadian rights to Ridaura (auranofin), a disease modifying antirheumatic
drug, from 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 U.S. and Canadian rights,
title and interest to Ridaura, including intellectual property rights, 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 in connection with its marketing of the
product in the United States. Connetics began marketing Ridaura through in its
own sales force in mid-1997. Through agreements with SmithKline, customer orders
and distribution for the product were 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 has established a
relationship with CORD Logistics, Inc. ("CORD"), a distribution company located
in Nashville, Tennessee and has been shipping Ridaura through CORD since
December 15, 1997. In December 1997, the Company sold the Canadian rights to
Ridaura to, and entered into a supply agreement with, Pharmascience Inc., a
Canadian company, for a net consideration of $1,300,000.
Corporate Strategy. The Company's strategy is to: (i) focus on the
development and commercialization of products targeting the rheumatology and
dermatology markets, which can be effectively served by focused and specialized
sales and marketing activities, (ii) expand its existing product portfolio and
pursue early commercialization opportunities by in-licensing other
therapeutically related products that are already marketed or in late-stage
clinical development, (iii) leverage its product development and
commercialization expertise by pursuing additional specialized diseases and
markets, (iv) utilize corporate partnerships to pursue new business
opportunities and overseas licensing of the Company's products in development
and (v) minimize drug discovery costs, manufacturing costs and capital
requirements.
The Company's principal executive offices are located at 3400 West
Bayshore Road, Palo Alto, California 94303, and its telephone number is (650)
843-2800.
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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
From its inception until its acquisition of Ridaura in December 1996,
Connetics was a development stage company. Except for Ridaura and Actimmune, all
of the Company's products are in clinical or preclinical development, and no
revenues were 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. For instance, in August 1997 the Company announced
results from a Phase III trial of gamma interferon for the treatment of atopic
dermatitis. The results indicated that the product did not show an acceptable
therapeutic response with respect to the primary clinical endpoint, and as a
result, the Company suspended plans to submit a biological license application
for gamma interferon for the treatment of atopic dermatitis.
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. 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 PRODUCT; UNCERTAINTY OF FUTURE RIDAURA REVENUES AND PATENT
STATUS OF RIDAURA
The Company's success will depend in part on its ability to manage the
marketing and sales of Ridaura. SmithKline's management of the Company's Ridaura
distribution operations
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ended December 31, 1997. The Company has established a relationship with CORD, a
distribution company located in Nashville, Tennessee and has been shipping
Ridaura through CORD since December 15, 1997; however, there can be no assurance
that this relationship will be successful. If CORD is unable to distribute
Ridaura in an effective manner or if the Company is unable to maintain
sufficient personnel with the appropriate levels of experience to manage this
function, the Company's business, financial condition and results of operations
could be materially and adversely affected. In addition, there can be no
assurance that the Company's Ridaura revenues will equal or exceed those
achieved by SmithKline over the last several years. The Company's Ridaura
revenues for the year ending December 31, 1997 were below the Company's
preliminary projections at the time of acquisition. 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.
