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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _________ to_________.
COMMISSION FILE NUMBER: 0-27406
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 No.)
3400 WEST BAYSHORE ROAD, PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (650) 843-2800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
PREFERRED SHARE PURCHASE RIGHTS
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period than the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $48,113,852 as of February 27, 1998, based upon
the closing sale price on the Nasdaq National Market reported for such date.
Shares of Common Stock held by each officer and director and by each person who
owns 5% of more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
There were 13,515,509 shares of Registrant's Common Stock issued and
outstanding as of February 27, 1998.
The "C with interlocking hemisphere" logo (used alone and with the
Company's name), "Connetics", "ConXn(R)", "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.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 22, 1998.
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PART I
ITEM 1. BUSINESS
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."
Connetics Corporation ("Connetics" or the "Company") was incorporated in the
State of Delaware on February 8, 1993. In May 1997, the Company's stockholders
approved a change of the Company's name from "Connective Therapeutics, Inc." to
"Connetics Corporation."
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 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
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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
(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 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 (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. Gamma interferon is approved by the FDA
and marketed by Genentech, Inc. ("Genentech") for a rare, serious immune
disease, known as chronic granulomatous disease (CGD). The Company is developing
gamma interferon for the treatment of keloids, which are unsightly, painful,
elevated scars resulting from collagen overproduction. The Company is currently
conducting a Phase II clinical trial for the treatment of keloids. 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
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analysis of the data from the trial was completed in December 1997 where areas
of drug activity were seen, and as a result, the Company is evaluating further
development opportunities for gamma interferon.
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 treatment of serious and chronic
diseases involving connective tissues caused by inflammation, abnormal
remodeling and autoimmune disorders, (ii) target its initial commercial
activities at rheumatologists and dermatologists, which can be effectively
served by focused and specialized sales and marketing activities, (iii) 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, (iv) pursue earlier stage opportunities
in the field of connective tissue disorders with high potential, (v) leverage
its product development and commercialization expertise by pursuing additional
specialized diseases and markets, (vi) utilize corporate partnerships to pursue
new business opportunities and overseas licensing of the Company's products in
development and (vii) minimize drug discovery costs, manufacturing costs and
capital requirements.
BACKGROUND
Connective tissue is composed of cells (such as fibroblasts) and the
extracellular matrix (such as collagen-containing fibers) produced by these
cells. Organs of the body such as lungs, kidneys and skin function normally in
part because of the precise three-dimensional arrangement of specialized cells
within a connective tissue framework. Alterations in this framework affect organ
function.
DISEASES INVOLVING CONNECTIVE TISSUE
Inflammation
Inflammation is a natural response to tissue injury and is necessary for normal
healing. During normal wound healing, tissue repair follows an orderly
progression of immune cell infiltration, new blood vessel formation and
connective tissue deposition and remodeling. Under abnormal conditions,
inappropriate
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regulation of the immune cells results in either local or widespread tissue
injury. Many disorders associated with inflammation occur in response to an
unknown stimulus that misdirects the inflammation process against normal tissue.
This lack of appropriate regulation generally results in chronic, progressive
disease conditions that may ultimately lead to dysfunction or destruction of the
affected organ system.
Abnormal Remodeling
Connective tissue undergoes constant turnover through a normal remodeling
process that links the breakdown of the collagen-based extracellular matrix with
the synthesis of new collagen. The body's ability to regulate this process
normally keeps the amount of connective tissue, which is 95% collagen, in
balance. When this balance is broken, as in the case of certain chronic
diseases, the result can lead to the increase in or breakdown of collagen. Both
excessive formation or destruction of connective tissue can result in serious
disease. There is currently no approved therapy that has been documented to have
significant beneficial effect on the clinical course of abnormal remodeling.
As an example, the overproduction of collagen can result in severe systemic
disorders, such as scleroderma and pulmonary fibrosis, keloid formation and
hypertrophic scarring. Scleroderma is one of the most serious diseases involving
the uncontrolled formation of connective tissue. Approximately 300,000
individuals, primarily women, suffer from various forms of this disease, with
approximately 70,000 having severe or systemic sclerosis, otherwise known as
diffuse scleroderma. In its most severe form, the disease has a five year
mortality rate in 50-70% of cases. In the United States, scleroderma is
primarily treated by rheumatologists. Currently there is no cure for this often
fatal disease and few therapies ease the pain and suffering of scleroderma
patients. Pulmonary fibrosis represents a group of diseases associated with
chronic inflammation and increase in fibrotic tissue in the walls of the
alveolar spaces in the lung. Ultimately, these diseases result in scarring of
lung tissue, impairment of lung function, and in many cases, death.
Approximately 144,000 individuals suffer from pulmonary fibrosis. Pulmonary
fibrosis is primarily treated by pulmonologists, oncologists and
rheumatologists. Keloids and hypertrophic scars are abnormal healing responses
that occur in the skin, resulting in large, painful, elevated scars that are
unattractive in appearance. There are approximately 300,000 patients treated by
dermatologists and plastic surgeons for keloids every year.
Autoimmune Disorders
Connective tissue can also be destroyed by various T cell-mediated autoimmune
diseases. Autoimmune diseases are generally believed to result from an
inappropriate response of the immune system. The immune system is the body's
major biological defense mechanism, first distinguishing antigens (foreign
substances) from the body's tissue and then eliminating a wide variety of
disease-causing pathogens, such as bacteria and viruses. A major component of
this system is T cells. In many autoimmune diseases, these T cells go awry and
attack the body's healthy tissues. There is mounting evidence that these
disease-causing T cells are concentrated at the disease site, where they
initiate signals leading to tissue destruction. The mechanism responsible for
causing these T cells to attack healthy tissue has, for the most part, not been
identified. Autoimmune diseases can attack virtually any tissue or organ of the
body, are often debilitating and can be fatal.
For example, rheumatoid arthritis is an autoimmune disease that attacks the
connective tissue in the joints. Rheumatoid arthritis is a chronic disease in
which the body's immune system leads to an attack on synovial tissue, resulting
in progressive, painful inflammation and destruction of the joints. In advanced
stages of the disease, symptoms include severe pain, body disfigurement and loss
of mobility. It is estimated that between one and two percent of the adult U.S.
population, or more than two million individuals, have
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rheumatoid arthritis. Women are three times more susceptible than men. No
current therapy cures the disease and often its progression cannot be stopped.
The efficacy of currently used drugs tends to be directly correlated with
systemic toxicity. Rheumatoid arthritis is primarily treated by rheumatologists.
CONNETICS STRATEGY
The key elements of the Company's strategy include:
- - Focus on the Treatment of Serious and Chronic Diseases Involving Connective
Tissue. The Company's products and technologies are initially focused on the
treatment of diseases involving connective tissues caused by inflammation,
abnormal remodeling and autoimmune disorders. These diseases include serious
skin and skin structure diseases such as psoriasis, scleroderma, organ
fibroses, rheumatoid arthritis, multiple sclerosis and keloids. Although
individually these diseases have been the subject of many research programs,
no concentrated effort has been aimed at the market segment as a whole,
representing significant and currently underserved therapeutic market
opportunities.
- - Develop a Marketing Organization Targeting Rheumatologists and
Dermatologists. The Company is targeting its initial commercial activities
at rheumatologists and dermatologists, which can be served by a focused,
specialized marketing organization. Scalp psoriasis and skin dermatoses,
betamethasone mousse's target indications, and keloids, gamma interferon's
lead indication, are treated primarily by dermatologists. Scleroderma,
ConXn's lead indication, and rheumatoid arthritis, treated by Ridaura, are
primarily treated by rheumatologists. With the acquisition of rights to
Ridaura the Company was able to enter the U.S. rheumatology market in
December 1996. The Company's strategy is to target its marketing activities
to the approximately 3,000 rheumatologists and 7,000 dermatologists
practicing in the United States. In addition, because rheumatologists and
dermatologists are primarily concentrated in major metropolitan areas, they
can be effectively served by a relatively small sales force.
- - In-License Development Stage and currently Marketed Products. The Company
expects to continue to in-license and acquire rights to development products
and currently marketed products in the areas of rheumatology and
dermatology. To date, the Company has in-licensed both relaxin and gamma
interferon from Genentech, and has acquired rights to TCR vaccines
technology primarily from Genentech and XOMA Corporation. In addition, the
Company has acquired exclusive license rights to betamethasone and
clobetasol mousse and the mousse delivery technology from Soltec Research
Pty Ltd., and exclusive U.S. rights to Ridaura from SmithKline. Increasing
consolidation in the pharmaceutical and biotechnology industries and
continuing changes in the health care system are changing the way
therapeutic products are developed and marketed. As a result, the Company
believes there are significant opportunities to in-license or acquire
additional products from pharmaceutical companies that are not being
developed or optimally promoted by these companies or do not fit in the
present business strategy of such companies, or from research and academic
institutions. The Company believes it is well-positioned to expand its
product portfolio by licensing such products because of its market focus,
complementary products in development and relevant management experience in
product development and marketing. The Company believes that this strategy
can result in accelerated development and commercialization of novel
products to treat serious diseases involving connective tissue at
significantly lower capital requirements than most biotechnology companies
while minimizing the Company's exposure to the risks inherent in drug
discovery and basic research.
- - Leverage Product Development and Commercialization Expertise. The Company is
leveraging its product pipeline by developing its products for multiple
indications. The Company believes certain of
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its products can be developed for significant markets and high-value
opportunities in addition to its primary markets. An example of leveraging a
product is the development of ConXn for scleroderma, organ fibrosis and
infertility. To target such uses, the Company plans to either retain such
products in-house or license them to third parties.
- - Utilize Corporate Partnerships to Pursue Additional Markets. In its
strategic markets, the Company plans to retain commercial rights to its
products in the United States and to enter into corporate partnerships with
respect to additional market segments in North America and international
markets. This strategy will allow the Company to pursue additional
therapeutic markets, offset near-term development costs and enter
international markets. The Company is pursuing collaborative relationships
to provide funding and consulting support for the Company's research and
development programs and to assist in the clinical and regulatory
development and commercialization of specific products outside of the United
States.
- - Minimize Drug Discovery and Manufacturing Costs. The Company has sought to
minimize the costs of drug discovery and manufacturing by in-licensing
later-stage development and currently marketed products, outsourcing
manufacturing and utilizing research collaborators and consultants. To date,
the Company's clinical supplies have been manufactured by third parties on a
contract basis. The Company also initially intends to use third parties for
the manufacture of its commercial products, including Ridaura, which is
being manufactured for the Company by SmithKline through December 2001. The
Company believes it will be able to minimize costly infrastructure by
continuing to use external resources where appropriate.
PRODUCT DEVELOPMENT
The Company has products in various stages of development as illustrated in the
table below:
<TABLE>
<CAPTION>
PRODUCT INDICATION DEVELOPMENT STATUS
- ------- ---------- ------------------
<S> <C> <C>
Betamethasone Mousse Psoriasis NDA filed
Clobetasol Mousse Severe Psoriasis / Skin Dermatoses Pivotal Trial (scheduled to begin in 1998)
ConXn(R) Scleroderma Pivotal Trial (scheduled to begin in 1998)
Organ Fibrosis Pre-clinical
Infertility Pre-clinical
TCR Peptide Vaccine Multiple Sclerosis Phase I/II
Rheumatoid Arthritis Phase I
Gamma Interferon Keloids Phase II
</TABLE>
Betamethasone Mousse Program
In June 1996, the Company signed an agreement with Soltec Research Pty Ltd.
which granted Connetics an exclusive license to develop and market betamethasone
mousse in North America. The product is being marketed in the United Kingdom by
Evans Medical Ltd., a division of Medeva PLC. Betamethasone mousse is a
quick-break foam formulation of betamethasone valerate, a mid-potency
corticosteroid currently marketed in the U.S. The foam formulation has been
shown to liquefy when applied to the body, enabling rapid penetration of active
dermatologic agent. This formulation is designed to be easier to apply and less
messy than currently marketed scalp lotions and gels. In addition, the ease of
use and patient
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acceptability may enhance patient compliance. The U.S. market for mid-potency
corticosteriods is estimated to be $200 million per year.
Psoriasis. Psoriasis, a chronic, recurrent dermatologic disease characterized by
inflammation and thickening of the skin, is estimated to affect six million
people in the United States. Scalp psoriasis, a distinct manifestation of
psoriasis, is a serious problem for more than sixty percent of psoriatics.
Patients with scalp psoriasis suffer from various degrees of erythema, scaling
and itching associated with the disease, and the disease course typically
involves periods of remission followed by acute exacerbations. In a comparative
clinical trial of betamethasone mousse against placebo in scalp psoriasis
patients in the U.K., patients treated with betamethasone mousse showed
statistically significant improvement in erythema (redness), scaling and plaque
thickness. The product was well tolerated and no adverse systemic effects were
observed.
In August 1997, the Company announced results from its Phase III clinical trial
of betamethasone mousse. The results demonstrated statistically significant
improvement over both placebo and a currently marketed betamethasone lotion for
the treatment of scalp psoriasis. The 190-patient, placebo-controlled,
randomized, double-blind, multi-center Phase III study demonstrated that
patients treated with betamethasone mousse, administered twice-daily for 28
days, experienced a statistically significant improvement over patients in the
groups treated with betamethasone lotion, or placebo, in all endpoints,
including erythema (redness of the skin), plaque thickness and scaling. In
addition, study investigators completed a physicians global assessment which
showed that overall, approximately 67% of patients treated with the mousse
formulation had complete or almost complete clearance of symptoms compared with
46% for lotion and 19% for placebo in an intent to treat analysis. Both
betamethasone mousse and lotion were generally well tolerated. The Company
submitted a New Drug Application (NDA) with the FDA to market the product for
use in all steroid-responsive dermatoses, including psoriasis, in December 1997.
The NDA has been accepted for filing by the FDA.
Clobetasol Mousse Program
In January 1998, the Company entered into an agreement with Soltec Research Pty
Ltd., and exercised an option to exclusively develop and market clobetasol
mousse in North America. Clobetasol mousse is a quick break foam formulation of
clobetasol propionate, a super high-potency corticosteriod currently marketed in
the United States. Clobetasol mousse utilizes a drug formulation similar to the
Company's betamethasone mousse product, whereby it remains a foam at room
temperature and then liquefies when applied to the body, facilitating the
delivery of active dermatologic agent. The Company plans to begin a Phase III
clinical trial of this product in 1998 for the treatment of severe psoriasis and
skin dermatoses. The U.S. market for high and super high potency corticosteriods
is estimated to be $300 million per year.
ConXn Development Program
ConXn is a naturally occurring peptide hormone that promotes remodeling of
connective tissues. Research by two of the Company's founders and their
colleagues has shown that ConXn can inhibit excessive connective tissue
formation and promote connective tissue remodeling through at least three
mechanisms: inhibiting the production of collagen by fibroblasts, increasing the
production of collagenase (the enzyme that breaks down collagen) and decreasing
the production of TIMP (a protein that blocks collagenase action). These results
have been confirmed by in vitro studies and in vivo animal models of human
disease. ConXn can now be produced in significant quantities by outside
contractors using the Company's recombinant manufacturing techniques. Connetics
is currently developing the recombinant form of ConXn
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for use in the treatment of scleroderma and other fibrotic conditions, including
various organ fibroses and in vitro fertilization.
Scleroderma. Scleroderma, also called systemic sclerosis in its advanced stages,
is a generalized disorder of connective tissue characterized clinically by
thickening and fibrosis of the skin and internal organs, including the heart,
lungs, kidneys and gastrointestinal tract. Although the underlying cause of this
disease is unknown, the overproduction and accumulation of collagen and other
extracellular matrix proteins in skin and other organs often leads to severe and
painful disfigurement, quality of life impairment, dysfunction of vital organs
and death. There are in excess of 300,000 individuals suffering from
scleroderma, of which approximately 70,000 have the most severe form. In the
most severe form, the disease has a five-year mortality rate of 50-70%. There
are no effective treatments for this disease; current therapies are directed
toward alleviating the symptoms of the disease, not the underlying cause.
In 1995, the Company completed a Phase I/II clinical trial for recombinant human
ConXn in patients with scleroderma. This study examined the safety and
pharmacokinetics of continuous subcutaneous infusion of ConXn for 28 days at
five different dose levels compared to placebo. Thirty patients with a history
of at least two years with systemic sclerosis were enrolled in a randomized,
double-blind, placebo-controlled trial. Administration of ConXn was well
tolerated through 28 days at all dose levels. In addition, during global
assessments performed at the end of the study, ten of 20 patients receiving
ConXn reported improvement versus two of ten patients receiving placebo. No
serious adverse events were observed and no patients dropped out of the study.
These safety and pharmacokinetic observations support continued clinical
evaluation of ConXn for the treatment of scleroderma.
In June 1997, the Company announced results from its Phase II clinical trial.
The double-blind, placebo-controlled study involved 64 patients randomized into
one of two treatment groups (25 or 100 ug/kg/day), or placebo. In the group
receiving a dose of 25 ug/kg/day, statistical significance was found in skin
score improvement, the primary clinical endpoint, and positive trends were seen
in eleven other parameters. As suggested by previous studies, the higher dose
had no effect on the treatment group compared to placebo. Based upon these
results, and a meeting with the FDA, the Company plans to begin a pivotal trial
of ConXn for the treatment of scleroderma in 1998.
The Company has been granted Orphan Drug Status for ConXn for treatment of
progressive systemic sclerosis, a severe form of scleroderma. In the United
States, the Orphan Drug Act of 1983 provides incentives to drug manufacturers to
develop and manufacture products for the treatment of rare diseases, currently
defined as diseases that affect fewer than 200,000 individuals in the United
States, or for a disease that affects more than 200,000 individuals in the
United States where the sponsor does not realistically anticipate its product
becoming profitable. Under the Orphan Drug Act, a manufacturer of a designated
orphan product can seek certain tax benefits, and the holder of the first FDA
approval of a designated orphan product will be granted a seven-year period of
marketing exclusivity for that product for the orphan indication. While the
marketing exclusivity of an orphan drug would prevent other sponsors from
obtaining approval of the same product for the same indication, it would not
prevent other types of products from being approved for the same use. The U.S.
Congress has considered and may consider in the future, legislation that would
restrict the duration of the market exclusivity of an orphan drug and, thus,
there can be no assurance that the benefits of the existing statute will remain
in effect.
Organ Fibrosis. In addition to scleroderma, the Company believes ConXn may have
potential in treating organ fibroses, such as pulmonary fibrosis. Pulmonary
fibrosis, also known as interstitial lung disease, represents a group of
diseases associated with chronic inflammation and excessive production of
collagen in the walls of the alveolar spaces in the lung. Approximately 144,000
individuals in the United States
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suffer from this disease. In the case of idiopathic pulmonary fibrosis the
underlying cause of the fibrosis is unknown, while other cases may be associated
with another disease process, such as scleroderma, or due to exposure to toxic
drugs or environmental agents. Current therapy for pulmonary fibrosis consists
of corticosteroids and cytotoxic drugs such as cyclophosphamide, which, when
utilized, are largely ineffective.
Infertility. Infertility is a serious problem that affects approximately one in
seven couples in the United States. The Company and external collaborators
recently accumulated data indicating that relaxin may be involved in encouraging
new blood vessel growth in the uterine lining and that this increased blood flow
enhances conception success. Furthermore, higher levels of relaxin expression in
preclinical studies are correlated with successful pregnancy and term delivery.
Relaxin therapy may therefore be useful in the treatment of infertility in in
vitro fertilization procedures, as well as in natural and other artificial
reproductive cycles. The Company plans to continue its assessment of these data,
and if promising, begin a development program for relaxin use in in vitro
fertilization.
T-Cell Receptor ("TCR") Peptide Development Program
The Company is also developing TCR peptide vaccines to arrest the autoimmune
disease process. As with other therapeutic vaccines, TCR technology is being
developed to help the body elicit an immune response against disease-causing
agents. In the case of autoimmune diseases, the disease-causing agents are
believed to be pathogenic T-cells. TCR vaccines are based upon the CDR2 of
pathogenic T-cells and are injected into the patient to elicit a heightened
immune response against the T-cells thought to cause autoimmune disease. These
vaccines elicit a "regulatory immune response" by increasing the number of
regulatory T-cells which produce anti-inflammatory cytokines. Connetics has two
TCR vaccine programs in development, one for multiple sclerosis and one for
rheumatoid arthritis.
Multiple Sclerosis. Multiple sclerosis is an autoimmune disease of the central
nervous system that results from damage to myelin, a substance that encircles
and insulates nerve fibers. Multiple sclerosis can result in impaired mobility,
visual impairment, slurred speech, poor bladder control, sexual dysfunction and,
ultimately, confinement to a wheelchair. Approximately 270,000 persons suffer
from multiple sclerosis in the United States. The cost of treatment in the
United States alone is expected to grow to $1.7 billion worldwide by 1999. None
of the currently available treatments address the underlying cause of the
disease.
In January 1998, the Company reported results from a multi-center Phase I/II
clinical testing of TCR peptide vaccines for the treatment of multiple
sclerosis. The Phase I/II study involved 106 patients with multiple sclerosis.
The trial evaluated safety and immunogenicity of the Company's proprietary TCR
vaccine being developed to elicit a heightened immune response against the
pathogenic T-cells believed to cause multiple sclerosis. Preliminary results
from this study indicate that administration of the TCR vaccine was safe and
well tolerated following three months of treatment. The response rate for TCR
vaccinated patients was similar to the response rate observed for TCR vaccinated
patients in previous studies. In this Phase I/II study, the response rate of
vaccine treated patients was approximately double the response rate of placebo
treated patients.
Rheumatoid Arthritis. Rheumatoid arthritis is a chronic disease in which the
body's immune system attacks synovial tissue in joints, resulting in
progressive, systemic and painful inflammation and erosion of joints. In
advanced phases of the disease, symptoms include severe pain, body disfigurement
and loss of mobility. The cause of rheumatoid arthritis is unknown, though
environmental toxins, certain pathogens and genetic factors have been
implicated. It is estimated that between one and two percent of the
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worldwide adult population, including approximately three million individuals in
the United States, suffer from rheumatoid arthritis and about one-half of these
will progress to severe disease. Women are three times more susceptible than
men. Current treatment for rheumatoid arthritis uses a combination of drugs and
physical and occupational therapy in an attempt to prevent further joint damage.
None of these therapies stops progression completely or reverses the damage.
At the tissue level, there is mounting evidence to suggest that T-cells present
at the sites of inflammation cause fibroblast dysfunction that leads to
destruction of the joint capsule. Company investigators have analyzed the
frequency of T-cells with certain types of receptors in patients with rheumatoid
arthritis. Through such studies the Company has identified peptides which mimic
these receptors and which may be useful as therapeutic vaccines. Company
investigators and their collaborators have performed parallel studies in animal
models of arthritis in which disease relevant T cells with specific receptor
configurations have been defined. Therapeutic vaccines based upon the relevant
protein sequences were produced and demonstrated to control the disease process.
Based on these studies, in 1997 the Company initiated a pilot clinical trial of
TCR Vaccines for rheumatoid arthritis.
As part of its TCR vaccines research program, Connetics has established a
methodology for identifying and isolating disease-causing T cells, which the
Company may use to develop additional products based on its TCR vaccine
technology to treat diseases such as inflammatory bowel disease, psoriasis and
type I diabetes. The TCRs from relevant T cells are analyzed and the resulting
amino acid sequence information is used to chemically synthesize therapeutic
vaccine peptides. The Company believes that these TCR peptides can be
administered to the patient as a disease-specific immune booster to halt the
progress of the autoimmune disease. The Company further believes that, because
TCR peptides selectively inhibit only certain T cells, side effects resulting
from general, non-specific immunosuppression can be avoided.
Gamma Interferon Development Program
Gamma interferon is a member of a family of proteins involved in the regulation
of the immune system, and has been shown to be effective in the treatment of
certain immune-mediated diseases. Gamma interferon is an FDA licensed product,
manufactured and marketed by Genentech for an orphan disease, chronic
granulomatous disease (CGD). Gamma interferon also has been shown to inhibit the
production of IgE (a type of antibody) and collagen. The Company is developing
gamma interferon for use in the treatment of keloids.
Keloids are abnormal healing responses caused by excess collagen production, and
typically occur in the skin of susceptible individuals resulting in large,
painful, elevated scars which are usually unattractive in appearance. There are
approximately 300,000 patients treated by dermatologists and plastic surgeons
for keloids every year. Although existing therapies are potentially efficacious,
recurrence after therapy is frequent.
In vitro studies have shown that gamma interferon can inhibit collagen synthesis
and production. Early-stage clinical trials conducted by independent
investigators in collaboration with Genentech have shown preliminary results
indicating that gamma interferon may be efficacious in the treatment of keloids
and hypertrophic scars. Based on in vitro and clinical information, the Company
is conducting a 40 patient Phase II clinical trial to demonstrate the efficacy
of gamma interferon therapy in patients with keloids.
In August 1997, the Company announced the results from its Phase III clinical
trial of gamma interferon for the treatment of atopic dermatitis. Analysis of
the trial did not show an acceptable therapeutic response with respect to the
primary clinical endpoint - a composite clinical severity index based upon
erythema,
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papulation (swelling) and excoriation (scratch marks). As a result, the Company
announced that it has suspended plans to submit a Biological License Application
(BLA) for gamma interferon for the treatment of atopic dermatitis. Further
analysis of the data from the trial suggested evidence of drug activity for
certain endpoints. The Company is currently evaluating additional development
opportunities for gamma interferon.
MARKETED PRODUCT
On December 31, 1996, the Company acquired the exclusive U.S. and Canadian
rights to Ridaura from SmithKline. Ridaura is an oral formulation of a gold salt
(auranofin). Also classified as a disease-modifying antirheumatic drug
("DMARD"), Ridaura has been shown to slow joint destruction and the progression
of rheumatoid arthritis. The drug is currently indicated for adults with active
rheumatoid arthritis who are not responsive to, or are intolerant of, treatment
with non-steroidal anti-inflammatory drugs.
Rheumatoid arthritis. Rheumatoid arthritis is an autoimmune disease that
afflicts one to two percent of adult Americans (approximately 3 million
patients), with women three times more susceptible than men. It is characterized
by inflammation of synovial tissues with joint pain, swelling and stiffness.
Although autoimmune arthritis can afflict children and adolescents, the
incidences of clinical illness is greatest among those aged 40 to 60 years.
Rheumatoid arthritis is an extremely disabling disease that carries a high
degree of morbidity.
Connetics began marketing Ridaura through its own sales force in mid-1997.
Through agreements with SmithKline, customer orders and distribution for the
product was managed by SmithKline through 1997 and SmithKline will manufacture
and supply Ridaura (in final finished package form) to the Company through
December 2001. 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.
In December 1997, the Company sold the Canadian rights to Ridaura to, and
entered a supply agreement with, Pharmascience, Inc., a Canadian corporation,
for a net consideration of $1,300,000.
COLLABORATIVE RELATIONSHIPS
The Company's initial technologies were licensed from Genentech and XOMA. As
part of its business strategy, the Company has entered into and continues to
explore strategic collaborative relationships and consulting agreements with
leading researchers and institutions working in its fields of interest, to
complement its internal research efforts and provide access to technologies that
complement and expand its existing portfolio. The Company is seeking
collaborative agreements with pharmaceutical companies as sources of additional
products and as partners for the development and marketing of existing products.
See "-- Connetics Strategy," "-- Marketing and Sales."
Genentech. In September 1993, Genentech and Connetics entered into a license
agreement (the "September 1993 Agreement") pursuant to which Connetics obtained
exclusive worldwide rights to relaxin (excluding reproductive indications and
the territories of Japan, Korea and the Republic of China), including rights
licensed to Genentech from the Howard Florey Institute of Experimental
Physiology and Medicine in Melbourne, Australia (the "Florey Institute").
