<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER ___, 1999.
REGISTRATION NO. 33-_______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CONNETICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3400 WEST BAYSHORE ROAD 94-3173928
(STATE OR OTHER JURISDICTION OF PALO ALTO, CA 94303 (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) (650) 843-2800 IDENTIFICATION NUMBER)
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(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF THE
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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THOMAS G. WIGGANS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CONNETICS CORPORATION
3400 WEST BAYSHORE ROAD
PALO ALTO, CA 94303
(650) 843-2800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<PAGE> 2
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<CAPTION>
CALCULATION OF REGISTRATION FEE
==================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SHARES AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
==================================================================================================================
<S> <C> <C> <C> <C>
Common Stock,
$0.001 par value per share.....1,220,471 shares $ 4.25 (2) $ 5,187,001.75 $ 1,441.99
Common Stock,
$0.001 par value per share..... 15,000 shares $ 6.063 (3) $ 90,945.00 $ 25.28
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Total Shares 1,235,471 $ 5,277,946.75 $1,467.27
==================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee
(2) Based on the average of the high and low prices of the Common Stock as
reported on the Nasdaq National Market on November 5, 1999 pursuant to Rule
457(c).
(3) Based on the price at which the warrants may be exercised, pursuant to Rule
457(g).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
<PAGE> 3
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION NOVEMBER ___, 1999
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO
BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
CONNETICS CORPORATION
1,235,471 SHARES
COMMON STOCK
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This Prospectus relates to 1,235,471 shares of Connetics Common Stock,
$0.001 par value (the "Shares") which may be offered for the account of several
stockholders of Connetics (the "Selling Stockholders") and will not be
underwritten. The Shares being registered by this Registration Statement for the
Selling Stockholders consist of the following:
(1) 531,341 shares were issued to Medeva PLC pursuant to a stock purchase
agreement entered into on January 11, 1999, pursuant to an exemption
from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act");
(2) 450,000 shares are reserved for issuance to Genentech, Inc. under
Connetics' obligation to issue equity to Genentech, Inc. in connection
with our acquisition of rights to interferon gamma;
(3) 95,815 shares were issued to Genentech under Connetics' right to issue
equity to Genentech in connection with certain royalty payments due to
Genentech for relaxin;
(4) 25,000 shares were authorized for issuance as shares of restricted
stock to Kirk Raab, a director of Connetics, and those shares were
issued to Mr. Raab on March 9, 1999;
(5) 50,000 were authorized for issuance as shares of restricted stock to
Thomas Wiggans, President and Chief Executive Officer of Connetics, of
which 25,000 shares were issued to Mr. Wiggans on March 9, 1999, and
25,000 shares were issued to Mr. Wiggans on May 11, 1999;
(6) 25,000 were issued as shares of restricted stock to Mazier Partners LLC
on May 12, 1999 in connection with a consulting agreement;
(7) 43,315 shares were issued to Paladin Labs Inc. pursuant to a stock
purchase agreement entered into on July 7, 1999, pursuant to an
exemption from the registration requirements of the Securities Act; and
(8) 15,000 shares are reserved for issuance to Bridge Technology Group LLC,
pursuant to a warrant issued July 1, 1999.
The Selling Stockholders or their successors-in-interest may sell the
Shares from time to time on the over-the-counter market in regular brokerage
transactions, in transactions directly with market makers or in certain
privately negotiated transactions or otherwise. Connetics will not receive any
proceeds from the sale of the Shares by the Selling Stockholders, but we have
agreed to pay certain of their expenses. See "Plan of Distribution."
The Selling Stockholders and any broker-dealers, agents or underwriters
that participate with them in the distribution of the Shares may be deemed to be
an "Underwriter" within the meaning of Section 2(11)
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of the Securities Act, and any commissions received by them and any profit on
the resale of the Shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. See "Plan of Distribution"
for a description of indemnification arrangements.
Our common stock is quoted on the Nasdaq National Market under the symbol
"CNCT." On November 5, 1999, the last reported sale price of our common stock
was $4.375 per share.
BEFORE BUYING ANY SHARES YOU SHOULD READ THE DISCUSSION OF MATERIAL RISKS OF
INVESTING IN OUR COMMON STOCK IN "RISK FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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Risk Factors................................................ 4
Forward Looking Information................................. 17
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Price Range of Common Stock................................. 18
Business ................................................... 19
Issuance of Common Stock to Selling Stockholders ........... 35
Selling Stockholders........................................ 36
Plan of Distribution ....................................... 36
Legal Matters............................................... 38
Experts .................................................... 38
Where You Can Find Additional Information .................. 38
</TABLE>
Connetics(R), Ridaura(R), ConXn(R), and the interlocking globe design are
registered trademarks of Connetics. We also own the trademarks Luxiq(TM) and
OLUX(TM). ACTIMMUNE(R) is a registered trademark of Genentech, Inc. All other
trademarks or service marks appearing in this prospectus are the property of
their respective companies.
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<PAGE> 6
RISK FACTORS
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You should carefully consider the risks described below together with all
of the other information included in or incorporated by reference into this
prospectus before making an investment decision. The risks and uncertainties
described below are not the only ones we face. If any of the following risks
actually occurs, our business, financial condition or results of operation could
be harmed. In that case, the trading price of our common stock could decline,
and you may lose all or part of your investment.
OUR FUTURE REVENUES DEPEND ON LUXIQ, A RECENTLY INTRODUCED PRODUCT, AND OLUX,
FOR WHICH WE HAVE SUBMITTED A NEW DRUG APPLICATION. IF THESE PRODUCTS FAIL TO
GAIN ACCEPTANCE WITH DERMATOLOGISTS AND PATIENTS, OUR BUSINESS WILL BE HARMED.
We received marketing clearance from the U.S. Food and Drug Administration
(FDA) in March 1999 for the use of Luxiq to treat mild to moderate scalp
dermatoses. In July 1999, we submitted a new drug application to the FDA for
OLUX, a product for the treatment of moderate to severe scalp dermatoses. We
will not be able to begin selling OLUX in the United States unless and until we
receive FDA approval to market this drug. Our future revenues will depend upon
dermatologist and patient acceptance of Luxiq, and OLUX if it receives
regulatory clearance. Factors that could affect acceptance of Luxiq and OLUX
include:
- satisfaction with existing alternative therapies;
- the effectiveness of our sales and marketing efforts;
- undesirable and unforeseeable side effects; and
- the cost of the product as compared with alternative therapies.
Since Luxiq was only recently introduced, we will need additional sales
history before we can complete a meaningful assessment of the acceptance of
Luxiq into the U.S. dermatology market. OLUX must receive FDA clearance before
we can sell in the United States, and, accordingly, we will be unable to assess
acceptance of OLUX until we begin commercial sales. If Luxiq and OLUX do not
achieve or sustain market acceptance, our revenues will not increase and our
business, financial condition and results of operations will be adversely
affected.
OUR FUTURE SUCCESS IS DEPENDENT UPON OUR ABILITY TO DEMONSTRATE CLINICAL
EFFICACY OF, OBTAIN REGULATORY APPROVAL FOR AND COMMERCIALIZE CONXN, OUR
RECOMBINANT HUMAN RELAXIN PRODUCT.
ConXn, the recombinant human relaxin product that we are developing, is
critical to our future success. We initiated a 200-patient, Phase II/III trial
of ConXn for the treatment of diffuse scleroderma in February 1999. In order to
complete the development of ConXn, we will need, at a minimum, to:
- demonstrate the safety and efficacy of ConXn in this clinical study;
and
- submit a biologic license application to the FDA for the purpose of
obtaining approval to market ConXn in the United States.
We cannot assure you that the current ConXn clinical trial will be
successful or that we will be able to submit a biologic license application for
ConXn. Furthermore, even if the clinical data support the submission of a
biologic license application, we cannot assure you that the FDA will approve
this
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application for the indications for which we submit or at all. Furthermore, we
may encounter unforeseen delays in the regulatory approval process.
If we are able to demonstrate the safety and efficacy of ConXn and obtain
FDA approval, our ability to commercialize ConXn will also depend upon
additional factors including the following:
- our ability to secure reliable, cost effective manufacturing for
ConXn; and
- the ability of ConXn to generate market acceptance among physicians
and patients.
If we are unable to complete the development of and obtain regulatory
approval for ConXn and successfully introduce ConXn, our future prospects and
results of operations would be materially and adversely affected.
WE HAVE ADDITIONAL DEVELOPMENT OBJECTIVES THAT WE NEED TO ACHIEVE WITH RESPECT
TO CONXN, INCLUDING DEVELOPMENT OF ALTERNATIVE DELIVERY SYSTEMS, AND OUR CURRENT
SUPPLIES OF CONXN ARE LIMITED.
In addition to demonstrating the safety and efficacy of ConXn in our
current clinical trial, we must meet several additional major development
objectives for ConXn. In particular, we may need to develop an alternative means
of delivering the drug. In the current clinical trials, ConXn is being delivered
through the use of an infusion pump. For a serious and life threatening
condition, such as diffuse scleroderma, this method of delivery may be
acceptable. However, we are pursuing other indications for ConXn, such as
treatment of infertility and peripheral vascular disease, which are not life
threatening conditions. For these indications, it will be necessary for us to
develop an alternative delivery system; however, the known biological properties
of the relaxin molecule may decrease the availability of certain delivery
systems. If we are not able to develop a suitable alternative delivery system
for ConXn, our ability to market ConXn for indications that are not life
threatening would be adversely affected. In this event, commercial potential of
ConXn would be materially and adversely affected.
We currently have limited availability of ConXn because we are exhausting
existing supplies in connection with our current clinical trial and our contract
manufacturer has not yet initiated larger scale manufacturing. We will be unable
to obtain additional supplies of ConXn until larger scale manufacturing is
initiated, which will limit the number and extent of ConXn clinical studies we
can conduct in the near term.
WE ACQUIRE AND COMMERCIALIZE LATE-STAGE DEVELOPMENT AND MARKETED PRODUCTS. OUR
FAILURE TO SUCCESSFULLY ACQUIRE, DEVELOP AND EXPLOIT THESE PRODUCTS MAY
MATERIALLY HARM OUR BUSINESS.
A significant part of our overall strategy is to exclusively license or
acquire marketed or late-stage development products in our targeted therapeutic
areas. The acquisitions of rights to our products (Luxiq, OLUX, Actimmune, and
Ridaura) reflect this strategy. Competition to acquire potentially attractive
products is likely to be intense, and we may not be able to acquire products in
the future on acceptable terms, in which case our future revenues and results of
operations may be adversely affected.
Some of the products we acquire cannot be commercialized until we obtain
regulatory clearance. If we are unable to obtain regulatory approvals, or if
approvals take longer than anticipated to obtain or if we are limited in the
marketing or labeling claims we are permitted to make, our business would be
harmed. If we are unable to effectively manage the integration of acquired
products into our product line or to market and sell such products successfully,
our revenues will not grow or may decline and our results of operations will be
harmed. In addition, if newly-acquired products do not achieve the clinical
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or marketing results that we expect of them at the time of acquisition or if any
of our licenses are terminated, our business will be harmed.
WE HAVE A HISTORY OF LOSSES AND HAVE ONLY RECENTLY BEGUN TO MARKET PRODUCTS. AS
A RESULT, OUR ABILITY TO ACHIEVE AND SUSTAIN PROFITABILITY IS HIGHLY UNCERTAIN.
We have incurred operating and net losses every year since our inception.
We had net losses of $26.6 million in 1998 and $10.7 million in the six months
ended June 30, 1999. Our accumulated deficit was $103.2 million at June 30,
1999. We expect to incur additional losses for at least the next few years. We
cannot assure you that we will achieve profitability and, if we do reach
profitability, we may not be able to sustain it. Our ability to reach, and
sustain profitability, will depend upon the success of our current products and
our products under development.
In particular, if our current ConXn clinical trial is successful, we would
incur significant additional expenditures associated with pursuing regulatory
approval and eventual commercialization of ConXn which would extend the date as
of which we could first achieve profitability. If we are unable to successfully
complete development and commercialization of ConXn, we may never achieve
profitability.
FUTURE SALES OF SHARES OF COMMON STOCK BY LARGE STOCKHOLDERS COULD LOWER THE
MARKET PRICE FOR OUR COMMON STOCK.