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 December 1996 Ridaura acquisition, the Company
has experienced operating losses every year since its incorporation. Net losses
for the fiscal years ended December 31, 1997, 1996 and 1995 were $27.9 million,
$18.5 million and $10.4 million, respectively, and the Company had an
accumulated deficit of $65.9 million at December 31, 1997. Additionally, the
Company continues to incur net losses. The Company incurred net losses of $5.3
million in the three months ended March 31, 1998, compared with $7.6 million for
the corresponding period in 1997. While the decrease of $2.3 million in net
losses, which was primarily due to a lower level of development activities and
lower amortization costs due to the sale of Canadian rights to Ridaura, it was
offset in part by higher selling, general and administrative expenses. The
Company expects to incur additional losses over the next few years and losses
are expected to fluctuate from period to period based on timing of product
revenues, clinical material purchases, possible acquisitions of new products and
technologies, scale-up activities and clinical activities. The time required by
the Company to reach profitability is uncertain and 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. For the year ended December 31, 1997, the Company recognized $6.8
million in product revenue from Ridaura, which was below the Company's
preliminary projections at the time of its acquisition of Ridaura. There can be
no assurance that growth in Ridaura revenue will be achieved, that current
revenue levels will be maintained, or that the Company will ever be profitable
on a quarterly or annual basis. As noted above, the Company expects to incur
quarterly and annual operating losses for at
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least the next fewyears. 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 AND DILUTIVE IMPACT OF FUTURE
FUNDING;
The Company has financed its operations to date primarily through
private sales of equity securities and proceeds from its initial public offering
in February 1996. At March 31, 1998, cash, cash equivalents, short-term
investments, and restricted cash totaled $11.3 million, a decrease of $3.0
million from $14.3 million at December 31, 1997. The Company believes that its
existing cash, cash equivalents and short-term investments, including $10.0
million cash raised through a self-managed private sale of the common stock in
April 1998 and a $1.5 million license fee payment from Suntory Pharmaceuticals
in April 1998, along with cash generated from sales of Ridaura, will be
sufficient to fund the Company's operating expenses, debt obligations and
capital requirements through the second quarter of 1999. The Company's future
capital uses and requirements depend on numerous factors, including the progress
of its research and development programs, the progress of clinical and
advanced-stage clinical testing, the time and costs involved in obtaining
regulatory approvals, the cost of filing, prosecuting, and enforcing patent
claims and other intellectual property rights, competing technological and
market developments, the ability of the Company to establish collaborative
arrangements, the level of product revenues, the possible acquisition of new
products and technologies, and the development of commercialization activities,
and therefore such capital uses and requirements may increase in future periods.
As a result, the Company will require substantial additional funds prior to
reaching profitability and may attempt to raise additional funds through equity
or debt financings, collaborative arrangements with corporate partners or from
other sources. There can be no assurance that additional funding will be
available for the Company to finance its ongoing operations on acceptable terms,
if at all. 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.
On May 5, 1998, the Company entered into a license agreement with
Genentech under which the Company received an exclusive license under certain
patent rights and know-how to Actimmune (gamma interferon) for the treatment of
chronic granulomatous disease ("CGD") and several additional indications
(non-cancer dermatological diseases, infectious diseases, osteopetrosis,
pulmonary fibrosis and asthma) in the United States. Under the terms of the
agreement, the Company issued Genentech 340,048 shares of common stock valued at
$2.0 million at the time of closing, with a guaranteed future value of $4.0
million at December 28, 1998. In the event that the future value of the such
shares is less that $4.0 million at
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December 28, 1998, the Company will have to either issue additional shares or
pay cash to Genentech to make up the difference.
The Company has a Structured Equity Line Flexible Financing Agreement
(the "Equity Line Agreement") with Kepler Capital LLC ("Kepler") that allows the
Company to access capital through sales of its Common Stock. If, during the next
three years, the Stock meets certain volume restrictions and trades above $10.00
per share, then up to $500,000 would be drawn down approximately every three
months during the three year term of the equity line. The Company's trading
price is currently below the $10.00 price requirement. While the Equity Line
Agreement has the potential to provide the Company with additional future
financing, the sale of shares thereunder will have a dilutive impact on other
stockholders of the Company.
Other than the Equity Line Agreement, 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.
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 product 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
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"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 its 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 and development, clinical studies and regulatory activities necessary
to bring such potential product to market. In addition, 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 others at the time of
acquisition.
UNPREDICTABILITY OF, AND LIMITED EXPERIENCE IN, CONDUCTING PRECLINICAL AND
CLINICAL TRIALS
The Company is conducting a Phase I clinical trial of TCR Vaccines for
the treatment of rheumatoid arthritis and a Phase II trial of gamma interferon
for keloids. In addition, in 1998 the Company intends to commence a pivotal
trial of ConXn for the treatment of scleroderma and a Phase III trial of
clobetasol mousse for the treatment of severe psoriasis and skin dermatoses.
There can be no assurance that the Company will be able to successfully complete
its ongoing clinical trials or commence any future trials. 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. For instance,
in August 1997 the Company announced results from a Phase III trial of gamma
interferon for the treatment of atopic dermatitis. The results indicated that
the product did not show an acceptable therapeutic response with respect to the
primary clinical endpoint, and as a result, the Company suspended plans to
submit a biological license application for gamma interferon for the treatment
of atopic dermatitis. Even if a product from the Company's research and
development programs or any other therapeutic product is successfully developed
according to plans, there can be no assurance 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.
