<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 2000.
REGISTRATION NO. 333-_______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CONNETICS CORPORATION
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3173928
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3400 WEST BAYSHORE ROAD
PALO ALTO, CA 94303
(650) 843-2800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
THOMAS G. WIGGANS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CONNETICS CORPORATION
3400 WEST BAYSHORE ROAD
PALO ALTO, CA 94303
(650) 843-2800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
--------------------------
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================
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.... 589,255 shares 14.1565(2) $8,341,788.40 $2,202.23
- ---------------------------------------------------------------------------------------------------------------
Total Shares 589,255 $8,341,788.40 $2,202.23
===============================================================================================================
</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 February 7, 2000 pursuant to
Rule 457(c).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, 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> 2
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION FEBRUARY ___, 2000
================================================================================
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.
================================================================================
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. ____________________
PROSPECTUS
FEBRUARY ___, 2000
CONNETICS CORPORATION
589,255 SHARES OF COMMON STOCK
This Prospectus relates to 589,966 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) 80,154 shares were issued to Soltec Research Pty. Ltd. pursuant
to a stock issuance agreement entered into on December 9, 1999,
pursuant to an exemption from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act");
(2) 9,101 shares were issued to Dr. Arthur A. Vandenbark pursuant to
an agreement dated December 8, 1999 in connection with the
assignment of the Company's T-cell receptor technology to The
Immune Response Corporation;
(3) 500,000 shares are being registered in connection with the
Company's obligations under its Structured Equity Line with
Kepler Capital LLC.
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) 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 February 7, 2000, the last reported sale price of our common stock
was $14.00 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 3.
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.
Page 1
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk Factors ........................................................... 3
Forward Looking Information ............................................ 14
Use of Proceeds ........................................................ 14
Dividend Policy ........................................................ 14
Price Range of Common Stock ............................................ 14
Business ............................................................... 15
Issuance of Common Stock to Selling Stockholders ....................... 29
Selling Stockholders ................................................... 29
Plan of Distribution ................................................... 30
Legal Matters .......................................................... 31
Experts ................................................................ 31
Where You Can Find Additional Information .............................. 31
</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.
Page 2
<PAGE> 4
RISK FACTORS
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 SUCCESS DEPENDS ON 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 Phase II/III trial of ConXn for
the treatment of diffuse scleroderma in February 1999, and completed patient
enrollment in that trial (with 239 patients) in December 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 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.
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
Page 3
<PAGE> 5
- 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.
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 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 $27.3 million 1999.
Our accumulated deficit was $119.8 million at December 31, 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.
WE NEED TO ACHIEVE ADDITIONAL DEVELOPMENT OBJECTIVES 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 likely 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.
Page 4
<PAGE> 6
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 only recently initiated larger scale
manufacturing. We will be unable to obtain additional supplies of ConXn until
larger scale manufacturing is underway, which will limit the number and extent
of ConXn clinical studies we can conduct in the near term.
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.
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 12 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.
Page 5
<PAGE> 7
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 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.
Page 6
<PAGE> 8
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 we completed patient enrollment in that
trial in December 1999. In July 1999 we filed an investigational new drug
application to commence clinical trials of ConXn for the treatment of
infertility and in December 1999 we opened enrollment in those trials. 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.
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
Page 7
<PAGE> 9
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 cannot
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
- 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.
Page 8
<PAGE> 10
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. If 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;
- 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.
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.
In December 1999, we assigned to The Immune Response Corporation all of
our intellectual property relating to our T-cell receptor, or TCR, vaccine
technology. As part of our agreement, we will continue to incur certain costs
relating to winding down pending patent opposition proceedings in Europe, even
though the asset is no longer included in our portfolio.
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
Page 9
<PAGE> 11
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.
Nearly our entire 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;
- CCL Pharmaceuticals, a Division of CCL Industries Limited, a U.K.
corporation 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.
Page 10
<PAGE> 12
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.
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, received FDA approval for new products and therapies to treat
rheumatoid arthritis in late 1998 and 1999. In addition, there are
Page 11
<PAGE> 13
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.
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 SUBJECT TO FOREIGN EXCHANGE RISKS IN SOME OF OUR CONTRACTS WHICH MAY
INCREASE OUR OPERATIONAL EXPENSES.
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.
Page 12
<PAGE> 14
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.
Our ten largest stockholders beneficially own approximately 63% 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.
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 HAVE ANTI-TAKEOVER PROVISIONS IN OUR CORPORATE CHARTER DOCUMENTS THAT MAY
RESULT IN OUTCOMES THAT YOU DO NOT AGREE WITH.
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.
Page 13
<PAGE> 15
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.