A significant percentage of our shares are held by large stockholders that
include venture capital and other private institutional investors, companies
with whom we have product development collaborations and companies from whom we
have acquired technology or products. In most cases, the holders of these shares
can resell them in the public securities markets under Securities and Exchange
Commission Rule 144 or under an effective registration statement or are entitled
to require us to register their securities for resale. Accordingly, we cannot
control the timing of sales of shares of our common stock by these stockholders,
and one or more of these stockholders may seek to sell a large block of shares
of our common stock at any time. In addition, since certain of these
stockholders are companies rather than financial investors, they may have
objectives with respect to their interest in us that may differ from those of
purely financial investors. Any sale or attempted sale of a large block of
shares of our common stock, particularly in light of the trading volume in our
common stock, would likely cause the market price of our common stock to decline
significantly.
BECAUSE OUR PRODUCT LINE IS NEW AND LIMITED, OUR FUTURE SUCCESS IS DIFFICULT TO
PREDICT AND REVENUES MAY FLUCTUATE FROM PERIOD TO PERIOD.
We have a new and limited product line whose market acceptance remains
uncertain. As a result, our quarterly and annual operating results are difficult
to predict and may fluctuate significantly in the future depending on factors
such as:
- the timing of market acceptance of our products;
- the timing and shipment of orders for Luxiq, Ridaura and Actimmune;
- changes in competitors' pricing policies;
- the mix of distribution channels through which current and future
products are sold; and
- our ability to obtain sufficient raw materials and an effective
supply chain for our products.
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AFTER THIS OFFERING IS COMPLETED, WE MAY NEED TO RAISE ADDITIONAL FUNDS. IF WE
ARE UNABLE TO RAISE ADDITIONAL FUNDS WHEN NEEDED, OUR BUSINESS WILL SUFFER.
We believe that our existing cash, cash equivalents, short term investments
and product and contract revenues will be sufficient to fund our operating and
working capital requirements for at least the next 18 months. Accordingly, we
may need to raise additional funding in the future. In particular, if our ConXn
clinical trial is successful, our working capital needs will increase as we will
incur additional regulatory and commercialization expenses for ConXn. In this
event, we would need to raise additional funds. Alternative financing strategies
may include, but are not limited to:
- equity or debt offerings;
- partnering relationships with larger pharmaceutical companies; and
- debt and lease instruments, including bank credit facilities and
capital and operating leases.
If we are unable to raise additional funds when needed, we may not be able
to market our products as planned, or continue development of our other
products, which would materially and adversely affect our business, financial
condition and results of operations.
If we need to raise additional money to fund our operations, we cannot be
certain that funding from any source will be available to us on acceptable
terms, or at all. The amount and the timing of raising additional funds will
depend primarily upon our ability to obtain needed regulatory clearances and
generate revenues from the sale of our products now approved or currently in
development. Our inability to obtain any additional funding on reasonable terms
would cause our business, financial condition and results of operations to
suffer.
WE RELY ON CORPORATE PARTNERS TO FUND THE DEVELOPMENT OF OUR PRODUCT
DEVELOPMENT. THE FAILURE OF OUR PARTNERS TO FUND OUR PRODUCTS WILL HARM OUR
BUSINESS.
We depend on licensing agreements with our corporate partners in order to
successfully develop and commercialize our products. We also generate revenue by
licensing out our products to third parties for specific territories and
indications. This reliance on third parties for our current and future success
carries several risks, including the possibilities that:
- a product development contract may expire or a relationship may be
terminated, and we will not be able to attract a satisfactory
alternative partner within a reasonable time;
- a partner involved in the development of our products does not
commit sufficient capital to successfully develop our products; and
- we may be contractually bound to terms that, in the future, are not
commercially favorable to us.
If any of these risks actually occur, our business, financial condition and
results of operations will be harmed.
OUR STOCK PRICE IS VOLATILE AND THE VALUE OF YOUR INVESTMENT COULD DECLINE
SIGNIFICANTLY.
The market prices for securities of pharmaceutical and biotechnology
companies, particularly such companies with market capitalizations below $500
million, have been and are likely to continue to be
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<PAGE> 10
highly volatile. The following factors may have a significant impact on the
market price of our common stock:
- announcements of technological innovations or new commercial
products by us or our competitors;
- developments concerning the progress of our clinical trials,
including, in particular, clinical trials of ConXn;
- publicity regarding actual or potential medical results relating to
products under development by us or our competitors;
- competitive developments, including the introduction of products by
our competitors that render our marketed products or products under
development obsolete or less competitive;
- regulatory developments in the United States and foreign countries;
- changes in the recommendations of securities market analysts
regarding our securities and others in our sector;
- public concern as to the safety of biotechnology products; and
- economic and other external factors.
The above factors may cause our stock price to fluctuate and the value of
your investment may decline significantly.
CLINICAL TRIALS ARE INHERENTLY UNPREDICTABLE AND OUR FAILURE TO SUCCESSFULLY
IMPLEMENT AND COMPLETE THEM WILL HARM OUR BUSINESS.
Before any company can obtain regulatory approval for the commercial sale
of its products under development, it must demonstrate through preclinical
studies and clinical trials that the product is safe and effective for use in
the target indication for which approval is sought. The results from preclinical
studies and early clinical trials may not be predictive of results that will be
obtained in later-stage testing. In particular, there can be no assurance that
our current ConXn trial or 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 pharmaceutical and biotechnology industries have
suffered significant setbacks in advanced clinical trials, even after promising
results from earlier trials.
In February 1999, we commenced a Phase II/III trial of ConXn for the
treatment of diffuse scleroderma, and in July 1999 we filed an investigational
new drug application to commence clinical trials of ConXn for the treatment of
infertility. We cannot be certain that we will be able to start any future
trials or successfully complete them once started. If we are unable to commence
clinical trials as planned, complete the clinical trials or demonstrate the
safety and efficacy of our products, our business will be harmed. Even if a
product from our research and development programs performs favorably in
clinical trials, the FDA may not approve it.
In addition, because we will, in a number of cases, rely on contractual
rights to access data collected by other companies in clinical trials, we are
dependent on the continued satisfaction by such parties of their contractual
obligations to provide such access and cooperate with us in the execution of
successful filings with the FDA. There can be no assurance that the FDA will
permit such reliance. If we are unable to rely on clinical data collected by
others, we could be required to repeat clinical trials, which could
significantly delay commercialization, and require significantly greater
capital.
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Moreover, the rate of completion of 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 in our
clinical trials may result in increased costs and delays, which could have a
material adverse effect on us.
If we are unable to commence clinical trials as planned, complete the
clinical trials or demonstrate the safety and efficacy of our products in these
clinical trials, our business, financial condition and results of operations
will be materially and adversely affected.
IF WE DO NOT OBTAIN GOVERNMENTAL APPROVALS FOR OUR PRODUCTS IN DEVELOPMENT, WE
CANNOT SELL THESE PRODUCTS, WHICH WOULD SIGNIFICANTLY HARM OUR BUSINESS.
Products developed by the pharmaceutical and biotechnology industries are
subject to extensive regulation by the FDA under the Food Drug and Cosmetic Act.
All of our products under development will require regulatory approval by the
FDA before we are permitted to sell them in the United States. In order to do
so, we must show in preclinical and clinical trials that our products are safe
and effective, which cannot be guaranteed. The results from such studies may not
be predictive of results that will be obtained in later-stage testing. Clinical
trial data can be the subject of differing interpretation. We cannot assure you
that the FDA will interpret our clinical data the way we do, or that the FDA
will not require additional clinical data to support approval.
After we complete the clinical trials for a product, we will be required to
file a new drug application, if the product is classified as a new drug, or a
biologic license application, if the product is classified as a biologic, which
is a drug based on natural substances. The requirements for submission of such
applications and the approval processes on the part of the FDA require
substantial time and effort, and there can be no assurance that any approval
will be granted on a timely basis if at all. The FDA can take between one and
two years to review new drug applications and biologic license applications or
longer if significant questions are raised during the review process. In
addition, delays or rejections may be encountered during FDA review. We can not
assure you that even after such time and expenditures, regulatory approval will
be obtained. If regulatory approval of a product is granted, it may limit the
indicated uses for which the product may be marketed.
In order to market our products in countries outside of the United States
we and our partners are required to obtain similar approvals from foreign
regulatory bodies. The process of obtaining these approvals is time consuming
and requires the expenditure of substantial resources, and we may encounter
similar delays, rejections, requests for additional data, and other setbacks
with regulatory authorities in other countries as we face in the United States.
If any of these risks occur, our business, financial condition or results of
operations would be materially and adversely affected.
IF WE FAIL TO MAINTAIN GOVERNMENTAL APPROVALS OUR BUSINESS WILL SUFFER.
If we get approval, whether in the United States or internationally, we
will continue to be subject to extensive regulatory requirements. These
regulations are wide ranging and govern, among other things:
- adverse drug experience reporting regulations;
- product promotion;
- product manufacturing, including good manufacturing practice
requirements; and
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- product changes or modifications.
If we fail to comply or maintain compliance with such laws and regulations,
we may be fined and barred from selling our products. If the FDA believes that
we are not in compliance with the law, it can:
- retain or seize our products;
- mandate a recall;
- stop future violations through injunctive procedures; and
- assess civil and criminal penalties against us.
We depend on third parties to manufacture our products. These parties must
comply with the applicable FDA good manufacturing practice regulations, which
include quality control and quality assurance requirements as well as the
corresponding maintenance of records and documentation. Manufacturing facilities
are subject to ongoing periodic inspection by the FDA and corresponding state
agencies, including unannounced inspections, and must be licensed before they
can be used in commercial manufacturing of our products. We cannot assure you
that our present or future suppliers will be able to comply with the applicable
good manufacturing practice regulations and other FDA regulatory requirements.
After regulatory approvals are obtained, later discovery of previously unknown
problems or failure to comply with the regulatory requirements may result in
restrictions on the marketing of a product, withdrawal of the product from the
market, seizures, injunctions, or criminal sanctions.
IF WE CANNOT ADEQUATELY PROTECT OUR PATENT AND PROPRIETARY RIGHTS, OUR BUSINESS
WILL SUFFER.
Our success will depend in part on our ability and the ability of our
licensors to obtain patent protection for our technology and processes, to
preserve our trade secrets, and to operate without infringing the proprietary
rights of third parties. We own or have exclusively licensed pending
applications and/or issued patents worldwide relating to the technology of all
three of our programs as well as technology in earlier stages of research.
The foam technology used in our Luxiq and OLUX products is not covered by
issued patents in the United States or any other country but is the subject of
pending patent applications. In the event that we do not obtain patent coverage
for Luxiq and OLUX, it may be easier and more attractive for potential new
market entrants to develop and introduce competitive products, which could
materially and adversely affect our business, financial condition and results of
operations.
With regard to patent applications filed by us or our licensors or patents
issued to us or our licensors, we cannot assure you that:
- any of our or our licensors' patent applications will issue as
patents;
- our competitors will not successfully challenge or circumvent our
patents; or
- any patents which exist or are issued will provide competitive
advantage to us.
In addition, others may obtain patents that contain claims having a scope
that covers products or processes that we make, have made, use, or sell. If a
third party claimed an intellectual property right to technology we use, we
might be forced to:
- discontinue an important product or product line;
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- alter our products or processes to avoid infringement;
- pay license fees and/or damages; and
- cease certain activities.
Although we might under these circumstances attempt to obtain a license to
such intellectual property, we may not be able to do so on favorable terms, if
at all.
We cannot be certain that we would be successful in any attempt to redesign
our products or processes to avoid infringement.
Litigation or administrative proceedings, including interference
proceedings before the U.S. Patent and Trademark Office, may be necessary to
enforce our patent and proprietary rights and/or to determine the scope and
validity of others' patent and proprietary rights. A judgment adverse to us in
any patent interference, litigation or other proceeding arising in connection
with these patent applications could materially and adversely affect our
business. In addition, the costs of any such proceeding may be substantial
whether or not we are successful.