Connetics also has rights to future developments regarding relaxin. The Company
is obligated to pay royalties on licensed product sales. In addition, Genentech
received an equity position in the Company. The September 1993 Agreement also
includes certain technology transfer, supply, and intellectual property
provisions. The Company is
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responsible for meeting certain milestones and making payments for supplies
provided under the September 1993 Agreement. Failure to timely achieve
designated milestones may result in termination of the agreement by Genentech
and a license on a non-exclusive basis to Genentech of relaxin technology
developed by the Company. In July 1994, Genentech and Connetics amended the
September 1993 Agreement to clarify the Company's right to sub-license the
relaxin technology, subject to a right of first offer held by Genentech, which
expired in January 1998. The Company's rights to relaxin were expanded to
include reproductive indications on a co-exclusive basis with Genentech. In
April 1996, the Company acquired rights to Japan, Korea and the Republic of
China from Genentech, thereby giving the Company worldwide rights to the
technology.
In January 1998, the Company negotiated an agreement with the Florey Institute
that will provide for the Company to pay royalties directly to the Florey
Institute (rather than through Genentech) and for such royalty payments to be
restructured. Under the agreement, the Company would provide approximately
$125,000 of annual research funding to the Florey Institute for a five-year
period (which could terminate earlier upon the date of the first sale of a
relaxin product by Connetics or its partner), and the Florey Institute would
receive a royalty on Connetics' sales of relaxin products and a portion of
revenues received from corporate partners. In addition, the Company is engaged
in discussions with a number of pharmaceutical companies regarding development,
marketing and sales alliances for ConXn for the European and Asian markets.
There can be no assurance that any of the agreements described in this paragraph
will be consummated on a timely basis, or at all.
In December 1995, Genentech and Connetics entered into an agreement with respect
to gamma interferon pursuant to which the Company acquired exclusive development
and marketing rights in the United States for dermatologic indications. This
Agreement includes supply provisions on the part of Genentech and obligates the
Company to pay for such supply, providing for a profit margin and an allowance
for the Company's expenses in developing and marketing the product.
XOMA. In June 1994, Connetics entered into an agreement with XOMA pursuant to
which the Company acquired additional TCR vaccine technology and patent rights.
This agreement obligates the Company to make certain milestone payments and to
pay certain royalties on sales of TCR vaccine products. The Company's failure to
meet certain milestones may result in the acquisition by XOMA of a co-exclusive
royalty-free license to the TCR vaccine technology with the right to sublicense.
Arthur A. Vandenbark, Ph.D. (Veterans Administration Medical Center, Portland,
Oregon). In July 1994, the Company entered into a Research Collaboration and
Assignment Agreement with Dr. Vandenbark, the inventor of the patent rights
acquired from XOMA, to establish a framework for a three-year scientific
collaboration relating to the development of the TCR Peptide vaccines. The
agreement, which was renewed in June 1997 for another two year term, provides
that the Company pays the Portland Veterans Affairs Research Foundation in order
to fund the collaborative research, gives the Company access to future
inventions and know-how, and obligates the Company to make certain royalty
payments on sales of products not already covered by the XOMA Agreement. In
addition, the Company granted to Dr. Vandenbark options to purchase the
Company's Common Stock, which vest upon the achievement of certain milestones.
Medical University of South Carolina (Christian Schwabe, Ph.D.). In April 1995,
the Company entered into a Collaborative Research Agreement with the Medical
University of South Carolina to establish a collaborative research program
expanding upon an existing consulting relationship with Dr. Christian Schwabe in
the area of relaxin research, including the biology, receptors, synthesis and
activities of relaxin, the genes encoding relaxin, relaxin peptides, analogs and
related compounds. The agreement provides
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funding for collaborative research, gives the Company access to future
inventions and know-how, and obligates the Company to make certain royalty
payments on sales of products covered by licensed patents.
Soltec. In June 1996, the Company entered into an exclusive License Agreement
with Soltec Research Pty Ltd. to develop and market betamethasone mousse (a
quick break foam formulation of the dermatologic drug, betamethasone valerate)
in North America. Under the terms of the agreement, the Company will pay a
licensing fee to Soltec, plus royalties on future sales of products, if any,
arising from the licensed technology. The Company also has an exclusive option
on Soltec's foam mousse system for the delivery of other compounds and, in
January 1998, exercised such option for clobetasol propionate, a super high
potency topical steroid.
Molecular Medicine Research Institute ("MMRI"). In October 1996, the Company
entered into a Laboratory Services Agreement with MMRI covering two years of
directed research relating to relaxin and TCR peptides. The agreement provides
funding for MMRI to conduct the research on behalf of the Company and also has
provisions covering intellectual property arising from the directed research and
other discoveries relating to the Company's areas of interest.
SmithKline. In December 1996, the Company entered into an agreement with
SmithKline under which the Company acquired exclusive United States rights to
Ridaura. 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
through December 2001. Distribution of Ridaura is conducted by CORD on the
Company's behalf.
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.
The Company's relaxin patent portfolio covers the composition of matter
(proteins and DNA), analogs and closely related compositions, formulations,
methods of manufacture and methods of treatment, including issued patents in the
U.S., a granted patent in Europe, and various international equivalents in
addition to other applications that remain pending. The issued relaxin patents
will expire at various times between 2003 and 2012. The Company's TCR vaccine
patent portfolio includes pending applications in the U.S., and corresponding
international patents and applications, relating to compositions of matter
(peptides, peptide analogs, peptide fragments, and antibodies), formulations,
methods of treatment, diagnostic methods, and methods of preparing/isolating
protective T cells. Issued international patents (Europe, Australia and Israel)
expire in 2010, an issued U.S. patent expires in 2014 and patents issuing on the
pending U.S. and international applications would expire at various times
beginning in 2010. Extensions may be available for certain key patents in the
U.S. and Europe (subject to statutory changes before product approval). The
Company's gamma interferon patent portfolio includes issued U.S. patents and
other pending applications relating to the composition of matter, formulations
and methods of treatment, which do not begin to expire until 2009. See
"Collaborative Relationships."
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
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involve complex factual and legal issues for which no consistent policy has
emerged, and therefore, are highly uncertain. Moreover, the patent laws of
foreign countries differ from those of the U.S. and the degree of protection, if
any, afforded by foreign patents may, therefore, be different. In Europe, a
third party appeal is pending from an opposition to a patent application
concerning relaxin DNA; the original opposition was successfully defended by the
Company's licensor. No assurance can be given that any of the Company's or its
licensors' patent applications will issue as patents or that any such issued
patents will provide competitive advantage to the Company or will not be
successfully challenged or circumvented by its competitors. In addition, 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.
In March 1997, the Company announced that the United States Patent and Trademark
Office had awarded the Company a patent (U.S. Patent Number 5,614,192) covering
TCR peptides and functional derivatives encompassing the second complementarity
determining region (CDR2) as compositions of matter, formulations (including
peptide cocktails) and methods of treatment of T-cell mediated diseases. In
January 1998, the Company announced that a patent in Europe was granted for the
same claims.
The Company has become aware that third parties have obtained patents generally
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 Peptide technology patent applications and those of one or more
of its competitors including the above-referenced patent of 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
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know whether its or its licensors' inventors are the first for inventions
covered by their pending patent applications or that it or its licensors were
the first to file patent applications for such inventions. A judgment adverse to
the Company in any such patent interference, litigation or other proceeding
could materially adversely affect the Company's business, financial condition
and results of operation, and its expense may be substantial whether or not the
Company is successful.
Connetics also relies on trade secrets and proprietary know-how. The Company
requires its employees, consultants and advisors to execute a confidentiality
agreement providing that all proprietary information developed or made known to
the individual during the course of the relationship will be kept confidential
and not used or disclosed to third parties except in specified circumstances.
The agreements also provide that all inventions conceived by an employee (or
consultant or advisor to the extent appropriate for the services provided)
during the course of the relationship shall be the exclusive property of the
Company, other than inventions unrelated to the Company and developed entirely
on the individual's own time. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for
misappropriation of the Company's trade secrets in the event of unauthorized use
or disclosure of such information.
MARKETING AND SALES
The Company's business strategy is to retain marketing rights for products in
the areas of rheumatology and dermatology in the United States. The Company
believes that a large, general sales and marketing infrastructure is not
required to effectively and successfully maximize the commercial potential of
products in the changing health care market, and in particular products directed
toward focused, specialty markets. The Company is targeting its initial
commercial activities at rheumatologists and dermatologists, which can be served
by a focused and specialized marketing organization. The Company has commenced
marketing and sales operations with the deployment of its initial 14 sales
representatives. This sales organization will market the Company's in-licensed
and internally developed products. The Company expects to expand the sales force
as it prepares to launch additional products. With regard to Ridaura, the
Company had a transitional services agreement with SmithKline which ended
December 31, 1997 whereby SmithKline performed order entry, packaging, shipping,
invoicing and credit and collection services for Ridaura on behalf of the
Company. The Company transitioned these functions on December 15, 1997 to CORD
Logistics, Inc.
Outside the United States, the Company's strategy is to establish development,
marketing and distribution agreements with pharmaceutical companies. The Company
is engaged in discussions with a number of pharmaceutical companies regarding
development, marketing and sales alliances for both ConXn and its TCR vaccine
products for the European and Asian markets, although there can be no assurance
that any such alliances will be consummated.
As of December 31, 1997, the Company had 18 employees devoted to marketing and
sales.
MANUFACTURING
The Company contracts with independent sources to manufacture its products,
which enables the Company to focus on its product and clinical development
strengths, minimize fixed costs and capital expenditures, and gain access to
advanced manufacturing process capabilities. Gamma interferon is manufactured by
Genentech and Parke-Davis. ConXn has been manufactured for Connetics under
contract with four outside vendors: BASF Bioresearch Corp. for fermentation,
Scios Nova, Inc. for purification, Chesapeake Biological Laboratory for filling
and Tektagen, Inc. for testing. TCR vaccines are manufactured by
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American Peptide Company and Multiple Peptide Systems. The Company is in
discussions with additional manufacturers who can supply ConXn 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. Betamathasone mousse is manufactured for Connetics by CCL
Pharmaceuticals.
The Company's strategy is to continue to use manufacturing agreements for the
production of its current and future products.
COMPETITION
The biopharmaceutical industry is highly competitive. The Company believes that
there are numerous pharmaceutical and biotechnology companies and academic
research groups throughout the world engaged in research and development efforts
with respect to therapeutic products targeted at diseases or conditions
addressed by the Company. In particular, with respect to TCR Vaccines, the
Company is aware that other companies and research institutions are engaged in
research and development efforts and are in various stages of clinical trials
with respect to rheumatoid arthritis and other autoimmune diseases. Connetics
believes that competitive factors in its industry include scientific and
technological expertise, managerial competence in identifying and pursuing
product in-licensing and acquisition opportunities, operational competence in
developing, protecting, manufacturing and marketing products and obtaining
timely regulatory agency approvals, and financial resources. The Company intends
to compete on the basis of the quality and exclusivity of its products, combined
with the effectiveness of its marketing and sales efforts. Competing
successfully will depend on the Company's continued ability to attract and
retain skilled and experienced personnel, to develop and secure the rights to
pharmaceutical products and compounds and to exploit these products and
compounds commercially prior to the development of competitive products by
others. The Company expects that there will be continued competition for highly
qualified scientific, technical and managerial personnel. 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. (See Additional Factors that May Affect Future Results - "Competition
and Technological Change")
GOVERNMENT REGULATION
FDA Regulation and Product Approval. 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
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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 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.
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
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business, financial condition and profitability of other companies 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 United States
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.
Environmental Regulation. 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.
SCIENTIFIC ADVISORY BOARD AND OTHER ADVISORS
Connetics utilizes various advisors to provide expertise and critical review of
its programs. For advice on and review of its current and long-term scientific
planning, research and development, the Company has established a Scientific
Advisory Board ("SAB") consisting of distinguished scientists and clinicians
with expertise in biologic processes and diseases that involve the connective
tissues of the body. All of the individuals on the SAB are recognized as leading
authorities in their fields.
The members of the SAB are as follows:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Edward P. Amento, M.D........................... Consultant, Molecular Medicine Research, Inc.
Eugene A. Bauer, M.D........................... Dean, Stanford University School of Medicine
Yueh-Hsiu Chien, Ph.D........................... Assistant Professor, Stanford University School of Medicine
Arthur Z. Eisen, M.D............................ Professor, Washington University School of Medicine,
Barnes Hospital
Philip C. Hanawalt, M.D......................... Professor of Biological Sciences and Dermatology, Stanford
University and Stanford University School of Medicine
Gerald T. Nepom, M.D., Ph.D..................... Director, Virginia Mason Research Center Professor,
University of Washington School of Medicine, Seattle
Brian Seed, Ph.D................................ Professor, Harvard Medical School (Massachusetts
General Hospital)
</TABLE>
Each member of the SAB has entered into an agreement with the Company covering
the terms of his position as a member of the SAB. Each member provides services
on an as-needed basis. Three members
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<PAGE> 20
of the SAB have entered into separate agreements with the Company covering
additional consultation above and beyond their activities as SAB members.
Certain SAB members hold options to purchase or have purchased Common Stock of
the Company. In addition, members of the SAB receive a fee of $1,000 for
attending any SAB meeting and are reimbursed for out-of-pocket expenses incurred
in attending each meeting. All members of the SAB are employed by institutions
other than the Company and may have commitments to, or consulting or advisory
agreements with, other entities that may limit their availability to the
Company.
For its preclinical and clinical development programs the Company has
established relationships with several contract research organizations and
practicing physicians.
Employees
The Company had 72 full-time employees at December 31, 1997, of which 35 are
engaged in, or directly support, the Company's research and development
activities. The Company also uses outside consultants. The Company considers
relations with its employees to be good. None of the Company's employees is
covered by a collective bargaining agreement.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. Specifically, the
Company wishes to alert investors and other readers that the following important
factors, as well as other factors, could in the future affect, and in the past
have affected, the Company's actual results and could cause the Company's
results for future years or quarters to differ materially from those expressed
in any forward looking statements made by or on behalf of the Company.
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, 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 in connection with the Ridaura acquisition. 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
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<PAGE> 21
foreign authorities for any indication or that an approved compound will be
capable of being produced in commercial quantities at reasonable costs and
successfully marketed. Products, if any, resulting from the Company's research
and development programs are not expected to be commercially available within
the next year. 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.
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. The Company expects
to incur increasing operating losses for the next few years and the amount of
net losses and the time required by the Company to reach profitability are
uncertain. There can be no assurance that the Company will ever be able to
generate revenue from its products now under development or achieve
profitability on a sustained basis.
UNPREDICTABILITY OF 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.
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
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<PAGE> 22
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.
FUTURE CAPITAL REQUIREMENTS AND UNCERTAINTY OF FUTURE FUNDING; DILUTIVE AND
OTHER EFFECTS OF EQUITY LINE AGREEMENT
The Company expects that its current cash and cash equivalents, short-term
investments, cash generated from the sale of Ridaura and funds available under
its capital loan will be sufficient to fund the Company's operations through the
fourth quarter of 1998. The development of the Company's products (other than
Ridaura) will require the commitment of substantial resources to conduct the
time-consuming research and development, clinical studies and regulatory
activities necessary to bring any potential medical product to market and to
establish production, marketing and sales capabilities. The Company will need to
raise substantial additional funds for these purposes. The Company may seek such
additional funding through collaborative arrangements and through public or
private financings, including equity financings. Any additional equity
financing, if available, will be dilutive to stockholders and any debt
financing, if available, may restrict the Company's ability to pay dividends on
its capital stock or the manner in which the Company conducts its business.
Under the terms of an equity line agreement, the Company has secured an equity
line that potentially allows the Company to raise up to $25 million from a
certain institutional investor over a three-year period beginning on December 1,
1997; however, this equity line is currently unavailable to the Company since
the Company does not currently meet a requirement that the trading price for its
Common Stock be at least $7.00 per share. Other than this equity line, the
Company currently has no commitments for any additional financings and there can
be no assurance that any such financings will be available to the Company or
that adequate funds for the Company's operations, whether from financial
markets, collaborative or other arrangements with corporate partners or from
other sources, will be available when needed or on terms attractive to the
Company. The inability to obtain sufficient funds may require the Company to
delay, scale back or eliminate some or all of its research and product
development programs, to limit the marketing of its products or to license third
parties the rights to commercialize products or technologies that the Company
would otherwise seek to develop and market itself.
While the equity line arrangement discussed above may help provide the Company
with additional future financing, the sale of shares thereunder will have a
dilutive impact on other stockholders of the Company. As a result, the market
price of the Company's Common Stock could be materially and adversely affected,
and if the Company is profitable, the Company's net income per share could be
materially decreased in future periods. In addition, the shares to be issued
under the Equity Line Agreement will be issued at a discount (of up to 15%) to
the then-prevailing market price of the Company's Common Stock. These discounted
sales could have an immediate adverse effect on the market price of the
Company's Common Stock. The Company also has an obligation to register the
shares to be issued under the equity line before the start of the commitment
period; therefore, the shares sold under the Equity Line Agreement will
generally be eligible for immediate resale, which could further adversely affect
the Company's stock price.
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<PAGE> 23
Finally, the equity line arrangement will not be available to the Company if its
trading price remains below $7.00 per share and certain other pricing conditions
are not met, which could require the Company to seek funds from other sources
(with the attendant risk factors set forth in the preceding paragraph).
As a commitment fee to the equity line investor, the Company has issued a
five-year warrant exercisable for 250,000 shares of Common Stock at an exercise
price of $8.25 per share. On each of the first, second, and third anniversaries
of the beginning of the equity line commitment period, the Company will issue
the equity line investor an additional five-year warrant exercisable for a
number of shares based on the amount of the equity line unused by the Company in
the preceding year (up to a maximum of 25,000 shares if the Company has not
drawn any amount under the equity line during the year and decreasing to zero to
the extent the Company has drawn down up to $8.33 million during the year). The
Company is obligated to file a registration statement covering the resale of the
shares issuable upon the exercise of such additional warrants. The issuance and
exercise of any such additional warrants would have a dilutive effect on the
Company's stockholders and could have an adverse effect on the Company's stock
price, as could the resale of the shares acquired thereunder.
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. As Ridaura generates additional revenue,
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 in the future. As noted above, the
Company expects to incur quarterly and annual operating losses for at least the
next several years. The Company's quarterly and annual operating results may
fluctuate significantly in the future depending on such factors as the timing
and shipment of significant Ridaura orders, if any, changes in pricing policies
by the Company and its competitors, the timing and market acceptance of any new
products introduced by the Company, the mix of distribution channels through
which Ridaura and other products (if any) are sold, and the Company's inability
to obtain sufficient supplies for its products. In response to competitive
pressures or new product introductions, the Company may take certain pricing or
other actions that could materially and adversely affect the Company's operating
results.
MANAGEMENT OF RIDAURA PRODUCT; UNCERTAINTY OF FUTURE RIDAURA REVENUES;
OFF-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 distribution
operations 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 such 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
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<PAGE> 24
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.
POTENTIAL EFFECTS OF GUARANTEE OF VALUE OF SHARES ISSUED TO SMITHKLINE
In connection with its acquisition of U.S. and Canadian rights to Ridaura in
December 1996, the Company issued 637,733 shares of Common Stock to SmithKline
Beecham Properties, Inc. ("SKB"). Pursuant to a December 1997 amendment to the
Company's original agreement with SKB, the total value of the shares issued to
SKB is required to be $8.0 million on April 1, 1998; to achieve such value, the
Company may be obligated to issue additional shares to SKB on such date (up to a
maximum of 1,672,512 total shares, including those originally issued), or may
repurchase a portion of the originally-issued shares to reduce the market value
of the remaining shares to $8.0 million. In the event the Company is required to
issue a substantial number of additional shares to SKB, such issuance will have
a dilutive impact on the other stockholders of the Company. As a result, the
market price of the Company's Common Stock could be materially and adversely
affected, and if the Company becomes profitable, the Company net income per
share could be materially decreased in future periods. In addition, SKB
currently owns approximately 4.8% of the Company's outstanding shares of Common
Stock. An additional issuance of a substantial number of shares to SKB would
increase SKB's ownership percentage and give SKB increased influence in matters
requiring a stockholder vote, such as electing directors or approving a merger
or sale of the Company. Given the Company's current stock price, it is likely
that the Company will need to issue additional shares to SKB on April 1, 1998 to
achieve the $8.0 million value.
Under the rules of the Nasdaq Stock Market, a second issuance to SKB cannot
result in SKB receiving more than 19.9% or more of the Company's outstanding
Common Stock as of December 30, 1996. Due to the Company's current stock price
and the Nasdaq rules, there is a material likelihood that the Company will be
unable to issue the full amount of shares otherwise issuable to SKB, and as a
result, under the Company's amended agreement with SKB, the Company would be
obligated to increase the amount of deferred royalty-based payments owed to SKB
for Ridaura product sales (currently capped at $6 million) by the cash value of
the unissuable shares. In addition, the Company's royalty rate for Ridaura sales
would increase on sales over a certain level. Such changes could divert the
Company's available liquid resources away from the Company's operations and
development programs, which could have a material adverse effect on the
Company's business and its results of operations.
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 Betamethasone mousse and
Ridaura reflect this strategy. Future product acquisitions, if any, may require
substantial additional funds (i) for the initial acquisition of rights to these
products and (ii) for the steps necessary to obtain FDA approval for the product
and to market, sell and distribute the products successfully. A portion of the
funds needed to acquire, develop and market any new products may come from the
Company's existing cash and short-term investments; in such case, fewer
resources will be available to the Company's current products and clinical
programs, which could have a material adverse effect on the Company's business,
financial conditions and results of operations. Alternatively, the Company may
seek to raise substantial additional funds for new product acquisitions.
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<PAGE> 25
As discussed above under "Future Capital Requirements and Uncertainty of Future
Funding," the Company may seek such additional funding through collaborative
arrangements and through public or private financings, including equity
financings. Any additional equity financing, if available, may be dilutive to
stockholders and any debt financing, if available, may restrict the Company's
ability to pay dividends on its capital stock or the manner in which the Company
conducts business. In addition, any acquisition of rights to additional products
that are not presently approved by the FDA will require the commitment of
substantial resources to conduct the research development, clinical studies and
regulatory activities necessary to bring such potential product to market. If
the newly-acquired product is already approved for sale, the Company will likely
assume the marketing and sale 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. (See "--
Management of Ridaura Acquisition; Uncertainty of Future Ridaura Revenues;
Off-Patent Status of Ridaura")
UNCERTAINTIES OF REGULATORY APPROVAL; GOVERNMENT REGULATION
The production and marketing of the Company's products and its ongoing research
and development activities are subject to regulation by numerous governmental
authorities in the United States and other countries. Prior to marketing, any
drug developed by the Company must undergo rigorous preclinical and clinical
testing and an extensive regulatory approval process mandated by the FDA and
equivalent foreign authorities. These processes can take a number of years and
require the expenditure of substantial resources. The Company is also subject to
regulations under the food and drug statutes and regulations of the State of
California.
Obtaining such approvals and completing such testing is a costly and
time-consuming process and approval may not be ultimately obtained. The length
of the FDA review period varies considerably as does the amount of preclinical
and clinical data required to demonstrate the safety and efficacy of a specific
product. The Company may also decide to replace the compounds in testing with
modified or optimized compounds, thus extending the testing process. In
addition, delays or rejections may be encountered based upon changes in FDA
policy during the period of product development and FDA regulatory review of
each submitted new drug application or product license application. Similar
delays may also be encountered in other countries. There can be no assurance
that even after such time and expenditures, regulatory approval will be obtained
for any products developed by the Company. If regulatory approval of a product
is granted, such approval may entail limitations on the indicated uses for which
the product may be marketed. Further, even if such regulatory approval is
obtained, the FDA will require post-marketing reporting and may require
surveillance programs to monitor the usage or side effects of each drug product.
A marketed product, its manufacturer and its manufacturing facilities are
subject to continual review and periodic inspections, and later discovery of
previously unknown problems with a product, manufacturer or facility may result
in restrictions on such product or manufacturer, potentially including
withdrawal of the product from the market. In addition, a failure to comply with
FDA requirements for manufacturing, labeling, advertising, recordkeeping or
reporting of adverse events and other information may result in enforcement
actions including, but not limited to, recalls, seizures, injunctions and
criminal prosecution.
Government regulation in the United States or in foreign countries may delay
marketing of the Company's potential products for years, may impose costly
procedures upon the Company and may furnish a
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<PAGE> 26
competitive advantage to larger companies that may compete with the Company.
There can be no assurance that FDA or other regulatory approval for any products
developed by the Company will be granted on a timely basis or at all. A delay in
obtaining or a failure to obtain such approvals would adversely affect the
marketing of any potential products developed by the Company and the Company's
liquidity and capital resources. The FDA regulatory process periodically goes
under substantial review and revision, and as a result, government regulation
may become more or less restrictive in the future.
PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in part on the ability of Connetics and its
licensors to obtain patent protection for the Company's products and processes,
to preserve its trade secrets, and to operate without infringing the proprietary
rights of third parties. The Company owns, controls or has exclusively licensed
pending applications and/or issued patents worldwide relating to the technology
of all three of its major programs as well as technology in the earlier stages
of research.
There has been increasing litigation in the biomedical, biotechnology and
pharmaceutical industries with respect to the manufacture, use and sale of new
therapeutic products that are the subject of conflicting patent rights. The
validity and breadth of claims in biomedical/pharmaceutical/biotechnology
patents involve complex factual and legal issues for which no consistent policy
has emerged, and therefore, are highly uncertain. Moreover, the patent laws of
foreign countries differ from those of the U.S. and the degree of protection, if
any, afforded by foreign patents may, therefore, be different. In Europe, a
third party appeal is pending from an opposition to a patent application
concerning relaxin DNA; the original opposition was successfully defended by the
Company's licensor. No assurance can be given that any of the Company's or its
licensors' patent applications will issue as patents or that any such issued
patents will provide 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
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<PAGE> 27
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 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
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<PAGE> 28
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 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
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<PAGE> 29
risks associated with the testing, manufacturing and marketing of its products.
However, there can be no assurance that it will be able to obtain such insurance
in the future, or that if obtained, such insurance will be sufficient.
Consequently, a product liability claim or other claims with respect to
uninsured liabilities or in excess of insured liabilities could have a material
adverse effect on the business or financial condition of the Company.
DEPENDENCE ON 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. 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 AND REIMBURSEMENT; HEALTH CARE REFORM AND
RELATED MATTERS
The levels of revenues and profitability of pharmaceutical companies may be
affected by the continuing efforts of governmental and third party payors to
contain or reduce the costs of health care through various means. In both the
United States and elsewhere, sales of prescription pharmaceuticals are dependent
in part on the availability of reimbursement to the consumer from third party
payors, such as government, employers and private insurance plans. Third party
payors are increasingly seeking to reduce the costs of medical products and
services and looking for improved cost/benefit relationships from the products
and services they buy. If the Company or one of its potential marketing or
strategic alliance partners succeeds in bringing one or more products based upon
the Company's technology to the market, there can be no assurance of market
acceptance of the Company's products or that these products will be considered
cost-effective and that reimbursement to the consumer will be available or will
be sufficient to allow the Company or its partner to sell such products on a
competitive basis. Any inability of the Company or its potential partners to
sell products developed using the Company's technology or in-licensed by the
Company on a competitive basis would have a material adverse effect on the
Company's business.
ENVIRONMENT AND CONTROLLED USE OF HAZARDOUS MATERIALS
The Company is subject to federal, state and local laws and regulations
governing the use, generation, manufacture, storage, discharge, handling and
disposal of certain materials and wastes used in its operations, some of which
are classified as "hazardous." There can be no assurance that the Company will
not be required to incur significant costs to comply with environmental laws and
regulations as its research activities are increased or that the operations,
business and future profitability of the Company will not be adversely affected
by current or future environmental laws and regulations. Although the Company
believes that its safety procedures for handling and disposing materials comply
with such laws and regulations, the risk of accidental contamination or injury
from these materials cannot be eliminated. In
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the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company.
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 such plans or
substitution of an equivalent option of a successor corporation or,
alternatively, at the discretion of the Board of Directors, exercise of some or
all of the option stock, including non-vested shares, or acceleration of vesting
of shares issued pursuant to stock grants, upon a change of control or similar
event.