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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 from 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
Regulation by governmental entities in the United States and other
countries will be a significant factor in the production and marketing of any
pharmaceutical products which are or may be developed by the Company. It is
expected that all of the Company's pharmaceutical products will require
regulatory approval by governmental agencies prior to commercialization. In
particular, human pharmaceutical therapeutic products are subject to rigorous
preclinical and clinical testing and other approval procedures by the FDA in the
United States and similar health authorities in foreign countries. Various
federal and, in some cases, state statutes and regulations also govern or
influence the manufacturing, safety, labeling, storage, record keeping and
marketing of such pharmaceutical products. The process of obtaining these
approvals and the subsequent compliance with appropriate federal and foreign
statutes and regulations are time-consuming and require the expenditure of
substantial resources. Generally, in order to obtain FDA approval for a new
therapeutic agent, a company first must conduct preclinical studies in the
laboratory and in animal model systems to gain preliminary information on the
agent's efficacy and to identify any safety problems. "Preclinical" studies
include toxicity, pharmacokinetic and efficacy testing in vitro and in animals
and chemical or biological formulation work in preparation for submission of the
necessary data to comply with applicable regulations prior to the commencement
of human testing. The results of these studies are submitted as a part of an
investigational new drug application ("IND"), which the FDA must review before
human clinical trials of an investigational drug can start. The Company has
filed and will continue to be required to sponsor and file INDs and will be
responsible for initiating and overseeing the clinical studies to demonstrate
the safety and efficacy that are necessary to obtain FDA approval of its
products.
Clinical trials are normally done in three phases and generally take two
to five years, but may take longer, to complete. "Phase I trials" generally
involve administration of a product to a small number of persons to determine
safety, tolerance and pharmacokinetic characteristics. "Phase I/II trials"
generally involve administration of a product to a small number of persons who
have the targeted disease to determine safety, tolerance and pharmacokinetic
characteristics
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and/or to obtain preliminary evidence of efficacy. "Phase II trials" generally
involve administration of a product to a limited number of patients with a
particular disease to determine dosage, efficacy and safety. "Phase III trials"
generally examine the clinical efficacy and safety in an expanded patient
population at multiple clinical sites. At least one such trial is required (but
usually two are required) for FDA approval to market a drug.
After completion of clinical trials of a product, the Company will be
required to file a new drug application ("NDA"), if the product is classified as
a new drug, or a biologic license application ("BLA"), if the product is
classified as a biologic, and receive FDA approval before commercial marketing
of the product. The testing and approval processes require substantial time and
effort and there can be no assurance that any approval will be granted on a
timely basis, if at all. While the Company will endeavor to secure expedited
review and approval when possible, NDAs and BLAs can take between one and two
years to be reviewed by the FDA, and can take longer if significant questions
arise during the review process. While recent legislative and regulatory
initiatives have focused on the need to reduce FDA review and approval times,
the ultimate impact of such initiatives on the Company's products cannot be
certain. If questions arise during the FDA review process, approval can take
more than five years.
Even if FDA regulatory clearances are obtained, a marketed product is
subject to continual review, and later discovery of previously unknown problems
or failure to comply with the applicable regulatory requirements may result in
restrictions on the marketing of a product or withdrawal of the product from the
market, recalls, seizures, injunctions or criminal sanctions. For marketing
outside the United States, the Company will also be subject to foreign
regulatory requirements governing human clinical trials, manufacturing and
marketing approval for pharmaceutical products. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely from country to country.
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
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such issued patents will provide a competitive advantage to the Company or will
not be successfully challenged or circumvented by its competitors. In addition,
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 has filed
an opposition to a European patent claiming compositions for use in treating
multiple sclerosis, covering certain TCR V beta peptides disclosed for treating
multiple sclerosis in the Company's own, earlier-filed application; another
opposition has been filed against this patent by an independent party. 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 vaccine 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
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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 each of 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.