We are aware of other pending third party patent applications which, if
issued, might be asserted against our T-cell receptor, or TCR, vaccine
technology. We are also involved in a European Opposition against one of our
European patents that is related to TCR. Even though we are not pursuing
clinical development of TCR, we are continuing to incur both patent prosecution
and maintenance costs related to TCR.
In addition, the patent laws of foreign countries differ from those of the
United States and the degree of protection, if any, afforded by foreign patents
may be different.
Furthermore, with respect to our relaxin patent portfolio, one of the
European patents licensed to us was opposed by a third party. Our licensor
successfully defended the original Opposition, resulting in a decision in our
favor, but the decision has been appealed. We cannot assure you that the
original decision will be upheld.
We also rely on trade secrets and proprietary know-how. We require each of
our 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, consultant
or advisor, to the extent appropriate for the services provided during the
course of the relationship, shall be our exclusive property, other than
inventions unrelated to us 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 our trade
secrets in the event of unauthorized use or disclosure of such information.
THE STRENGTH OF OUR PATENT PORTFOLIO DEPENDS ON CERTAIN THIRD PARTIES.
We or our licensors are prosecuting patent applications both in the U.S.
Patent and Trademark Office and various foreign patent agencies for patents that
would cover technology we own or license. However, we do not know whether any of
our applications will result in the issuance of any patents, or whether any
issued patent will provide significant proprietary protection or will be
circumvented or invalidated.
-11-
<PAGE> 14
Nearly all of our patent portfolio is licensed from third parties, who are
responsible to varying degrees for the prosecution and maintenance of those
patents. Our success will depend on our ability, or the ability of our
licensors, to obtain and maintain patent protection on technologies, to preserve
trade secrets, and to operate without infringing the proprietary rights of
others. Patent applications filed by us or on our behalf may not result in
patents being issued or, if issued, the patents may not afford protection
against competitors with similar technology. It is possible that before any of
our products in development can be commercialized, the related patents may have
expired or be close to expiration, thus reducing any advantage of the patent.
Moreover, composition of matter patent protection, which gives patent protection
for a compound or a composition, may not be available for some of our product
candidates.
While we have taken reasonable steps to ensure that the patents licensed to
us are valid and enforceable, we cannot give any assurance that the patents, if
challenged, would be upheld. In addition, the patents in our relaxin patent
portfolio begin to expire in 2002 in foreign countries and 2005 in the United
States. While we and our licensors continue to file and prosecute patent
applications, there can be no assurance that any additional patents will issue,
or that they will be sufficient to protect our relaxin products.
Additionally, licenses with Genentech and the Florey Institute require us
to use our best efforts to commercialize relaxin. Our failure to successfully
commercialize relaxin may result in the reversion of our rights under these
licenses to Genentech and the Florey Institute. The termination of these
agreements and subsequent reversion of rights could materially and adversely
affect our business.
WE ARE DEPENDENT UPON THIRD-PARTY MANUFACTURERS AND DISTRIBUTORS FOR OUR
PRODUCTS. IF THEY ARE UNABLE OR UNWILLING TO PRODUCE OR DISTRIBUTE OUR PRODUCTS,
OUR BUSINESS RESULTS WILL SUFFER.
We have no manufacturing or distribution facilities for any of our
products, and we do not currently intend to develop any of these capabilities.
We have manufacturing agreements with the following companies:
- SmithKline for Ridaura;
- Consolidated Chemical Laboratories (Pvt.) Ltd. for Luxiq and OLUX;
- Boehringer Ingelheim Austria GmbH for relaxin; and
- Genentech for Actimmune.
If these third parties are unable or unwilling to produce our products in
sufficient quantities, with appropriate quality for our clinical trials and
subsequent commercialization, if any, and under commercially reasonably terms,
our business, financial condition and results of operations will suffer.
In addition, we have entered into an agreement with CORD Logistics, Inc. to
distribute Ridaura, Luxiq and Actimmune. If CORD were to become unable to
continue to distribute our products in an effective manner or if we were unable
to maintain sufficient personnel with the appropriate levels of experience to
manage this function, our business, financial condition and results of
operations would be harmed.
Our strategy is to continue to use contract manufacturers to produce our
current and future products. If we were unable to contract for manufacturing
capabilities on acceptable terms, our ability to conduct preclinical and human
clinical testing of products under development and to market and sell products
would be adversely affected. Therefore, manufacturing difficulties would
adversely affect our business, financial condition and results of operations.
-12-
<PAGE> 15
WE HAVE A NUMBER OF SOLE SOURCE MANUFACTURERS, AND INTERRUPTIONS IN THE SUPPLY
CHAIN COULD HARM OUR BUSINESS.
We currently rely on several sole source manufacturers. In particular,
Ridaura is currently manufactured by SmithKline and ConXn is being manufactured
for us by Boehringer Ingelheim. CCL Pharmaceuticals is currently our sole source
manufacturer for Luxiq and OLUX and we are currently in the process of seeking
to qualify an additional source for these products. We have not made any
attempts to qualify additional sources of supply for our other sole source
products. Any failure of sole source manufacturers to provide us with product
requirements in a timely and cost-effective manner could result in reduced sales
of marketed products and delays in the progress of clinical trials for products
under development. Accordingly, the failure of sole source manufacturers to meet
our requirements could have a material adverse effect on our business, financial
condition and results of operations.
WE FACE INTENSE COMPETITION, AND THE FAILURE TO COMPETE EFFECTIVELY WOULD HARM
US.
The pharmaceutical and biotechnology industries are highly competitive.
Other products and therapies currently exist on the market or are under
development that could compete directly with some of the products that we are
marketing, or seeking to develop and market. 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 us. We believe that competitive
factors in our industry include:
- scientific and technological expertise;
- sales and marketing resources;
- operational competence in developing, protecting, manufacturing and
marketing products and obtaining timely regulatory agency approvals;
- managerial competence in identifying and pursuing product
in-licensing and acquisition opportunities; and
- financial resources.
We cannot assure you that physicians will adopt our products over competing
products, or that our products will offer an economically feasible alternative
to existing modes of therapy.
In addition, many of our existing or potential competitors, particularly
large pharmaceutical companies, have substantially greater financial, technical
and human resources than we have. Many of these competitors have more collective
experience than we do in undertaking preclinical testing and human clinical
trials of new pharmaceutical products and obtaining regulatory approvals for
therapeutic products. Accordingly, our competitors may succeed in obtaining FDA
approval for products more rapidly than us.
THE INTRODUCTION OF NEW TREATMENTS FOR RHEUMATOID ARTHRITIS WILL LIKELY RESULT
IN DECLINING SALES OF RIDAURA, WHICH WILL ADVERSELY AFFECT OUR REVENUES AND
COULD HARM OUR BUSINESS.
Three companies, Immunex Corporation, Hoechst Marion Roussel and Monsanto
Company, recently received FDA approval for new products and therapies to treat
rheumatoid arthritis. In addition, there are other products under development
for treatment of rheumatoid arthritis, and the number of new products in this
field is therefore likely to continue to increase.
-13-
<PAGE> 16
There can be no assurance that physicians will continue to prescribe
Ridaura over other rheumatoid arthritis products, or that Ridaura will offer a
cost-effective alternative to competing therapies. In addition, although we
believe that there will be a continued role for products such as Ridaura, the
market for products to treat rheumatoid arthritis is changing dramatically by
virtue of these recent product introductions and is likely to continue to change
based upon other new product introductions. As a result, we expect that sales of
Ridaura will decline, which will have a negative effect on our revenues and
could harm our business, financial condition and results of operations.
THE UNAVAILABILITY OF THIRD-PARTY REIMBURSEMENT MAY LIMIT THE USE OF OUR
PRODUCTS, WHICH WOULD CAUSE OUR REVENUES TO DECLINE.
Our products' commercial success is substantially dependent on whether
third-party reimbursement is available for the use of our products by hospitals,
clinics and doctors. We cannot be certain that Medicare, Medicaid, health
maintenance organizations and other third-party payers will authorize or
otherwise budget for the reimbursement of our products. Such governmental and
third-party payors are increasingly challenging the prices charged for medical
products and services. We cannot be certain that our products will be viewed as
cost-effective or that reimbursement will be available to consumers or will be
sufficient to allow our products to be marketed on a competitive basis. The
continuing efforts of government, insurance companies, and other payors of
health care costs to contain or reduce those costs could lead to reduced sales
of our products. Likewise, legislative proposals to reform health care or reduce
government programs could result in lower prices for or rejection of our
products. The cost containment measures that health care payors are instituting,
both in the United States and internationally, could adversely affect our
business, financial condition and results of operations. To the extent that
changes in reimbursement policies or health care cost containment initiatives
limit or restrict reimbursement for our products, our business, financial
condition and results of operations would be materially and adversely affected.
In certain foreign markets pricing of prescription pharmaceuticals is
already subject to government control. Continued significant changes in the
United States or foreign health care systems could have a material adverse
effect on our business.
WE ARE LIKELY TO HAVE TO ISSUE ADDITIONAL SHARES OF OUR COMMON STOCK TO
GENENTECH, WHICH WOULD DILUTE YOUR EQUITY OWNERSHIP INTEREST IN US.
In 1998, we obtained a license from Genentech for Actimmune for the
treatment of infections resulting from chronic granulomatous disease and several
additional indications in the United States. As a result of the license, we
issued to Genentech 380,048 shares of common stock valued at $2.0 million in May
1998. The license originally required that the value of these shares equal $4.0
million on December 28, 1998. This license was amended in December 1998 and now
requires the total value of the shares issued to Genentech equal $4.0 million on
or before December 15, 1999. If the value of the shares is less than $4.0
million at that time, we would have to either issue additional shares or pay
cash to Genentech to make up the difference. The value of the 380,048 shares
issued to Genentech was approximately $1.9 million on October 31, 1999, making
it likely that we will need to issue additional shares to Genentech before
December 15, 1999. If we are required to issue additional shares, your
percentage ownership in us will be reduced.
WE ARE SUBJECT TO FOREIGN EXCHANGE RISKS IN SOME OF OUR CONTRACTS WHICH MAY
INCREASE OUR OPERATIONAL EXPENSES.
-14-
<PAGE> 17
Payments to us under our relaxin collaboration with Suntory for the
Japanese market are made to us in Japanese yen. The expenses that we incur to
develop relaxin are denominated in U.S. dollars. Accordingly, in the event that
the U.S. dollar appreciates against the Japanese yen, the payments we receive
from Suntory would cover a smaller portion than anticipated of relaxin
development costs. This would require us to bear a greater proportion of
development costs. In addition, if in the future we enter into additional
agreements or make product sales that are denominated in foreign currencies, our
foreign currency exchange risk would increase.
In addition, we make payments to Boehringer Ingelheim for the production of
ConXn in Austrian Schillings and to CCL Pharmaceuticals for the production of
Luxiq and OLUX in Pounds Sterling. In the event that the U.S. dollar depreciates
against the schilling or the pound, the payments that we must make will
increase, which may have a material adverse effect on our business.
WE DEPEND ON OUR KEY PERSONNEL, AND WILL NEED TO ATTRACT AND RETAIN ADDITIONAL
KEY PERSONNEL IN THE FUTURE.
We depend on the principal members of our development and management
staffs, the loss of whose services might impede the achievement of development
and commercial objectives. We do not maintain key person insurance on any of
these individuals. Moreover, the hiring of additional personnel in such areas as
clinical trials, governmental approvals, manufacturing and sales and marketing
will increase burdens on our management, operational and financial resources.
Competition for key personnel with the expertise that we are likely to require
is intense and is expected to continue to increase. If we are unable to attract
and retain the required number of skilled and experienced management and
operational and scientific personnel, our business will be harmed.
WE USE HAZARDOUS MATERIALS IN OUR BUSINESS AND ARE SUBJECT TO ENVIRONMENTAL
CONTROLS AND REGULATIONS.
Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive materials. We are subject
to federal, state and local laws and regulations governing the use, storage,
handling and disposal of such materials and certain waste products. Although we
believe that our 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, we could be
held liable for any damages that result and any liability could exceed our
resources. We could be required to incur significant costs to comply with
environmental laws and regulations as its research activities are increased, and
if that were to happen our business, financial condition and results of
operations could be adversely affected.