POSSIBLE VOLATILITY OF STOCK PRICE; LACK OF DIVIDENDS
Prior to February 1996 there was no public market for the Common Stock of the
Company. There can be no assurance that an active trading market will continue
to be sustained or that the market price of the Common Stock will not decline
below the its present market price. The market prices for securities of
biotechnology companies have been highly volatile. Announcements regarding the
results of regulatory approval filings, clinical studies or other testing,
technological innovations or new commercial products by the Company or its
competitors, government regulations, developments concerning proprietary rights
or public concern as to safety of technology have historically had, and are
expected to continue to have, a significant impact on the market prices of the
stocks of biotechnology companies. 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.
ITEM 2. PROPERTIES
Connetics currently leases approximately 23,500 square feet of laboratory and
office space at 3400 West Bayshore Road in Palo Alto, California. The Company
leases this space under a master lease agreement that commenced in August 1996
and which will expire in July 1999 with a renewal option that, if
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<PAGE> 31
exercised, would extend the term of the lease to the year 2001. The Company
currently pays base monthly rent of $45,825 for this space and has the right to
use this space for laboratory research and development, storage and
distribution, offices, marketing and other related uses. The Company also leases
approximately 3,100 square feet of office space at 2483 East Bayshore Road, in
Palo Alto, California. The Company leases this space under an agreement that
expires March 31, 1999. The Company currently pays base monthly rent of $9,300
for this space. The Company believes that its existing facilities are adequate
to meet its requirements for the near term and that additional space will be
available on commercially reasonable terms if needed.
ITEM 3. LEGAL PROCEEDINGS
Connective knows of no material litigation or proceeding pending or
threatened to which the Company is, or may become, a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company, and their ages as of December 31,
1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Thomas G. Wiggans........................... 46 President, Chief Executive Officer and Director
W. Scott Harkonen, M.D...................... 45 Sr. Vice President, Product Development and Operations
Richard J. Hammel, Ph.D..................... 54 Vice President, Commercial Development
John L. Higgins ............................ 27 Vice President, Finance and Administration and Chief
Financial Officer
David A. Lowin ............................. 43 Vice President, Intellectual Property, Chief Patent
Counsel and Assistant Secretary
Ernst H. Rinderknecht, Ph.D ................ 50 Vice President, Process Science and Manufacturing
</TABLE>
Thomas G. Wiggans has served as President, Chief Executive Officer and as a
director of the Company since July 1994. From February 1992 to April 1994, Mr.
Wiggans served as President and Chief Operating Officer of CytoTherapeutics, a
biotechnology company. From 1980 to February 1992, Mr. Wiggans served in various
positions at Ares-Serono Group, a pharmaceutical company, including President of
its U.S. pharmaceutical operations and Managing Director of its U.K.
pharmaceutical operations. From 1976 to 1980 he held various sales and marketing
positions with Eli Lilly & Co., a pharmaceutical company. He is currently a
director of the Biotechnology Industry Organization, and a member of the
governing body of its emerging company section. He was also President of the
Board of Directors of the Association of Biotechnology Companies. Mr. Wiggans
received his B.S. degree in Pharmacy from the University of Kansas and his
M.B.A. from Southern Methodist University.
W. Scott Harkonen has served as Senior Vice President, Product Development and
Operations of the Company since September 1995. From March 1991 to August 1995,
Dr. Harkonen served as Vice
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President of medical and regulatory affairs at Univax Biologics, Inc., a
biotechnology company. From May 1989 to February 1991, he served as Vice
President, medical and regulatory affairs at Scios Nova, Inc., a biotechnology
company. He is currently a director of Planet Biotechnology, a privately-owned
biopharmaceutical company. He received his B.A. and M.D. from the University of
Minnesota and M.B.A. from the University of California, Berkeley.
Richard J. Hammel has served as Vice President, Commercial Development of the
Company since September 1995. From September 1993 to September 1995, he served
at Matrix Pharmaceutical, Inc., a biotechnology company, as Vice President of
Business Development, Sales and Marketing. From March 1992 to September 1995,
Dr. Hammel served as a Senior Consultant to Marketing Corporation of America, a
marketing company. From 1986 to March 1992, he served at Glaxo, Inc., a
pharmaceutical company, most recently as Director of Business Development. He
received a B.S., M.S. and Ph.D. from the University of Minnesota.
John L. Higgins has served as Vice President, Finance and Administration and
Chief Financial Officer since September 1997. From August 1994 to September
1997, he was a member of the management team at BioCryst Pharmaceuticals, Inc.,
a pharmaceutical company, serving most recently as Executive Vice President of
Corporate Development. From July 1992 to July 1994, Mr. Higgins was a member of
the health care banking team of Dillon, Read & Co. Inc., an investment banking
firm. While at Dillon, Read, he focused on financing and advisory assignments
for biotechnology and managed care companies. He received a B.A. in Economics
from Colgate University, where he serves on the Board of Trustees.
David A. Lowin has served as Vice President, Intellectual Property and Chief
Patent Counsel of the Company since January 1995 and Assistant Secretary of the
Company since July 1995. From 1982 to January 1995, Mr. Lowin served at Syntex
Corporation, a pharmaceutical company, as Assistant Director of the Patent Law
Department. From 1979 to 1982, he served as an associate at Owen, Wickersham &
Erickson. He received a B.A. from Hobart College and a J.D. from the Franklin
Pierce Law Center, where he serves on the Intellectual Property Law Advisory
Committee.
Ernst H. Rinderknecht has served as Vice President, Process Sciences and
Manufacturing of the Company since September 1994. From 1980 to September 1994,
Dr. Rinderknecht worked at Genentech in various positions, since 1987 as Staff
Scientist. He received his M.S. from the Swiss Federal Institute of Technology
(ETH) and Ph.D. in Biochemistry from the University of Zurich, Switzerland.
Each executive officer serves at the sole discretion of the Board of Directors.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Market under
the symbol CNCT on February 1, 1996. The price per share reflected in the table
below represents the range of low and high closing sale prices for the Company's
Common Stock as reported in the Nasdaq National Market for the quarters
indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31, 1997 HIGH LOW
---- ---
<S> <C> <C>
First Quarter........................................................... $8.00 $6.63
Second Quarter.......................................................... $7.88 $6.00
Third Quarter........................................................... $9.50 $3.50
Fourth Quarter.......................................................... $4.25 $2.56
FISCAL YEAR ENDED DECEMBER 31, 1996 HIGH LOW
---- ---
First Quarter........................................................... $11.25 $8.00
Second Quarter.......................................................... $11.00 $7.75
Third Quarter........................................................... $10.25 $5.75
Fourth Quarter.......................................................... $ 8.75 $6.50
</TABLE>
The Company had approximately 187 stockholders of record as of February 27,
1998, including several holders who are nominees for an undetermined number of
beneficial owners.
The Company has never paid cash dividends on its capital stock. The Company
currently anticipates that it will retain all available funds for use in the
operation and expansion of its business, and does not anticipate paying any cash
dividends in the foreseeable future. The Company must obtain the approval of its
bank before declaring or paying dividends.
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<PAGE> 34
ITEM 6: SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE
AMOUNTS)
The following table presents selected financial data of the Company. This
historical data should be read in conjunction with the attached consolidated
Financial Statements and the related notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing in Item
7 of this Form 10-K.
<TABLE>
<CAPTION>
Period from
inception
(February
December 31, 8, 1993) to
--------------------------------------------------------- December 31,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Product revenues $ 6,803 $ 428 $ -- $ -- $ --
Operating costs and expenses:
Cost of product revenues 1,149 -- -- -- --
License amortization 7,124 594 -- --
Research and development 17,162 13,161 8,271 6,436 836
General and administrative 8,966 5,434 2,113 1,317 240
------------ ------------ ------------ ------------ ------------
Total operating costs and expenses 34,401 19,189 10,384 7,753 1,076
Loss from operations (27,598) (18,761) (10,384) (7,753) (1,076)
Gain on sale of license rights 525 -- -- -- --
Interest income (expense), net (862) 247 12 (97) (2)
============ ============ ============ ============ ============
Net loss $ (27,935) $ (18,514) $ (10,372) $ (7,850) $ (1,078)
============ ============ ============ ============ ============
Basic and diluted net loss per share(1) $ (2.69) $ (2.71)
Shares used to calculate basic and diluted net loss
per share(1) 10,412,039 6,824,668
Pro forma basic and diluted net loss per share(1) $ (2.34) -- --
Shares used to calculate pro forma basic and
diluted net loss per share(1) 4,434,299 -- --
Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 14,346 $ 24,554 $ 9,023 $ 1,287 $ 729
Working capital 6,687 14,904 5,844 (979) (147)
Total assets 31,068 47,922 11,796 2,901 930
Current portion of capital lease obligations,
capital loans and long-term debt 2,746 2,408 1,259 233 --
Current portion of notes payable and other 2,884 -- -- -- --
liabilities
Non-current portion of capital lease obligations,
capital loans and long-term debt 649 3,062 4,933 829 13
Other long-term liabilities and notes payable(2) 9,666 10,858 3,467 2,643 --
Redeemable convertible preferred stock 600 2,000 -- -- --
Total stockholders' equity (net capital deficiency) 10,809 21,800 63 (2,919) (60)
</TABLE>
(1) Earnings per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128) and Staff Accounting Bulletin No. 98, ("SAB 98"). See
Notes 1 and 13 of Notes to Financial Statements
(2) See Note 5 of Notes to Financial Statements for a description of the
Company's other long-term liabilities.
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<PAGE> 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains, in addition to historical information,
certain forward looking statements that involve risks and uncertainties. The
Company's actual results could differ materially from the results anticipated in
these forward looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below as well as
those discussed above under the heading "Additional Factors That May Affect
Future Results".
The following discussion should be read in conjunction with the Financial
Statements and Notes filed with this Report.
OVERVIEW
Connetics Corporation acquires, develops and markets products in the areas of
rheumatology and dermatology. The Company acquired the U.S. and Canadian rights
to Ridaura(R) (auranofin), a treatment for rheumatoid arthritis, from SmithKline
Beecham Corporation and related entities ("SmithKline") in December 1996. Under
a related Transitional Services Agreement, customer orders and distribution for
Ridaura were managed by SmithKline through 1997. The Company's products under
development include betamethasone mousse for the treatment of scalp psoriasis
and other dermatoses; clobetasol mousse for the treatment of severe dermatoses;
ConXn(R) (relaxin) for the treatment of scleroderma, other fibrotic disorders
and infertility; T-cell receptor (TCR) peptide vaccines for the treatment of
multiple sclerosis and rheumatoid arthritis; and gamma interferon for the
treatment of keloids. The Company's stockholders approved a change of the
Company's name from "Connective Therapeutics, Inc." to "Connetics Corporation"
at its annual meeting in May 1997.
There can be no assurance that any of the Company's potential products will be
successfully developed, receive the necessary regulatory approvals or be
successfully commercialized.
The Company has financed its operations primarily through the sale and issuance
of equity securities. Additional cash has been received in connection with
certain credit financing arrangements. To date, a majority of the Company's
expenditures have been for research and development activities. The Company has
incurred operating losses since its inception and had an accumulated deficit of
$65.9 million at December 31, 1997. The Company will require additional funds to
continue the development of its products and to fund operating losses which are
expected for the next few years. Other than Ridaura, the Company does not expect
any of its products to be commercialized within the next year.
RESULTS OF OPERATIONS
The Company's revenues, derived from the sales of Ridaura, were $6.8 million and
$0.4 million for the years ended December 31, 1997 and 1996, respectively. The
Company had no revenue in 1995, or for the first eleven months in 1996, as all
of its products were in development stage. Revenues from Ridaura sales in 1997
were somewhat below the Company's preliminary projections at the time of its
acquisition of Ridaura. There can be no assurance that the Company will be able
to market and sell Ridaura successfully or that Ridaura revenues will equal or
exceed those achieved by SmithKline prior to the Company's
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<PAGE> 36
acquisition of the product and, as a result, the Company's financial condition
and results of operations could be materially and adversely affected.
Under Transitional Services and Supply agreements between SmithKline and the
Company, entered into in conjunction with the acquisition of Ridaura, SmithKline
will manufacture and supply Ridaura in final package form through December 2001
and has managed distribution of the product, with no additional consideration
for performing such services, through December 1997. The Company has established
a distribution arrangement with CORD Logistics, Inc. ("CORD") under which CORD
will manage customer orders and distribution of Ridaura and any other future
products of the Company. CORD began distributing Ridaura for the Company on
December 15, 1997 and, as a result, the Company incurred distribution costs of
$45,000 which included a one time program implementation start-up fee in
December. Future distribution costs are currently estimated to be approximately
three percent of net revenue.
The Company's cost of product sales includes the cost of Ridaura purchases from
SmithKline, a percentage royalty based on product sales, and distribution costs
from CORD. For the year ending December 31, 1997, the Company recorded $1.1
million in cost of product sales and $7.1 million in amortization expense
associated with the acquisition of product rights to Ridaura (the Company has
determined the useful life of the asset to be three years based on information
regarding products currently in the Company's development pipeline, competitive
products, the off-patent position of Ridaura and expected future revenues from
Ridaura sales). No product costs were recorded for the years ending December 31,
1996 and 1995 as the Company was still in development stage without any revenue
generating product. There was no cost associated with the Ridaura revenue the
Company recognized in December 1996.
Research and development expenses were $17.2 million, $13.2 million and $8.3
million for the years ended December 31, 1997, 1996 and 1995, respectively. The
$4.0 million increase in research and development expenses in fiscal 1997 over
fiscal 1996 was primarily due to the 555 patient Phase III clinical trial of
gamma interferon for the treatment of atopic dermatitis, the 64 patient Phase II
clinical trial of ConXn for the treatment of scleroderma, the 190 patient Phase
III clinical trial of betamethasone mousse for the treatment of scalp psoriasis,
the 106 patient Phase I/II clinical trial of TCR peptide vaccines for the
treatment of multiple sclerosis and the 40 patient Phase II clinical trial of
gamma interferon for the treatment of keloids, all of which commenced subsequent
to June 1996. The increase in research and development expenses in fiscal 1996
over fiscal 1995 was primarily attributable to significant increases in
personnel staffing particularly related to clinical development, commencement of
the clinical trials associated with gamma interferon, ConXn and TCR peptide
vaccines as listed above, and increased outside services required to support
operations. The factors contributing to increases in spending were partially
offset by decreases in technology acquisition costs from $0.9 million in fiscal
1995, to $35,000 and none for fiscal 1996 and 1997, respectively. Although the
Company has currently suspended any material further activities associated with
gamma interferon for the treatment of atopic dermatitis due to less than
acceptable therapeutic response with respect to the primary clinical endpoint,
research and development expenses may continue to increase in future periods due
to continued expansion of development activities, including progression in
advanced-stage clinical trials, and possible acquisition of new technologies and
products.
Selling, general and administrative expenses were $9.0 million, $5.4 million and
$2.1 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The increase of $3.6 million in expenses from fiscal 1996 to 1997 was primarily
due to the establishment of a new sales and marketing organization, costs
associated with the re-launching of Ridaura, increases in personnel in the
general and administrative functions, and legal expenses associated with
operating as a public company. The increase of $3.3 million in expenses from
fiscal 1995 to 1996 was primarily due to increased support costs associated with
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operating as a public company (including costs related to strengthening the
senior management team), professional fees and expenses associated with the
acquisition of Ridaura and other business development expenses. Selling, general
and administrative expenses are expected to continue to increase primarily due
to increased staffing of the sales organization, costs associated with marketing
Ridaura and possible launching of new acquired products.
On December 18, 1997, the Company entered into a Canadian Asset Purchase
Agreement and a Supply Agreement with Pharmascience, Inc., a Canadian
corporation, whereby the Company sold its Canadian rights to Ridaura for a net
consideration of $1.3 million. The book value of the Canadian rights to Ridaura
at December 31, 1997 was approximately $775,000 and accordingly, the Company
recognized a gain of $525,000 from the sale of Ridaura Canadian rights to
Pharmascience, Inc. in 1997.
Interest income was $0.9 million, $1.2 million and $0.4 million for the years
ended December 31, 1997, 1996 and 1995, respectively. The decrease in interest
income in fiscal 1997 over fiscal 1996 was the result of lower cash and
investment balances due to increase in operating expenses and a $3.0 million
payment to SmithKline for rights to Ridaura. The increase in fiscal 1996 over
fiscal 1995 was due to higher invested cash balances from proceeds of the
Company's initial public offering and two private placements of equity
securities. Interest earned in the future will depend on Company funding cycles
and prevailing interest rates. Interest expense increased to $1.7 million for
the year ended December 31, 1997, from $0.9 million and $0.4 million for the
same periods in 1996 and 1995, respectively. The increase of $0.8 million
interest expense in fiscal 1997 over fiscal 1996 was due to imputed interest
expense of $1.1 million attributable to the non-interest bearing $11.0 million
promissory note payable to SmithKline as partial consideration of the
acquisition of U.S. and Canadian rights to Ridaura, offset in part by lower
interest expense associated with lower balances outstanding for obligations
under capital leases and loans, and notes payable. The increase of $0.5 million
from fiscal 1996 over fiscal 1995 was due to increased balances outstanding for
obligations under capital leases and loans, and notes payable.
The Company incurred net losses of $27.9 million, $18.5 million and $10.4
million for the years ended December 31, 1997, 1996 and 1995, respectively. The
increase of $9.4 million in net loss in fiscal 1997 was primarily due to a
higher level of product development activities and Ridaura-related sales and
marketing expenses, amortization costs and imputed interest expenses, offset in
part by revenues generated from the sale of Ridaura. The increase in net loss of
$8.1 million from fiscal 1996 over fiscal 1995 was primarily due to the
Company's development stage activities. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through private sales
of equity securities, proceeds from its initial public offering in February 1996
and four self-managed financings, two in December 1996, one in May 1997 and one
in December 1997. At December 31, 1997, cash, cash equivalents and short-term
investments totaled $14.3 million, a decrease of $10.3 million from $24.6
million at December 31, 1996.
Cash used in operations in 1997 was $23.6 million compared with $10.4 million in
1996. The fiscal 1997 net loss was affected by a number of charges that did not
use cash, including $7.1 million of amortization expense and $1.1 million
imputed interest expense associated with the acquisition of Ridaura. The impact
of these charges was somewhat offset by a $0.5 million gain recognized from the
sale of Ridaura Canadian
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<PAGE> 38
rights. In addition, the increase in net loss of $9.4 million from 1997 over
1996 was due to higher expenses associated with clinical trials and sales and
marketing activities. The cash outflow from operations also included a $3.0
million payment to SmithKline for rights to Ridaura in January 1997, offset by
$4.8 million cash generated from Ridaura product sales (net of product costs).
Receivables at December 31, 1997 were $1.5 million as compared with $0.4 million
for the same period in 1996 due to increased sales of Ridaura.
Investing activities, other than changes in the Company's short-term
investments, consumed $0.6 million in cash during fiscal 1997, compared with
$3.6 million during fiscal 1996. Cash outlays in 1997 included a $1.0 million
payment to SmithKline in consideration of the omnibus amendment to the asset
purchase agreement in December, and equipment and leasehold improvements
expenditures of $0.9 million due to headcount growth, offset in part by $1.3
million cash generated from the sale of the Canadian rights to Ridaura.
Cash proceeds from financing activities in 1997 was $13.9 million compared with
$29.4 million in 1996. In 1997, the Company generated $16.1 million cash
primarily from the sales of its common stock in May and December compared with
$32.6 million cash generated primarily from its initial public offering and a
private financing in 1996. The Company also financed $0.3 million of its
equipment expenditures through a capital loan arrangement, and at December 31,
1997, had approximately $0.6 million available for additional borrowings under
the same loan. Cash proceeds were offset by $2.5 million in payments on
obligations under capital leases and loans.
Working capital decreased by $8.2 million to $6.7 million at December 31, 1997
from $14.9 million at December 31, 1996. The decrease was the result of lower
cash, cash equivalents and short-term investments, the now current portion of
capital loans and long-term debt, and the current portion of the note payable
due to SmithKline in 1998 for rights to Ridaura, offset in part by lower
accounts payable, lower accrued expenses due to the winding down of clinical
trial activities, lower accrued process development expenses and higher
receivable balance. The decrease in accounts payable and accrued process
development expenses of $3.3 million was partially due to payments of $3.0 to
SmithKline and $0.7 million for gamma interferon material associated with the
Phase III clinical trial.
At December 31, 1997, the Company had an aggregate of $15.9 million in future
obligations of principal payments under capital leases, loans, long-term debt
and other obligations, of which $5.6 million is due in 1998. On November 13,
1997, the Company amended the repayment terms of its non-interest bearing $11.0
million promissory note with SmithKline. The amendment allows the Company to
defer the first $6.0 million installment payment, originally due in January
1998, to April 1998, October 1998 and January 1999 with payments of $1.0
million, $1.5 million and $3.5 million, respectively. The Company is required to
pay interest on the principal amount outstanding of the $6.0 million from
January 1, 1998 through January 4, 1999 at prime rate plus 2%. The second
installment payment of $5.0 million under the note, also due January 1999,
remains unchanged. On December 18, 1997, the Company added an omnibus amendment
to the equity and asset purchase agreements with SmithKline. The amendment
adjusts the November 13, 1997 amended payments from $1.5 million and $3.5
million to $1.0 million and $4.0 million in October 1998 and January 1999,
respectively. All other payment terms pertaining to the November 13, 1997
amendment remain unchanged. (See Note 5 of Notes to Financial Statements)
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 up to $25 million through sales of its Common Stock. The
equity line is available for a three-year period beginning on December 1, 1997.
The Equity Line Agreement provides that the Company can, at its option, obtain
from $500,000 to
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<PAGE> 39
$2,000,000 at any one time through a sale of its Common Stock to Kepler, subject
to the satisfaction of certain conditions, including registration of shares for
resale, minimum volume requirements, and a minimum trading price of $7.00 per
share over a specified period. In addition, the Company must sell $500,000 of
its Common Stock from time to time if the price per share exceeds $10.00 and
minimum volume requirements are met. Since the Company's trading price is
currently below the $7.00 minimum price requirement, the Company is presently
unable to draw under the equity line. (See Note 6 of Notes to Financial
Statements)
The Company believes that its existing cash and cash equivalents, short-term
investments, cash generated from Ridaura revenues and funds available under the
capital loan will be sufficient to fund the Company's operating expenses, debt
obligations and capital requirements through 1998. 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. 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. Other
than the Equity Line Agreement (which is presently unavailable), the Company
currently has no commitments for any additional financings, and 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 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.
IMPACT OF YEAR 2000
The "Year 2000 Issue" is the result of certain computer programs being written
using two digits rather than four to define the applicable year. Some of the
Company's older computer programs were written using two digits rather than four
to define the applicable year and as a result, those computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on a recent assessment, the Company presently believes that with
modifications and upgrades to existing software, the Year 2000 Issue will not
pose significant operational problems for its computer systems. However, if such
modifications and upgrades are not made, or are not completed timely, the Year
2000 Issue could have an impact on the operations of the Company. The total Year
2000 project cost is estimated at less than $50,000.
The Company has begun initiating formal communications with its significant
service providers and suppliers to determine the extent to which the Company's
interface systems are vulnerable to those third parties' failure to remediate
their own Year 2000 Issues. However, there can be no guarantee that the systems
of other companies on which the Company's systems rely will be timely converted
and would not have an adverse effect on the Company's systems.
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<PAGE> 40
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the consolidated financial statements and
supplementary financial information that are attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this report because the
Company will file a definitive proxy statement within 120 days after the end of
its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its
annual meeting of shareholders to be held May 22, 1998 and the information
included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company and the Chairman of the
Company's Board of Directors is incorporated by reference from the information
under the caption "Election of Directors--Nominees" in the Company's Proxy
Statement.
Information as to the Company's executive officers appears at the end of Part I
of this report.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the caption "Executive
Compensation and Related Information" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption "Common Stock
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the caption "Certain
Relationships and Related Transactions" in the Company's Proxy Statement.
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<PAGE> 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements and Report of Ernst & Young LLP, Independent
Auditors
Report of Ernst & Young LLP, Independent Auditors.
Consolidated Balance Sheet at December 31, 1997 and 1996.
Consolidated Statements of Operations Years ended December 31, 1997,
1996 and 1995.
Consolidated Statement of Shareholders' Equity - Three years ended
December 31, 1997.
Consolidated Statements of Cash Flows Years ended December 31, 1997,
1996, and 1995.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Financial statement schedules are omitted because they are not
applicable or are not required as the information required to be set
forth therein is included in the financial statements or notes
thereto.
3. Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibits
3.1(1) Form of Amended and Restated Certificate of Incorporation.
3.2(1) Form of Bylaws.
3.3(5) Certificate of Designation of 7% Redeemable Convertible Preferred
Stock, Series A of Connective Therapeutics, Inc., as filed with the
Delaware Secretary of State on December 4, 1996.
3.4(11) Amendment to the Company's Amended and Restated Certificate of
Incorporation, as filed with the Delaware Secretary of State on May
15, 1997, changing the Company's name to Connetics Corporation.
3.5 Certificate of Designation of Rights, Preferences and Privileges of
Series B Participating Preferred Stock, as filed with the Delaware
Secretary of State on May 15, 1997. Reference is made to Exhibit
4.2.
4.1(1) Form of Common Stock Certificate.
4.2(12) Preferred Shares Rights Agreement, dated as of May 20, 1997, between
the Company and U.S. Stock Transfer Corporation, including the
Certificate of Designation of Rights, Preferences and Privileges of
Series B Participating Preferred Stock, the form of Rights
Certificate and the Summary of Rights attached thereto as Exhibits
A, B and C, respectively.
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<PAGE> 42
10.1(1) Form of Indemnification Agreement with the Company's directors and
officers.
10.2(7)* 1994 Stock Plan, as amended, and form of Option Agreement.
10.3(7)* 1995 Employee Stock Purchase Plan, as amended, and form of
Subscription Agreement.
10.4(1)* 1995 Directors' Stock Option Plan and form of Option Agreement.
10.5(1) Third Amended and Restated Registration Rights Agreement dated
February 14, 1995 among the Registrant and certain security holders
of the Registrant and Amendments Nos. 1 and 2 thereto dated May 31,
1995 and September 28, 1995.
10.6(1)(2) License Agreement dated September 27, 1993, between Genentech, Inc.
and the Company, Amendment dated July 14, 1994, and side letter
agreement dated November 17, 1994.
10.8(1) Assignment and Assumption Agreement, dated June 3, 1994, by and
between the Company and XOMA Corporation.
10.9(1)(2) Technical Collaboration and Manufacturing Agreement, dated May 24,
1994, by and between the Company and Scios Nova Inc.
10.10(1)(2) Technology Acquisition Agreement dated June 3, 1994 by and between
the Company and XOMA Corporation, and License Agreement dated
February 27, 1990 by and between Arthur A. Vandenbark, Ph.D. and
XOMA Corporation.
10.11(1)(2) Agreement on Interferon Gamma-1B dated December 8, 1995 by and
between the Company and Genentech, Inc.
10.12(1) Equipment Lease Line, dated May 31, 1994 with Lease Management
Services, Inc.
10.13(1) Business Loan Agreement, dated July 18, 1995, between the Company,
Silicon Valley Bank and MMC/GATX Partnership No. 1.
10.14(1)(2) Research Collaboration and Assignment Agreement, dated July 1, 1994,
between the Company and Dr. Arthur A. Vandenbark.
10.17(1) Consulting Agreement dated November 17, 1993 between the Company and
Brian Seed.
10.18(1) Consulting Agreement dated November 17, 1993 between the Company and
Eugene Bauer.
10.19(1) Employment Agreement dated June 9, 1994 between the Company and
Thomas Wiggans.
10.20(1) Loan Agreements between the Company and Thomas Wiggans dated July
15, 1994 and August 1, 1994.
10.21(1) Letter Agreement with G. Kirk Raab dated October 1, 1995.
10.23(1) Facility Master Lease between the Company and Renault & Handley
dated February 9, 1994.
10.26(1) Loan and Security Agreement dated December 21, 1995 by and among the
Company, Silicon Valley Bank and MMC/GATX Partnership No. 1.