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. Relaxin has been manufactured for Connetics
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. TCR vaccines are manufactured for the
Company by American Peptide Company and Multiple Peptide Systems. The Company is
in discussions with additional 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. Betamethasone mousse and clobetasol mousse are manufactured for
Connetics by CCL Pharmaceuticals. Gamma interferon is manufactured by Genentech
and Parke-Davis. 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 additional suppliers will be engaged by the Company 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
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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 marketing, or 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, particularly in the field of rheumatoid arthritis,
and 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.
With regard to Ridaura, there are numerous products on the market, and
under development, for the treatment of rheumatoid arthritis. There can be no
assurance that Ridaura will continue to be utilized by physicians over other
rheumatoid arthritis products, or that Ridaura will continue to offer a
cost-effective alternative to competing therapies. In addition, although the
Company believes that there will be a continued role for products such as
Ridaura, the market for rheumatoid arthritis will likely change based upon new
product introductions, which could have a material adverse effect on the
Company's sales of Ridaura.
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.
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
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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.
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.
UNCERTAINTY OF PHARMACEUTICAL PRICING; THIRD PARTY REIMBURSEMENT AND HEALTH CARE
REFORM
The commercial success of the Company's products under development will
be substantially dependent upon the availability of government or private
third-party reimbursement for the use of such products. There can be no
assurance that Medicare, Medicaid, health maintenance organizations and other
third-party payers will authorize or otherwise budget such reimbursement. Such
governmental and third party payers are increasingly challenging the prices
charged for medical products and services. If the Company succeeds in bringing
one or more of its development products to market, there can be no assurance
that such products will be viewed as cost-effective or that reimbursement will
be available to consumers or will be sufficient to allow the Company's products
to be marketed on a competitive basis. Furthermore, federal and state
regulations govern or influence the reimbursement to health care providers of
fees and capital equipment costs in connection with medical treatment of certain
patients. In response to concerns about the rising costs of advanced medical
technologies, the current administration of the federal government has in the
past publicly stated its desire to reform health care, including the possibility
of price controls and revised reimbursement policies; while the administration
is no longer pursuing major initiatives, there can be no assurance that any
future actions taken by the administration with regard to health care reform
will not have a material adverse effect on the Company. If any actions are taken
by the administration, such actions could adversely affect the prospects for
future sales of the Company's products. Further, to the extent that these or
other proposals or reforms have a material adverse effect on the Company's
ability to secure funding for its development or on the business, financial
condition and profitability of other companies
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that are prospective collaborators for certain of the Company's product
candidates, the Company's ability to develop or commercialize its product
candidates may be adversely affected.
Given recent government initiatives directed at lowering the total cost
of health care throughout the United States, it is likely that the U.S. Congress
and state legislatures will continue to focus on health care reform and the cost
of prescription pharmaceuticals, as well as on the reform of the Medicare and
Medicaid systems. The Company cannot predict the likelihood of passage of
federal and state legislation related to health care reform or lowering
pharmaceutical costs. In certain foreign markets pricing of prescription
pharmaceuticals is already subject to government control. Continued significant
changes in the U.S. or foreign health care systems could have a material adverse
effect on the Company's business.
ENVIRONMENT AND CONTROLLED USE OF HAZARDOUS MATERIALS
The Company's research and development activities involve the controlled
use of hazardous materials, chemicals and various radioactive materials. The
Company is subject to federal, state and local laws and regulations governing
the use, storage, handling and disposal of such materials and certain waste
products. Although the Company believes that its safety procedures for handling
and disposing of such materials comply with the standards prescribed by state,
federal, and local laws and regulations, the 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 any liability could exceed the resources of the Company. 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.
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
April 1997, the Company's Board of Directors adopted a stockholder rights plan,
which entitles existing stockholders of the Company to certain rights (including
the right to purchase shares of Preferred Stock) in the event of an acquisition
of 15% or more of the Company's outstanding common stock, or an unsolicited
tender offer for such shares. The existence of the rights plan could delay,
prevent, or make more difficult a merger or tender offer or proxy contest
involving 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 Company's
stock option and purchase plans generally provide for the assumption of
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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 there will be an active trading
market for the Common Stock of the Company or that the market price of the
Common Stock will not decline below its present market price. The market prices
for securities of biotechnology companies have been and are likely to continue
to be 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. For instance, in August 1997, the Company's trading price dropped
approximately 46.7% the day the Company announced negative results from its
Phase III clinical trial of gamma interferon for the treatment of atopic
dermatitis. 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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USE OF PROCEEDS
The company will not receive any proceeds from the sale of the Shares by
the Selling Stockholders in the offering.