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>
2000
First Quarter (through February 7, 2000) ........ 15.31 7.63
1999
Fourth Quarter .................................. 10.50 4.13
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 February 7, 2000 was $14.00. As of December 31, 1999, there were
approximately 177 stockholders of record of our common stock.
Page 14
<PAGE> 16
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 PROGRAM:
- 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
- Additional foam formulations --in development
- Liquipatch(TM) formulations
CONXN (RECOMBINANT HUMAN RELAXIN) DEVELOPMENT PROGRAMS:
- Scleroderma -- Phase II/III trial ongoing
- Infertility -- Phase I/II trials initiated 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 that are both effective and
cosmetically superior to existing products.
- Capitalize Upon our Focused Marketing and Sales Force. We have a 51
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
Page 15
<PAGE> 17
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. Our
December 1999 agreement with Soltec provides us with access to a broad
array of formulations and opportunities. 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, and completed patient enrollment in December 1999. We
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 opened enrollment in two Phase I/II clinical trials
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. Through December 31, 1999, we had received
$10.9 million in revenue from these partners.
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 Marketed Connetics - North America
scalp dermatoses
OLUX FOAM Moderate to severe NDA submitted Connetics - Worldwide
scalp dermatoses
</TABLE>
Page 16
<PAGE> 18
<TABLE>
<CAPTION>
PRODUCT INDICATION STATUS MARKETING PARTNERS
------- ---------- ------ ------------------
<S> <C> <C> <C>
RELAXIN
CONXN Scleroderma Phase II/III trial ongoing Medeva - Europe
Paladin - Canada
Suntory - Japan(1)
Connetics - Rest of World
Infertility(2) Phase I/II trials initiated Medeva - Europe
in late 1999 Paladin - Canada
Connetics - Rest of World
Peripheral vascular Preclinical development Medeva - Europe
disease and organ underway for treatment of Paladin - Canada
fibroses 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 until
disease December 31, 2001 (royalties
thereafter)
</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.
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, 51 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
Page 17
<PAGE> 19
- 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, 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.
OTHER OPPORTUNITIES
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. On December 14, 1999, we announced that we had entered
into a comprehensive licensing agreement with Soltec Research Pty Ltd., a
subsidiary of F.H. Faulding & Co., Ltd., for exclusive rights to certain
applications of a broad range of unique topical delivery technologies, including
aerosol foam formulations and Soltec's patented Liquipatch(TM) technology. With
this agreement in place, we are positioned to pursue simultaneous development of
a number of innovative products, which could result in entries into the acne,
actinic keratosis, low-potency steroid and hair loss markets. Under the terms of
the agreement, Connetics will pay Soltec $1 million in cash and stock, in
addition to milestone, development and royalty payments.
Under the agreement, Connetics received exclusive North American rights
to a number of unique topical delivery systems, including several distinctive
aerosol foams. Similar to Connetics' foam delivery system for Luxiq and OLUX,
the new aerosol foams may offer improved efficacy over traditional formulations
due to greater absorption of the active ingredient to the skin. In addition to
the potential for improved efficacy, the foam formulations represent a
cosmetically elegant alternative to existing dermatologic treatments. The new
aerosol foams, including water-, ethanol- and petrolatum-based foams, are
intended to be developed containing leading dermatologic agents, in such a way
as to deliver formulations that are tailored to treat specific diseases or
different areas of the body.
We also licensed certain applications of Liquipatch(TM), a gel-matrix
delivery system that applies to the skin like a normal gel and dries to form a
very thin, invisible, water-resistant film. This film enables a controlled
release of the active agent to provide longer relief, while potentially being
less irritating.
Page 18
<PAGE> 20
We anticipate conducting parallel product development over the next
several years, forecasting the introduction of several new dermatology products
by 2005. We expect to seek partners for OTC market opportunities and for
development and commercialization outside the US.
CONXN
ConXn is our tradename 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
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 Phase II/III trial of ConXn for the treatment of
diffuse scleroderma in February 1999 and completed enrollment (with 239
Page 19
<PAGE> 21
patients) in December 1999. We anticipate 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 initiated
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.
<TABLE>
<CAPTION>
AFFECTED ORGAN POTENTIAL INDICATION CURRENT THERAPIES
- -------------- -------------------- -----------------
<S> <C> <C>
Heart Scarring of the heart that occurs in heart Angiotensin-converting enzyme
attacks, atherosclerosis or hypertension inhibitors
Vessel blockage (restenosis) following Stents, radiation and thrombolytics
Angioplasty
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- converting
diseases leading to impairment of kidney 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-
Page 20
<PAGE> 22
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 twelve months ended December 31, 1999 were approximately $5.7
million as compared to approximately $7.5 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 twelve
months ended December 31, 1999 were approximately $4.8 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.