10.27(3)(2) Agreement on Relaxin Rights in Asia dated April 1, 1996 between the
Company and Mitsubishi Chemical Corporation (Exhibits A and B to
Exhibit 10.27 have been previously filed as Exhibit 10.6 above.
Confidential treatment has been granted as to certain portions of
Exhibit 10.6 by the SEC).
10.28(3)(2) Soltec License Agreement dated June 14, 1996.
10.29(4) Laboratory Services Agreement dated October 24, 1996.
10.30(4) Agreement with Dr. Edward Amento dated October 24, 1996.
10.31(4) Form of Directors and Officers Change in Control Agreement
10.32(5) Common Stock Purchase Agreement, dated December 4, 1996 by and among
the Company and certain investors.
10.33(5) Registration Rights Agreement, dated December 4, 1996 by and among
the Company and certain investors.
10.34(5) Securities Purchase Agreement, dated December 4, 1996 by and among
the Company and a certain purchaser.
10.35(5) Warrant, dated December 4, 1996 between the Company and a certain
purchaser.
10.36(6)(2) Asset Purchase Agreement dated December 2, 1996 between the Company,
SmithKline Beecham Corporation, SmithKline Beecham Pharma Inc.,
SmithKline Beecham Properties, Inc. and SmithKline Beecham
Inter-American Corporation.
10.37(6) Stock Issuance Agreement dated December 31, 1996 between the Company
and SmithKline Beecham Properties, Inc.
10.38(6) Secured Promissory Note dated December 31, 1996 issued to SmithKline
Beecham Corporation.
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<PAGE> 43
10.39(6) Security Agreement dated December 31, 1996 between the Company and
SmithKline Beecham Corporation.
10.40(6)(2) Supply Agreement dated December 31, 1996 between the Company and
SmithKline Beecham Corporation.
10.42(8) Structured Equity Line Flexible Financing Agreement dated January 2,
1997 between the Company and Kepler Capital LLC.
10.43(8) Registration Rights Agreement dated January 2, 1997 between the
Company and Kepler Capital LLC.
10.44(9) Common Stock and Warrant Purchase Agreement dated May 15, 1997 by
and among the Company, Genentech, Inc. and certain investors.
10.45(9) Registration Rights agreement dated May 15, 1997 by and among the
Company and certain investors.
10.46(9) Form of Common Stock Purchase Warrant issued to certain investors on
May 15, 1997.
10.47(7)* Form of Notice of Stock Option Grant to G. Kirk Raab for stock
option issued in January 1997.
10.48(10) Secured Loan Agreement dated October 30, 1997 between the Company
and W. Scott Harkonen.
10.49(10)* Letter Agreement with Cynthia M. Butitta dated September 22, 1997.
10.50(10) Amendment dated November 13, 1997 to Secured Promissory Note dated
December 31, 1996 issued to SmithKline Beecham Corporation.
10.51(10) Letter Agreement dated November 26, 1997 between the Company and
Gerard Klauer Mattison & Co., Inc.
10.52(10)* Letter Agreement with John L. Higgins dated August 25, 1997.
10.53(10) Omnibus Agreement with SmithKline Beecham Corporation and related
entities dated December 18, 1997.
10.54(10) Canadian Asset Purchase Agreement with Pharmascience, Inc. dated
December 19, 1997.
10.55(10) Supply Agreement with Pharmascience, Inc. dated December 19, 1997.
10.56** Agreement on Relaxin dated January 19, 1998 by and between the
Company and Howard Florey Institute of Experimental Physiology and
Medicine.
10.57** License Agreement dated January 1, 1998 between the Company and
Soltec Research Pty Limited.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 46).
27.1 Financial Data Schedule (EDGAR filed version only).
- ----------
* This item is a management compensatory plan or arrangement required to
be listed as an exhibit to this form pursuant to Item 601(a)(10)(iii) of
Regulation S-K.
** The Company has omitted certain portions of this Exhibit and has
requested confidential treatment of such portions from the SEC.
1. Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-1 (File No. 33-80261) declared
effective by the Securities and Exchange Commission (the "SEC") on
January 31, 1996.
2. Certain portions of this Exhibit were granted confidential treatment
pursuant to an order from the SEC.
3. Incorporated by reference from an exhibit to the Company's Quarterly
Report on Form 10-Q (File No. 0-27406) filed with the SEC for the fiscal
quarter ended June 30, 1996.
4. Incorporated by reference from an exhibit to the Company's Quarterly
Report on Form 10-Q (File No. 0-27406) filed with the SEC for the fiscal
quarter ended September 30, 1996.
5. Incorporated by reference from an exhibit to the Company's Report on
Form 8-K (File No. 0-27406) dated December 4, 1996.
6. Incorporated by reference from an exhibit to the Company's Report on
Form 8-K (File No. 0-27406) dated January 15, 1997.
7. Incorporated by reference from an exhibit filed with Post-Effective
Amendment No. 1 to the Company's Registration Statement on Form S-8
(File No. 333-04985) filed with the SEC on June 30, 1997.
8. Incorporated by reference from an exhibit filed with the Company's
Annual Report on Form 10-K (File No. 0-27406) for the fiscal year ended
December 31, 1996.
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<PAGE> 44
9. Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-3 (File No. 333-21941) filed with the
SEC on July 3, 1997.
10. Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-1 (File No. 333-41195) declared
effective by the SEC on December 15, 1997.
11. Incorporated by reference from an exhibit filed with the Company's
Current Report on Form 8-K (File No. 0-27406) filed on May 23, 1997.
12. Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form 8-A (File No. 0-27406) filed on May 23,
1997.
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the three months ended December
31, 1997.
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<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Palo Alto,
California on this 20th day of March 1998.
CONNETICS CORPORATION
By: /s/ JOHN L. HIGGINS
John L. Higgins
Vice President, Finance and Administration and
Chief Financial Officer
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<PAGE> 46
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas G. Wiggans and John L. Higgins, jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below 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) March 11, 1998
Thomas G. Wiggans
/s/ JOHN L. HIGGINS Vice President, Finance and
- ------------------------------- Administration and Chief Financial
John L. Higgins Officer (Principal Financial
and Accounting Officer) March 19, 1998
/s/ G. KIRK RAAB Chairman of the Board of
- ------------------------------- Directors March 11, 1998
G. Kirk Raab
/s/ ALEXANDER E. BARKAS Director
- -------------------------------
Alexander E. Barkas March 18, 1998
/s/ EUGENE A. BAUER Director
- -------------------------------
Eugene A. Baue March 13, 1998
/s/ BRIAN H. DOVEY Director
- -------------------------------
Brian H. Dovey March 19, 1998
/s/ JOHN C. KANE Director
- -------------------------------
John C. Kane March 16, 1998
/s/ THOMAS D. KILEY Director
- -------------------------------
Thomas D. Kiley March 19, 1998
/s/ KENNETH B. PLUMLEE Director
- -------------------------------
Kenneth B. Plumlee March 19, 1998
/s/ JOSEPH J. RUVANE, JR. Director
- -------------------------------
Joseph J. Ruvane, Jr. March 19, 1998
</TABLE>
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<PAGE> 47
CONNETICS CORPORATION
INDEX TO FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors................ F-2
Balance Sheets................................................... F-3
Statements of Operations......................................... F-4
Statements of Stockholders' Equity............................... F-5
Statements of Cash Flows......................................... F-6
Notes to Financial Statements.................................... F-7
F-1
<PAGE> 48
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Connetics Corporation
We have audited the accompanying balance sheets of Connetics Corporation
as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material aspects, the financial position of Connetics Corporation
at December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
January 15, 1998
F-2
<PAGE> 49
CONNETICS CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,452 $ 14,555
Short-term investments 5,894 9,999
Accounts receivable 1,527 428
Other current assets 158 124
-------- --------
Total current assets 16,031 25,106
Property and equipment, net 1,663 1,484
Notes receivable from related parties 333 301
Deposits and other assets 160 250
Licensed assets and product rights 12,881 20,781
-------- --------
$ 31,068 $ 47,922
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,492 $ 4,179
Accrued liabilities 1,100 2,023
Accrued process development expenses 586 1,198
Accrued payroll and related expenses 536 394
Current portion of notes payable and other liabilities (note 5) 2,884 --
Current portion of capital lease obligations, capital loans and long-term debt 2,746 2,408
-------- --------
Total current liabilities 9,344 10,202
Non-current portion of capital lease obligations, capital loans and long-term debt 649 3,062
Other long-term liabilities (note 5) 9,666 10,858
Redeemable convertible preferred stock, Series A 600 2,000
Commitments
Stockholders' equity:
Preferred stock, $0.001 par value:
5,000,000 shares authorized; redeemable convertible preferred stock, Series
A, shares issued and outstanding: 60 in 1997 and 200 in 1996; and preferred
stock, none issued or outstanding in 1997 and 1996 -- --
Common stock, $0.001 par value, and additional paid-in capital:
50,000,000 shares authorized; shares issued and outstanding: 13,249,410 in 1997
and 9,057,393 in 1996 77,566 61,004
Notes receivable from stockholders (75) (75)
Deferred compensation, net (763) (1,315)
Accumulated deficit (65,873) (37,814)
Treasury stock, at cost: 5,246 shares in 1997 (46) --
-------- --------
Total stockholders' equity 10,809 21,800
-------- --------
$ 31,068 $ 47,922
======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 50
CONNETICS CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Product revenues $ 6,803 $ 428 $ --
Operating costs and expenses:
Cost of product revenues 1,149 -- --
License amortization 7,124 594 --
Research and development 17,162 13,161 8,271
Selling, general and administrative 8,966 5,434 2,113
------------ ------------ ------------
Total operating expenses 34,401 19,189 10,384
Interest income 860 1,190 405
Gain on sale of license rights 525 -- --
Interest expense (1,722) (943) (393)
------------ ------------ ------------
Net loss $ (27,935) $ (18,514) $ (10,372)
============ ============ ============
Basic and diluted net loss per share $ (2.69) $ (2.71)
Shares used to calculate basic and diluted net
loss per share 10,412,039 6,824,668
Pro forma basic and diluted net loss per share $ (2.34)
Shares used to calculate pro forma basic and diluted
net loss per share 4,434,299
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 51
CONNETICS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE COMMON STOCK AND
PREFERRED STOCK ADDITIONAL PAID IN CAPITAL
SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 1,343 $ 1 866 $ 6,105
Issuance of series B preferred stock, net of issuance costs 2,622 3 -- 12,787
Issuance of common stock under stock option plans -- -- 43 19
Deferred compensation related to certain options and stock
purchase rights granted to employees and consultants, -- -- -- 2,265
net of amortization
Issuance of warrants -- -- -- 250
Net loss -- -- -- --
-------- -------- -------- --------
Balances at December 31, 1995 3,965 4 909 21,426
-------- -------- -------- --------
Issuance of common stock in initial public offering
("IPO"), net of issuance costs of $2,981 -- -- 2,500 24,521
Conversion of preferred stock into common stock in
conjunction with IPO in February (3,965) (4) 3,965 4
Issuance of common stock under stock option and purchase plans -- -- 63 118
Issuance of common stock warrants -- -- 10 --
Issuance of common stock pursuant to private placement,
net of issuance costs -- -- 972 5,930
Issuance of common stock upon asset purchase from
SmithKline Beecham -- -- 638 9,000
Payment of notes receivable -- -- -- --
Deferred compensation related to certain options and stock
purchase rights granted to employees and consultants,
net of amortization -- -- -- 8
Unrealized loss on investments -- -- -- (3)
Net loss -- -- -- --
-------- -------- -------- --------
Balances at December 31, 1996 -- -- 9,057 61,004
======== ======== ======== ========
Issuance of common stock under stock option and purchase
plans -- -- 190 233
Issuance of common stock pursuant to private placement,
net of issuance costs -- -- 1,810 10,886
Issuance of common stock pursuant to public offering, net
of issuance costs -- -- 1,750 5,008
Conversion of redeemable preferred stock, Series A and
preferred dividends -- -- 442 1,521
Reduction of guaranteed market value of shares issued
pursuant to asset purchase agreement with SmithKline
Beecham -- -- -- (1,000)
Repurchase of officer's common stock -- -- -- --
Amortization and reversal of deferred compensation -- -- -- (91)
Unrealized gain on investments -- -- -- 5
Net loss -- -- -- --
-------- -------- -------- --------
Balances at December 31, 1997 -- $ -- 13,249 $ 77,566
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
NOTES DEFERRED ACCUMULATED
RECEIVABLE COMPENSATION DEFICIT
---------- ------------ -----------
<S> <C> <C> <C>
Balances at December 31, 1994 $ (97) $ -- $ (8,928)
Issuance of series B preferred stock, net of issuance costs (28) -- --
Issuance of common stock under stock option plans (9) -- --
Deferred compensation related to certain options and stock
purchase rights granted to employees and consultants, -- (1,933) --
net of amortization
Issuance of warrants -- -- --
Net loss -- -- (10,372)
-------- -------- --------
Balances at December 31, 1995 (134) (1,933) (19,300)
-------- -------- --------
Issuance of common stock in initial public offering
("IPO"), net of issuance costs of $2,981 -- -- --
Conversion of preferred stock into common stock in
conjunction with IPO in February -- -- --
Issuance of common stock under stock option and purchase plans -- -- --
Issuance of common stock warrants -- -- --
Issuance of common stock pursuant to private placement,
net of issuance costs -- -- --
Issuance of common stock upon asset purchase from
SmithKline Beecham -- -- --
Payment of notes receivable 59 -- --
Deferred compensation related to certain options and stock
purchase rights granted to employees and consultants,
net of amortization -- 618 --
Unrealized loss on investments -- -- --
Net loss -- -- (18,514)
-------- -------- --------
Balances at December 31, 1996 (75) (1,315) (37,814)
-------- -------- --------
Issuance of common stock under stock option and purchase
plans -- -- --
Issuance of common stock pursuant to private placement,
net of issuance costs -- -- --
Issuance of common stock pursuant to public offering, net
of issuance costs -- -- --
Conversion of redeemable preferred stock, Series A and
preferred dividends -- -- (124)
Reduction of guaranteed market value of shares issued
pursuant to asset purchase agreement with SmithKline
Beecham -- -- --
Repurchase of officer's common stock -- -- --
Amortization and reversal of deferred compensation -- 552 --
Unrealized gain on investments -- -- --
Net loss -- -- (27,935)
-------- -------- --------
Balances at December 31, 1997 $ (75) $ (763) $(65,873)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
SHARES AMOUNT TOTAL
-------- -------- --------
<S> <C> <C> <C>
Balances at December 31, 1994 -- $ -- $ (2,919)
Issuance of series B preferred stock, net of issuance costs -- -- 12,762
Issuance of common stock under stock option plans -- -- 10
Deferred compensation related to certain options and stock
purchase rights granted to employees and consultants, -- -- 332
net of amortization
Issuance of warrants -- -- 250
Net loss -- -- (10,372)
-------- -------- --------
Balances at December 31, 1995 -- -- 63
-------- -------- --------
Issuance of common stock in initial public offering
("IPO"), net of issuance costs of $2,981 -- -- 24,521
Conversion of preferred stock into common stock in
conjunction with IPO in February -- -- --
Issuance of common stock under stock option and purchase plans -- -- 118
Issuance of common stock warrants -- -- --
Issuance of common stock pursuant to private placement,
net of issuance costs -- -- 5,930
Issuance of common stock upon asset purchase from
SmithKline Beecham -- -- 9,000
Payment of notes receivable -- -- 59
Deferred compensation related to certain options and stock
purchase rights granted to employees and consultants,
net of amortization -- -- 626
Unrealized loss on investments -- -- (3)
Net loss -- -- (18,514)
-------- -------- --------
Balances at December 31, 1996 -- -- 21,800
-------- -------- --------
Issuance of common stock under stock option and purchase
plans -- -- 233
Issuance of common stock pursuant to private placement,
net of issuance costs -- -- 10,886
Issuance of common stock pursuant to public offering, net
of issuance costs -- -- 5,008
Conversion of redeemable preferred stock, Series A and
preferred dividends -- -- 1,397
Reduction of guaranteed market value of shares issued
pursuant to asset purchase agreement with SmithKline
Beecham -- -- (1,000)
Repurchase of officer's common stock (5) (46) (46)
Amortization and reversal of deferred compensation -- -- 461
Unrealized gain on investments -- -- 5
Net loss -- -- (27,935)
-------- -------- --------
Balances at December 31, 1997 (5) $ (46) $ 10,809
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 52
CONNETICS CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(27,935) $(18,514) $(10,372)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 7,911 1,237 393
Technology acquired in exchange for note payable and other
long-term liability -- -- 855
Amortization of deferred compensation 461 626 332
Accrued interest on notes payable 1,107 -- --
Gain on sale of Canadian rights to Ridaura (525) -- --
Changes in assets and liabilities:
Accounts receivable (1,099) (428) --
Current and other assets (17) 690 (731)
Accounts payable (2,687) 3,738 (117)
Accrued liabilities (809) 2,203 843
-------- -------- --------
Net cash used by operating activities (23,593) (10,448) (8,797)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments (12,152) (21,650) (7,560)
Sales and maturities of short-term investments 16,263 11,648 7,560
Capital expenditures (865) (461) (400)
Sale of Canadian rights to Ridaura 1,300 -- --
Payment for licensed assets and product rights (1,000) (3,000) --
-------- -------- --------
Net cash used in investing activities 3,546 (13,463) (400)
-------- -------- --------
Cash flows from financing activities:
Proceeds (payments) from bank loans -- -- (750)
Payment of notes payable -- (2,205) --
Proceeds from capital loans and long-term debt 333 323 5,230
Payments on obligations under capital leases and capital loans (2,470) (1,244) (319)
Proceeds from issuance of redeemable preferred stock -- 2,000 --
Proceeds from issuance of preferred and common stock, net 16,081 30,569 12,772
-------- -------- --------
Net cash provided by financing activities 13,944 29,443 16,933
-------- -------- --------
Net change in cash and cash equivalents (6,103) 5,532 7,736
Cash and cash equivalents at beginning of period 14,555 9,023 1,287
-------- -------- --------
Cash and cash equivalents at end of period $ 8,452 $ 14,555 $ 9,023
======== ======== ========
SUPPLEMENTARY INFORMATION:
Interest paid $ 615 $ 1,062 $ 274
INVESTING AND FINANCING ACTIVITIES:
Assets acquired under capital leases $ -- $ 199 $ 171
Issuance of warrants $ -- $ -- $ 250
Deferred compensation related to stock options and purchase rights $ -- $ 145 $ 2,265
Issuance of common stock for licensed assets and product rights purchased
from SmithKline Beecham $ -- $ 9,000 $ --
Issuance of note payable for licensed assets and product rights purchased
from SmithKline Beecham $ -- $ 9,375 $ --
Preferred dividends on redeemable preferred stock, series A $ 124 $ -- $ --
Conversion of redeemable preferred stock, series A and preferred
dividends into common stock $ 1,521 $ -- $ --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 53
CONNETICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
Connetics Corporation (the "Company") was incorporated in the State of
Delaware on February 8, 1993. In May 1997, the Company's stockholders approved a
change of the Company's name from "Connective Therapeutics, Inc." to "Connetics
Corporation". References in this section to historical results include the
Company's results when it was known as "Connective Therapeutics, Inc." From its
inception until December 1996, the Company was in the development stage,
principally involved in research and development of therapeutics for diseases
that involve connective tissues of the body, obtaining financing, recruiting
personnel, securing operating facilities, and pursuing business development
opportunities. On December 31, 1996, the Company acquired exclusive U.S. and
Canadian rights to Ridaura(R), a disease modifying antirheumatic drug, from
SmithKline Beecham Corporation and related entities ("SmithKline"). Ridaura is
the first product the Company markets and it signifies the beginning of the
Company's transition from purely product development to a revenue based sales
and marketing company. The Company has no products from its current development
programs available for sale and does not expect to have any within the next
year. Accordingly, the Company's ability to continue its research and
development activities is dependent upon the ability of management to obtain
substantial additional financing.
Liquidity and financial viability
In the course of its development activities, the Company has sustained
continuing operating losses and expects such losses to continue for the next few
years. 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. 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. Other than the Equity Line
Agreement (which is presently unavailable) (see Note 6), the Company currently
has no commitments for any additional financings, and 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 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.
F-7
<PAGE> 54
Cash, cash equivalents and short-term investments
Cash and cash equivalents consist of cash on deposit with banks and
money market instruments with original maturity of 90 days or less. Investments
with maturities beyond three months at the date of acquisition and that mature
within one year from the balance sheet date are considered to be short-term
investments. Cash equivalents and short-term investments are carried at fair
value, with unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity. The cost of securities sold is based on the
specific identification method.
Management of the Company believes it has established guidelines for
investment of its excess cash relative to diversification and maturities that
maintain safety and liquidity.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that fair values be disclosed for
most of the Company's financial instruments. The carrying amount of cash, cash
equivalents and short-term investments, accounts receivable, current
liabilities, notes payable, and long-term lease obligations, loans and debt are
considered to be representative of their respective fair values.
Property and equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over the useful lives of the assets, generally three to
five years. Assets acquired under capital lease arrangements are amortized over
the shorter of the estimated useful lives or the lease term.
Research and development
Research and development costs are charged to expense as incurred.
Revenue recognition
Revenues from product sales are recognized upon shipment, net of
allowances for estimated returns, rebates and chargebacks. The Company is
obligated to accept from customers the return of pharmaceuticals which have
reached their expiration date. The Company has not experienced significant
returns of expired product since its acquisition of U.S. and Canadian rights to
Ridaura in December 1996. In 1997, the Company's sole customer was SmithKline
who in turn distributed Riduara under a Transitional Services Agreement with the
Company. At December 31, 1997, the Company had accounts receivable from
SmithKline on an uncollateralized basis of $1.6 million. These amounts were paid
in full in February 1998.
Income taxes
Income taxes are accounted for under the asset and liability method
where deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
<PAGE> 55
Net loss per share
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128), which requires the Company to simplify the calculation of earnings
per share ("EPS") and achieve comparability with the recently issued
International Accounting Standard No. 33, "Earnings Per Share." Statement 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods presented have been restated, where appropriate, to
conform to the Statement 128 requirements (see Note 13).
Basic and diluted loss per share for 1995 have been retroactively
restated to apply the requirements of Staff Accounting Bulletin No. 98, issued
by the SEC in February 1998 ("SAB 98"). Under SAB 98, certain shares of common
stock and options and warrants to purchase shares of common stock issued at
prices substantially below the per share price of shares sold in the Company's
initial public offering previously included in the computation of shares
outstanding pursuant to Staff Accounting Bulletin Nos. 55, 64 and 83 are now
excluded from the computation.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New accounting standards
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" (SFAS 130), and Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). The Company is required to adopt these Statements in fiscal 1998. SFAS 130
establishes new standards for reporting and displaying comprehensive income and
its components. SFAS 131 requires disclosure of certain information regarding
operating segments, products and services, geographic areas of operation and
major customers. Adoption of these Statements is expected to have no impact on
the Company's financial position, results of operations or cash flows.
2. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
The following is a summary of available-for-sale investments (in thousands):
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Costs Gains Loss Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate bonds ............................ $ 3,824 $ 1 $ -- $ 3,825
Commercial paper ........................... 1,947 -- -- 1,947
Certificate of deposits .................... 2,068 1 -- 2,069
Money market funds ......................... 3,582 -- -- 3,582
---------- ---------- ---------- ----------
Total ................................ 11,421 2 -- 11,423
Less amount classified as cash equivalents . (5,529) -- -- (5,529)
---------- ---------- ---------- ----------
Total short-term investments ............... $ 5,892 $ 2 $ -- $ 5,894
========== ========== ========== ==========
</TABLE>
<PAGE> 56
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Costs Gains Loss Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate bonds ............................ $ 9,802 $ 2 $ (5) $ 9,799
Commercial paper ........................... 8,269 -- -- 8,269
Certificate of deposits .................... 5,021 -- -- 5,021
Money market funds ......................... 14 -- -- 14
---------- ---------- ---------- ----------
Total ................................ 23,106 2 (5) 23,103
Less amount classified as cash equivalents . (13,104) -- -- (13,104)
---------- ---------- ---------- ----------
Total short-term investments ............... $ 10,002 $ 2 $ (5) $ 9,999
========== ========== ========== ==========
</TABLE>
The net unrealized holding gain (loss) on available-for-sale investments
included as a separate component of stockholders' equity at December 31, 1997
and 1996 totaled $2,000 and $(3,000), respectively. The gross realized gains on
sales of available-for-sale investments for the years ended December 31, 1997
and 1996 totaled $442,000 and $543,000, respectively and gross realized losses
for the same periods totaled $78,000 and $289,000, respectively. Realized gains
and losses were calculated based on the specific identification method.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
------- -------
<S> <C> <C>
Laboratory equipment ......................... $ 1,779 $ 1,357
Computer equipment ........................... 501 288
Furniture and fixtures ....................... 397 224
Leasehold improvements ....................... 729 672
------- -------
3,406 2,541
Less accumulated depreciation and amortization (1,743) (1,057)
------- -------
Property and equipment, net .................. $ 1,663 $ 1,484
======= =======
</TABLE>
Property and equipment includes assets under capitalized leases at
December 31, 1997 and 1996 of approximately $1,005,000. Accumulated amortization
related to leased assets was approximately $831,000 and $559,000 at December 31,
1997 and 1996, respectively. There were no new capitalized leases for the twelve
months ended December 31, 1997.
4. NOTES RECEIVABLE FROM RELATED PARTIES
At December 31, 1997 and 1996, the Company held notes receivable from
officers of the Company totaling $333,000 and $301,000, respectively. These
notes, which bear interest at rates ranging from 6.0% to 8.5% annually, are
collateralized by certain personal assets of the officers and are generally due
and payable within three to five years.
<PAGE> 57
5. RESEARCH AND LICENSE AGREEMENTS:
Licensed Assets and Product Rights
In December 1996, the Company entered into an agreement with SmithKline
under which the Company acquired exclusive United States and Canadian rights to
Ridaura, a disease modifying antirheumatic drug. Under the Asset Purchase
Agreement, the Company paid $3.0 million in cash in January 1997, issued a
non-interest bearing $11.0 million promissory note payable in two installments,
in January 1998 and January 1999 of $6.0 million and $5.0 million, respectively,
issued 637,733 shares of common stock with a guaranteed value of $9.0 million at
December 31, 1997, and is obligated to pay up to $6.0 million in royalty
payments based on future product sales, for a potential aggregate consideration
of up to $29.0 million. The $11.0 million promissory note was discounted at
inception using an imputed interest rate of 11% and total imputed interest
expense attributable to these payments is $1.6 million. The original amount of
the discounted note, $9.4 million, has been included in current and other
long-term liabilities with imputed interest to be amortized over the term of the
note. The total purchase price of $21.4 million has been capitalized. The
Company determined the useful life of this asset to be three years based on
information regarding products currently in the Company's development pipeline,
competitive products, the off-patent position of Ridaura and expected future
revenues from Ridaura, and has recorded amortization expense of $7.1 million and
$0.6 million for the years ended December 31, 1997 and 1996, respectively.
Accumulated amortization at December 31, 1997 and 1996 were $7.7 million and
$0.6 million, respectively.
On November 13, 1997, the Company amended the repayment terms of its
non-interest bearing $11.0 million promissory note with SmithKline. The
amendment allows the Company to defer the first $6.0 million installment
payment, originally due in January 1998, to April 1998, October 1998 and January
1999 with payments of $1.0 million, $1.5 million and $3.5 million, respectively.
The Company is required to pay interest on the principal amount outstanding of
the $6.0 million from January 1, 1998 through January 4, 1999 at prime rate plus
2% (10.5% at December 31, 1997). The second installment payment of $5.0 million
under the note remains due in January 1999.