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 may be permitted to directors,
officers and controlling persons of the Company, the Company has been advised
that in the opinion of the Commission, such indemnification is against public
policy, as stated by the Commission, and is, therefore, unenforceable.
ISSUANCE OF COMMON STOCK TO SELLING STOCKHOLDERS
On April 10, 1998, the Company entered into an agreement with Alta
BioPharma Partners, L.P. ("Alta") and certain funds affiliated with Alta
(collectively the "Investors"), to sell an aggregate of 2,162,163 shares of the
Company's Common Stock at a price of $4.625 per share, for an aggregate purchase
price of approximately $10,000,004. Additionally, pursuant to its equity and
asset purchase agreements with SmithKline, the Company guaranteed that the total
value of the Common Stock previously issued to SmithKline would be $8,000,000 on
April 1, 1998. As of April 1, 1998, the aggregate fair market value of the
shares previously issued under the agreement was less than $8,000,000. As a
result, on April 10, 1998, the Company issued 1,037,779 shares of its Common
Stock to SmithKline in fulfillment of this obligation. The issuance completes
the Company's obligation to issue equity to SmithKline. The Company also paid
SmithKline approximately $308,000 in cash on May 4, 1998 in conjunction with the
transaction to fulfill its obligation to SmithKline related to this transaction.
For additional information, see Note 5 of Notes to Financial Statements for the
year ended December 31, 1997 in the Company's Annual Report on Form 10-K.
In connection with the Equity Line Agreement, the Company has agreed to
register certain shares of its Common Stock that may be issued in the event that
the equity line is drawn upon. Although the Company has no present intention of
drawing on the equity line, in the event that during the next three years the
Company's stock meets certain volume restrictions and trades above $10.00 per
share, then the Company would be required to sell shares of its Common Stock to
Kepler pursuant to the terms of the Equity Line Agreement. As a result, the
Company is registering a portion of the shares covered by this Prospectus to
satisfy any obligation it may have to register the Kepler shares.
21
<PAGE> 23
SELLING STOCKHOLDERS
The following table sets forth certain information as of June 1, 1998
with respect to each Selling Stockholder:
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior Shares Owned After the
Name of Selling Stockholder to the Offering(1) Offered Hereby(1) Offering(1)(2)
--------------------------- ------------------ ----------------- --------------
Number Percent Number Percent Number Percent
<S> <C> <C> <C> <C> <C> <C>
Alta BioPharma Partners, L.P.(3) 0 0.0% 2,162,163 11.7% 0 0
------- ---- --------- -----
SmithKline Beecham Properties, Inc. 637,733 3.4% 1,037,779 5.6% 637,733 3.4%
------- ---- --------- -----
Kepler Capital LLC 187,500 1.0% 100,000 0.5% 187,500 1.0%
------- ---- --------- -----
Total 825,233 4.4% 3,299,942 17.8% 825,233 4.4%
------- ---- --------- -----
</TABLE>
- ----------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules and
regulations of the Commission and generally includes voting or
investment power with respect to securities. Information with respect to
beneficial ownership is based on information as of June 1, 1998 and
assumes that there is outstanding an aggregate of 17,199,956 shares of
Common Stock and 1,295,193 shares issuable upon the exercise of
warrants, and options to purchase the Company's Common Stock which are
exercisable within 60 days of June 1, 1998. No options have been issued
to the Selling Stockholders named herein. Options to purchase shares of
Common Stock which are currently exercisable or will become exercisable
within 60 days of June 1, 1998, are deemed to be outstanding for
purposes of the individuals named in this chart. Except as indicated
otherwise in the footnotes below, and subject to community property laws
where applicable, the Company believes based on information furnished by
the Selling Stockholders that the persons named in the table above have
sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
(2) Assumes the sale of all Shares offered hereby and no other purchases or
sales of Connetics Common Stock. See "Plan of Distribution."