BECAUSE STOCK OWNERSHIP IS CONCENTRATED, YOU AND OTHER INVESTORS WILL HAVE
MINIMAL INFLUENCE ON STOCKHOLDER DECISIONS.
Prior to this offering, our ten largest stockholders beneficially owned
approximately 67% of our outstanding common stock. As a result, these
stockholders are able to significantly influence matters requiring stockholder
approval, including the election of directors. Such concentration of ownership
may also have the effect of delaying, deferring or preventing a change in
control of our company.
WE MAY FACE PRODUCT LIABILITY CLAIMS RELATED TO THE USE OR MISUSE OF OUR
PRODUCTS.
-15-
<PAGE> 18
We face an inherent business risk of product liability claims in the event
that the use or misuse of our products results in personal injury or death. We
have not experienced any such claims to date, but we cannot be certain, in
particular after commercial introduction of products, that we will not
experience losses due to product liability claims. We currently maintain
liability insurance with specified coverage limits. Although we believe these
limits are adequate, we cannot be certain that the insurance policies will be
sufficient to cover claims which may be made against us. Product liability
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms, or at all. Any claims against us, regardless of
their merit, could materially and adversely affect our business.
WE MAY BE ADVERSELY AFFECTED BY THE YEAR 2000 ISSUE.
Many computer systems and software applications were not designed to handle
dates beyond the year 1999, and therefore will need to be modified prior to year
2000 in order to remain functional. Those computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. Beginning in the year 2000, these date code fields will need
to accept four digit entries to the 1900's from the year 2000 or they 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. As with many
other companies the Year 2000 issue poses a potential risk for us, and computer
systems and/or software used by many companies, including us, may need to be
upgraded to comply with such Year 2000 requirements.
We have completed an assessment of our business information systems and
related business processes used in our operations, most of which are provided by
outside suppliers. As of September 30, 1999, we have completed the testing and
upgrading of all of our information technology and operating systems. We have
on-line access to our third party distribution service system that includes
customer orders, billing, shipping and inventory management. This vendor has
made its distribution system Year 2000 compliant, and we converted to the
compliant system in November 1998.
Our reliance on key suppliers, and therefore on the proper functioning of
their information systems and software, is increasing, and there can be no
assurance that another company's failure to address Year 2000 issues might not
have an adverse effect on us. We have initiated formal communications with each
of our significant suppliers and customers to determine the extent of our
vulnerability to those third parties' failure to remediate their own Year 2000
issues. We have requested that third party vendors represent their products and
services to be Year 2000 compliant and that they have a program to test for Year
2000 compliance. However, the response of those third parties is beyond our
control.
We have initiated the process of developing contingency plans for certain
critical business processes. These contingency plans involve, among other
actions, adjusting production schedules, increasing inventories, developing
manual workarounds, and including a test run with the date "00" for our internal
operating systems by mid-November. The necessity of any contingency plan must be
evaluated on a case-by-case basis and will vary considerably in nature depending
on the Year 2000 issue it may need to address. However, there can be no
assurance that we will be able to solve all potential Year 2000 issues, and if
we fail to correct a material Year 2000 problem, our normal business activities
and operations could be interrupted. Such interruptions could have a material
adverse effect on our business, financial condition and results of operations.
Our total cost for the Year 2000 project is estimated to be less than $100,000,
and has been funded through available cash resources and has not been material
to our financial condition to date.
WE HAVE ANTI-TAKEOVER PROVISIONS IN OUR CORPORATE CHARTER DOCUMENTS THAT MAY
RESULT IN OUTCOMES THAT YOU DO NOT AGREE WITH.
-16-
<PAGE> 19
Our 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 our
stockholders. The rights of the holders of common stock will be subject to, and
may be adversely affected 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
our outstanding voting stock. We also have a stockholder rights plan, which
entitles existing stockholders to rights (including the right to purchase shares
of preferred stock) in the event of an acquisition of 15% or more of our
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 us.
In addition, provisions of our 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 us. Further, our 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.
FORWARD-LOOKING INFORMATION
- --------------------------------------------------------------------------------
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act. When used in this prospectus, the words "anticipate," "believe,"
"estimate," "will," "may," "intend" and "expect" and similar expressions
identify forward-looking statements. Although we believe that our plans,
intentions and expectations reflected in these forward-looking statements are
reasonable, we can give no assurance that these plans, intentions or
expectations will be achieved. Forward-looking statements in this prospectus
include, but are not limited to, those relating to the commercialization of our
currently marketed products, the progress of our product development programs,
developments with respect to clinical trials and the regulatory approval
process, developments related to acquisitions and clinical development of drug
candidates, and developments relating to the growth of our sales and marketing
capabilities. Actual results, performance or achievements could differ
materially from those contemplated, expressed or implied, by the forward-looking
statements contained in this prospectus. Important factors that could cause
actual results to differ materially from our forward-looking statements are set
forth in this prospectus, including under the heading "Risk Factors." These
factors are not intended to represent a complete list of the general or specific
factors that may affect us. It should be recognized that other factors,
including general economic factors and business strategies, may be significant,
presently or in the future, and the factors set forth in this prospectus may
affect us to a greater extent than indicated. All forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements set forth in this prospectus. Except
as required by law, we undertake no obligation to update any forward-looking
statement, whether as a result of new information, future events or otherwise.
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<PAGE> 20
USE OF PROCEEDS
- --------------------------------------------------------------------------------
Connetics will not receive any proceeds from the sale of the Shares by the
Selling Stockholders in the offering.
DIVIDEND POLICY
- --------------------------------------------------------------------------------
We have never declared or paid cash dividends on our common stock. We
currently intend to retain all available funds for use in our business, and do
not anticipate paying any cash dividends in the foreseeable future. Covenants
under our bank credit agreement restrict us from paying cash dividends.
PRICE RANGE OF COMMON STOCK
- --------------------------------------------------------------------------------
Our common stock commenced trading on the Nasdaq National Market under the
symbol CNCT on February 1, 1996. The following table sets forth, for the periods
indicated, the intra-day high and low bid prices per share of common stock on
the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1999
Fourth Quarter (through November 5, 1999)............ $ 5.06 $4.06
Third Quarter........................................ 7.75 4.88
Second Quarter....................................... 8.00 5.88
First Quarter........................................ 10.25 4.50
1998
Fourth Quarter....................................... 5.88 2.00
Third Quarter ....................................... 4.50 2.13
Second Quarter....................................... 6.06 3.25
First Quarter........................................ 5.56 3.00
1997
Fourth Quarter....................................... 4.38 2.50
Third Quarter........................................ 9.75 3.50
Second Quarter....................................... 8.13 6.00
First Quarter........................................ 8.38 6.00
</TABLE>
The last reported sale price of our common stock on the Nasdaq National
Market on November 5, 1999 was $4.375. As of October 31, 1999, there were
approximately 177 stockholders of record of our common stock.
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<PAGE> 21
BUSINESS
- --------------------------------------------------------------------------------
OUR BUSINESS
We are a pharmaceutical company focused on late-stage product development
and commercialization for dermatology and other specialty medical markets. We
believe we have a competitive advantage due to our focused marketing and sales
force, our expertise in developing products in an efficient manner, and our
commitment to pursuing the development and commercialization of innovative
products with significant commercial potential. We currently market three
products, and our goal is to continue to increase revenues with our existing, as
well as future, products. The status of our development and commercialization
activities is as follows:
Dermatology products:
- Luxiq foam--marketed for the treatment of mild to moderate
scalp dermatoses
- OLUX foam--NDA submitted for the treatment of moderate to
severe scalp dermatoses
- Ketoconazole foam--in development for the treatment of topical
fungal diseases
ConXn (recombinant human relaxin) development programs:
- Scleroderma--Phase II/III trial ongoing
- Infertility--Phase I/II trials scheduled to begin in late 1999
- Peripheral vascular disease and organ fibroses--preclinical
development ongoing
Other commercialized products:
- Ridaura--marketed for the treatment of rheumatoid arthritis
- Actimmune--marketed for the treatment of infections resulting
from chronic granulomatous disease, a rare congenital
autoimmune disease
We are building our business by offering dermatological products with
clinically proven therapeutic or cosmetic advantages and by providing quality
customer service to dermatologists through our experienced sales and marketing
staff. We are also targeting the development of ConXn for several indications
and are conducting a Phase II/III trial. We plan to continue to leverage our
expertise in efficiently developing and marketing our products by continuing to
innovate, strategically acquire, in-license or enter into co-development
agreements for commercially attractive pharmaceutical products.
OUR OBJECTIVES
ESTABLISH STRONG PRESENCE IN THE DERMATOLOGY MARKET
- Exploit Attractive Market Opportunities. We have identified the
dermatology market as one that is underserved by large
pharmaceutical companies because the market opportunity, while
significant for us, is relatively small for them. We intend to
differentiate ourselves from our competitors by offering products
which are both effective and cosmetically superior to existing
products.
-19-
<PAGE> 22
- Capitalize Upon our Focused Marketing and Sales Force. We have a 52
person pharmaceutical sales and marketing organization. We require
that our sales people have pharmaceutical sales experience, and the
majority has prior dermatological sales experience. Our goal is to
build close relationships with the approximately 6,000
dermatologists who are responsible for 90% of all prescriptions
written by dermatologists. We intend to enhance our existing
marketing and sales capabilities in order to expand and increase the
penetration of our existing products as well as market new products.
- License and Develop Products Based Upon Innovative Delivery
Formulations. We believe that the proprietary foam technology offers
significant advantages over conventional therapies, and we plan to
develop other products employing this unique delivery formulation.
We will seek to develop other innovative products from existing
pharmaceutical agents with proven efficacy and a demonstrated
physician and patient need. We intend to pursue further strategic
licensing of innovative formulations consistent with our standards
for efficacy, quality, cosmetic elegance, cost and gross profit
margins.
- In-License Development Stage and Currently Marketed Products. We
plan to continue to in-license and acquire rights to late-stage
development products and currently marketed products in the
dermatology area. Changing industry conditions have resulted in
opportunities to in-license or acquire additional products.
Additionally, we are able to provide our development and
commercialization expertise to products that are beyond the core
competencies of some research companies. This strategy allows us to
develop products while minimizing our exposure to the risks inherent
in drug discovery and basic research.
AGGRESSIVELY AND BROADLY DEVELOP CONXN
- Exploit Exclusive License Rights. We licensed the exclusive rights
to develop and commercialize recombinant human relaxin from
Genentech. ConXn may serve as a potential treatment for several
life-threatening diseases and medical disorders that currently have
limited therapies. Accordingly, if successfully developed and
cleared for marketing by the FDA, ConXn could represent a
significant commercial opportunity.
- Conduct Clinical Trials for Multiple Indications. We initiated a
Phase II/III trial of ConXn for the treatment of diffuse scleroderma
in February 1999. We anticipate completing enrollment by year end
1999, and plan to announce trial results by year end 2000. In
addition, we filed an application to initiate human studies for the
treatment of infertility and expect to begin enrolling patients in a
Phase I/II clinical trial during the fourth quarter of 1999. We are
also investigating the opportunities that exist for ConXn in
treating peripheral vascular disease and organ fibroses.
- Leverage Our Strategic Development Partnerships. In collaboration
with our three corporate partners-Medeva, Suntory and Paladin-we are
rapidly expanding our development and commercial planning activities
for relaxin. These strategic agreements involve license,
development, milestone and equity payments to us of up to $52
million in exchange for the commercial rights to relaxin for the
treatment of scleroderma outside of the United States. As of June
30, 1999, we had received $12.5 million from these partners.