On December 18, 1997, the Company amended the equity and asset purchase
agreements with SmithKline. Pursuant to the omnibus amendment, the guaranteed
value of the common stock was revised form $9.0 million based on the fair market
value of the Company's common stock on December 31, 1997 to $8.0 million on
April 1, 1998, with a maximum of 1,675,512 shares to be issued in total. In the
event that the sum of such shares exceeds 1,675,512 shares, the dollar value of
the excess portion of the second issuance shall be added to the Company's
maximum sales-based royalty payments of $6.0 million to be paid to SmithKline at
a royalty rate equal to 8% of net sales of Ridaura commencing from the time of
closing. The Company also paid SmithKline $1.0 million on December 31, 1997 in
consideration of the amendment. This amendment also adjusts the November 13,
1997 amended note repayments from $1.5 million and $3.5 million to $1.0 million
and $4.0 million in October 1998 and January 1999, respectively. All other
payment terms pertaining to the November 13, 1997 amendment remain unchanged. As
of December 31, 1997, the Company has classified principal and accrued interest
on this note of $2.0 million in current portion of notes payable and other
liabilities and $8.5 million in other long-term liabilities.
Under a related Transitional Services Agreement, customer orders and
distribution for the product were managed by SmithKline through 1997 with no
additional consideration for performing such services. The parties also entered
into a Supply Agreement, under which SmithKline will manufacture and supply
Riduara, in final package form, to the Company for an initial term through
December 2001.
<PAGE> 58
On December 18, 1997, the Company also entered into a Canadian Asset
Purchase Agreement ("Canadian Rights") and a supply agreement with
Pharmascience, Inc., a Canadian corporation, whereby the Company sold its
Canadian rights to Ridaura for a net consideration of $1.3 million. Under the
Supply Agreement with Pharmascience, Inc. the Company, through its relationship
with SmithKline or other future vendors, will supply Ridaura exclusively in
Canada to Pharmascience, Inc. At December 31, 1997, the book value of the
Canadian rights to Ridaura was approximately $775,000. As a result, the Company
recognized $525,000 in gain on the sale of the Canadian rights to Pharmascience,
Inc. in 1997.
License agreements
In September 1993, the Company entered into a Letter Agreement and a
License Agreement with a corporation (the "Licensor"), which was subsequently
amended in July 1994, for an exclusive right to make, use and sell certain
products arising from licensed technology in a defined field and territory in
exchange for Series A preferred stock which was issued in September 1994. The
Company charged the value of the preferred stock to research and development
expense in 1993. In addition, the Company charged $684,000 to expense in 1994
for the purchase of research materials and payment of technology transfer costs
under the agreement. This amount, payable in the form of cash or equity, is due
in September 1998 and has been included in current portion of notes payable and
other liabilities. The Company will also pay to the Licensor royalties on sales
of products arising from the licensed technology, if any. In April 1996, the
Company acquired worldwide rights to such technology from the Licensor.
In June 1996, the Company entered into an exclusive License Agreement
with Soltec Research Pty Ltd. (the "Licensor"), to develop and market
betamethasone mousse (a quick-break foam formulation of the dermatologic drug,
betamethasone valerate) in North America. Under the terms of the Agreement, the
Company will pay $75,000, of which $35,000 was paid in 1996 and $22,500 was paid
in January 1998, in licensing fees to the Licensor (based on certain milestones)
plus royalties on future sales of products, if any, arising from the licensed
technology. The Company also has an exclusive option on the Licensor's foam
formulation for the delivery of other compounds.
Technology acquisition agreement
In June 1994, the Company entered into a Technology Acquisition
Agreement (the "Agreement") with a corporation to purchase all rights to certain
technology and for the exclusive right to make, use and sell certain products
pursuant to a sublicense agreement in exchange for the issuance of a $1,350,000
subordinated promissory note. The note, including interest, was paid in full in
February 1996 after the closing of the Company's initial public offering of
common stock. In addition to this note, the Company has accrued additional
consideration of $500,000, which is payable by the Company upon the earlier of
the achievement of commencement of Phase III clinical trials for a product
involving the licensed technology, or six years from the date of the agreement.
This amount has been included in other long-term liabilities.
The Agreement also provided for certain contingent payments based on
future financings. As a result of the Series B financing which was completed in
1995, the Company issued an additional note in the amount of $855,000 under this
Agreement. The note, including interest, was paid in full in February 1996 after
the closing of the Company's initial public offering of common stock. An
additional $1,000,000 will be payable by the Company upon FDA approval of a
product involving the licensed technology.
Under the terms of the Agreement, the Company is also committed to pay
royalties on applicable sales.
<PAGE> 59
Technology license agreement
In December 1995, the Company entered into a Technology License
Agreement (the "License") to acquire exclusive rights to develop and market
products arising from certain licensed technology, other than for its currently
marketed indications, for dermatological diseases in the United States as part
of a collaborative marketing and profit sharing agreement. Such agreement is
contingent upon the Company using its best efforts to achieve commencement of a
Phase III clinical trial within 30 months of the agreement effective date. In
September 1996, the Company achieved this milestone with the initiation of a
Phase III clinical trial. In August 1997, the Company announced the results from
its Phase III clinical trial, and analysis of the trial did not show an
acceptable therapeutic response to the primary clinical endpoint. As a result,
the Company has suspended plans to submit a Biological License Application (BLA)
for this licensed technology.
6. FINANCING ARRANGEMENTS
Long-Term Debt
On December 21, 1995, the Company entered into a term Loan and Security
Agreement (the "Term Loan") with a bank consortium (the "Lenders") under which
the Company borrowed $5,000,000. The Term Loan bears interest at 13%, with
interest only payments for the first six months, and interest and principal
payments for the following 30 months. In connection with the Term Loan, the
Company issued a warrant to purchase 73,071 shares of Common Stock at an
exercise price of $5.78 per share. The warrant is exercisable at any time
through December 2002. In conjunction with the Term Loan, the Company granted
the lender a first security interest in its corporate assets. Under the terms of
the loan, the Company is required to maintain a minimum cash balance of the
greater of $6,000,000 or six times the Company's average monthly cash usage. If
the Company violates the covenants during the loan period, the Company would be
required to pledge restricted cash of 65% of the outstanding loan, or $1,427,000
as of December 31, 1997, to cure the violation. At December 31, 1997, the
Company was in compliance with these covenants.
Future minimum principal payment under the Term Loan for year ending
December 31, 1998 is $2,196,000, at which point the loan will be paid in full.
Structured Equity Line Flexible Financing
On December 2, 1996, the Company entered into a Structured Equity Line
Flexible Financing Agreement (the "Agreement") with Kepler Capital LLC
("Kepler") that allows the Company to access up to $25 million through sales of
its Common Stock. The equity line will be available for a three-year period
beginning on or before December 1, 1997. The Agreement provides that the Company
can obtain from $500,000 to $2,000,000 at any one time through a sale of its
Common Stock to Kepler, subject to the satisfaction of certain conditions,
including registration of the shares for resale, minimum volume requirements,
and a minimum trading price of $7.00 per share over a specified period. In
addition, the Company must sell $500,000 of its Common Stock from time to time
if the price per share exceeds $10.00 and certain volume conditions are met.
Such sales will occur no more frequently than every 60 trading days. Any shares
sold under the equity line will be priced at 93% of the lesser of (i) the
average of the daily low trading price of the Common Stock for the 5 days
preceding the sale and (ii) the weighted average of daily low trading price of
the Common Stock during a valuation period. The purchase price will be subject
to further adjustment, up to a maximum discount of 15% depending on the length
of the valuation period - the period following the purchase date and ending on
the day, not to exceed 80 trading
<PAGE> 60
days, on which the aggregate value of open market trading during the period
equals or exceeds the aggregate value of open market trading during the 20 days
preceding the purchase date. As a commitment fee to Kepler for keeping the
equity line available, the Company has issued a warrant to purchase 250,000
shares of Common Stock (see Note 11). The Company's trading price has been below
the $7.00 minimum price requirement since September 1997 and, as a result, is
currently unable to draw under the equity line.
7. CAPITAL LEASE OBLIGATIONS AND CAPITAL LOANS
The Company has capital lease and capital loan credit lines available
totaling $3,222,000 at December 31, 1997, of which $598,000 was unused and
available at December 31, 1997. Under the terms of the master lease agreement,
ownership of the leased equipment reverts to the Company at the end of the lease
term.
As of December 31, 1997, future minimum lease payments under capital
leases and principal payments on capital loans are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES CAPITAL LOANS
-------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Year ending December 31:
1998 ................................................. $ 302 $ 293
1999 ................................................. 79 225
2000 ................................................. 54 168
2001 ................................................. 39 --
Thereafter ........................................... -- --
-------- --------
Total minimum lease and principal payments, respectively 474 $ 686
-------- ========
Less amount representing interest ...................... 61
--------
Present value of future payments ....................... 413
Less current portion of capital lease obligations ...... 263
--------
Non-current portion of capital lease obligations ....... $ 150
========
</TABLE>
The obligations under the capital leases and loans are secured by the
leasehold improvements and equipment financed, bear interest at fixed rates of
approximately 8% to 19% and are payable in monthly installments through
September 2001.
8. OPERATING LEASES
The Company leases two facilities under non-cancelable operating leases,
which expire in July 1999, with an option to extend the term of the lease for
one additional period of two years, and in March 1999, respectively. The future
minimum rental payments under the leases are as follows (in thousands):
<TABLE>
Years ending December 31:
<S> <C>
1998.......................................... $ 692
1999.......................................... 379
------
$1,071
======
</TABLE>
The Company recognizes rent expenses on a straight-line basis over the
term of each lease. Rent expense under operating leases was approximately
$639,000, $425,000 and $416,000 for the years ended December 31, 1997, 1996 and
1995, respectively.
<PAGE> 61
9. NOTES RECEIVABLE FROM STOCKHOLDERS
At December 31, 1997 and 1996, the Company held $75,000 in notes
receivable from certain stockholders for the purchase of the Company's common
stock. These notes bear interest at rates ranging from 6% to 7% annually and are
secured by the shares of common stock held by the borrowers. The notes are due
and payable, together with any unpaid interest, no later than either the fourth
or fifth anniversary of the note, or, for certain of these notes, within 30 days
of termination of employment with the Company.
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In December 1996, the Company issued 200 shares of 7% Series A
Redeemable Convertible Preferred Stock ("Series A Redeemable Preferred Stock"),
par value $.001 per share, in a Regulation S offering at a per share price of
$10,000 with a mandatory redemption date of December 4, 1999. Dividends and
principal on the Series A Redeemable Preferred Stock are convertible into common
stock at a conversion price equal to 85% of the average daily low price for the
ten trading days immediately preceding the conversion date. Each holder is
entitled to convert all or a portion of its Series A Redeemable Preferred Stock
into common stock at any time. Any Series A Redeemable Preferred Stock that upon
conversion would result in the cumulative issuance of common stock in excess of
20% of the outstanding common stock, will be automatically redeemed by the
Company for cash at a redemption price equal to 120% of the $10,000 original
purchase price plus accrued dividends at the rate of 7%. As of December 31,
1997, 140 shares of Series A Redeemable Preferred Stock plus accrued dividends
of $121,000 had been converted to 442,409 shares of common stock with a value of
$1,521,000.
11. STOCKHOLDERS' EQUITY
The Company is authorized to issue two classes of shares, common stock
(Common Stock) and preferred stock (Preferred Stock), each with par value of
$.001 per share. Prior to the Company's initial public offering, two series of
Preferred Stock, Series A and B were issued. In connection with the initial
public offering of the Company's common stock in February 1996, each previously
outstanding share of preferred stock (an aggregate of 3,965,137 shares) was
converted into one share of common stock and all previously authorized preferred
stock was eliminated. The Company's Articles of Incorporation was restated to
delete all references to Series A and B of Preferred Stock, and to authorize a
new class of 5,000,000 shares of Preferred Stock.
Warrants
In July 1995, the Company issued warrants to purchase 18,395 shares of
Series B Preferred Stock at an exercise price of $4.89 per share pursuant to a
capital lease and capital loan agreement. Each warrant for the purchase of
preferred stock was converted into a warrant for the purchase of one share of
common stock and such warrants are exercisable any time through the later of
seven years from grant date or five years from the Company's initial public
offering of common stock in February 1996.
In connection with a Master Bridge Loan Agreement with certain
stockholders of the company in December 1995, the Company issued warrants which
expire in December 2000 to purchase a total of 22,727 shares of common stock at
an exercise price of $11.00 per share.
Also in December 1995, in connection with a loan and security agreement
with a bank consortium, the Company issued warrants which expire in December
2002 to purchase 73,071 shares of common stock at an exercise price of $5.78 per
share.
<PAGE> 62
In conjunction with the Company's issuance of 200 shares of Series A
Redeemable Preferred Stock in December 1996 (see Note 10), warrants were issued
that allow the holders to purchase up to 20,000 shares of the Company's common
stock at an exercise price of $7.425 per share, with an expiration date of
December 4, 2001.
In conjunction with the Structured Equity Line Flexible Financing
Agreement in December 1996 (See Note 6), the Company issued a warrant on January
2, 1997 to purchase 250,000 shares of common stock at an exercise price of $8.25
per share. The warrant is exercisable over a period of 5 years from date of
issuance. On each of the first, second and third anniversaries of the beginning
of the commitment period, the Company will issue the Investor an additional
five-year warrant exercisable for a number of shares based on the amount of
equity line still available to the Company.
In conjunction with the Company's issuance of 1,810,000 shares in May
1997 to certain private investors, warrants were issued to purchase 905,000
shares of the Company's common stock at an exercise price of $9.08 per share.
These warrants will expire May 15, 2001.
Common stock
The Company has the right to repurchase, at the original issue price per
share, certain shares of common stock issued to employees, consultants,
investors and founders. This right generally expires ratably over a period of
time not greater than five years, in accordance with terms determined by the
Board of Directors.
At December 31, 1997 and 1996, outstanding shares of 36,202 and 154,786,
respectively, were subject to repurchase at an original issue price of $0.45 per
share, including shares issued pursuant to stock purchase rights under the 1994
Stock Plan (see Note 12).
Dividend restrictions
The Company's loan agreement with a bank lender prohibits the Company
from declaring or paying a dividend without the banks' prior written consent.
Common shares reserved for future issuance
The Company has reserved shares of common stock as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
--------- ---------
<S> <C> <C>
1994 Stock Plan .................. 1,706,467 1,353,347
1995 Employee Stock Purchase Plan 46,147 88,126
1995 Directors Stock Option Plan . 150,000 150,000
Non-plan stock options outstanding 38,863 --
Common stock warrants ............ 1,289,193 384,193
--------- ---------
3,230,670 1,975,666
========= =========
</TABLE>
In addition, the Company is required to reserve shares of common stock
for issuance upon the conversion of the Series A Redeemable Convertible
Preferred Stock based on the conversion formula. This amount was approximately
221,280 shares at December 31, 1997.
<PAGE> 63
12. STOCK PLANS
1994 Stock Plan
The Company's 1994 Stock Plan (the "Plan") authorizes the Company's
Board of Directors (the "Board") to grant incentive stock options, nonstatutory
stock options, and stock purchase rights for up to 2,000,000 shares of common
stock.
The options under this Plan expire no later than ten years from the date
of grant. The exercise price of the incentive stock options, nonstatutory stock
options and options granted to 10% shareholders shall be at least 100%, 85%, and
110%, respectively, of the fair value of the stock subject to the option on the
grant date. The price for shares purchased pursuant to stock purchase rights by
10% shareholders shall be at least 100% of the fair market value of the stock on
the date of grant.
The options generally become exercisable at such times as determined by
the Company's Board of Directors, but in no event at a rate of less than 20% per
year for a period of five (5) years from date of grant. Shares granted under the
Plan pursuant to stock purchase rights are generally subject to repurchase by
the Company at the original issue price per share. The Company's right to
repurchase these shares generally expires ratably over a period of time not
greater than five years.
1995 Director Stock Option Plan
The 1995 Director Stock Option Plan (the "Directors' Plan") was adopted
by the Board of Directors in December 1995. A total of 150,000 shares of Common
Stock has been reserved for issuance under the Directors' Plan. The Directors'
Plan provides for the grant of nonstatutory stock options to nonemployee
directors of the Company.
The Directors' Plan provides that each person who first becomes a
nonemployee director of the Company after the date of the Company's initial
public offering shall be granted a nonstatutory stock option to purchase 30,000
shares of Common Stock (the "First Option") on the date on which the optionee
first becomes a nonemployee director of the Company. The First Option was not
granted to any nonemployee director who was a director as of the date of the
offering. Thereafter, on the date of each annual meeting of the Company's
stockholders, each nonemployee director (including directors who were not
eligible for a First Option) shall be granted an additional option to purchase
7,500 shares of Common Stock (a "Subsequent Option") if, on such date, he or she
shall have served on the Company's Board of Directors for at least six months.
The Directors' Plan provides that the First Option shall become
exercisable in installments as to 25% of the total number of shares subject to
the First Option on each of the first, second, third and fourth anniversaries of
the date of grant of the First Option; each Subsequent Option shall become
exercisable in full on the first anniversary of the date of grant of that
Subsequent Option. The exercise price of all stock options granted under the
Directors' Plan shall be equal to the fair market value of a share of the
Company's Common Stock on the date of grant of the option. Options granted under
the Directors' Plan have a term of ten years. At December 31, 1997, 105,000
shares had been granted and outstanding at a weighted average price of $6.9643,
with 45,000 available for future grants.
<PAGE> 64
Non-Plan Stock Options
The Company may from time to time grant options outside one of its
qualified plans ("Non Plan Stock Options"). As of December 31, 1997, a total of
39,612 Non Plan Stock Options were granted. At December 31, 1997, 38,863 shares
were outstanding at a weighted average price of $4.7439 per share.
Activity under the Plan, the Directors' Plan and Non-Plan Stock Options
are summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------
SHARES WEIGHTED
AVAILABLE FOR NUMBER OF AVG. PRICE
GRANT SHARES PER SHARE
------------- --------- ----------
<S> <C> <C> <C>
Balance, December 31, 1994 .................. 223,803 57,772 $ 0.45
Additional shares authorized .............. 1,011,758 -- --
Stock purchase rights granted ............. (37,320) -- $ 0.45
Options granted ........................... (910,178) 910,178 $ 0.71
Options exercised ......................... -- (3,193) $ 0.45
Options and stock purchase rights canceled. 9,778 (8,655) $ 0.45
--------- ---------
Balance, December 31, 1995 .................. 297,841 956,102 $ 0.71
Additional shares authorized .............. 300,989 -- --
Options granted ........................... (196,540) 196,540 $ 8.76
Options exercised ......................... -- (62,302) $ 0.45
Shares repurchased ........................ 10,717 -- $ 0.45
Options canceled .......................... 57,154 (57,154) $ 0.45
--------- ---------
Balance, December 31, 1996 .................. 470,161 1,033,186 $ 2.04
Additional shares authorized .............. 500,000 -- --
Options granted ........................... (865,023) 904,635 $ 6.15
Options exercised ......................... -- (147,629) $ 0.67
Shares repurchased ........................ -- -- --
Options canceled .......................... 58,349 (58,349) $ 4.64
--------- ---------
Balance, December 31, 1997 ................. 163,487 1,731,843 $ 4.33
========= =========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- --------------------------------
WEIGHTED-AVG.
REMAINING WEIGHTED-AVG. WEIGHTED-AVG.
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICE SHARES LIFE (IN YEARS) PRICE SHARES PRICE
- -------------- ---------- --------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
$0.4448 - $ 0.4500 565,628 7.71 $0.44 282,725 $0.45
$2.2239 - $ 6.7500 524,775 9.22 $4.27 83,352 $2.81
$7.1250 - $11.0000 641,440 8.90 $7.80 122,793 $8.68
---------- ---- ----- ------- -----
$0.4448 - $11.0000 1,731,843 8.61 $4.33 488,870 $2.92
</TABLE>
For the years ended December 31, 1997 and 1996, the Company recorded
deferred compensation expense for the difference between the exercise price and
the deemed fair value of the Company's common
<PAGE> 65
stock, related to shares issued pursuant to stock purchase rights and options
granted in 1996 and 1995. These options were granted to provide additional
incentives to retain management and key employees. This deferred compensation
expense is being amortized over the related vesting period, generally a 48-month
period.
1995 Employee Stock Purchase Plan
The Company's 1995 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Board of Directors in December 1995. A total of 100,000
shares of Common Stock has been reserved for issuance under the Purchase Plan.
The Purchase Plan is administered by the Compensation Committee of the Board of
Directors. Employees (including officers and employee directors) of the Company,
or of any majority owned subsidiary designated by the Board of Directors, are
eligible to participate if they are employed by the Company or any such
subsidiary for at least 20 hours per week and more than 5 months per year. The
Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions, which may not exceed 15% of an employee's compensation, at a
price equal to the lower of 85% of the fair market value of the Company's Common
Stock at the beginning or end of the offering period. During 1997 and 1996,
53,853 and 11,874 shares, respectively, had been issued under the plan and as of
December 31, 1997, 46,147 shares were reserved for future issuance.
Pro Forma Information
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," in 1996. In accordance with
the provisions of SFAS No. 123, the Company applies APB Opinion No. 25 and
related interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation cost. If the Company had elected to
recognize compensation cost based on the fair value of the options granted at
grant date and including stock purchases under the 1995 Employee Stock Purchase
Plan as prescribed by SFAS No. 123, net loss and net loss per share would have
been increased to the pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
(In thousands except per share amounts) 1997 1996
---------- ----------
<S> <C> <C>
Net loss - as reported ............ $ (27,935) $ (18,514)
Net loss - pro forma .............. $ (29,287) $ (19,339)
Net loss per share - as reported... $ (2.69) $ (2.71)
Net loss per share - pro forma .... $ (2.81) $ (2.83)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Stock Option Plan Stock Purchase Plan
--------------------- ---------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Expected stock price volatility 60.0% 60.0% 60.0% 60.0%
Risk-free interest rate ....... 5.77% 5.91% 5.63% 5.48%
Expected life (in years) ...... 4.1 3.6 0.5 0.5
Expected dividend yield ....... 0.0% 0.0% 0.0% 0.0%
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility.
<PAGE> 66
Because the Company's options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of its options. The weighted average fair value of options granted during
1997 and 1996 was $3.1174 and $4.846 per share, respectively.
The effects on pro forma disclosures of applying SFAS 123 are not likely
to be representative of the effects on pro forma disclosures of future years.
Because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until 1998.
1997 Stockholder Rights Plan
In May 1997, the Company adopted a stockholder rights plan (the "Rights
Plan") which provides existing stockholders with the right to purchase one
one-thousandth of a share of the Company's Series B Participating Preferred
Stock, $0.001 par value, at an exercise price of $49 per one one-thousandth of a
preferred share in the event of certain changes in the Company's ownership. The
Company will be entitled to redeem the rights at $0.01 per right at any time on
or before the tenth day following acquisition by a person or group of 15% or
more of the Company's common stock. The Rights Plan may serve as a deterrent to
certain abusive takeover tactics which are not in the best interest of
stockholders. At December 31, 1997, 90,000 shares were designated and no shares
were issued and outstanding.
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
(In thousands except per share amounts) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net loss ................................................... $(27,935) $(18,514) $(10,372)
Preferred stock dividends .................................. (124) -- --
-------- -------- --------
Numerator for basic and diluted earnings per share --
loss to common stockholders .............................. (28,059) (18,514) (10,372)
Denominator:
Denominator for basic and diluted earnings per share --
weighted-average shares .................................. 10,412 6,825 877
Adjusted to reflect the effect of the assumed conversion
of preferred stock from date of issuance ................. 3,557
-------
Denominator for pro forma basic and diluted net loss
per share .............................................. 4,434
Basic and diluted net loss per share .......................... $ (2.69) $ (2.71)
======== ========
Pro forma basic and diluted net loss per share ................ $ (2.34)
========
</TABLE>
Options to purchase 1,731,843 shares of common stock at exercise prices ranging
from $0.4448 to $11.00, warrants to purchase 1,289,193 shares of common stock at
exercise prices ranging from $4.89 to $11.00,
<PAGE> 67
and 600 shares of redeemable convertible preferred stock, Series A were
outstanding during 1997 but were not included in the computation of diluted
earnings per share as their effect would be antidilutive.
13. INCOME TAXES
As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $59,700,000 and $12,600,000, respectively.
The Company also had federal and California research and development tax credit
carryforwards of approximately $1,300,000 and $1,000,000, respectively. The
federal net operating loss and credit carryforwards will expire at various dates
beginning in the year 2008 through 2012, if not utilized. The state of
California net operating losses will expire at various dates beginning in 1998
through 2002, if not utilized.
Utilization of the Company's net operating loss carryforwards and
credits may be subject to an annual limitation due to the "change in ownership"
provisions of the Internal Revenue Code of 1986 and similar state provisions.
The annual limitation may result in the expiration of net operating losses and
credits before utilization.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets for financial reporting and
the amount used for income tax purposes. Significant components of the Company's
deferred tax assets for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax assets
Net operating loss carryforward .... $ 21,000 $ 11,300
Capitalized research and development 2,400 1,200
Research credit .................... 1,900 800
Other - Net ........................ 600 1,200
-------- --------
Total Deferred Tax Assets .......... 25,900 14,500
Valuation allowance ................ (25,900) (14,500)
-------- --------
Net deferred tax assets ............... $ -- $ --
======== ========
</TABLE>
Due to the Company's lack of earnings history, the net deferred tax
assets has been fully offset by a valuation allowance. The net valuation
allowance increased by $11,400,000 and $7,200,000 for the fiscal years ended
December 31, 1997 and 1996, respectively.
<PAGE> 68
Exhibit Index
Exhibits
Number Description
- -------- -----------
3.1(1) Form of Amended and Restated Certificate of Incorporation.
3.2(1) Form of Bylaws.
3.3(5) Certificate of Designation of 7% Redeemable Convertible Preferred
Stock, Series A of Connective Therapeutics, Inc., as filed with the
Delaware Secretary of State on December 4, 1996.
3.4(11) Amendment to the Company's Amended and Restated Certificate of
Incorporation, as filed with the Delaware Secretary of State on May
15, 1997, changing the Company's name to Connetics Corporation.
3.5 Certificate of Designation of Rights, Preferences and Privileges of
Series B Participating Preferred Stock, as filed with the Delaware
Secretary of State on May 15, 1997. Reference is made to Exhibit
4.2.
4.1(1) Form of Common Stock Certificate.
4.2(12) Preferred Shares Rights Agreement, dated as of May 20, 1997, between
the Company and U.S. Stock Transfer Corporation, including the
Certificate of Designation of Rights, Preferences and Privileges of
Series B Participating Preferred Stock, the form of Rights
Certificate and the Summary of Rights attached thereto as Exhibits
A, B and C, respectively.
<PAGE> 69
10.1(1) Form of Indemnification Agreement with the Company's directors and
officers.
10.2(7)* 1994 Stock Plan, as amended, and form of Option Agreement.
10.3(7)* 1995 Employee Stock Purchase Plan, as amended, and form of
Subscription Agreement.
10.4(1)* 1995 Directors' Stock Option Plan and form of Option Agreement.
10.5(1) Third Amended and Restated Registration Rights Agreement dated
February 14, 1995 among the Registrant and certain security holders
of the Registrant and Amendments Nos. 1 and 2 thereto dated May 31,
1995 and September 28, 1995.
10.6(1)(2) License Agreement dated September 27, 1993, between Genentech, Inc.
and the Company, Amendment dated July 14, 1994, and side letter
agreement dated November 17, 1994.
10.8(1) Assignment and Assumption Agreement, dated June 3, 1994, by and
between the Company and XOMA Corporation.
10.9(1)(2) Technical Collaboration and Manufacturing Agreement, dated May 24,
1994, by and between the Company and Scios Nova Inc.
10.10(1)(2) Technology Acquisition Agreement dated June 3, 1994 by and between
the Company and XOMA Corporation, and License Agreement dated
February 27, 1990 by and between Arthur A. Vandenbark, Ph.D. and
XOMA Corporation.
10.11(1)(2) Agreement on Interferon Gamma-1B dated December 8, 1995 by and
between the Company and Genentech, Inc.
10.12(1) Equipment Lease Line, dated May 31, 1994 with Lease Management
Services, Inc.