(3) Includes 1,367,712 shares of Common Stock held by Alta BioPharma
Partners, L.P., 745,264 shares of Common Stock held by Connetics
Partners (Alta Bio), LLC and 49,187 shares of Common Stock held by Alta
Embarcadero BioPharma, LLC.
22
<PAGE> 24
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 have advised the Company that during such time
as the Selling Stockholders may be engaged in the attempt to sell Shares
registered hereunder, that they 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, the Company has agreed to maintain the
effectiveness of this Registration Statement until two years after the effective
date of this Registration Statement; provided however that the Company has
agreed to extend the effectiveness of the Registration Statement for an
additional one year period following the expiration of the initial two year
period, if requested in a writing signed by a majority of the Selling
Stockholders; provided further, however, that if counsel to the Company provides
an opinion to the requesting holders, based on factual representations provided
by the requesting holders or information filed with the Commission that such
holders are not, at the time of such request, "affiliates" of the Company,
within the meaning of Rule 144 of the Securities Act, then the Company shall not
be obligated to extend the effectiveness of the Registration Statement. No sales
may be made pursuant to this Registration Statement and Prospectus after such
dates unless the Company amends or
23
<PAGE> 25
supplements this Registration Statement and 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, 2775 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 appearing in the
Company's Annual Report (Form 10-K) for the year ended December 31, 1997, have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
financial statements 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.
24
<PAGE> 26
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................................................... $ 3,286.00
Legal Fees and Expenses............................................ $10,000.00
Accounting Fees and Expenses....................................... $ 3,000.00
Miscellaneous...................................................... $ 6,000.00
---------
Total................................................... $22,286.00
=========
</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> 27
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
10.1(1) Common Stock Purchase Agreement dated April 10,
1998 by and among the Registrant and certain
investors
10.2(1) Registration Rights Agreement, dated April 10, 1998
by and among the Registrant and certain investors
10.4(2) Stock Issuance Agreement dated December 31, 1996
between the Registrant and SmithKline Beecham
Properties, Inc.
10.5(3) Omnibus Agreement with SmithKline Beecham
Corporation and related entities dated December 18,
1997
10.6(4) Second Omnibus Agreement with SmithKline Beecham
Corporation and related entities dated April 28,
1998
10.7(5) Structured Equity Line Flexible Financing Agreement
dated January 2, 1997 between the Company and
Kepler Capital LLC.
5.1 Opinion of Venture Law Group, A Professional
Corporation
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (see page II-5)
</TABLE>
- ----------
(1) Incorporated by reference to the identically numbered exhibit filed with
the Registrant's Current Report on Form 8-K, filed with the Commission
on May 6, 1998.
(2) Incorporated by reference from an exhibit to the Registrant's Report on
Form 8-K (File No. 0-27406) dated January 15, 1997.
(3) Incorporated by reference from an exhibit to Post-Effective Amendment
No. 1 to the Registrant's Registration Statement on Form S-1 (File No.
333-41195) filed with the Commission on December 19, 1997.
(4) Incorporated by reference from Exhibit 10.6 to the Company's Current
Report on Form 8-K (File No. 0-271406) filed May 6, 1998
(5) Incorporated by reference from Exhibit 10.42 to the Company's Annual
Report on Form 10-K (File No. 0-271406) for the fiscal year ended
December 31, 1997.
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.
II-2
<PAGE> 28
(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 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> 29
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 12th day of
June 1998.
CONNETICS CORPORATION
By: /s/ JOHN L. HIGGINS
------------------------------
John L. Higgins
Vice President of Finance and
Administration and Chief
Financial Officer
II-4
<PAGE> 30
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Thomas G.
Wiggans and John L. Higgins, and each of them acting individually, as his
attorney-in-fact, each with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments), and to file the same, with exhibits
thereto and other documents in connection therewith, with the Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said Registration Statement.