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<PAGE> 23
PRODUCTS
Our marketed products and those under development are primarily
concentrated in dermatology as well as other specialty markets. Our products are
as follows:
<TABLE>
<CAPTION>
PRODUCT INDICATION STATUS MARKETING PARTNERS
<S> <C> <C> <C>
Dermatology
LUXIQ FOAM Mild to moderate scalp Marketed Connetics - North America
dermatoses
OLUX FOAM Moderate to severe scalp NDA submitted Connetics - Worldwide
dermatoses
KETOCONAZOLE Topical fungal diseases Phase III trials expected Connetics - Worldwide (excluding
FOAM late 2000 Australia and New Zealand)
Relaxin
CONXN Scleroderma Phase II/III trial initiated Medeva - Europe
in February 1999 Paladin - Canada
Suntory - Japan(1)
Connetics - Rest of World
Infertility(2) Phase I/II trials Medeva - Europe
scheduled to begin Paladin - Canada
in late 1999 Connetics - Rest of World
Peripheral vascular Preclinical development Medeva - Europe
disease and organ fibroses underway for treatment Paladin - Canada
of organ fibroses and Connetics - Rest of World
peripheral vascular
disease
Other
RIDAURA Rheumatoid arthritis Marketed Connetics - United States
ACTIMMUNE Chronic granulomatous Marketed Connetics - United States
disease until December 31, 2001
(royalties
thereafter)
T-CELL RECEPTOR Autoimmune diseases Early-stage clinical Connetics - Worldwide
VACCINES studies completed - Further
development activities
have been suspended
</TABLE>
(1) Suntory did not license the tradename ConXn.
(2) We currently have co-exclusive rights with Genentech for reproductive
indications. Medeva and Paladin have options to acquire rights for
reproductive indications in their territories if we obtain exclusive
worldwide rights.
-21-
<PAGE> 24
DERMATOLOGY
According to IMS, the 1998 prescription dermatology market accounted for an
estimated $2.7 billion in annual sales in the United States and is comprised
mostly of products with annual sales of less than $50 million per product. We
believe that most prescription dermatology products do not generate a level of
sales that would typically interest large pharmaceutical companies.
Approximately 6,000 of the 8,500 U.S. dermatologists account for 90% of the
prescriptions written by dermatologists. We believe this concentrated physician
base enables us to effectively address this market with our well trained, highly
experienced, 52 person sales and marketing force.
Often dermatological diseases persist for an extended period of time and
are treated with clinically proven drugs that are currently delivered in a
variety of formulations, including solutions, creams, gels and ointments. We
believe that these existing delivery systems often inadequately address a
patient's needs for efficacy and cosmetic elegance, which combined may decrease
patient compliance. We believe that our foam-based dermatology products offer
significant advantages over these conventional therapies. These advantages
include improved efficacy due to higher absorption and more localized delivery
of the active agent. In addition, the foam is cosmetically elegant as it is
non-staining, non-greasy and quick drying. All of these factors may lead to
increased patient compliance.
We focus on developing and commercializing innovative products for
dermatology and other specialty market needs. We have two foam-based products
for the treatment of scalp dermatoses: Luxiq, which we currently market, and
OLUX, which is awaiting FDA review. We believe that the proprietary foam
delivery system has significant treatment and cosmetic advantages over
conventional therapies for scalp dermatoses. These advantages include:
- - Strong Efficacy: The unique foam formulation liquefies when applied, and
enables rapid penetration of active dermatologic agent, thus enhancing
efficacy;
- - Cosmetic Elegance: The foam formulation when applied is quick drying,
non-greasy, non-staining and odorless; and
- - Increased Patient Compliance: The formulation's cosmetic elegance and
increased efficacy may improve patient compliance and satisfaction.
Luxiq Foam
Luxiq is a foam formulation of a mid-potency topical steroid with the
active ingredient betamethasone valerate, which is prescribed for the treatment
of steroid responsive scalp dermatoses such as psoriasis, eczema and seborrheic
dermatitis. According to IMS, the 1998 sales of mid and high potency topical
steroid treatments were approximately $450 million in the United States. We
licensed the North American rights from Soltec to develop and commercialize
Luxiq. In our Phase III trial, patients treated with Luxiq experienced a
statistically significant improvement over patients treated with placebo or a
currently approved betamethasone valerate mid-potency lotion. In March 1999, we
received FDA clearance for Luxiq and in April 1999 we initiated commercial sales
in the United States. The product is approved for sale in the United Kingdom and
is being marketed in the United Kingdom by a subsidiary of Medeva.
OLUX Foam
OLUX is a foam formulation of a super high potency topical steroid with the
active ingredient clobetasol propionate, which is being developed for the
treatment of moderate to severe scalp psoriasis and other steroid-responsive
dermatoses of the scalp. According to IMS, the 1998 sales of super-high potency
steroid treatments were $190 million in the United States. We have licensed
worldwide rights from Soltec to develop and commercialize OLUX. In 1998, we
completed a Phase III multicenter,
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randomized, double-blind clinical trial of approximately 190 scalp psoriasis
patients which compared OLUX to a currently approved clobetasol solution and
placebo during a two week treatment regimen. OLUX trial results showed a 74%
improvement in the global response to treatment as judged by the investigators
for OLUX as opposed to 63% for clobetasol solution and 8% for placebo. Primary
endpoints included changes in the clinical signs of psoriasis: plaque thickness,
scaling, erythema (redness), and the global response to treatment as judged by
the investigator. In July 1999, we submitted a new drug application to the FDA
for OLUX.
Ketoconazole Foam
In July 1999, we entered into an exclusive worldwide license, excluding
Australia and New Zealand, with Soltec to develop and commercialize a foam
formulation of ketoconazole, a commercially available drug for the treatment of
topical fungal diseases. The marketing of ketoconazole foam will require us to
receive specific labeling approvals for each indication. According to IMS, the
1998 sales of topical antifungal agents for all indications were approximately
$500 million in the United States. Ketoconazole is our third dermatology product
to enter development in the last three years. We intend to initiate Phase III
trials with our ketoconazole product in late 2000, following completion of
formulation and stability studies.
ConXn
ConXn is our trademark for recombinant human relaxin, a cloned version of
the natural hormone, relaxin. We licensed the exclusive rights to develop and
commercialize recombinant human relaxin from Genentech, except for co-exclusive
rights for reproductive indications. Relaxin is known to have an antifibrotic
property, or the lessening or prevention of the creation of dense, firm scar
tissue in skin and connective tissue, and an angiogenic property, or the
stimulation and formation of new blood vessels. We are pursuing development
programs for both properties of relaxin; scleroderma and other organ fibroses
represent the target indications for relaxin's antifibrotic properties; while
infertility and peripheral vascular disease represent potential opportunities
for relaxin's angiogenic properties.
Relaxin, identified over 70 years ago, was first described as a substance
associated with pregnancy. In the mid-1950's, animal-derived relaxin was
available as a medical treatment for halting or controlling pre-term labor. Over
the years, data has been accumulated regarding the biological properties of this
hormone outside the realm of pregnancy.
To date, we have entered into three collaborative partnerships for our
relaxin program for markets outside of the United States. We have licensed
rights to develop and commercialize relaxin to Medeva for Europe, Suntory for
Japan, and Paladin for Canada. Our license agreements with these international
partners are financially and commercially valuable as they offset much of the
costs associated with developing relaxin and will provide product
commercialization in geographical markets outside of our focus. In combination,
the three deals may potentially provide approximately $52 million in license,
development, milestone and equity payments, plus royalties on product sales for
the successful development of ConXn for the treatment of scleroderma. We may
receive additional milestone payments for the approval of additional indications
outside of the United States. We may pursue additional license agreements for
other foreign markets, and we intend to retain rights for the United States.
Scleroderma
The first indication for which we are developing ConXn is scleroderma, a
serious disease involving the excessive formation of connective tissue.
Scleroderma is characterized by thickening and hardening of the skin and, in
severe cases, the internal organs, including the heart, lungs, kidneys and the
organs of the gastrointestinal tract. Scleroderma can cause extensive
disfigurement and quality of life impairment, often making it impossible for
afflicted patients to carry out the most routine daily functions. The
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Scleroderma Research Foundation estimates that between 300,000 and 500,000
individuals in the United States, of whom 80% are women, suffer from various
forms of this disease, with approximately 70,000 having a severe form of
scleroderma called progressive systemic sclerosis. We have been granted orphan
drug status in the United States for ConXn for treatment of progressive systemic
sclerosis. The Orphan Drug Act of 1983 provides incentives to develop and
manufacture products for the treatment of rare diseases. Under the Orphan Drug
Act, we may be eligible for tax benefits and be granted a seven-year period of
marketing exclusivity for ConXn for the orphan indication.
The most serious form of progressive systemic sclerosis, called diffuse
scleroderma, is often fatal. Few therapies exist that ease the pain and
suffering of scleroderma patients. In June 1997, we announced results of a Phase
II trial for ConXn in patients with diffuse scleroderma. The results of the six
month, 64-patient Phase II trial showed that the administration of 25 micrograms
per kilogram per day of ConXn caused a statistically significant reduction in
skin score, which is a measure of skin thickening, the primary clinical
endpoint, and positive trends were seen in eleven other secondary disease
parameters. To our knowledge, ConXn is the only therapy to show statistically
significant efficacy in a Phase II, double-blind, placebo-controlled trial for
scleroderma. Based partly on the results of the Phase II trial and an earlier
Phase I/II trial for scleroderma, we believe that ConXn may have a beneficial
effect on connective tissue turnover and may serve as a treatment for
scleroderma. We initiated a 200-patient, Phase II/III trial of ConXn for the
treatment of diffuse scleroderma in February 1999. We anticipate completing
enrollment by the end of 1999 and announcing trial results by the end of 2000.
If the results from this trial are positive, we intend to submit a biologic
license application to the FDA requesting clearance to market the drug.
Infertility
Despite improvements in infertility therapy, it is believed that a major
cause of infertility is due to the failure of the embryo to implant in the
uterus. Our scientists and collaborators have accumulated data indicating that
relaxin may be involved in stimulating new blood vessel formation and thickening
of the lining of the uterus, which may enhance embryonic implantation and
pregnancy success. Accordingly, we believe that ConXn may be useful in the
treatment of infertility. In June 1999, we filed an investigational drug
application for use of ConXn in the treatment of infertility, and we expect to
begin enrolling patients in Phase I/II clinical trials during the fourth quarter
of 1999. We intend to conduct reproductive toxicology tests in animals in
parallel with the Phase I/II trials.
Peripheral Vascular Disease
Peripheral vascular disease, which is generally known as PVD, is a syndrome
characterized by inadequate blood flow to the extremities, particularly the
lower limbs. PVD often leads to pain and debilitating ulcers, and in its more
serious manifestations, gangrene and amputation of the affected limb. It is
caused by a variety of serious medical conditions, but the single most common
cause is diabetes mellitus. As the incidence of Type II diabetes is increasing
in both developed and developing nations, and because there are limited
therapeutic options for treatment, PVD is becoming of increasing concern.
Because ConXn has a stimulating effect on new blood vessel formation and because
of anecdotal reports of wound-healing in our scleroderma trials, we believe that
it may have a therapeutic effect on treating PVD. We are currently evaluating
the feasibility of a clinical trial with ConXn to treat PVD.
Organ and Other Fibroses
We believe that ConXn may have further potential in treating organ-specific
fibroses, such as pulmonary, liver, and kidney fibroses, and fibroses stemming
from cardiovascular disease. Each of these fibrotic conditions has a common
cause -- the production of too much collagen that the body is unable to
adequately break down. ConXn's ability to interrupt the production of and
promote the breakdown of scarred or hardened tissue may make it effective in the
treatment of such diseases, as outlined below.
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<TABLE>
<CAPTION>
AFFECTED ORGAN POTENTIAL INDICATION CURRENT THERAPIES
<S> <C> <C>
Heart Scarring of the heart that occurs in heart Angiotensin-converting
attacks, atherosclerosis or hypertension enzyme inhibitors
Vessel blockage (restenosis) following Stents, radiation and
angioplasty thrombolytics
Lung Chronic inflammation and scarring in the Steroids
walls of the lungs
Liver Fibrosis induced by chronic hepatitis or Steroids
cirrhosis of the liver
Kidney Fibrosis that occurs from diabetes and other Steroids; Angiotension-
diseases leading to impairment of kidney converting enzyme inhibitors
filtration
</TABLE>
OTHER PRODUCTS
Ridaura
Ridaura is an oral formulation of gold salt for the treatment of rheumatoid
arthritis, a chronic autoimmune disease that results in painful inflammation and
erosion of the joints and loss of mobility. It is estimated that over two
million individuals in the United States suffer from this disease. Ridaura 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. Ridaura competes on the basis of clinical evidence
which shows the drug slows the progression of damage to joint tissue. Our sales
of Ridaura for the six months ended June 30, 1999 were approximately $2.3
million as compared to approximately $3.2 million for the same period last year.