10.13(1) Business Loan Agreement, dated July 18, 1995, between the Company,
Silicon Valley Bank and MMC/GATX Partnership No. 1.
10.14(1)(2) Research Collaboration and Assignment Agreement, dated July 1, 1994,
between the Company and Dr. Arthur A. Vandenbark.
10.17(1) Consulting Agreement dated November 17, 1993 between the Company and
Brian Seed.
10.18(1) Consulting Agreement dated November 17, 1993 between the Company and
Eugene Bauer.
10.19(1) Employment Agreement dated June 9, 1994 between the Company and
Thomas Wiggans.
10.20(1) Loan Agreements between the Company and Thomas Wiggans dated July
15, 1994 and August 1, 1994.
10.21(1) Letter Agreement with G. Kirk Raab dated October 1, 1995.
10.23(1) Facility Master Lease between the Company and Renault & Handley
dated February 9, 1994.
10.26(1) Loan and Security Agreement dated December 21, 1995 by and among the
Company, Silicon Valley Bank and MMC/GATX Partnership No. 1.
10.27(3)(2) Agreement on Relaxin Rights in Asia dated April 1, 1996 between the
Company and Mitsubishi Chemical Corporation (Exhibits A and B to
Exhibit 10.27 have been previously filed as Exhibit 10.6 above.
Confidential treatment has been granted as to certain portions of
Exhibit 10.6 by the SEC).
10.28(3)(2) Soltec License Agreement dated June 14, 1996.
10.29(4) Laboratory Services Agreement dated October 24, 1996.
10.30(4) Agreement with Dr. Edward Amento dated October 24, 1996.
10.31(4) Form of Directors and Officers Change in Control Agreement
10.32(5) Common Stock Purchase Agreement, dated December 4, 1996 by and among
the Company and certain investors.
10.33(5) Registration Rights Agreement, dated December 4, 1996 by and among
the Company and certain investors.
10.34(5) Securities Purchase Agreement, dated December 4, 1996 by and among
the Company and a certain purchaser.
10.35(5) Warrant, dated December 4, 1996 between the Company and a certain
purchaser.
10.36(6)(2) Asset Purchase Agreement dated December 2, 1996 between the Company,
SmithKline Beecham Corporation, SmithKline Beecham Pharma Inc.,
SmithKline Beecham Properties, Inc. and SmithKline Beecham
Inter-American Corporation.
10.37(6) Stock Issuance Agreement dated December 31, 1996 between the Company
and SmithKline Beecham Properties, Inc.
10.38(6) Secured Promissory Note dated December 31, 1996 issued to SmithKline
Beecham Corporation.
<PAGE> 70
10.39(6) Security Agreement dated December 31, 1996 between the Company and
SmithKline Beecham Corporation.
10.40(6)(2) Supply Agreement dated December 31, 1996 between the Company and
SmithKline Beecham Corporation.
10.42(8) Structured Equity Line Flexible Financing Agreement dated January 2,
1997 between the Company and Kepler Capital LLC.
10.43(8) Registration Rights Agreement dated January 2, 1997 between the
Company and Kepler Capital LLC.
10.44(9) Common Stock and Warrant Purchase Agreement dated May 15, 1997 by
and among the Company, Genentech, Inc. and certain investors.
10.45(9) Registration Rights agreement dated May 15, 1997 by and among the
Company and certain investors.
10.46(9) Form of Common Stock Purchase Warrant issued to certain investors on
May 15, 1997.
10.47(7)* Form of Notice of Stock Option Grant to G. Kirk Raab for stock
option issued in January 1997.
10.48(10) Secured Loan Agreement dated October 30, 1997 between the Company
and W. Scott Harkonen.
10.49(10)* Letter Agreement with Cynthia M. Butitta dated September 22, 1997.
10.50(10) Amendment dated November 13, 1997 to Secured Promissory Note dated
December 31, 1996 issued to SmithKline Beecham Corporation.
10.51(10) Letter Agreement dated November 26, 1997 between the Company and
Gerard Klauer Mattison & Co., Inc.
10.52(10)* Letter Agreement with John L. Higgins dated August 25, 1997.
10.53(10) Omnibus Agreement with SmithKline Beecham Corporation and related
entities dated December 18, 1997.
10.54(10) Canadian Asset Purchase Agreement with Pharmascience, Inc. dated
December 19, 1997.
10.55(10) Supply Agreement with Pharmascience, Inc. dated December 19, 1997.
10.56** Agreement on Relaxin dated January 19, 1998 by and between the
Company and Howard Florey Institute of Experimental Physiology and
Medicine.
10.57** License Agreement dated January 1, 1998 between the Company and
Soltec Research Pty Limited.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (see page 46).
27.1 Financial Data Schedule (EDGAR filed version only).
- ----------
* This item is a management compensatory plan or arrangement required to
be listed as an exhibit to this form pursuant to Item 601(a)(10)(iii) of
Regulation S-K.
** The Company has omited certain portions of this Exhibit and has
requested confidential treatment of such portions from the SEC.
1. Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-1 (File No. 33-80261) declared
effective by the Securities and Exchange Commission (the "SEC") on
January 31, 1996.
2. Certain portions of this Exhibit were granted confidential treatment
pursuant to an order from the SEC.
3. Incorporated by reference from an exhibit to the Company's Quarterly
Report on Form 10-Q (File No. 0-27406) filed with the SEC for the fiscal
quarter ended June 30, 1996.
4. Incorporated by reference from an exhibit to the Company's Quarterly
Report on Form 10-Q (File No. 0-27406) filed with the SEC for the fiscal
quarter ended September 30, 1996.
5. Incorporated by reference from an exhibit to the Company's Report on
Form 8-K (File No. 0-27406) dated December 4, 1996.
6. Incorporated by reference from an exhibit to the Company's Report on
Form 8-K (File No. 0-27406) dated January 15, 1997.
7. Incorporated by reference from an exhibit filed with Post-Effective
Amendment No. 1 to the Company's Registration Statement on Form S-8
(File No. 333-04985) filed with the SEC on June 30, 1997.
8. Incorporated by reference from an exhibit filed with the Company's
Annual Report on Form 10-K (File No. 0-27406) for the fiscal year ended
December 31, 1996.
<PAGE> 71
9. Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-3 (File No. 333-21941) filed with the
SEC on July 3, 1997.
10. Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form S-1 (File No. 333-41195) declared
effective by the SEC on December 15, 1997.
11. Incorporated by reference from an exhibit filed with the Company's
Current Report on Form 8-K (File No. 0-27406) filed on May 23, 1997.
12. Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form 8-A (File No. 0-27406) filed on May 23,
1997.
<PAGE> 1
EXHIBIT 10.56
Note: Certain confidential portions of this
document have been omitted and filed
separated with the Securities and Exchange
Commission.
AGREEMENT
This AGREEMENT ("Agreement") is made by and between Connetics
Corporation ("CNCT"), a corporation of the State of Delaware, having an address
at 3400 West Bayshore Road, Palo Alto, California, U.S.A., and the Howard Florey
Institute of Experimental Physiology and Medicine ("HFI"), a statutory
corporation incorporated by an Act of the Parliament of the State of Victoria
(being Act No. 8108 of 1971 as amended by Act No. 9728 of 1982) of Royal Parade,
Parkville, Melbourne in the State of Victoria, Australia.
RECITALS
WHEREAS, HFI has granted to Genentech, Inc. ("GNE") an exclusive,
worldwide license to certain patents and know-how owned by HFI pertaining to the
hormone(s) known as Relaxin pursuant to the License Agreement made on December
31, 1982 and re-executed as amended and varied as of June 30, 1987 (the "HFI/GNE
Agreement");
WHEREAS, GNE has granted to CNCT an exclusive sublicense under its
license from HFI pursuant to the License Agreement, effective September 27,
1993, as amended July 14, 1994 (the "GNE/CNCT Agreement"), and the Consent to
Sublicense signed by HFI on November 18, 1993;
WHEREAS, pursuant to the GNE/CNCT Agreement, in partial satisfaction of
its obligations to GNE, CNCT has agreed to pay directly to HFI the royalties due
HFI pursuant to the HFI/GNE Agreement or such other payment as may be agreed to
between HFI and CNCT, acknowledging that HFI and CNCT may desire to restructure
such payments; and
WHEREAS, HFI and CNCT, desiring to cooperate towards maximizing the
value of Relaxin, wish to restructure such payment terms and obligations of CNCT
to HFI as set forth below, which during the term of this Agreement will be in
full satisfaction of CNCT's (and, to that extent GNE's) obligations to HFI,
respectively pursuant to Section 4.1.1 (as amended by Paragraph 26) of the
GNE/CNCT Agreement and Clauses 5.1 and 5.2 of the HFI/GNE Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
1.0 DEFINITIONS.
The following defined terms, and other capitalized terms defined herein,
shall govern the interpretation of this Agreement. Except as otherwise provided
herein, capitalized defined terms
<PAGE> 2
HFI / CNCT Agreement
Page 2
shall be interpreted consistent with their definition in the HFI/GNE Agreement
and the GNE/CNCT Agreement, or in the case of conflict therebetween shall be
interpreted consistent with the HFI/GNE Agreement.
1.1 "Net Revenue" shall mean the gross payments received by CNCT or an
Affiliate of CNCT from a Partner on account of a Licensed Product, less: (a) any
tax impost or other governmental charge assessed against such payments; and (b)
in the case of milestone payments received by CNCT or an Affiliate of CNCT from
a Partner, the extent to which such payment constitutes reimbursement of genuine
research and development costs reasonably incurred by CNCT or an Affiliate of
CNCT (including but not limited to expenses for reagents, materials, equipment,
salaries, testing, clinical trials, insurance and any overhead reasonably
attributable to such research and development).
1.2 "Net Sales Price" shall mean the gross invoiced price from the sale
of a Licensed Product to an unaffiliated third party purchaser less: (a) actual
cost of packaging which has been included in the gross invoiced price; (b) the
actual cost of freight and insurance which has been included in the gross
invoiced price; (c) trade, prompt payment and quantity discounts actually given
by CNCT in relation to the Licensed Product at the normal commercial rates usual
in the pharmaceutical industry; (d) any tax imposed or other governmental charge
(other than an income or value added tax) charged or levied on the sale,
transportation, or delivery of a Licensed Product and borne by CNCT; (e) credits
or allowances actually given by CNCT arising from returned Licensed Product or
retrospective price adjustments to Licensed Products, and (f) rebates and
adjustments actually given or made, including charge backs.
1.3 "Partner" shall mean a third party who has entered into an agreement
with CNCT for the manufacture, use or sale of a Licensed Product.
1.4 "Valid Claim" shall mean a claim of an issued, unexpired patent
included in the Licensed Patents, which has not been abandoned for any reason,
and which, but for the license to CNCT would be infringed by CNCT's or a
Partner's manufacture, use or sale of a product, which claim has not been held
invalid or unenforceable by a decision of an administrative agency or a court of
competent jurisdiction, unappealable or unappealed within the time allowed for
appeal, and which has not been admitted to be invalid through reissue,
reexamination or disclaimer.
1.5 "Up-front Payment(s)" shall mean Net Revenue (whether in money or
money's worth) received by CNCT or an Affiliate of CNCT from a Partner in the
nature of a one-time license fee, option fee or like payment on account of the
grant by CNCT or such Affiliate of a license or an option to obtain a license to
manufacture, use or sell Relaxin (excluding key milestone and genuine research
and development payments).
<PAGE> 3
HFI / CNCT Agreement
Page 3
2.0 COMMITTED RESEARCH FUNDING
CNCT will pay to HFI the following amounts (in U.S. Dollars) to fund
research by HFI each year after the execution of this Agreement ("Committed
Research Funding"):
(a) 1998: $115,000.00,
(b) 1999: $120,750.00,
(c) 2000: $126,787.50,
(d) 2001: $133,126.87, and
(e) 2002: $139,783.21.
Such payments shall be rendered to HFI by CNCT in U.S. Dollars in two (2)
installments each year, each installment to be paid within ten (10) business
days of the beginning to each calendar half, the first payment due January 20,
1998. HFI shall, in good faith, employ reasonable efforts to use the Committed
Research Funding provided by CNCT herein for the purpose of funding research on
Relaxin.
3.0 EQUITY PARTICIPATION
3.1 CNCT shall provide equity in the form of common stock (the
"Securities") at a value (in U.S. Dollars) of 1.5 times the average trading
price of CNCT common stock over the twenty (20) days prior to a particular
issuance in accordance with the following schedule ("Equity Participation"):
(a) $10,000.00 on the Effective Date,
(b) $10,500.00 on the 1999 anniversary of the Effective Date,
(c) $11,025.00 on the 2000 anniversary of the Effective Date,
(d) $11,576.25 on the 2001 anniversary of the Effective Date, and
(e) $12,155.06 on the 2002 anniversary of the Effective Date.
Such equity shall be evidenced by certificate therefor, to be delivered to HFI
within one (1) month of the date due.
3.2 With regard to the "Securities", HFI hereby represents and warrants
that:
(a) Purchase Entirely for Own Account. The Securities will be
acquired for investment for HFI's own account, and not with a view to
the resale or distribution of any part thereof unless such resale or
distribution is in compliance with the United States Securities Act of
1933, as amended (the "Act"), and any rules or regulations promulgated
thereunder, and, except as provide above, that HFI has no present
intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, HFI further
represents that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participation to
such person or to any third person, with respect to any of the
Securities.
<PAGE> 4
HFI / CNCT Agreement
Page 4
(b) Disclosure of Information. HFI believes it has received all
the information it considers necessary or appropriate for deciding
whether to acquire the Securities. HFI further represents that it has
had an opportunity to ask questions and receive answers from CNCT
regarding the terms and conditions of the Securities.
(c) Restricted Securities. HFI understands that the Securities
are characterized as "restricted securities" under the United States
federal securities laws inasmuch as they are being acquired from CNCT in
a transaction not involving a public offering and that, under such laws
and applicable regulations, such Securities may be resold without
registration under the Act only in certain limited circumstances.
(d) Regulation S Representations and Warranties. HFI represents
and warrants that is not a "U.S. Person" as that term is defined in
Regulation S promulgated under the Act and is not acquiring the
Securities for the account or benefit of a U.S. Person. Under Regulation
S, with certain exceptions, "U.S. Person" means: (i) any natural person
resident in the U.S.; (ii) any partnership or corporation organized or
incorporated under the laws of the U.S.; (iii) any estate of which any
executor or administrator is a U.S. Person; (iv) any trust of which any
trustee is a U.S. Person; (v) any agency or branch of a foreign entity
located in the U.S.; (vi) any non-discretionary account or similar
account (other than an estate or trust) held by a dealer or other
fiduciary for the benefit or account of a U.S. Person; (vii) any
discretionary account or similar account (other than an estate or trust)
held by a dealer or other fiduciary organized, incorporated, or (if an
individual) resident in the U.S.; and (viii) any partnership or
corporation if: (A) organized or incorporated under the laws of any
foreign jurisdiction; and (B) formed by a U.S. Person principally for
the purpose of investing in securities not registered under the Act,
unless it is organized or incorporated and owned by accredited investors
(as defined in Rule 501(a) under the Act) who are not natural persons,
estates or trusts.
(e) Further Limitations on Disposition. Without in anyway
limiting the representations set forth above, HFI further agrees that it
will not make any disposition of all or any portion of the Securities
unless and until the transferee and any subsequent transferee has agreed
in writing for the benefit of CNCT to be bound by the terms of this
Section 3.2, and;
(i) There is then in effect a Registration
Statement under the Act covering such proposed disposition and such
disposition is made in accordance with such Registration Statement;
(ii) Such disposition is in accordance with
Regulation S promulgated under the Act; or
(iii) HFI shall have notified the Company of the
proposed disposition and shall have furnished CNCT with a detailed
statement of the circumstances
<PAGE> 5
HFI / CNCT Agreement
Page 5
surrounding the proposed disposition, and shall have furnished CNCT
with an opinion of counsel, reasonably satisfactory to CNCT, that such
disposition will not require registration of such securities under the
Act.
(f) Legends. It is understood that the certificates evidencing
the Securities may bear the following legend:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD
OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE
OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH
SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE SATISFACTORY TO THE COMPANY THAT SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT
OR UNLESS SOLD IN FULL COMPLIANCE WITH THE RULES PROMULGATED
UNDER THE ACT."
3.3 With regard to the "Securities", CNCT hereby represents and warrants
that:
(a) the Securities will be validly issued by CNCT to HFI;
(b) the Securities will be fully paid and will not oblige HFI to
pay any amount whatsoever to CNCT in respect of the Securities;
(c) the Securities will be issued to HFI without any encumbrance
whatsoever being attached to them (except as set forth in Section 3.2);
and
(d) the representations and warranties of Section 3.2 are
required for compliance with U.S. law.
4.0 TERMINATION OF COMMITTED RESEARCH FUNDING AND EQUITY PARTICIPATION
CNCT's obligation to pay to HFI Committed Research Funding and Equity
Participation pursuant to Articles 2.0 and 3.0 respectively shall cease
immediately on the date of the first arms' length sale of a Licensed Product by
CNCT or a Partner to a third party forming part of a continuous program or
campaign designed to market the Licensed Product (after all required regulatory
approvals have been granted therefor). For the purpose of this Article 4.0, the
date of first commercial sale shall be the date when a Licensed Product is
transferred from the manufacturing facilities for such Licensed Product to a
common carrier bound for delivery to a customer. Any payment of Committed
Research Funding and Equity Participation by CNCT prior to the date of first
commercial sale of a Licensed Product shall not be creditable against future
royalties due to HFI under Article 5.0.
<PAGE> 6
HFI / CNCT Agreement
Page 6
5.0 UP-FRONT PAYMENTS AND ROYALTIES
5.1 Sale of Licensed Product by CNCT. CNCT shall pay HFI a royalty of
[1] percent [1] of the Net Sales Price for the sale by CNCT of any Licensed
Product in each country where such Licensed Product is within the scope of a
Valid Claim of one or more Licensed Patents in such country.
5.2 Revenue Received from Partners.
(a) CNCT shall pay HFI [1] percent [1] of Up-front Payments, or
in the case of a payment received for multiple purposes of the
proportion that constitutes an Up-front Payment, if any.
(b) CNCT shall pay HFI [1] percent [1] of the Net Revenues, if
any: (i) from payments received by CNCT from a Partner for the
achievement of key development milestones (e.g., initiation of Phase III
studies, BLA filing and approval) for Licensed Products; and/or (ii)
from royalties received by CNCT from a Partner on account of the sale by
the Partner of any Licensed Product in each country where such Licensed
Product is within the scope of a Valid Claim of one or more Licensed
Patents in such country.
(c) No payment shall be owed to HFI by CNCT based upon any other
revenues received by CNCT from a Partner, including but not limited to,
reimbursements and ongoing payments or support for research and
development, technology transfer, research material transfer and
manufacturing scale-up.
5.3 Payment. CNCT shall within one hundred twenty (120) days after the
last day of each calendar quarter provide HFI with a statement, in writing,
setting forth:
(a) by country: (i) the quantities of Licensed Product sold by
CNCT, (ii) the gross sales price and the corresponding Net Sales Price
of all such Licensed Product, and (iii) a calculation of the royalties
payable to HFI pursuant to Section 5.1; and
(b) by Partner (i) the Up-front Payments, gross revenue and
corresponding Net Revenue received by CNCT pursuant to Section 5.2, and
(ii) a calculation of the royalties payable to HFI pursuant to Section
5.2.
CNCT's statement shall be accompanied by evidence of the deposit in U.S. Dollars
of the amounts due HFI for such calendar quarter to the account of HFI at such
bank in the U.S. as designated by HFI. The Net Sales Price and Net Revenue shall
first be calculated in the currency
- ---------
(1) Confidential treatment has been requested for the language which has been
omitted. All such omitted material has been filed separately with the SEC.
<PAGE> 7
HFI / CNCT Agreement
Page 7
in which the sales were made or the revenues were received and then directly
converted into U.S. Dollars at the exchange rate reported in the U.S. Edition of
the Wall Street Journal (or other publication chosen by the parties by mutual
consent from time to time) for the last business day of the quarterly period for
which such payment is due.
5.4 Audit. CNCT shall keep complete and accurate records (in conformity
with good accounting practice) relating to the calculation of the amounts due
HFI pursuant to Sections 5.2 and 5.3 for a period of three (3) years following
the closing date of the period to which they refer. Upon reasonable notice to
CNCT, HFI shall have the right to have an independent certified public
accountant, selected by HFI and reasonably acceptable to CNCT, audit CNCT's
records, during normal business hours, to verify the amounts payable by CNCT to
HFI; provided, however, that such audit shall not take place more frequently
than once a year and shall not cover such records for more than the preceding
three (3) years. The accountant shall only report to HFI as to the accuracy of:
(a) the payments made by CNCT to HFI; and (b) in the event of any inaccuracy,
the correct amounts thereof. CNCT shall promptly pay to HFI the amount of any
underpayment determined in such audit. Such audit shall be at HFI's expense
unless the audit identifies greater than five percent (5%) error in the total
amounts due to HFI for the audited period, in which case such audit shall be at
CNCT's expense. The provisions of this Section 5.4 shall apply, mutatis
mutandis, to the extent applicable in any agreement providing for a royalty- or
payment-generating transaction hereunder between CNCT and a Partner; upon
request, CNCT shall provide HFI a copy of such agreement, except that CNCT may
redact such copy to the extent necessary for compliance with its confidentiality
or related obligations thereunder.
5.5 The provisions of Clause 5.4 of the HFI/GNE Agreement shall govern
disposals of Licensed Product by other than bona fide arms length transactions.
Notwithstanding anything herein to the contrary, no royalty or payment shall be
payable to HFI by CNCT with respect to any Licensed Products which are used or
provided, free of charge: (a) to scientific institutions for use solely in
scientific research; (b) to governmental authorities for use in testing or
evaluation; (c) for use in bona fide pre-clinical and clinical trials; (d) to
HFI; (e) in reasonable and customary amounts for post approval evaluations by
physicians; and (f) in reasonable and customary amounts to third parties, in the
course of bona fide promotional activities for Licensed Products and as free
"trade goods," including for indigent patient programs. No royalty or payment
shall be made with respect to any sale or transfer of a Licensed Product between
and among CNCT, its Affiliates, its sub-licensees and their distributors where
such sale or transfer is made in the course of a subsequent royalty- or
payment-generating transaction hereunder. No royalty or payment shall be made
with respect to any transaction between CNCT or an Affiliate of CNCT and a
Partner that does not entail a Licensed Product. No multiple royalties shall be
payable on account of the sale of any Licensed Product, regardless of whether or
not more than one patent, or patent and other intellectual property rights,
exist(s) covering such Licensed Product in any country.
<PAGE> 8
HFI / CNCT Agreement
Page 8
6.0 MISCELLANEOUS.
6.1 Term. The term of this Agreement shall commence upon the date of
execution of the last of the parties to sign ("Effective Date") and continue in
full force and effect until the termination or expiration of: (a) the HFI/GNE
Agreement; or (b) the GNE/CNCT Agreement, whichever event is earlier. Upon
termination or expiration of this Agreement, all rights and obligations of the
parties herein shall cease.
6.2 Effect. The parties hereby agree that the payment terms set forth
herein shall, during the term of this Agreement, be in lieu of and in full
satisfaction of any and all payment obligations arising during the term of this
Agreement and due HFI under Clauses 5.1 and 5.2 of the HFI/GNE Agreement
resulting from the sublicense to CNCT of the Licensed Patents and Licensed
Know-How pursuant to the GNE/CNCT Agreement. The parties acknowledge that CNCT
shall not be liable to HFI for any other payment obligations (under Clauses
3.3.6(c), 5 or any other provision in the HFI/GNE Agreement) incurred by GNE or
any third party. Other than as expressly provided herein, the respective rights,
duties and obligations of HFI, GNE and CNCT pursuant to the HFI/GNE and GNE/CNCT
Agreements are not altered, amended, changed or affected by this Agreement.
6.3 Governing Law. This Agreement is executed and delivered in, and
shall be construed and enforced in accordance with the domestic laws of the
State of California, U.S.A., and shall be binding upon and shall inure to the
benefit of the respective successors and assigns of the parties to this
Agreement.
6.4 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
6.5 Integration. The parties have, in this Agreement and the HFI/GNE and
GNE/CNCT Agreements, incorporated all representations, warranties, covenants,
commitments and understandings on which they have relied in entering into this
Agreement and, except as provided herein, the parties make no covenants or other
commitments to the other concerning their future actions. Accordingly, this
Agreement (and to the extent applicable, the HFI/GNE and GNE/CNCT Agreements):
(a) constitutes the entire agreement and understanding between
the parties, and there are no promises, representations, conditions,
provisions or terms relating to it other than as set forth in this
Agreement, and
(b) supersedes all previous understandings, agreements and
representations between the parties, written or oral,
relating to the subject matter of this Agreement.
<PAGE> 9
HFI / CNCT Agreement
Page 9
6.6 Assignment. This Agreement shall be binding on the parties hereto
and their successors and assigns; provided, however, that neither party shall
assign or transfer, in whole or part, this Agreement or any of its rights or
obligations arising hereunder without the prior written consent of the other
party, which shall not be unreasonably withheld. Any purported assignment
without such consent shall be null and void.
6.7 Waivers and Amendments. No failure or delay by either party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial waiver thereof include any other right,
power or privilege. This Agreement may not be amended, changed, discharged or
terminated except by a written document signed by duly authorized officers of
the parties.
6.8 Severability. In the event that any provision of this Agreement
shall be unenforceable or invalid under any applicable law or be so held by
applicable court decision, such unenforceability or invalidity shall only apply
to such provision and shall not render this Agreement unenforceable or invalid
as a whole; and, in such event, such provision shall be modified or interpreted
so as to best accomplish the objective of such unenforceable or invalid
provision within the limits of applicable law or applicable court decision and
the manifest intent of the parties hereto.
6.9 Headings. The headings used in this Agreement are for convenience
only and shall not be used to construe or interpret this Agreement.
6.10 Notification to GNE. CNCT shall, upon receipt of a fully executed
original of this Agreement, provide notice thereof to GNE by delivering a true
and correct copy to GNE in accordance with the notice provisions of the GNE/CNCT
Agreement.
[Signature Page Follows]
<PAGE> 10
HFI / CNCT Agreement
Page 10
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives.
THE COMMON SEAL OF THE
HOWARD FLOREY INSTITUTE OF
EXPERIMENTAL PHYSIOLOGY
AND MEDICINE WAS HEREUNTO AFFIXED
BY AUTHORITY OF THE BOARD
/s/ C.B. Goode Board Member
- -------------------------
Print Name C.B. Goode
----------------------------
Date January 19, 1998
----------------------------------
/s/ F.A.O. Mendelsohn Board Member
- -------------------------
Print Name F.A.O. Mendelsohn
----------------------------
Date January 19, 1998
----------------------------------
CONNETICS CORPORATION
By /s/ Thomas G. Wiggans
------------------------------------
Thomas G. Wiggans
President & CEO
Date: January 19, 1998
---------------------------------
<PAGE> 1
EXHIBIT 10.57
NOTE: CERTAIN CONFIDENTIAL PORTIONS OF THIS
AGREEMENT HAVE BEEN OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.
LICENSE AGREEMENT
THIS AGREEMENT, effective January 1, 1998, is between Soltec Research PTY
Limited ("SOLTEC"), an organization organized under the laws of Australia
(A.C.N. 006 363 891), having an address at 8 Macro Court, Rowville, Victoria
3178 Australia and Connetics Corporation ("CONNETICS"), a corporation organized
under the laws of Delaware, having an address at 3400 West Bayshore Road, Palo
Alto, California 94303 U.S.A.