T-CELL RECEPTOR PROGRAM
In December 1999, we assigned to The Immune Response Corporation all of
our technology and intellectual property relating to T-cell receptor vaccines,
generally known as TCR vaccines. In exchange, Connetics received a cash payment
and common stock of The Immune Response Corporation, and will receive additional
cash payments and potential equity and royalty payments on future sales of
products.
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 December 31,
1999, we had 51 people in our sales and marketing organization, including over
40 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 supplemented our sales staff in late 1999 - and may continue to
do so 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.
Page 21
<PAGE> 23
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.
FLOREY INSTITUTE
Many of our relaxin patent rights are licensed from The Howard Florey
Institute of Experimental Physiology and Medicine 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. On February 2, 2000, InterMune filed a registration statement for its
proposed initial public offering.
Page 22
<PAGE> 24
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
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
Research Pty Ltd., a subsidiary of F.H. Faulding & Co., Ltd., 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.
In December 1999,we entered into a comprehensive licensing agreement
with Soltec for exclusive rights to certain applications of a broad range of
unique topical delivery technologies. Connetics anticipates conducting parallel
product development on several products over the next several years. Under the
agreement, Connetics received exclusive North American rights to a number of
unique topical delivery systems, including several distinctive aerosol foams.
Similar to Connetics' foam delivery system for Luxiq and OLUX, the new aerosol
foams may offer improved efficacy over traditional formulations due to greater
absorption of the active ingredient to the skin. In addition to the potential
for improved efficacy, the foam formulations represent a cosmetically elegant
alternative to existing dermatologic treatments. The new aerosol foams,
including water-, ethanol- and petrolatum-based foams, are intended to be
developed containing leading dermatologic agents, in such a way as to deliver
formulations that are tailored to treat specific diseases or different areas of
the body. Connetics also licensed certain applications of Liquipatch(TM), a
gel-matrix delivery system that applies to the skin like a normal gel and dries
to form a very thin, invisible, water-resistant film. This film enables a
controlled release of the active agent to provide longer relief, while
potentially being less irritating.
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
Page 23
<PAGE> 25
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.
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.
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.
Page 24
<PAGE> 26
The issued interferon gamma patents do not begin to expire until 2009.
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;
- 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.
Page 25
<PAGE> 27
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.
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.
Page 26
<PAGE> 28
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 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
Page 27
<PAGE> 29
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 engage 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.
YEAR 2000 ISSUE
Many computer systems and software applications were not designed to
handle dates beyond the year 1999, and therefore had to be modified prior to
year 2000 in order to remain functional. Those computer programs that had
time-sensitive software had to be updated to accept four digit entries to the
1900's from the year 2000 to avoid the possibility of 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, we assessed
the potential impact on our operations of the Year 2000 issue, and incurred
expenses in anticipation of the transition from 1999 to 2000.
During the course of 1999, we completed the testing and upgrading of all
of our information technology and operating systems. Our third party
distribution service system (which includes customer orders, billing, shipping
and inventory management) made its distribution system Year 2000 compliant, and
we converted to the compliant system in November 1998. We 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 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.
We also developed contingency plans for certain critical business
processes. Our total cost for the Year 2000 project was less than $100,000, was
funded through available cash resources and was not material to our financial
condition to date. We did not experience any material disruptions to our
business as a result of the arrival of the year 2000, and did not incur any
material unplanned expenditures to address any unanticipated Year 2000 issues.
EMPLOYEES
As of December 31, 1999, we had 112 full-time employees. Of the
full-time employees, 51 were engaged in sales and marketing, 41 were in research
and development and 20 were in general and administrative positions. We believe
our relations with our employees are good.
Page 28
<PAGE> 30
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 that 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.
ISSUANCE OF COMMON STOCK TO SELLING STOCKHOLDERS
Soltec. On December 9, 1999, in connection with a license agreement,
Connetics and Soltec entered into a Stock Issuance Agreement, pursuant to which
we agreed to issue 80,154 shares of Connetics Common Stock to Soltec at the
then- fair market value of the stock.
Kepler Capital. In connection with the Equity Line Agreement, we have
agreed to register certain shares of its Common Stock that may be issued in the
event that the equity line is drawn upon. Although we have no present intention
of drawing on the equity line, we are required to sell shares of our Common
Stock to Kepler pursuant to the terms of the Equity Line Agreement during the
next two and a half years if our stock meets certain volume restrictions and
trades above $10.00 per share. In January 2000, our stock met those
restrictions, and in that connection we issued approximately 58,000 shares of
our stock to Kepler under the terms of the Equity Line Agreement. As a result,
we are registering additional shares covered by this Prospectus to satisfy any
obligation it may have to issue shares to Kepler in future quarters.