We believe that our sales have declined in part due to the recent introduction
of several major rheumatoid arthritis therapies.
Actimmune
Interferon gamma is one of a family of proteins involved in the regulation
of the immune system and has been shown to reduce the frequency and severity of
certain infections. In May 1998, we entered into a license agreement with
Genentech for exclusive rights in the United States, under certain patent rights
and know-how, to Actimmune, Genentech's interferon gamma product, for the
following indications: infections resulting from chronic granulomatous disease,
or CGD; non-cancer dermatological diseases; infectious diseases; infections in
osteopetrosis; pulmonary fibrosis; and asthma. At the same time, we also entered
into a supply agreement with Genentech in which they will manufacture and supply
Actimmune to us. We amended the license agreement effective January 15, 1999 and
April 27, 1999 with the cumulative effect of expanding the fields of use for
which the license applies, and adding Japan to the license territory. Actimmune
was approved for sale in the United States in January 1999 and commercially
launched in April 1999. In late April 1999, we spun-off our wholly-owned
subsidiary InterMune to develop commercial uses for Actimmune. In connection
with the spin-off, we have retained the commercial rights to and revenue from
Actimmune for CGD until December 31, 2001 and we will receive a royalty on
Actimmune sales thereafter. In addition, we have retained the product rights for
potential dermatological applications. Our sales of Actimmune for the six months
ended June 30, 1999 were approximately $2.0 million as compared to zero for the
same period in 1998. InterMune has assumed our obligations under the license
with Genentech and the supply agreement.
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T-Cell Receptor Program
Autoimmune diseases are generally believed to result from an inappropriate
response of the immune system; however, the mechanism responsible for causing
these T-cells to attack healthy tissue has, for the most part, not been
identified. Through a license agreement with XOMA and a research and
collaboration and assignment agreement with Arthur A. Vandenbark, Ph.D., we hold
certain patents to T-cell receptor vaccines, generally known as TCR vaccines,
for the treatment of autoimmune diseases, such as rheumatoid arthritis and
multiple sclerosis. We conducted early-stage clinical studies to evaluate TCR
vaccines. While the results for the treatment of rheumatoid arthritis and
multiple sclerosis were encouraging, we have suspended most of our activity with
respect to TCR, to permit us to focus resources on our dermatology and
relaxin-based products. We are exploring strategic alternatives for this
product.
SALES AND MARKETING
We strive to maintain an experienced, highly productive sales and marketing
organization. In recruiting people to join our sales team, we require that
people have pharmaceutical sales experience, and the majority of our sales staff
has prior experience selling dermatology products. As of September 30, 1999, we
had 54 people in our sales and marketing organization, including 45 sales
representatives. Our sales representatives focus on cultivating relationships of
trust and confidence with dermatologists. We use a variety of advertising,
promotional material, specialty publications, participation in educational
conferences and product Internet sites to achieve our marketing objectives. We
may supplement our sales staff from time to time with contract sales
representatives to increase the frequency of our sales calls or to assist with
the launch of products.
We intend to maintain control of sales and marketing responsibilities for
our targeted specialty markets in the United States. Outside of our target
markets, we have entered partnerships to manage product commercialization
activities. For example, in March 1999, we entered into agreements with MGI
Pharma to provide sales support for Ridaura and Luxiq to rheumatologists. The
agreements help us achieve our sales objectives for these products, while
permitting us to focus primarily on the dermatology market. In addition, our
relaxin partners, Medeva for Europe, Suntory for Japan and Paladin for Canada,
will be responsible for commercializing relaxin in their territories should that
product be approved. Currently, all of our product distribution activities are
handled by CORD in the United States.
PARTNERING AGREEMENTS
Since our founding, we have entered numerous strategic partnerships that
have substantially expanded our business. Our main reasons for entering
partnerships are to:
- gain access to additional product opportunities;
- share the risk and financial cost of developing products;
- increase product sales and marketing activities; and
- extend development and commercialization activities to foreign
markets.
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Florey Institute
Many of our relaxin patent rights are licensed from the Florey Institute
through a sublicense from Genentech. In January 1998, we entered into a direct
agreement with the Florey Institute that requires us to pay relaxin royalties
based on our sales directly to the Florey Institute in addition to those
royalties payable to Genentech, and according to a modified royalty structure.
Under the agreement, we provide approximately $125,000 of annual research
funding to the Florey Institute for up to five years or until the date of the
first sale of a relaxin product by us or our relaxin partners. We have also
agreed to pay the Florey Institute a portion of revenues received from corporate
partners. If we fail to use our best efforts to commercialize relaxin, our
rights to the Florey Institute patents could be terminated by the Florey
Institute.
Genentech
In September 1993, we entered into an agreement with Genentech, which was
subsequently amended in July 1994 and April 1996. The agreement, as amended,
grants to us exclusive rights, for indications other than reproductive, to make,
have made, use, import and sell certain products derived from recombinant human
relaxin. Genentech retains co-exclusive rights for reproductive indications. The
agreement also includes technology transfer, supply, and intellectual property
provisions, including a provision requiring us to meet milestones. Our failure
to achieve designated milestones allows the termination of the license by
Genentech. Upon termination, we could be required to license to Genentech, on a
non-exclusive basis, our relaxin technology.
In December 1995, we entered into a license agreement with Genentech to
acquire exclusive U.S. development and marketing rights to interferon gamma for
dermatological indications. In May 1998, the agreement was amended in its
entirety and we entered into a new license agreement with Genentech that granted
us an exclusive U.S. license under certain patent rights and know-how to
Actimmune for the treatment of chronic granulomatous disease and several
additional indications. At the same time, we also entered into a supply
agreement with Genentech in which they will manufacture and supply Actimmune to
us. We amended the license agreement effective January 1999 and April 1999 with
the cumulative effect of expanding the fields of use for which the license
applies, and adding Japan to the licensed territory.
InterMune
In April 1999, we spun-off our wholly owned subsidiary, InterMune, through
the sale of a majority interest to outside investors. We established InterMune
to develop Actimmune in conjunction with our license of Actimmune from
Genentech. At the close of the spin-off, we retained approximately a 10% equity
position in InterMune, and will receive additional cash and equity payments over
the next three years. We will retain commercial rights to and revenue from
Actimmune for chronic granulomatous disease until December 31, 2001 and receive
a royalty on Actimmune sales thereafter. In addition, we hold an option to
purchase the product rights for potential dermatological applications of
Actimmune.
MGI Pharma
In March 1999, we entered into two agreements with MGI Pharma. Under the
terms of the agreements, MGI Pharma will promote Ridaura and Luxiq to the
rheumatology market in the United States. These arrangements take advantage of
MGI Pharma's specialty sales force that calls on rheumatologists in the United
States, and allows us to focus our attention on the dermatology marketplace.
Medeva
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<PAGE> 30
In January 1999, we entered into an exclusive license agreement with Medeva
for the development, commercialization and supply of ConXn in Europe. Under the
terms of the agreement, Medeva will pay up to $35.0 million in development,
milestone and equity payments for the successful development of ConXn for the
treatment of scleroderma. We may receive additional milestone payments for the
approval of additional indications for ConXn in Europe. Medeva will be
responsible for all development and commercialization activities in Europe.
Medeva will purchase ConXn from us and pay royalties on European sales of ConXn.
Until the earlier of five years after we launch ConXn in the United States or
the end of the first calendar year when Medeva's European net sales of ConXn
exceed $25.0 million, Medeva will receive 50% of our operating profits from U.S.
ConXn sales.
Paladin
In July 1999, we entered into an exclusive license agreement with Paladin
for the development, commercialization and supply of ConXn in Canada. Under the
terms of the agreement, Paladin will pay up to $2.7 million in development,
milestone and equity payments for the successful development of ConXn for the
treatment of scleroderma. We may receive additional milestone payments for the
approval of additional indications for ConXn in Canada. Paladin is responsible
for all development and commercialization activities in Canada, and will pay
royalties on all sales of ConXn in Canada.
Soltec
In June 1996, we entered into an exclusive license agreement with Soltec,
to develop and market a foam formulation of the dermatologic drug, betamethasone
valerate, in North America. This license agreement led to our launch of Luxiq,
in April 1999. In January 1998, we acquired the North American rights to
Soltec's proprietary foam formulation of the drug clobetasol propionate. In June
1999, we expanded the license to include worldwide rights to the product, which
we intend to market under the tradename OLUX. In July 1999, we submitted an NDA
to the FDA for OLUX for the treatment of moderate to severe scalp dermatoses. In
July 1999, we licensed the exclusive worldwide rights (excluding Australia and
New Zealand) to develop and market ketoconazole foam. We also have an exclusive
option on Soltec's foam formulation for the delivery of other dermatological
compounds.
Suntory
In April 1998, we entered into an exclusive license agreement with Suntory
for the development, commercialization and supply of relaxin for scleroderma in
Japan. Under the terms of the agreement, Suntory will pay up to 1.6 billion yen,
which we estimated to be $14.0 million in license, development and milestone
payments, based upon the exchange ratio at the time of the transaction. Suntory
is responsible for all development and commercialization activities in Japan.
Suntory will purchase relaxin materials from us, make payments based upon
development progress in the United States and Japan and pay us royalties on
sales in Japan.
XOMA
In June 1994, we entered into a technology acquisition agreement with XOMA
to purchase all rights to T-cell receptor vaccines technology and for the
exclusive right to make, use and sell certain products pursuant to a sublicense
agreement.
PATENTS AND PROPRIETARY RIGHTS
Our success will depend in part on our ability and our licensors' ability
to obtain and retain patent protection for our products and processes, to
preserve our trade secrets, and to operate without infringing the proprietary
rights of third parties.
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We own or are exclusively licensed under pending applications and/or issued
patents worldwide relating to ConXn, Luxiq and OLUX, as well as other technology
in the earlier stages of research.
Our relaxin patent portfolio includes pending applications and issued
patents in the United States and various international equivalents which are
owned by us or licensed to us. Our relaxin patent portfolio includes certain
claims within the following categories:
- compositions of matter;
- pharmaceutical compositions;
- methods of manufacture; and
- methods of treatment.
The issued patents in our relaxin patent portfolio will expire at various
times between 2002 and 2015. Further, no consistent policy has emerged from the
U.S. Patent and Trademark Office regarding the breadth of claims allowed in
biotechnology patents and, therefore, the degree of future protection for our
proprietary rights is uncertain. In addition, the patent laws of foreign
countries differ from those of the U.S. and the claims allowed may differ from
country to country. Accordingly, the degree of protection, if any, afforded by
foreign patents may be different from that in the U.S.
One of the European patents licensed to us, which claims gene sequence
encoding human relaxin, was opposed by a third party challenging the ethics of
patents on a human gene sequence. Our licensor successfully defended the
original opposition, resulting in a decision in our favor, but the decision has
been appealed. No assurance can be given that we will be successful on appeal.
With respect to patent applications filed by us or our licensors, and
patents issued to us or our licensors, no assurance can be given that:
- any of our or our licensors' patent applications will issue as
patents;
- any such issued patents will provide competitive advantage to us; or
- any such issued patents will not be successfully challenged or
circumvented by our competitors.
Our interferon gamma patent portfolio includes issued U.S. patents and
other pending U.S. applications. The interferon gamma portfolio covers:
- compositions of matter;
- pharmaceutical compositions; and
- methods of treatment.
The issued interferon gamma patents do not begin to expire until 2009.
Our TCR vaccine patent portfolio contains U.S. patents, pending
applications in the United States, and corresponding international patents and
applications. Most of the issued TCR patents expire in 2010, with one issued
U.S. patent expiring in 2014.
We have been advised that an opposition has been filed against one of our
European TCR patents. We are also aware of other pending third party patent
applications which, if issued, might be asserted against our TCR vaccines and
products or processes as planned to be made, used or sold by us. A
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<PAGE> 32
judgment adverse to us in any patent interference, litigation or other
proceeding could materially adversely affect our business. In addition, its
expense may be substantial, whether or not we are successful.