WHEREAS, SOLTEC owns or is licensed under all rights of whatsoever nature for
the Territory for a clobetasol propionate quick-break foam (defined below as the
"Product"); and
WHEREAS, pursuant to the Exclusive Option Letter Agreement dated March 25, 1996,
as amended and the Feasibility Evaluation Agreement dated March 5, 1997
(collectively attached as Exhibit A), CONNETICS (under its former name,
Connective Therapeutics, Inc.) has acquired from SOLTEC an exclusive Option for
a license to the exclusive rights to certain Technology, including the right to
grant sub-licenses, under SOLTEC's entire rights in and to the Product for the
Territory; and
WHEREAS, CONNETICS wishes to exercise its Option for the Product;
NOW, THEREFORE, IT IS HEREBY AGREED as follows:
1. DEFINITIONS
1.1 "Affiliate" shall mean in respect of either party any corporation or
business entity controlled by, controlling, or under common control with
SOLTEC or CONNETICS, respectively. For this purpose "control" shall mean
the direct or indirect beneficial ownership of at least fifty percent
(50%) of the voting stock of, or at least fifty percent (50%) interest
in the income of, such corporation or other business entity, or such
other relationship as, in fact, constitutes actual control.
1.2 "Market Exclusivity" shall mean the absence of sales of a clobetasol
propionate quick-break foam or Equivalent quick break foam product by
any party other than CONNETICS, its Affiliates or its sub-licensees. The
determination as to whether of any such product is "Equivalent" shall be
made in good faith, including comparison of its formulation,
characteristics and positioning against that of the Product.
1.3 "MEDEVA" shall mean Medeva PLC, having a registered office at 10 St.
James's Street, London SW1A 1EF England, i.e., the organization that is
SOLTEC's assignee for the Patent Rights.
1.4 "Territory" shall mean the NAFTA countries (i.e., The United States of
America, its territories and posessions, Canada and Mexico). Upon
conclusion of SOLTEC's negotiations with MEDEVA (as referenced in
Section 2.2) the parties shall confer in
<PAGE> 2
SOLTEC/CONNETICS
Clobetasol License Agreement
Page 2
good faith on expanding the Territory (and, as appropriate, other
provisions corresponding to such expanded Territory) to include such of
the other the countries of the world for which the Product, the Product
Information, and a license under national applications corresponding to
PCT/GB96/00490 (if necessary) are available, any such expansion of the
Territory to be memorialized by an amendment to this Agreement signed by
SOLTEC and CONNETICS.
1.5 "NDA" shall mean a new drug application filed with the United States
Food and Drug Administration ("FDA").
1.6 "Net Sales" shall mean the proceeds actually received by CONNETICS and
its Affiliates from the sale of Product to purchasers who are not
Affiliates, less:
(a) trade, quantity and cash discounts actually allowed and taken;
(b) credits actually allowed on account of the rejection or return or
billing error relating to any Product previously billed and paid;
(c) freight, other transportation and insurance costs;
(d) taxes imposed on account of such sale (including, without
limitation, sales, value-added and distribution taxes); and
(e) rebates and adjustments, including charge backs.
1.7 "Patent(s)" shall mean all patents, and patent applications and any
patents issuing therefrom, together with any extensions, reissues,
reexaminations, substitutions, renewals, divisions, continuations,
continuations-in-part and counterparts thereof or therefor, licensed to
or owned by SOLTEC presently or hereafter during the term of this
Agreement, that directly claim or relate to the manufacture, use or sale
of the Product, including without limitation, PCT/GB96/00490, filed
March 1, 1996 and corresponding national applications U.S. Serial No.
08/913,144, Canada Serial No. _________ and Mexico Serial No. 976698.
1.8 "Product" shall mean clobetasol propionate quick-break foam,
substantially as described in the Product Specification (copy attached
as Exhibit B).
1.9 "Product Information" shall mean all information relating to the
specification of the Product and information relating to the manufacture
(including method, conditions, and process equipment), testing
(including quality control standards, assay methods and stability
studies), storage and use of the Product now or hereafter during the
term of this Agreement in the possession or under the control of SOLTEC.
1.10 "Proprietary Information" shall mean any information of value, not
generally known to the public, including (but not limited to):
(a) the Product Information; the development status of the Product;
Product indications and modes of administration; technical
information, such as clinical, biological, pharmaceutical and
characterizing data; and know-how; and
(b) business information, such as reports; records; customer lists;
supplier lists; marketing and sales plans; financial information;
costs; and pricing information.
<PAGE> 3
SOLTEC/CONNETICS
Clobetasol License Agreement
Page 3
1.11 "Quarter" shall mean in respect of each calendar year, a period of three
consecutive calendar months beginning January 1, April 1, July 1 and
October 1 and ending March 31, June 30, September 30 and December 31,
respectively.
1.12 "Transfer Date" shall mean January 1, 1998.
1.13 "Valid Claim" shall mean a claim of an issued, unexpired Patent in the
Territory that has not been abandoned for any reason, which, but for the
license to CONNETICS hereunder would be infringed by CONNETICS'
manufacture, use or sale of a Product, which claim has not been held
invalid or unenforceable by a decision of a court of competent
jurisdiction, unappealable or unappealed within the time allowed for
appeal, and which has not been admitted to be invalid through reissue,
reexamination or disclaimer.
1.14 "Up-front Payment(s)" shall mean payments received by CONNETICS from a
sub-licensee in the nature of license fees, option fees and like
payments on account of the grant of a license or an option to obtain a
license to manufacture use or sell the Product (excluding payments to
reimburse or defray the direct costs of CONNETICS' research and
development on the Product).
1.15 "Net Revenue" shall mean the gross revenue received by CONNETICS from a
sublicensee in respect of such sublicensee's sales of Product, less any
tax impost or other governmental charge assessed against such revenue
(other than an income tax).
1.16 The phrase "duly authorized representatives" shall mean Affiliates,
assignees, sub-licensees, consultants, contractors or the like, as
authorized in writing from time to time by CONNETICS, as appropriate
from the context of usage.
1.17 "Commencement of Commercial Marketing" shall mean CONNETICS first arms'
length sale of the Product to a third party forming part of a continuous
program or campaign designed to market the Product in the Territory
during the term of this Agreement.
1.18 "Technology" shall have the meaning as set forth in the Exclusive Option
Letter Agreement attached hereto as Exhibit A.
2. LICENSE GRANT/ACQUISITION OF RIGHTS
2.1 With effect from the Transfer Date and for the consideration referred to
in Section 5 below SOLTEC hereby exclusively licenses the following
rights in the Territory free from all liens, interests or equities,
charges and encumbrances, namely: the Product and the Product
Information.
2.2 With effect from the Transfer Date (prospectively or retroactively) and
for the consideration referred to in Section 5 and, to the extent
required to enable CONNETICS to develop, manufacture, use and/or sell
the Product directly or indirectly, SOLTEC hereby grants (or agrees to
grant) to CONNETICS an exclusive license under the Patents in the
Territory with the right to sub-license, and a non-exclusive license
under
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SOLTEC/CONNETICS
Clobetasol License Agreement
Page 4
the Patents to have the Product manufactured outside the Territory. To
the extent necessary for the foregoing, SOLTEC agrees to use its best
efforts to obtain the grant of such license rights from MEDEVA
(including substantially the representations, warranties and provisions
as set forth in Exhibit C) without obligation of CONNETICS to make any
payments in addition to those required pursuant to Section 5 of this
Agreement; SOLTEC shall provide CONNETICS with a copy of any agreement
with MEDEVA concerning such license rights promptly after its execution.
2.3 SOLTEC undertakes to do all such acts and provide all such formal
licenses as may be legally permissible and appropriate to ensure that
CONNETICS is licensed under all SOLTEC's rights (including
sub-contracting and sub-licensing) to use, manufacture, distribute and
market, directly or indirectly, the Product in the Territory as from the
Transfer Date.
3. TECHNOLOGY TRANSFER AND ASSISTANCE
3.1 Promptly after the Transfer Date SOLTEC shall complete the transfer and
communication of the Product Information to CONNETICS. Until such
transfer is completed, SOLTEC will allow CONNETICS or its duly
authorized representatives to inspect and/or to be provided with copies
of all such information.
3.2 At CONNETICS' request, SOLTEC shall promptly provide to CONNETICS such
technical assistance and the services of its suitably qualified staff as
may reasonably be required to assist CONNETICS or its duly authorized
representatives to acquire a proper understanding of and use the Product
Information, whether at CONNETICS' premises, at SOLTEC's premises, or at
such other locations as may be mutually agreed to. The obligation to
provide such assistance shall terminate twelve months after the
beginning of manufacture of the Product by or for CONNETICS.
3.3 Of the technical assistance and services provided for in Section 3.2,
included in the compensation payable to SOLTEC pursuant to Sections 5.1
and 5.2 and not subject to any additional compensation by CONNETICS
shall be:
1. Provision of the formula, manufacturing methods, test
specifications, packaging specification and raw material
specifications developed for the Product under the Feasibility
Evaluation Agreement.
2. Written reports on formulation development and stability studies
conducted by SOLTEC as part of the development process including
the feasibility study, to the extent necessary for inclusion with
CONNETICS' regulatory submissions.
3. Review and comment on drafts of appropriate sections in
CONNETICS' regulatory submissions.
4. Information on technical improvements to the Products as and when
they become available.
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SOLTEC/CONNETICS
Clobetasol License Agreement
Page 5
5. Participation in the drafting, prosecution, maintenance and
enforcement of patents as provided for in Sections 6.2 to 6.6 and
Exhibit C.
6. Safety data and post-marketing information as provided for in
Section 4.3.
3.3 Of the technical assistance and services provided for in Section 3.2,
the following shall be compensated by CONNETICS at the rate of A$150.00
per person hour plus out of pocket expenses (e.g., materials, coach
class transportation, lodging and meals):
1. Additional experimentation addressing manufacturing problems,
formulation trouble-shooting and the like, if any.
2. Prompt responses to CONNETICS' or manufacturer's queries with
regard to the technology.
The first forty (40) person hours attributable to the foregoing shall be
provided as included in the compensation payable to SOLTEC pursuant to
Sections 5.1 and 5.2 and not subject to any additional compensation by
CONNETICS.
4. PRODUCT DEVELOPMENT
4.1 It shall be CONNETICS' responsibility to apply for and obtain all
governmental licenses, registrations, authorizations and approvals
required for the purposes of manufacturing, packaging, advertising,
selling or using the Product in the Territory.
4.2 All governmental licenses, registrations, authorizations and approvals
required for the purposes of manufacturing, packaging, advertising,
selling or using the Product in the Territory shall be and remain the
property of CONNETICS.
4.3 CONNETICS and SOLTEC shall make available to each other during the term
of this Agreement all safety data obtained, including any details
regarding complaints and adverse event reports relating to the use of
the Product.
5. CONSIDERATION
5.1 CONNETICS agrees to pay SOLTEC a "License Fee" of [1] U.S. Dollars [1]
payable as follows: [1] U.S. Dollars [1] upon signing this License
Agreement, [1] U.S. Dollars [1] upon filing of CONNETICS' NDA for a
Product, and [1] U.S. Dollars [1] upon approval of CONNETICS' NDA for a
Product, each such payment due within one (1) month of CONNETICS'
accomplishment of the respective milestone.
5.2 CONNETICS will pay SOLTEC a royalty on Net Sales of Product, Net Revenue
and Up-front Payments in the Territory as follows:
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SOLTEC/CONNETICS
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Page 6
(a) [1] percent [1] of Net Sales by CONNETICS or an Affiliate of
Product in a country in the Territory where such Product is
covered by a Valid Claim of a Patent;
(b) [1] percent [1] of Net Sales by CONNETICS or an Affiliate of
Product in a country in the Territory where such Product is not
covered by a Valid Claim of a Patent, but where CONNETICS retains
Market Exclusivity;
(c) [1] percent [1] of Net Sales by CONNETICS or an Affiliate of
Product in a country in the Territory where such Product is not
covered by a Valid Claim of a Patent and where CONNETICS does not
retain Market Exclusivity;
(d) [1] percent [1] of Net Revenue received by CONNETICS on sales of
Product by an unaffiliated third party sub-licensee of CONNETICS;
and
(e) [1] percent [1] of Up-front Payments received by CONNETICS.
5.3 All royalties payable pursuant to this Agreement shall be paid within
two (2) months after the close of the Quarter during which the Net Sales
were actually made, or Net Revenue or Up-front Payments were received.
Each royalty payment shall be accompanied by a statement that sets forth
Net Sales, Net Revenue and Up-front Payments during the Quarter in
question and the royalty payment due thereon.
5.4 Unless the parties agree otherwise in writing, the royalties of Section
5.2 will be paid in U.S. Dollars. Royalties with respect to amounts
other than U.S. Dollars shall be computed in U.S. Dollars by converting
the currency of such country at the average exchange rate for U.S.
Dollars prevailing over the last business day of each month of the
Quarter during which the Net Sales were actually made, or Net Revenue or
Up-front Payments were received. The exchange rate shall be the rates
published by the Wall Street Journal, and if it does not publish any
such rate or if it is no longer published, a comparable publication to
be agreed upon from time to time by the parties.
5.5 If the royalties provided for under this Agreement are greater than the
maximum royalties permitted by the laws or regulations of a particular
country, the royalty payment with respect to sales in such country shall
be equal to such maximum permitted royalty.
5.6 If any taxes, withholding or otherwise, are levied by any taxing
authority in connection with the accrual or payment of royalties under
this Agreement, CONNETICS shall have the right to pay such taxes to the
local taxing authorities on behalf of SOLTEC and to remit to SOLTEC in
full satisfaction of its royalty obligations under this Agreement the
net amount due after reduction by the amount of such taxes, together
with evidence of payment of such taxes.
5.7 No royalty shall be made with respect to any sale or transfer of a
Product between and among CONNETICS, its Affiliates, its sub-licensees
and their distributors where such sale or transfer is made in the course
of a subsequent royalty-generating transaction hereunder. No multiple
royalties shall be payable on account of the sale of any Product,
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omitted. All such omitted material has been filed separately with the SEC.
<PAGE> 7
SOLTEC/CONNETICS
Clobetasol License Agreement
Page 7
regardless of whether or not more than one patent, or patent and other
intellectual property rights, exist(s) covering such Product in any
country. No royalty shall be payable with respect to reasonable and
customary quantities of samples provided free of charge to physicians
and free "trade goods" including indigent patient programs.
5.8 CONNETICS shall keep records of all items in a manner and in sufficient
detail to determine Net Sales in accordance with Section 1.6, Net
Revenue and Up-front Payments and otherwise in accordance with generally
accepted accounting principles in effect in the respective country where
royalties are due and to regularly maintain such records in sufficient
detail to permit calculation of royalties. Such records shall be
retained for three (3) years after the end of the relevant Quarter.
5.9 SOLTEC shall have the right to nominate an independent firm of certified
public accountants reasonably acceptable to CONNETICS to verify records
of CONNETICS and for three (3) years thereafter, the calculation of any
royalties payable under this Agreement with respect to the preceding
calendar year. Such verification shall not occur more than once each
calendar year during the term of this Agreement and shall be conducted
during normal business hours. The fees and expenses of the accountants
performing such verification shall be borne by SOLTEC unless the
royalties payable for the period being verified by the accountants
exceeds by more than five percent (5%) the royalties actually paid by
CONNETICS to SOLTEC in which case such fees and expenses will be
reimbursed by CONNETICS to SOLTEC upon demand. The accountants appointed
hereunder shall not be authorized to disclose to SOLTEC any information
other than the accuracy or inaccuracy of the item(s) to be verified.
5.10 Upon verification of a difference between royalties payable and
royalties paid, as provided in Section 5.9, the difference shall be
remitted to SOLTEC (in the case of underpayment), or to CONNETICS (in
the case of overpayment) within twenty (20) days of notice thereof. If
any underpayment of royalty for a Quarter exceeds five percent (5%) of
the royalty owed, then the amount of the difference shall bear interest,
calculated on a daily basis, from the date upon which it should have
been paid until the date of payment at a rate equal to the prime rate as
publicly announced by Citibank NA plus one percent (1%), payable on
demand.
5.11 The royalties payable hereunder shall be reduced by the amount of any
consideration CONNETICS pays if required to obtain a patent license from
a third party in order to make, use or sell the licensed Technology
portion of the Product in the Territory.
5.12 CONNETICS' payments under any clause of this Agreement are not
refundable for any reason whatsoever including, but without limitation,
failure of any Valid Claim of a Patent to issue in any country in the
Territory.
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SOLTEC/CONNETICS
Clobetasol License Agreement
Page 8
6. PATENTS
6.1 SOLTEC confirms that the Patents represent the only patent protection it
and its Affiliates and related companies owns or has applied for in
relation to the hydroalcoholic quick-break foam delivery system as
pertains to the Product.
6.2 SOLTEC shall retain title to the Patents (except to the extent owned by
MEDEVA) and to any patent rights and know-how related to the Product
developed solely by SOLTEC in the future. CONNETICS shall retain title
to any patent rights and know-how related to the Product developed
solely by CONNETICS in the future. Any patent rights and know-how
related to the Product developed jointly by SOLTEC and CONNETICS in the
future shall be owned in equal undivided half interests by SOLTEC and
CONNETICS.
6.3 SOLTEC (except to the extent a patent is owned by MEDEVA) shall be
responsible for the prosecution and maintenance of the Patents at
SOLTEC's expense, in consultation with CONNETICS. Soltec shall keep
CONNETICS promptly informed of the status of prosecution of the Patents,
including providing copies of all material correspondence with the U.S.
or other Patent Office(s).
6.4 CONNETICS shall assist SOLTEC in prosecuting the Patents, including the
right to comment upon and make suggestions for such prosecution. SOLTEC
agrees to give CONNETICS' comments and suggestions due consideration and
not to unreasonably refuse to implement same. If SOLTEC decides to
discontinue prosecution or maintenance of any or all of the Patents, at
its option CONNETICS may elect to continue such prosecution and
maintenance at its own expense, upon which election title to such
Patent(s) shall be assigned to CONNETICS.
6.5 If either party learns that a third party is infringing the Patents, it
shall promptly notify the other in writing. The parties shall use
reasonable efforts in cooperation with each other to stop such patent
infringement without litigation. If such efforts are unsuccessful,
SOLTEC shall have the responsibility to remove the infringement of the
Patents, including, without limitation, initiating suit. If SOLTEC
decides not to take such steps to remove the infringement within three
(3) months of discovering or being notified of the infringement,
CONNETICS may, but shall not be required to do so. Any legal action
taken under this section will be at the expense of the party by whom
suit is filed and will be controlled by the party bringing suit. The
party not bringing suit may choose to be represented in any such action
by counsel of its own choice at its own expense. If CONNETICS elects to
bring suit, for the duration of such litigation CONNETICS' royalty
payments shall be calculated according to Section 5.2(c). The party
bringing suit shall be reimbursed for its costs associated with bringing
suit with the proceeds of any damages or costs recovered. Any moneys
remaining shall be split between the parties on an equitable basis
proportional to their respective damage from the infringement. If both
parties bring suit, equitable apportionment of the costs and damages to
be recovered shall be agreed upon before the filing of the suit.
6.6 If a notice of infringement is received by, or a suit is initiated
against either SOLTEC or CONNETICS with respect to the Product as made,
used or sold in the Territory, the parties will in good faith discuss
the best way to respond.
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SOLTEC/CONNETICS
Clobetasol License Agreement
Page 9
7. COVENANTS, REPRESENTATIONS AND WARRANTIES
7.1 SOLTEC and CONNETICS each covenant not to disclose any of the Product
Information to any third party save as may be required for the purposes
of this Agreement, in connection with a sub-license consistent herewith,
or to comply with any regulatory obligations or Court order (and in such
cases to take reasonable steps to preserve the confidentiality of the
Product Information) and save for information which enters into the
public domain through no fault of SOLTEC, CONNETICS and their duly
authorized representatives.
7.2 Within the Territory, SOLTEC shall not use, manufacture, distribute or
market the Product or a hydroalcoholic quick-break foam containing a
steroid or a steroid salt for dermal application, which is encompassed
by the Technology that is the subject of CONNETICS' Option, nor shall
SOLTEC authorize or purport to authorize any person firm or company
other than CONNETICS and its duly authorized representatives to do so.
7.3 CONNETICS shall actively and diligently develop and commercialize the
Product in the Territory and covenants to:
(a) apply for NDA or equivalent in the United States of America
within three (3) years of the Transfer Date;
(b) to effect Commencement of Commercial Marketing of the Product in
the United States of America or Canada within five (5) years of
the Transfer Date;
(c) to pay royalties of not less than US [1] cumulatively in the four
(4) consecutive Quarters beginning with the first Quarter after
the Commencement of Commercial Marketing; and
(d) to pay royalties of not less than US [1] cumulatively in the four
(4) consecutive Quarters following the period set forth in
Section 7.3(c) above.
7.3 SOLTEC represents and warrants to CONNETICS in the terms set out in
Exhibit D.
7.4 CONNETICS represents and warrants to SOLTEC in the terms set out in
Exhibit E.
7.5 SOLTEC agrees to promptly inform CONNETICS of any inquiries of it for
purchase of the Product in the Territory and CONNETICS agrees to
promptly inform SOLTEC of any inquiries of it for purchase of the
Product outside the Territory.
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SOLTEC/CONNETICS
Clobetasol License Agreement
Page 10
8. INDEMNIFICATION
8.1 SOLTEC hereby undertakes to indemnify CONNETICS from and against all
liabilities and obligations incurred or arising in connection with or
arising out of any default by SOLTEC under the terms of this Agreement,
save to the extent that such default arises out of any negligence,
wrongful act or default of CONNETICS.
8.2 CONNETICS hereby undertakes to indemnify SOLTEC from and against all
liabilities and obligations incurred or arising in connection with or
arising out of any default by CONNETICS under the terms of this
Agreement, save to the extent that such default arises out of any
negligence, wrongful act or default of SOLTEC.
8.3 CONNETICS agrees to carry sufficient liability insurance to cover its
indemnification obligations under this Agreement. As soon as practicable
upon execution of this Agreement, CONNETICS will provide SOLTEC with
certificate(s) of insurance evidencing this coverage.
9. GENERAL TERMS AND CONDITIONS
9.1 In order to facilitate this Agreement it will be necessary for the
parties to exchange certain Proprietary Information, each recipient of
which agrees to retain such Proprietary Information in strict confidence
and not to disclose or transfer to any party or use other than as
authorized by the terms of this Agreement or otherwise in writing by the
discloser. The parties hereby acknowledge that such Proprietary
Information can constitute "inside information" for securities purposes
and the responsibility to refrain from any unauthorized disclosure,
trading or other such use. These obligations of confidentiality and
non-use shall not apply to Proprietary Information: (a) that was
previously known to the recipient as evidenced by recipient's written
records, b) that is lawfully obtained by recipient from a source
independent of the discloser, or c) that is now or becomes public
knowledge other than by breach of this Agreement. These obligations of
confidentiality and non-use shall survive the expiration or termination
of this Agreement.
9.2 Arbitration and Applicable Law
Any dispute, controversy or claim arising out of or relating to this
Agreement, or the breach or termination thereof shall be dealt with in
the following manner:
(a) The dispute, controversy or claim shall first be referred to the
chief executive officer of each of SOLTEC and CONNETICS for
resolution at a place to be agreed between such chief executive
officers and, failing agreement, at the head office of CONNETICS.
(b) If the dispute, controversy or claim is not settled or agreed
between such chief executive officers within a period of one (1)
month, then it shall be settled by arbitration in accordance with
the rules of the American Arbitration Association then in effect.
Judgment upon the award rendered by the arbitrators may be
entered in
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SOLTEC/CONNETICS
Clobetasol License Agreement
Page 11
any court having jurisdiction thereof. In any arbitration
pursuant to this section, the award shall be rendered by a
majority of the members of a board of arbitration consisting of
three members, one being appointed by each party and the third
being appointed by mutual agreement of the two arbitrators
appointed by the parties. The place of arbitration shall be
Hawaii.
(c) This Agreement shall be interpreted and enforced in accordance
with, and any arbitrators shall apply, the law of the State of
California (regardless of that jurisdiction's or any other
jurisdiction's choice of law principles), and the parties
stipulate to jurisdiction and venue in the state and federal
courts located within the State of California.
9.3 Notices
Any notice required or permitted by the terms of this Agreement shall be
given by registered mail, prepaid and properly addressed, or delivered
by hand to SOLTEC or CONNETICS at the respective addresses first given
above or at such other address as either party hereto may designate by
notice pursuant hereto. Any such notice shall be deemed to have been
given when received. All notices to CONNETICS shall be sent to the
attention of its President, with a copy to Vice President, Intellectual
Property. All notices to SOLTEC shall be sent to the attention of its
Managing Director.
9.4 Term and Termination
(a) This Agreement shall come into force with effect from the
Transfer Date and shall remain in force for the longer of:
expiration of the last to expire Patent having a Valid Claim in
the Territory, or ten (10) years from the Commencement of
Commercial Marketing.
(b) If either party hereto breaches any of the material terms of this
Agreement, and fails to remedy such breach within two (2) months
after written notice thereof from the other party pursuant to
Section 9.3, the other party may at its option terminate this
Agreement immediately upon written notice pursuant to Section 9.3
to the breaching party, upon which event all rights of the
breaching party shall terminate upon the effective date of
termination specified in such notice.
(c) CONNETICS may, immediately upon written notice to SOLTEC,
terminate this Agreement if SOLTEC fails to obtain the grant of
license rights from MEDEVA substantially as provided for in
Section 2.2 and Exhibit C.
(d) SOLTEC may terminate this Agreement by notice to CONNETICS in the
event that CONNETICS shall have become insolvent or bankrupt, or
shall have made an assignment for the benefit of creditors, or
there shall have been appointed a trusted or receiver for all or
a substantial part of its property, or any case or proceeding
shall have been commenced or other action taken by or aginst
CONNETICS in bankruptcy or seeking reorganization, liquidation,
dissolution,
<PAGE> 12
SOLTEC/CONNETICS
Clobetasol License Agreement
Page 12
winding-up, arrangement, composition or readjustment of its debts
or any other similar relief, and any such event shall have
continued for more than 60 days undismissed, unbonded and
undischarged.
(e) Termination of this Agreement shall not release either party from
any liability or obligation which has accrued prior to such
termination and which remains to be performed under the terms of
this Agreement, nor release either party from any obligation that
is intended to survive termination of this Agreement.
9.5 Independent Parties/Announcements/Publicity
Notwithstanding anything herein to the contrary, the parties' status
with each other shall be, at all times during the term of this
Agreement, that of an independent contractors. Nothing in this Agreement
shall be construed to give either party the power or authority to act or
make representations for, or on behalf of, or to bind or commit the
other. Accordingly, the parties shall endeavor to provide each other
courtesy copies in advance of any public statements, whether verbal or
written, including, but not limited to shareholder reports,
prospectuses, communications with stock market analysts, press releases
or other communications with the media.
9.6 Force Majeure
Neither party shall be liable for failure to perform any duty or
obligation that party may have under this Agreement where such failure
has been occasioned by any Force Majeure which shall mean and include
government regulation, fire, strike, inevitable accident, national
emergency, or any other cause outside the reasonable control of the
party having the duty so to perform. Such failure to perform shall only
be excusable under the provisions of this Section for so long as, and to
the extent that, the same is rendered impossible by Force Majeure. The
party claiming that Force Majeure has occurred shall send to the other
party within five working days of the first occurrence of Force Majeure
full particulars thereof including its date of first occurrence and of
the cause or event giving rise to it. Notwithstanding the relief granted
to any party by this Section, the relevant party shall nevertheless use
its reasonable endeavors in any situation where it has invoked this
Section to perform its relevant obligations as soon as possible after
Force Majeure has ceased.
9.7 Assignment
Save as otherwise agreed this Agreement may not be assigned by either of
the parties but CONNETICS shall be entitled to assign or delegate
performance of this Agreement to any company which is an Affiliate of
CONNETICS provided that such Affiliate first agrees with SOLTEC to be
bound by the terms of the Agreement as if named as a party thereto. For
the avoidance of doubt the provisions of this sub-section shall not
prevent CONNETICS, or any Affiliate to which it has assigned its rights,
from sub-licensing the rights granted to CONNETICS hereunder provided
that such sub-licensing shall be effected on terms which are not
inconsistent or in conflict with the terms of this
<PAGE> 13
SOLTEC/CONNETICS
Clobetasol License Agreement
Page 13
Agreement and further provided that CONNETICS shall remain responsible
for royalty payments in accordance with the terms of this Agreement on
Products sold by such sub-licensee as if such sales had been made by
CONNETICS.