Dr. Vandenbark. On December 8, 1999, we entered into Agreement Relating
to Acceleration and Termination of Contracts with Dr. Vandenbark in conjunction
with the assignment of our TCR technology to The Immune Response Corporation.
Pursuant to that agreement, we agreed to issue 9,101 shares of Connetics Common
Stock to Dr. Vandenbark.
SELLING STOCKHOLDERS
The following table sets forth certain information as of December 31,
1999 with respect to each Selling Stockholder:
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
AFTER OFFERING(1)
SHARES OFFERED ---------------------------
NAME OF SELLING STOCKHOLDER HEREBY(1) NUMBER PERCENT
- --------------------------- -------------- ------- -------
<S> <C> <C> <C>
Kepler Capital LLC(2) 500,000 58,438 *
Soltec Research Pty Ltd. 80,154 -0- *
Arthur A. Vandenbark(3) 9,101 14,839 *
TOTAL 589,255 73,277 *
</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 December 31, 1999 and assumes that there is outstanding an
aggregate of 26,903,716 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
December 31, 1999. No options have been issued to the Selling Stockholders named
in this Prospectus other than
Page 29
<PAGE> 31
Dr. Vandenbark. No warrants have been issued to the Selling Stockholders named
in this Prospectus other than Kepler Capital. 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 the right to purchase 58,438 shares of Common Stock pursuant to
the Structured Equity Line Agreement which is currently exercisable or
will become exercisable on or before February 29, 2000 by Kepler Capital
LLC.
(3) Includes 14,839 options to purchase shares of Common Stock which are
currently exercisable or will become exercisable on or before
February 29, 2000 by Dr. Vandenbark.
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 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;
Page 30
<PAGE> 32
(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 two years after the effective
date of this Registration Statement; provided 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 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 included in our Annual Report on Form 10-K for the years
ended December 31, 1998 and 1997, as set forth in their report, which is
incorporated by reference in this prospectus and elsewhere in the registration
statement. Our financial statements are incorporated by reference 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.
Page 31
<PAGE> 33
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. __________________). The
documents we incorporate by reference are:
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' Quarterly report on Form 10-Q for the quarter ended
September 30, 1999.
5. Connetics' Registration Statement on Form 8-A dated May 23,
1997, which contains a description of our capital stock.
6. 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.
Page 32
<PAGE> 34
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 .......................... $ 2,202.23
Legal fees and expenses ....................... 10,000.00
Accounting fees and expenses .................. 8,000.00
Miscellaneous expenses ........................ 2,000.00
----------
Total ..................................... $22,202.23
==========
</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.
Page II-1
<PAGE> 35
(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.
Page II-2
<PAGE> 36
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 FEBRUARY, 2000.
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>
/s/ THOMAS G. WIGGANS President, Chief Executive Officer February 9, 2000
- ------------------------------------------ (Principal Executive Officer)
THOMAS G. WIGGANS and Director
/s/ JOHN L. HIGGINS Vice President, Finance and February 9, 2000
- ------------------------------------------ Administration and Chief
JOHN L. HIGGINS Financial Officer
(Principal Financial and
Accounting Officer)
/s/ G. KIRK RAAB Chairman of the Board of February 9, 2000
- ------------------------------------------ Directors
G. KIRK RAAB
/s/ ALEXANDER E. BARKAS Director February 9, 2000
- ------------------------------------------
ALEXANDER E. BARKAS, PH.D.
/s/ EUGENE A. BAUER Director February 9, 2000
- ------------------------------------------
EUGENE A. BAUER, M.D.
</TABLE>
Page II-3
<PAGE> 37
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ BRIAN H. DOVEY Director February 9, 2000
- ------------------------------------------
BRIAN H. DOVEY
/s/ JOHN C. KANE Director February 9, 2000
- ------------------------------------------
JOHN C. KANE
/s/ THOMAS D. KILEY Director February 9, 2000
- ------------------------------------------
THOMAS D. KILEY
/s/ JOSEPH J. RUVANE, JR. Director February 9, 2000
- ------------------------------------------
JOSEPH J. RUVANE, JR.
</TABLE>
Page II-4
<PAGE> 38
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>
Page II-5
<PAGE> 1
EXHIBIT 5.1
OPINION OF COUNSEL
February 7, 2000
Connetics Corporation
3400 West Bayshore Road
Palo Alto, California 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 589,255 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
<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 589,255 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
February 7, 2000