Pursuant to the requirements of the Securities Act, 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 Officer and Director
------------------------------- (Principal Executive Officer) June 11, 1998
Thomas G. Wiggans
/s/ JOHN L. HIGGINS Vice President of Finance and
------------------------------- Administration and Chief
John L. Higgins Financial Officer (Principal
Financial and Accounting
Officer) June 11, 1998
/s/ G. KIRK RAAB Chairman of the Board of Directors
-------------------------------
G. Kirk Raab June 11, 1998
/s/ ALEXANDER E. BARKAS Director
-------------------------------
Alexander E. Barkas June 12, 1998
/s/ EUGENE A. BAUER Director
-------------------------------
Eugene A. Bauer June 11, 1998
/s/ BRIAN H. DOVEY Director
-------------------------------
Brian H. Dovey June 12, 1998
/s/ JOHN C. KANE Director June 11, 1998
-------------------------------
John C. Kane
/s/ THOMAS D. KILEY Director
-------------------------------
Thomas D. Kiley June 11, 1998
/s/ KENNETH B. PLUMLEE Director
-------------------------------
Kenneth B. Plumlee June 11, 1998
/s/ JOSEPH J. RUVANE, JR. Director
-------------------------------
Joseph J. Ruvane, Jr. June 11, 1998
</TABLE>
II-5
<PAGE> 31
CONNETICS CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
10.1(1) Common Stock Purchase Agreement dated April 10,
1998 by and among the Registrant and certain
investors
10.2(1) Registration Rights Agreement, dated April 10, 1998
by and among the Registrant and certain investors
10.4(2) Stock Issuance Agreement dated December 31, 1996
between the Registrant and SmithKline Beecham
Properties, Inc.
10.5(3) Omnibus Agreement with SmithKline Beecham
Corporation and related entities dated December 18,
1997
10.6(4) Second Omnibus Agreement with SmithKline Beecham
Corporation and related entities dated April 28,
1998
10.7(5) Structured Equity Line Flexible Financing Agreement
dated January 2, 1997 between the Company and
Kepler Capital LLC.
5.1 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)
</TABLE>
- ----------
(1) Incorporated by reference to the identically numbered exhibit filed with
the Registrant's Current Report on Form 8-K, filed with the Commission
on May 6, 1998.
(2) Incorporated by reference from an exhibit to the Registrant's Report on
Form 8-K (File No. 0-27406) dated January 15, 1997.
(3) Incorporated by reference from an exhibit to Post-Effective Amendment
No. 1 to the Registrant's Registration Statement on Form S-1 (File No.
333-41195) filed with the Commission on December 19, 1997.
(4) Incorporated by reference from Exhibit 10.6 to the Company's Current
Report on Form 8-K (File No. 0-271406) filed May 6, 1998
(5) Incorporated by reference from Exhibit 10.42 to the Company's Annual
Report on Form 10-K (File No. 0-271406) for the fiscal year ended
December 31, 1997.
<PAGE> 1
EXHIBIT 5.1
OPINION OF COUNSEL
June 12, 1998
Connectics Corporation
3400 W. Bayshore Road
Palo Alto, CA 94303
REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 to be filed
by you with the Securities and Exchange Commission on or about June 12, 1998
(the "Registration Statement") for purposes of registering under the Securities
Act of 1933, as amended (the "Act") a total of 3,299,942 shares of your Common
Stock (the "Shares"). As your legal counsel, we prepared and examined the
documentation associated with the issuances of the Shares being covered by the
Registration Statement, and we are familiar with the proceedings to be taken in
connection with the sale and issuance of the Shares being registered.
It is our opinion that the Shares when sold in the manner referred to
in the Registration Statement will be legally and validly issued, fully paid and
nonassessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name wherever it
appears in the Registration Statement and any amendments to it.
Sincerely,
VENTURE LAW GROUP
/s/ Venture Law Group
<PAGE> 1
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 No. 333-00000) and related Prospectus of
Connetics Corporation for the registration of 3,299,942 shares of its common
stock and to the incorporation by reference therein of our report dated January
15, 1998, with respect to the financial statements of Connetics Corporation
included in its Annual Report (Form 10-K) for the year ended December 31, 1997,
filed with the Securities and Exchange Commission.
Palo Alto, California /s/ ERNST & YOUNG LLP
June 12, 1998