We also rely on trade secrets and proprietary know-how. We require each of
our employees, consultants and advisors to execute a confidentiality agreement
providing that all proprietary information developed by or made known to the
individual during the course of the relationship will be kept confidential
during the term of the relationship with us and for one to ten years after the
relationship ends, and will not be 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, are our
exclusive property. The agreement does not include inventions unrelated to our
business and developed entirely on the individual's own time. There can be no
assurance that this agreement will provide meaningful protection or adequate
remedies for misappropriation of our trade secrets in the event of unauthorized
use or disclosure of such information.
In addition, we encourage ongoing scientific research on relaxin by making
samples of recombinant human relaxin available for medical or scientific
research studies. We require each recipient of relaxin samples to sign a
materials transfer agreement to protect our rights to the relaxin technology. If
these agreements are breached, however, remedies may not be available or
adequate and our trade secrets may otherwise become known to competitors. To the
extent that our consultants, employees or other third parties apply
technological information independently developed by them or by others to our
proposed projects, third parties may own all or part of the proprietary rights
to such information, and disputes may arise as to the ownership of these
proprietary rights which may not be resolved in our favor. We cannot guarantee
that such third parties will not attempt to patent their work or, if patents are
issued, that they would be available to license to us.
MANUFACTURING
We currently have no manufacturing facilities for clinical or commercial
production of any of our products, nor do we intend to develop such capabilities
in the near future. We contract with independent sources to manufacture our
products, which enables us to focus on product and clinical development
strengths, minimize fixed costs and capital expenditures, and gain access to
advanced manufacturing process capabilities. Ridaura, in final finished package
form, is manufactured by SmithKline under an agreement with an initial term
through December 2001. Luxiq and OLUX are currently manufactured for us by CCL
Pharmaceuticals. Actimmune is manufactured by Genentech. Boehringer Ingelheim
manufactures relaxin for us for clinical and commercial uses under a long-term
contract.
COMPETITION
The pharmaceutical and biotechnology industries are highly competitive.
Other products and therapies currently exist on the market or are under
development that could compete directly with some of the products that we are
marketing, or seeking to develop and market. 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 us. We believe that the
principal competitive factors in our industry include:
- managerial competence in identifying and pursuing product in-licensing
and acquisition opportunities;
- ability to obtain timely regulatory approvals from the FDA and similar
foreign regulatory agencies;
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<PAGE> 33
- operational competence in developing, protecting, manufacturing and
marketing products; and
- access to financial resources.
We intend to compete on the basis of the quality and efficacy of our
products, combined with the effectiveness of our marketing and sales efforts.
Competing successfully will depend on our continued ability to attract and
retain skilled and experienced personnel, to identify, secure the rights to, and
develop pharmaceutical products and compounds and to exploit these products and
compounds commercially prior to the development of competitive products by
others.
With regard to Ridaura, there are numerous products on the market, and
under development, for the treatment of rheumatoid arthritis. We believe that
our sales have declined recently in part due to the competition of several new
rheumatoid arthritis therapies introduced by Hoechst Marion Roussel, Immunex
Corporation and Monsanto Company.
There can be no assurance that our products, even if successfully tested
and developed, will be adopted by physicians over such other products, or that
our products will offer an economically feasible alternative to existing modes
of therapy where they exist.
Many of our existing or potential competitors, particularly large
pharmaceutical companies, have substantially greater financial, technical and
human resources than us. In addition, many of these competitors have more
collective experience than us in undertaking preclinical testing and human
clinical trials of new pharmaceutical products and obtaining regulatory
approvals for therapeutic products. Accordingly, our competitors may succeed in
obtaining FDA approval for products more rapidly than us.
GOVERNMENT REGULATION
The pharmaceutical and biotechnology industries are subject to regulation
by the FDA under the Food Drug and Cosmetic Act and by similar agencies outside
of the United States. It is expected that all of our 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. Labeling and promotional activities are subject to scrutiny
by the FDA. 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. Failure to comply with
applicable requirements can result in, among other things, warning letters,
fines, injunctions, penalties, recall or seizure of products, total or partial
suspension of production, denial or withdrawal of approval, and criminal
prosecution. Accordingly, ongoing 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 that we have or may develop. 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 pre-clinical studies. The basic purpose of
pre-clinical investigation is to gather enough evidence on the potential new
agent through laboratory experimentation and animal testing, to determine if it
is reasonably safe to begin preliminary trials in humans. The results of these
studies are submitted as a part of an investigational new drug application,
which the FDA must review before human clinical trials of an investigational
drug can start. We have 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 our products.
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Clinical trials are normally done in phases and generally take two to five
years, but may take longer, to complete. The rate of completion of our clinical
trials depends upon, among other factors, the rate at which patients enroll in
the study. 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 our business. Phase I trials generally involve
administration of a product to a small number of persons to determine safety,
tolerance and the metabolic and pharmacologic actions of the agent in humans and
the side effects associated with increasing doses. Phase II trials generally
involve administration of a product to a larger group of patients with a
particular disease to obtain evidence of the agent's effectiveness against the
targeted disease, to further explore risk and side effect issues, and to confirm
preliminary data regarding optimal dosage ranges. Phase I and Phase II trials
can sometimes be combined, with the FDA's concurrence, into a Phase I/II trial.
Phase III trials involve more patients, and often more locations and clinical
investigators than the earlier trials. At least one such trial is required for
FDA approval to market a drug. Phase II and Phase III trials can sometimes be
combined, with the FDA's concurrence, into a Phase II/III trial.
After we complete the clinical trials of a product, we must file with the
FDA a new drug application, if the product is classified as a new drug, or a
biologic license application, if the product is classified as a biologic. We
must receive FDA clearance before we can commercialize 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. The
FDA can take between one and two years to review NDAs and BLAs, and can take
longer if significant questions arise during the review process. While various
legislative and regulatory initiatives have focused on the need to reduce FDA
review and approval times, the ultimate impact of such initiatives on our
products cannot be certain. In addition, if there are changes in FDA policy
while we are in product development, we may encounter delays or rejections that
we did not anticipate when we submitted the NDA or BLA for that product. We
could encounter similar delays in other countries. There can be no assurance
that even after such time and expenditures, regulatory approval will be obtained
for any products that we develop. If regulatory approval of a product is
granted, such approval may entail limitations on the indicated uses for which
the product may be marketed.
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.
The "orphan drug" status of ConXn may provide us with seven years of market
exclusivity in the United States if we are the first to be cleared to market
ConXn for progressive systemic sclerosis. Although this status would prevent
other sponsors from obtaining clearance of the same product for the same
indication, it would not prevent sponsors from seeking or receiving clearance of
other types of products to treat the same indication. Moreover, 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.
In order to develop and market outside the United States, our products will
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 our products 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
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<PAGE> 35
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. There can be no assurance that our products, once
marketed, will be viewed as cost-effective or that reimbursement will be
available to consumers or will be sufficient to allow our 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. We cannot predict the likelihood of passage of federal and state
legislation related to health care reform or lowering pharmaceutical costs. To
the extent that these or other proposals or reforms have a material adverse
effect on our ability to secure funding for its development or on the business,
financial condition and profitability of other companies that are prospective
collaborators for certain of our product candidates, our ability to develop or
commercialize its product candidates may be adversely affected. 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 our business.
ENVIRONMENTAL REGULATION
Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive materials. We are subject
to federal, state and local laws and regulations governing the use, storage,
handling and disposal of such materials and certain waste products. Although we
believe that our 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, we could be
held liable for any damages that result and any liability could exceed our
resources. We could be required to incur significant costs to comply with
environmental laws and regulations as our research activities are increased, and
if that were to happen there can be no assurance that our operations, business
and future profitability will not be adversely affected.
DEVELOPMENT
We have several products that require clinical and manufacturing
development, including our OLUX and ketoconazole foam products and ConXn. Our
development activities involve work related to product formulation, preclinical
and clinical study coordination, regulatory administration, manufacturing, and
quality control and assurance. While many other pharmaceutical and biotechnology
companies conduct earlier stage research and drug discovery, our focus is on
later-stage development to minimize the risk and time requirements for us to get
a product on the market.
In addition to our in-house staff and resources, we contract a substantial
portion of development work to outside parties. For example, we typically
utilize contract research organizations to manage our clinical trials. We have
contracts with vendors to conduct product analysis and stability studies, and we
outsource all of our manufacturing scale-up and production activities.
Our product development activities are leveraged by our collaborative
relationships with pharmaceutical partners and academic researchers. In
particular, we have three partners that have responsibility for developing
relaxin in Europe, Japan and Canada. Through our agreements with these partners,
we have joint development committees that collaborate on decision making and
product development. Also, from time to time we enter agreements with academic
or university-based researchers to conduct various studies for us.
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<PAGE> 36
EMPLOYEES
As of September 30, 1999, we had 114 full-time employees. Of the full-time
employees, 54 were engaged in sales and marketing, 39 were in research and
development and 21 were in general and administrative positions. We believe our
relations with our employees are good.
FACILITIES
We currently lease 36,964 square feet of laboratory and office space at
3400 and 3294 West Bayshore Road in Palo Alto, California. We lease this space
under two lease agreements which will expire in January 2003. We believe that
our existing facilities are adequate to meet our requirements for the near term
and that additional space will be available on commercially reasonable terms if
needed.
LITIGATION
We are not a party to any material litigation proceedings.
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<PAGE> 37
ISSUANCE OF COMMON STOCK TO SELLING STOCKHOLDERS
- --------------------------------------------------------------------------------
On January 11, 1999, we entered into an agreement with Medeva PLC to
sell an aggregate of 531,341 shares of our Common Stock at a price of $7.528 per
share, for an aggregate purchase price of $4,000,000. These shares were issued
to Medeva on that date.
In May 1998, we guaranteed that the value of shares issued to
Genentech, Inc. in connection with the Genentech Gamma License would have a
value of $4,000,000 by December 31, 1998, a deadline which was extended to
December 15, 1999 by an amendment to the original license agreement. In
anticipation that we may need to issue additional shares to Genentech to satisfy
this obligation, we are proposing to register an additional 450,000 shares for
issuance to Genentech. This would be sufficient shares as long as the fair
market value of Connetics' Common Stock (calculated by the formula set out in
the agreement) is over $4.82.
In connection with our acquisition of rights to relaxin, we have the
right to make certain payments to Genentech in cash or equity. A payment of
$683,500, originally due to Genentech in September 1998, was postponed to April
1999. In choosing to satisfy that obligation in equity, not cash, Connetics
issued an additional 95,815 shares to Genentech, representing the payment due
plus interest.
On November 5, 1998, the Compensation Committee of Connetics' Board of
Directors authorized the issuance of 25,000 shares of restricted stock to Kirk
Raab, the Chairman of the Board of Directors, and 25,000 shares of restricted
stock to Thomas Wiggans, President and Chief Executive Officer, at a price of
$0.10 per share for an aggregate purchase price of $2,500 each. Mr. Raab
purchased 25,000 shares on November 5, 1998, and Mr. Wiggans purchased 25,000
shares on March 9, 1999.
On February 17, 1999, the Compensation Committee of Connetics' Board of
Directors authorized the issuance of an additional 25,000 shares of restricted
stock to each of Mr. Raab and Mr. Wiggans, at a price of $0.10 per share. Mr.
Raab purchased 25,000 shares on March 9, 1999, and Mr. Wiggans purchased 25,000
shares on May 11, 1999.
On April 28, 1999, we entered into an agreement with Mazier Partners
LLC in connection with consulting services rendered by Mazier Partners LLC, and
we agreed to issue 25,000 shares of Common Stock to Mazier Partners LLC in
satisfaction of its obligations. We issued those shares on May 12, 1999.
Effective July 1, 1999, we entered into a letter agreement with Bridge
Technology Group LLC, which included an agreement to issue a warrant to Bridge
to purchase up to 15,000 shares of our Common Stock at a price per share of
$6.063. The warrant was issued as of July 1, 1999, and has a five year term.
On July 7, 1999, we entered into an agreement with Paladin Labs Inc. to
sell 43,315 shares of our Common Stock at a price of $9.235 per share, for an
aggregate purchase price of $400,000. These shares were issued to Paladin on
that date.