9.8 Survival
(a) The covenants and agreements set forth in Section 2.1 and the
non-exclusive license of Section 2.2 shall survive any expiration
of this Agreement and remain in full force and effect.
(b) The covenants and agreements set forth in Sections 4.2, 8 and 9
shall survive any termination or expiration of this Agreement and
remain in full force and effect regardless of the cause of
termination.
9.9 Nonwaiver of Rights
No failure or delay on the part of a party in exercising any right
hereunder will operate as a waiver of, or impair, any such right. No
single or partial exercise of any such right will preclude any other or
further exercise thereof or the exercise of any other right. No waiver
of any such right will be deemed a waiver of any other right hereunder.
9.10 Headings
Section headings contained in this Agreement are included for
convenience only and form no part of the agreement between the parties.
9.11 Validity of Provisions and Severability
If any provision of this Agreement is or becomes or is deemed to be
invalid, illegal, or unenforceable in any jurisdiction: such provision
will be deemed amended to conform to applicable laws of such
jurisdiction so as to be valid and enforceable, or, if it cannot be so
amended without materially altering the intention of the parties, it
will be stricken; the validity, legality and enforceability of such
provision will not in any way be affected or impaired thereby in any
other jurisdiction; and the remainder of this Agreement will remain in
full force and effect.
9.12 Entire Agreement
This Agreement sets forth the entire agreement of the parties with
respect to the subject matter hereof. This Agreement may not be modified
except by a writing signed by the parties.
[Signature Page Follows]
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SOLTEC/CONNETICS
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Page 14
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement
as of the day and year first above written.
CONNETICS CORPORATION SOLTEC RESEARCH PTY LTD.
By /s/ Thomas G. Wiggans By /s/ Geoff L. Mullen
---------------------------------- -----------------------------
Thomas G. Wiggans Geoff L. Mullen
President & CEO Sales and Marketing Director
Date January 1, 1998 Date January 1, 1998
--------------- ---------------
<PAGE> 15
SOLTEC/CONNETICS
Clobetasol License Agreement
EXHIBIT A
March 25, 1996 - VIA FACSIMILE AND FEDEX
Mr. Geoff Mullen
Sales & Marketing Director
SOLTEC RESEARCH PTY LTD.
8 Macro Court
Rowville
Victoria 3178
AUSTRALIA
Re: Pharmaceutical Mousse Delivery System Technology
Exclusive Option Letter Agreement
Dear Mr. Mullen:
This will confirm that Connective Therapeutics, Inc. ("Connective") is
interested in obtaining from Soltec Research Pty Ltd. ("Soltec") an exclusive
option for the Pharmaceutical Mousse Delivery System Technology, exemplified as
employed with betamethasone valerate as the active agent in the Betamousse
product described in the MCA Marketing Authorisation Application under the
Marketing Authorisation Type and Number PL0039/0488 (the "Technology").
Connective agrees to pay Soltec an Option Fee in the amount of [1] U.S. Dollars
[1] in exchange for an exclusive option (the "Option") effective March 25, 1996,
for one or more licenses (each, the "License") including the following:
Exclusive rights, including the right to grant sub-licenses, under all
intellectual property (including Soltec's know-how and U.S. Patent
Application Serial No. 403,110, filed March 14, 1995) pertaining to the
Technology for the NAFTA territory, each such License covering the
Technology as employed with a particular active agent and/or use (the
"Product").
An up-front payment (the "License Fee") of [1] Dollars [1] payable as
follows: [1] U.S. Dollars [1] upon signing the License agreement, [1]
U.S. Dollars [1] upon filing of Connective's NDA for a Product covered
by the License, and [1] U.S. Dollars [1] upon approval of Connective's
NDA for a Product covered by the License. Connective's Option Fee of [1]
U.S. Dollars [1] shall be fully creditable against the first License Fee
arising upon exercise of the Option granted hereunder.
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1 Confidential treatment has been requested for the language which has been
omitted. All such omitted material has been filed separately with the SEC.
<PAGE> 16
SOLTEC/CONNETICS
Clobetasol License Agreement
The remaining terms (including a royalty reasonably related to the value
of the Technology for the Product) of each License are to be negotiated
in good faith between the parties upon exercise of Connective's Option.
For purposes of the License contemplated for the betamethasone valerate
Product, it is agreed that Connective's royalty payments will be no more
than [1] percent [1] of Connective's net sales (to be defined), nor more
than [1] percent [1] of net sales by an unaffiliated third party
Connective sub-licensee.
Connective's Option shall include all active agents and/or uses of the
Technology set forth in Exhibit A hereto. Connective is further granted the
right of first refusal, on a most favored nations basis, for any additional or
subsequently identified uses of the Technology for Products having current
therapeutic application with active ingredients prescribed by physicians and any
over-the counter versions of prescription Products developed by Connective
hereunder (excluding the surgical antiseptic and pediculocide uses previously
licensed by Soltec, and cosmetic, over-the-counter products including those
currently under discussions between Soltec and third parties), pursuant to
which:
Soltec shall first offer a License for any such additional or
subsequently identified use to Connective prior to offering same to any
third party, such License to be on terms no less favorable than those to
be offered to such third party, and
Connective may notify Soltec of any such additional or subsequently
identified use and receive a License thereto upon payment of the License
Fee of [1] Dollars [1], payable as set forth above.
If Connective fails to exercise this Option within One Hundred Twenty (120) days
of the effective date, then the Option shall expire and Connective shall forfeit
one-half of the Option Fee, the other half to be promptly refunded to
Connective. If Connective timely exercises the Option for any Product, then its
option for all other active agents and/or uses of the Technology as set forth in
Exhibit A and right of first refusal shall extend for ten (10) years from the
effective date.
Soltec represents and warrants that it has the full right and authority to
convey the License for the Technology to Connective, and further that there has
been no sale assignment, license or transfer to any person, firm or corporation
which would be inconsistent with these representations and warranties.
If this is acceptable to Soltec, please have this fax executed by Soltec's duly
authorized representative and transmit the signed agreement to me via fax at
415-843-2899 along with payment instructions for the Option Fee, to be paid
within 10 business days of Connective's
- ----------
1 Confidential treatment has been requested for the language which has been
omitted. All such omitted material has been filed separately with the SEC.
<PAGE> 17
SOLTEC/CONNETICS
Clobetasol License Agreement
receipt of the signed fax. We will send both originals of this Option Letter
Agreement, which may be executed in counterparts, via FedEx for Soltec's
execution and the return one fully executed original to the attention of Mr.
David Lowin at Connective.
Very truly yours,
CONNECTIVE THERAPEUTICS, INC. UNDERSTOOD AND ACCEPTED:
SOLTEC RESEARCH PTY LTD.
By /s/ Richard J. Hammel By /s/ Soltech Research Pty Ltd.
--------------------------- ----------------------------------
Richard J. Hammel, Ph.D.
Vice President, Name
Commercial Development -----------------------------------
Title
-----------------------------------
Date March 25, 1996 Date March 25, 1996
------------------------- -----------------------------------
c: Mr. Steve Harris A210.4
<PAGE> 18
SOLTEC/CONNETICS
Clobetasol License Agreement
EXHIBIT A
[TO MARCH 25, 1996 LETTER AGREEMENT]
ACTIVE AGENTS AND TECHNOLOGY USES
[1]
- ----------
1 Confidential treatment has been requested for the language which has been
omitted. All such omitted material has been filed separately with the SEC.
<PAGE> 19
SOLTEC/CONNETICS
Clobetasol License Agreement
March 5, 1997 - VIA FAX AND FEDEX (tel. # +61 3 9 763 0022)
Mr. Geoff Mullen
SOLTEC RESEARCH PTY LTD.
8 Macro Court
Rowville, Victoria 3178
AUSTRALIA
Re: Feasibility Evaluation Agreement
Dear Geoff:
This will confirm our verbal agreement with respect to further evaluating the
feasibility of two active agents, hydrocortisone and clobetasol propionate, in
Soltec's pharmaceutical mousse delivery system, each a Product pursuant to
Connective's Option under the Exclusive Option Letter Agreement dated March 25,
1996 (as amended June 14, 1996, collectively the "Option Agreement").
1. Soltec agrees to develop and optimize two (2) prototype pharmaceutical
mousse formulations, respectively of [1] and [1] (% active ingredient
without inclusion of propellant weight), to the point of submitting the
prototypes for development evaluation by Connective. This development
activity shall include (a) submission of preliminary prototype samples
and (b) submission of a feasibility evaluation submission addressing
optimization of compounding and formulation for stabilization of the
indicated active ingredient(s), outline of manufacturing options that
could successfully be transferred to a contract manufacturer such as
CCL, and transfer to Connective of a fifty to one hundred (50-100) units
for its independent analysis and evaluation. Upon submission, sufficient
data will be provided to ensure a reasonable stability of the prototypes
under recommended storage condition(s), including three (3) months
stability data, minimally generated at reduced (2-8 degrees),
recommended and elevated (40-50 degrees) temperatures., along with all
other data/information generated during the prototype development
process (e.g., comparative results from other formulation tested,
analytical test methods used in the evaluation). The feasibility
evaluation submission will be completed by August 1, 1997.
2. For your services and all other obligations assumed hereunder,
Connective agrees to pay Soltec [1] U.S. Dollars [1] per prototype,
payable as follows: [1] U.S. Dollars [1] within one (1) month of
Connective's receipt of each initial prototype and accompanying detailed
information, and [1] U.S. Dollars [1] within one (1) month of
Connective's receipt of the feasibility evaluation and samples. In
addition, Connective agrees to reimburse Soltec's costs for any
analytical method development and assays up to [1] U.S. Dollars [1] per
Product. The maximum amount payable under this Agreement is [1] U.S.
Dollars [1].
3. Connective shall notify Soltec whether it wishes to exercise its Option
for each Product within three (3) months of receipt of the feasibility
evaluation and samples. Failure to exercise Connective's Option shall
release Soltec to offer the evaluated formulation for license to third
parties without further obligation to Connective, but shall not affect
Connective's Option for subsequently developed formulations using the
same active agent(s). Upon any decision not to exercise Connective's
Option, Connective shall cooperate with Soltec through the return of
such Soltec-generated and transfer of such Connective-generated
information and materials as will be of assistance to Soltec in any
continuing efforts to license the evaluated formulation to third
- ----------
1 Confidential treatment has been requested for the language which has been
omitted. All such omitted material has been filed separately with the SEC.
<PAGE> 20
SOLTEC/CONNETICS
Clobetasol License Agreement
parties; Soltec and Connective shall negotiate in good faith an
appropriate return to Connective for its participation in the initial
evaluation and for such assistance. Connective shall be entitled to
retain at least one copy of any Soltec-generated information and
materials.
4. Upon Connective's exercise of the Option for either or both Product(s),
Connective and Soltec shall proceed to negotiate in good faith the terms
of one or more Development and License Agreement(s) therefor, including
payment by Connective of the License Fee of [8] Dollars [1] per Product
as set forth in the Option Agreement. Under the Development and License
Agreement(s) contemplated hereunder:
Soltec and Connective shall establish a development plan,
timetable, funding and division of responsibilities;
Connective shall acquire exclusive OTC and Rx rights for
the clobetasol propionate Product within the NAFTA Terrirory;
Connective shall acquire exclusive OTC and Rx rights for
the hydrocortisone Product within the NAFTA Territory, such OTC
rights to be contingent on Connective using its best efforts for
diligent OTC commercialization, consistent with good business
judgment and development/commercialization of the hydrocortisone
Product for the RX market;
Soltec and Connective shall discuss in good faith
commercialization of the Product(s) outside the NAFTA Territory,
pursuant to which Connective may acquire exclusive or
co-exclusive OTC and Rx rights outside the NAFTA Territory or
shall be entitled to royalties consistent with Connective's
participation in development of the Product(s) and the extent to
which such participation is relevant to development outside the
NAFTA Territory, any such OTC rights for the hydrocortisone
Product to be contingent on the parties using their best efforts
for diligent OTC commercialization, consistent with good
business judgment and development/commercialization of the
hydrocortisone Product for the RX market;
Soltec and Connective agree that any intellectual
property, whether patentable or not, developed as a result of
the feasibility evaluation and subsequent development shall be
treated as confidential, and the individual or joint ownership
of any patents or other intellectual property rights resulting
therefrom shall be determined in accordance with the Patent Laws
of the United States, depending upon whether inventor(s) from
one or both parties could be named in a corresponding patent
application. Soltec and Connective shall cooperate in all
decisions regarding the drafting, filing and prosecution of
applications for patent on all such inventions jointly approving
all decisions regarding jointly held subject matter or having an
effect on rights in the NAFTA territory and the sole owner
giving due consideration to the comments and suggestions of the
other with regard to rights outside the NAFTA territory; and
Connective shall pay Soltec a royalty on Connective's or
unaffiliated third party sub-licensee's net sales of Products at
rates to be negotiated based on industry standards using as a
point of reference the royalty structure from Connective's
betamethasone valerate mousse license, the stage of development
of the Product upon commencement of Connective's participation,
and the parties' respective investments in the Product(s)
development.
- ----------
1 Confidential treatment has been requested for the language which has been
omitted. All such omitted material has been filed separately with the SEC.
<PAGE> 21
SOLTEC/CONNETICS
Clobetasol License Agreement
5. In order to facilitate the evaluation under this Agreement, it will be
necessary to exchange certain data, other proprietary information and
samples, the recipient of which agrees to retain in strict confidence
and not to use, disclose or transfer to any party other than for the
purposes of this Agreement or as authorized by the provider, except for
that which: a) was previously known to as evidenced by written records,
b) is lawfully obtained from a source independent of the provider, or c)
is now or becomes public knowledge other than by breach of this
Agreement. These obligations of confidentiality and non-use shall
survive the expiration or termination of this Agreement for a period of
ten (10) years.
6. Soltec and Connective each confirm that this Agreement does not conflict
with its duties and obligations under any other agreement to which it is
a party, and that each will inform the other should any conflict or
possible conflict of duties and obligations arise during the term of
this Agreement.
7. The terms of this Agreement can be modified only by the mutual written
agreement of the parties. This Agreement will be interpreted and
enforced in accordance with the laws of California, notwithstanding the
choice of law principles of California or those of any other
jurisdiction.
If the foregoing terms and conditions are agreeable to Soltec, please sign and
date both duplicate originals of this Letter Agreement and return one original
to David A. Lowin, Vice President, Intellectual Property at Connective. We look
forward with pleasure to this next venture in the continuing relationship
between Soltec and Connective.
Very truly yours,
UNDERSTOOD AND ACCEPTED:
CONNECTIVE THERAPEUTICS, INC. SOLTEC RESEARCH PTY LTD.
By /s/ Richard J. Hammel By /s/ Soltech Research Pty Ltd.
------------------------------------- --------------------------------
Richard J. Hammel, Ph.D.
Vice President, Corporate Development Name
------------------------------
Title
------------------------------
Date March 5, 1997 Date March 5, 1997
----------------------------------- ------------------------------
<PAGE> 22
SOLTEC/CONNETICS
Clobetasol License Agreement
EXHIBIT B
CLOBETASOL PROPIONATE QUICK BREAK FOAM
SPECIFICATION
[1]
- ----------
1 Confidential treatment has been requested for the language which has been
omitted. All such omitted material has been filed separately with the SEC.
<PAGE> 23
SOLTEC/CONNETICS
Clobetasol License Agreement
EXHIBIT C
To the extent necessary for the license granted by SOLTEC to CONNETICS pursuant
to Section 2.2 of the Agreement, SOLTEC agrees to use its best efforts to obtain
the grant of such license rights from MEDEVA, without obligation of CONNETICS to
make any payments in addition to those required pursuant to Section 5 of this
Agreement, including substantially the representations, warranties and
provisions as set forth below.
1. An exclusive license for CONNETICS to develop, manufacture, use and/or
sell the Product directly or indirectly under MEDEVA's Patents in the
Territory with the right to sub-license, and a non-exclusive license
under the Patents to have the Product manufactured outside the
Territory.
2. Confirmation that the Patents represent the only patent protection
MEDEVA and its Affiliates and related companies owns or has applied for
in relation to the hydroalcoholic quick-break foam delivery system
encompassed by the Technology that is the subject of CONNETICS' Option
or that otherwise would be infringed by the unlicensed manufacture, use
or sale of the Product.
3. SOLTEC shall endeavor in good faith to secure from MEDEVA such
additional rights as may be required for the purpose of expanding the
Territory, as provided in Section 1.4 of the Agreement, to the fullest
extent possible.
4. Patent preparation, prosecution, maintenance and enforcement provisions
at least equivalent to those obtained by SOLTEC from MEDEVA in the June
19, 1996 Amendment to the Purchase Agreement Dated 26 April 1994
(attached as part of Exhibit F to the License Agreement effective June
14, 1996 between SOLTEC and CONNETICS under its prior name, Connective
Therapeutics, Inc.) and to the extent possible, consistent with the
following:
A. MEDEVA shall be responsible for the prosecution and maintenance
of MEDEVA's Patents at MEDEVA's expense, in consultation with
SOLTEC and CONNETICS.
B. MEDEVA shall keep SOLTEC and CONNETICS promptly informed of the
status of prosecution of MEDEVA's Patents, including providing
copies of all material correspondence with the U.S. or other
Patent Office(s).
C. SOLTEC and CONNETICS shall assist MEDEVA in prosecuting MEDEVA's
Patents in the Territory, including the right to comment upon and
make suggestions for such prosecution. MEDEVA shall give SOLTEC's
and CONNETICS' comments and suggestions due consideration and not
unreasonably refuse to implement same.
D. If MEDEVA decides to discontinue prosecution or maintenance of
any or all of MEDEVA's Patents, at its option CONNETICS may elect
to continue such prosecution and maintenance at its own expense,
upon which election title to such Patent(s) shall be assigned to
CONNETICS.
E. If MEDEVA, SOLTEC or CONNETICS learns that a third party is
infringing the Patents in the Territory, it shall promptly notify
the others in writing. MEDEVA, SOLTEC and CONNETICS shall use
reasonable efforts in cooperation with each other to stop such
patent infringement without litigation. If such efforts are
unsuccessful, SOLTEC shall have the authority and responsibility
to remove the infringement of the Patents in the Territory,
including, without limitation, initiating suit in its own name;
MEDEVA shall provide such documents and do such acts as are
necessary therefor. If SOLTEC decides
<PAGE> 24
SOLTEC/CONNETICS
Clobetasol License Agreement
EXHIBIT C
not to take such steps to remove the infringement within three
(3) months of discovering or being notified of the infringement,
CONNETICS may, but shall not be required to remove the
infringement of the Patents in the Territory, including, without
limitation, initiating suit in its own name; MEDEVA shall provide
such documents and do such acts as are necessary therefor. Any
legal action taken under this section will be at the expense of
the party by whom suit is filed and will be controlled by the
party bringing suit. MEDEVA and the party not bringing suit may
choose to be represented in any such action by counsel of its own
choice at its own expense.
F. If MEDEVA, SOLTEC or CONNETICS learns that a third party is
infringing the Patents outside the Territory, it shall promptly
notify the others in writing. MEDEVA, SOLTEC and CONNETICS shall
use reasonable efforts in cooperation with each other to stop
such patent infringement without litigation. If such efforts are
unsuccessful, any legal action taken will be at the expense of
the party by whom suit is filed and will be controlled by the
party bringing suit. CONNETICS and the party not bringing suit
may choose to be represented in any such action by counsel of its
own choice at its own expense.
G. If a notice of infringement is received by, or a suit is
initiated against either MEDEVA, SOLTEC or CONNETICS with respect
to the Product, MEDEVA, SOLTEC and CONNETICS will in good faith
discuss the best way to respond.
H. MEDEVA shall have no grant-back, option or other right with
respect to any patent rights and know-how related to the Product
developed solely by SOLTEC, solely by CONNETICS, or jointly by
SOLTEC and CONNETICS in the future.
<PAGE> 25
SOLTEC/CONNETICS
Clobetasol License Agreement
EXHIBIT D
SOLTEC'S REPRESENTATIONS AND WARRANTIES
For the purpose of the following representations and warranties, where any
statement is qualified by the expression "to the best of SOLTEC's knowledge and
belief" or any similar expression, that statement shall be deemed to include an
additional statement that it has been made after due and careful inquiry. The
term "Delivery System" where used below shall mean SOLTEC's hydroalcoholic
mousse delivery system encompassed by the Technology that is the subject of
CONNETICS' Option, itself and when used in conjunction with any active
ingredient.
SOLTEC hereby represents and warrants as follows:
1. CAPACITY
SOLTEC has all requisite power and authority to enter into and perform
this Agreement.
2. ACCURACY OF INFORMATION.
2.1 The information given in Exhibit B to this Agreement is true and
accurate in all material respects and is not misleading because of any
omission or ambiguity or for any other reason.
2.2 To the best of SOLTEC's knowledge and belief the Product Information is
at the date hereof complete and accurate in all material respects in
relation to the matters it is expressed to relate to, will be kept
complete and accurate until the same is handed over to CONNETICS, and
comprises all information necessary to enable the Product to be
manufactured to the specification (as set out in Exhibit B) and to the
same quality as the Product is (or other equivalent products are)
currently manufactured by or with the assistance of SOLTEC.
2.3 To the best of SOLTEC's knowledge and belief the information provided to
CONNETICS regarding the Product and the Delivery System is not
misleading and is complete and accurate in all material respects and
where SOLTEC has provided data or information which has been extracted
from any other source that information has been correctly extracted is
not misleading and accurately reflects the source material. To the best
of SOLTEC's knowledge information and belief there are no other facts or
matters which render any such information misleading in any material
respects. SOLTEC is not aware of any other fact or matter which has not
been disclosed to CONNETICS and which in the reasonable opinion of
SOLTEC (given the scope of SOLTEC's business and expertise) may have a
material adverse affect on the business of using, manufacturing,
marketing and/or distributing the Product.
3. INVESTIGATIONS
To the best of SOLTEC's knowledge and belief there are not pending or in
existence and SOLTEC is not aware of any event or circumstance which
might give rise to any investigations or inquiries by or on behalf of
any government or other body with respect to or affecting the Product
and or the Delivery System.
<PAGE> 26
SOLTEC/CONNETICS
Clobetasol License Agreement
EXHIBIT D
4. COMPETITIVE PRODUCTS
4.1 There is no product due to be launched (or licensed to a third party) in
the Territory by SOLTEC or any of its Affiliates following the date
hereof which is reasonably anticipated to be competitive with the
Product and/or the Delivery System.
4.2 SOLTEC has no agreements or arrangements for the manufacture,
distribution or sale of the Product with any other party, except to the
extent that SOLTEC's agreement(s) with MEDEVA pertains to the Patents.
5. LITIGATION
5.1 Neither SOLTEC, nor to SOLTEC's knowledge any Affiliate, is engaged in
any litigation, arbitration, administration or criminal proceedings
whether as Plaintiff, Defendant or otherwise with respect to the
Product, the Delivery System or the Patents. No litigation, arbitration,
administrative or criminal proceedings by or against SOLTEC in relation
to the same is threatened and there is no fact or circumstances known to
SOLTEC which SOLTEC reasonably believes is likely to give rise to any
such litigation or arbitration, administrative or criminal proceedings.
5.2 SOLTEC is not and has never been a party to any undertaking or assurance
given to any court or governmental body, agency or department with
respect to the Product or the Delivery System that could affect the
ability of CONNETICS to sell the Product.
5.3 SOLTEC has not received any claim for damages or compensation in the
five years prior to the date hereof arising out of any injury to any
person caused or alleged to have been caused by the Product, the
Delivery System, the Product Information or any ingredients of the
Product.
5.4 SOLTEC has not received and is not aware of any complaint or
investigation concerning or relating to the Product and/or the Delivery
System and so far as SOLTEC is aware no regulatory authority or any
other governmental authority is carrying out any investigation into the
efficacy or safety of the Product and/or the Delivery System, that could
affect the ability of CONNETICS to sell the Product.
6. COMPLIANCE WITH LEGISLATION
6.1 SOLTEC has at all relevant times tested and developed the Product in
accordance with all legislation relevant to the scope of its business
activities to the best of its ability.
7. INTELLECTUAL PROPERTY
7.1 No claim has been made or threatened against SOLTEC alleging any
infringement by the Product and/or the Delivery System of any trademark,
patent or other intellectual property rights of any third party.
7.2 No claim is outstanding or threatened by SOLTEC alleging any
infringement of the Patents and SOLTEC is not aware of any circumstances
which might give rise to such a claim.
7.3 SOLTEC has not granted any license under the Product Information or the
Patents in respect of the Product or the Delivery System (except
MEDEVA's license for betamethasone valerate) and
<PAGE> 27
SOLTEC/CONNETICS
Clobetasol License Agreement
EXHIBIT D
CONNETICS will not require any other license of intellectual property
rights in respect of manufacture, use or sale of the Delivery System.
7.4 SOLTEC has no interest in or rights to or over any trademarks or patents
or other intellectual property rights relating specifically to the
Product and/or the Delivery System and/or a quick break foam product
currently considered by SOLTEC to be equivalent to the Technology, other
than the Patents and the other rights referred to herein.
7.5 To the best of SOLTEC's knowledge and belief none of the processes or
materials used in the Delivery System, the Product or the testing,
manufacture or processing thereof infringes any right of any other
person relating to intellectual property or otherwise or involves the
unlicensed use of know-how or confidential information in circumstances
which might entitle that person to make a claim against SOLTEC or
CONNETICS or to require the use of such know-how or confidential
information to cease.
7.7 To the best of SOLTEC's knowledge and belief the Patents will when
granted be valid patents granting effective and enforceable protection
to CONNETICS in respect of the Product, its use, manufacture and sale.
8. MISCELLANEOUS
8.1 To conduct its business in a proper and businesslike manner so as to
ensure that the same remains of good character and reputation.
<PAGE> 28
SOLTEC/CONNETICS
Clobetasol License Agreement
EXHIBIT E
CONNETICS' REPRESENTATIONS AND WARRANTIES
CONNETICS hereby represents and warrants as follows:
1. CONNETICS has all requisite power and authority to enter into and
perform this Agreement.
2. To provide for and maintain a sales organization and a marketing program
reasonably adequate and competent to promote, sell and stimulate
interest in the Product in the Territory.
3. To take all commercially reasonable steps to promptly obtain FDA
approval of the product.
4. To conduct its business in a proper and businesslike manner so as to
ensure that the same remains of good character and reputation.
5. To actively and diligently promote and advertise the sale of the Product
in the Territory.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated January 15, 1998 in this
Annual Report (Form 10-K) of Connetics Corporation for the year ended December
31, 1997.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-04985 and Form S-3 No. 333-21941) pertaining to the
1995 Employee Stock Purchase Plan, 1994 Stock Plan and 1995 Director Stock
Option Plan of Connetics Corporation, of our report dated January 15, 1998, with
respect to the consolidated financial statements of Connetics Corporation
included in this Annual Report (Form 10-K) for the year ended December 31, 1997.
ERNST & YOUNG, LLP
Palo Alto, California
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,452
<SECURITIES> 5,894
<RECEIVABLES> 1,527
<ALLOWANCES> 0
<INVENTORY> 47
<CURRENT-ASSETS> 111
<PP&E> 3,406
<DEPRECIATION> 1,743
<TOTAL-ASSETS> 31,068
<CURRENT-LIABILITIES> 9,344
<BONDS> 0
13
600
<COMMON> 0
<OTHER-SE> 10,796
<TOTAL-LIABILITY-AND-EQUITY> 31,068
<SALES> 6,803
<TOTAL-REVENUES> 6,803
<CGS> 1,149
<TOTAL-COSTS> 1,149
<OTHER-EXPENSES> 33,252
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,722
<INCOME-PRETAX> (27,935)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,935)
<EPS-PRIMARY> (2.69)<F1>
<EPS-DILUTED> (2.69)
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