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<PAGE> 38
SELLING STOCKHOLDERS
- --------------------------------------------------------------------------------
The following table sets forth certain information as of October 31, 1999
with respect to each Selling Stockholder:
<TABLE>
<CAPTION>
SHARES OFFERED SHARES BENEFICIALLY OWNED AFTER
NAME OF SELLING STOCKHOLDER HEREBY (1) OFFERING (1)
Number Percent
------ -------
<S> <C> <C> <C>
Medeva PLC 531,341 -0- *
Genentech, Inc. 545,815 380,048 1.4%
Thomas Wiggans (2) 50,000 353,457 1.3%
Paladin Labs Inc. 43,315 -0- *
Kirk Raab (3) 25,000 200,024 *
Mazier Partners LLC 25,000 3,844 *
Bridge Technology Group LLC 15,000 -0- *
TOTAL 1,235,471 937,373 3.5%
</TABLE>
* Less than 1%
NOTE: Beneficial ownership is determined in accordance with the rules and
regulations of the SEC and generally includes voting or investment power with
respect to securities. Information with respect to beneficial ownership is based
on information as of October 31, 1999 and assumes that there is outstanding an
aggregate of 26,411,095 shares of Common Stock (not including treasury shares)
and 1,310,193 shares issuable upon the exercise of warrants, and options to
purchase the Connetics' Common Stock which are exercisable within 60 days of
October 31, 1999. No options have been issued to the Selling Stockholders named
in this Prospectus other than Messrs. Wiggans and Raab. Except as indicated
otherwise in the footnotes below, and subject to community property laws where
applicable, Connetics believes based on information furnished by the Selling
Stockholders that the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(1) Assumes the sale of all Shares offered by this Prospectus and no other
purchases or sales of Connetics' Common Stock. See "Plan of
Distribution." If shares offered by this prospectus are not sold,
actual share ownership will be higher than this table reflects.
(2) Includes 172,569 options to purchase shares of Common Stock which are
currently exercisable or will become exercisable within 60 days of
October 31, 1999 by Mr. Wiggans.
(3) Includes 191,982 options to purchase shares of Common Stock which are
currently exercisable or will become exercisable within 60 days of
October 31, 1999 by Mr. Raab.
PLAN OF DISTRIBUTION
- --------------------------------------------------------------------------------
The Shares offered by this Prospectus may be sold by the Selling
Stockholders or their pledgees, donees, transferees, or other successors in
interest from time to time in one or more transactions (which may include block
transactions) in the over-the-counter market, on the Nasdaq National Market or
such other market on which Connetics' Common Stock may, from time to time, be
traded, in privately negotiated transactions, through the writing of options on
the Shares (whether such options are listed on an options exchange or otherwise)
or by a combination of such methods of sale, at fixed prices which may be
changed, at market prices prevailing at the time of sale, at prices related to
prevailing market
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<PAGE> 39
prices, or at negotiated prices. The Selling Stockholders may effect such
transactions by selling the Shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of the Shares
for whom such broker-dealers may act as agents or to whom they sell as
principals, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions). In connection with distributions of the
Shares, the Selling Stockholders may enter into hedging transactions with
broker-dealers and the broker-dealers may engage in short sales of the Shares in
the course of hedging the positions they assume with the Selling Stockholder.
The Selling Stockholders also may sell the Shares short and deliver the Shares
to close out such short Positions. The Selling Stockholders also may enter into
options or other transactions with broker-dealers that involve the delivery of
the Shares to the broker-dealers, which may then resell or otherwise transfer
such Shares. The Selling Stockholders also may loan or pledge the Shares to a
broker-dealer and the broker-dealer may sell the Shares so loaned or upon a
default may sell or otherwise transfer the pledged shares. In addition, any
Shares that qualify for sale pursuant to Rule 144 under the Securities Act may
be sold under Rule 144 rather than pursuant to this Prospectus.
The Selling Stockholders will pay selling commissions or brokerage fees, if
any, with respect to the sale of the Shares in amounts customary for the type of
transaction effected. The Selling Stockholders will also pay all applicable
transfer taxes and all fees and disbursements of counsel for the Selling
Stockholders incurred in connection with the sale of Shares.
The Selling Stockholders have advised Connetics that during such time as
the Selling Stockholders may be engaged in the attempt to sell Shares registered
under this Prospectus, that they will:
(i) not engage in any stabilization activity in connection with
any of Connetics' securities;
(ii) cause to be furnished to each person to whom Shares included
in this Prospectus may be offered, and to each broker-dealer,
if any, through whom Shares are offered, such copies of this
Prospectus, as supplemented or amended, as may be required by
such person; and
(iii) not bid for or purchase any of Connetics' securities or any
rights to acquire Connetics' securities, or attempt to induce
any person to purchase any of Connetics' securities or rights
to acquire Connetics' securities other than as permitted under
the Exchange Act.
The Selling Stockholders, and any other persons who participate in the sale
of the Shares, may be deemed to be "Underwriters" as defined in the Securities
Act. Any commissions paid or any discounts or concessions allowed to any such
persons, and any profits received on resale of the Shares, may be deemed to be
underwriting discounts and commissions under the Securities Act.
With regard to the Shares, Connetics has agreed to maintain the
effectiveness of this Registration Statement until the later of (a) the date all
of the shares issued to Genentech in connection with this Registration Statement
have been sold, or (b) two years after the effective date of this Registration
Statement; provided however that Connetics has agreed to extend the
effectiveness of the Registration Statement for an additional one year period
following the expiration of the initial two year period, if requested in a
writing signed by a majority of the Selling Stockholders; provided further,
however, that if counsel to Connetics provides an opinion to the requesting
holders, based on factual representations provided by the requesting holders or
information filed with the SEC that such holders are not, at the time of such
request, "affiliates" of Connetics, within the meaning of Rule 144 of the
Securities Act, then Connetics shall not be obligated to extend the
effectiveness of the Registration Statement. No sales may be made pursuant to
this Registration Statement and Prospectus after such dates unless Connetics
amends
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<PAGE> 40
or supplements this Registration Statement and Prospectus to indicate that it
has agreed to extend such period of effectiveness.
Connetics has agreed to indemnify the Selling Stockholders against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
- --------------------------------------------------------------------------------
The validity of our common stock will be passed upon for us by Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
- --------------------------------------------------------------------------------
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998, as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
This prospectus constitutes a part of a registration statement on Form S-3
filed by us with the SEC under the Securities Act. This prospectus does not
contain all of the information set forth in the registration statement, parts of
which are omitted in accordance with the rules and regulations of the SEC. For
further information about Connetics and the shares of common stock offered,
reference is made to the registration statement. Statements contained in this
prospectus concerning the provisions of any document are not necessarily
complete, and each such statement is qualified in its entirety by reference to
the copy of such document filed with the SEC.
We file annual, quarterly and special reports, proxy statements, and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's following Regional
Offices: Suite 1400, Northwest Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661; and 13th Floor, Seven World Trade Center, New York, New York
10048. Copies of this material can be obtained at prescribed rates from the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public at the
SEC's web site at http://www.sec.gov. Additional information about us may be
found on our web site at http://www.connetics.com. Information contained on our
web site does not constitute part of this prospectus.
The SEC allows us to incorporate by reference the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus, and later information that we file with the SEC
will automatically update and supersede this information. We incorporate by
reference the documents listed below, and any future filings made with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, until the offering
is completed. This prospectus is part of a registration statement on Form S-3 we
filed with the SEC (Registration No. 333-_________). The documents we
incorporate by reference are:
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<PAGE> 41
1. Connetics' annual report on Form 10-K for the fiscal year ended
December 31, 1998,
2. Connetics' quarterly report on Form 10-Q for the quarter ended March
31, 1999,
3. Connetics' quarterly report on Form 10-Q for the quarter ended June
30, 1999.
4. Connetics' Registration Statement on Form 8-A dated May 23, 1997,
which contains a description of our capital stock.
5. Connetics' Registration Statement on Form 8-A dated December 8, 1995,
which contains a description of our capital stock.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address: Corporate Counsel, Connetics
Corporation, 3400 West Bayshore Road, Palo Alto, CA 94303; telephone number
(650) 843-2800.
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<PAGE> 42
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table shows the costs and expenses payable by Connetics in
connection with the sale and distribution of common stock being registered. All
amounts are estimates except the SEC registration fee and the NASD filing fee.
The Selling Stockholders are responsible for paying selling commissions,
brokerage fees, and any applicable transfer taxes and fees and disbursements of
their counsel.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC registration fee........................................... $1,500
NASD filing fee................................................ 3,260 (est.)
Nasdaq National Market listing fee............................. 17,500
Legal fees and expenses........................................ 10,000
Accounting fees and expenses................................... 4,000
Miscellaneous expenses......................................... 2,000
-----
Total..................................................... $38,260
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. Article IX of the
Registrant's Amended and Restated Certificate of Incorporation and Article VII,
Section 6 of the Registrant's Bylaws provide for indemnification of its
directors, officers, employees and other agents to the maximum extent permitted
by law. In addition, the Registrant has entered into Indemnification Agreements
with its officers and directors and maintains director and officer liability
insurance.
ITEM 16. EXHIBITS
See Index to Exhibits (page II-5).
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to include any material
information with respect to the plan of distribution not previously disclosed in
the Registration Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-1
<PAGE> 43
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 15 above or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted against the Registrant by such director, officer
or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
II-2
<PAGE> 44
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PALO ALTO,
STATE OF CALIFORNIA, ON THE 9th DAY OF NOVEMBER, 1999.
CONNETICS CORPORATION
By: /s/ John L. Higgins
--------------------------------------
JOHN L. HIGGINS
VICE PRESIDENT, FINANCE AND
ADMINISTRATION AND CHIEF
FINANCIAL OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints,
jointly and severally, Thomas G. Wiggans and John L. Higgins, and each of them
acting individually, as his attorney-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Registration Statement (including post-effective amendments), and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming our signatures as they may be signed by our said attorney to any and
all amendments to said Registration Statement.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
President, Chief Executive Officer November 8, 1999
/s/ Thomas G. Wiggans (Principal Executive Officer)
- ---------------------------------- and Director
THOMAS G. WIGGANS
Vice President, Finance and November 8, 1999
/s/ John L. Higgins Administration and Chief
- ----------------------------------- Financial Officer (Principal
JOHN L. HIGGINS Financial and Accounting
Officer)
/s/ G. Kirk Raab Chairman of the Board of November 8, 1999
- ----------------------------------- Directors
G. KIRK RAAB
/s/ Alexander E. Barkas
- ----------------------------------- Director November 8, 1999
ALEXANDER E. BARKAS, Ph.D.
</TABLE>
II-3
<PAGE> 45
<TABLE>
<S> <C> <C>
/s/ Eugene A. Bauer Director November 5, 1999
- -----------------------------------
EUGENE A. BAUER, M.D.
/s/ Brian H. Dovey Director November 8, 1999
- -----------------------------------
BRIAN H. DOVEY
/s/ John C. Kane Director November 8, 1999
- -----------------------------------
JOHN C. KANE
/s/ Thomas D. Kiley Director November 6, 1999
- -----------------------------------
THOMAS D. KILEY
/s/ Joseph J. Ruvane Director November 9, 1999
- -----------------------------------
JOSEPH J. RUVANE, JR.
</TABLE>
II-4
<PAGE> 46
EXHIBIT INDEX
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Counsel (included in Exhibit 5.1)
24.1 Power of Attorney (included on signature page to registration
statement)
</TABLE>
- ----------
II-5
<PAGE> 1
EXHIBIT 5.1
OPINION OF COUNSEL
November 8, 1999
Connetics Corporation
3400 West Bayshore Road
Palo Alto, CA 94303
Re: Connetics Corporation (the "Company") Registration Statement
on Form S-3
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3 to be filed with
the Securities and Exchange Commission (the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of 1,235,471 shares of the Company's Common Stock. As your counsel, we have
examined the proceedings taken in connection with the sale and issuance of the
above-referenced securities.
It is our opinion that the above-referenced securities, when issued and
sold in the manner referred to in the Registration Statement, will be legally
and validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
II-6
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Connetics
Corporation for the registration of 1,235,471 shares of its common stock and to
the incorporation by reference therein of our report dated January 13, 1999,
with respect to the consolidated financial statements of Connetics Corporation
included in its Annual Report (Form 10-K) for the year ended December 31, 1998,
filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Palo Alto, California
November 4, 1999
II-7
