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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission file number: 0-27406
CONNETICS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3173928
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3400 WEST BAYSHORE ROAD
PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 843-2800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes [X] No [ ]
As of October 31, 2000, 29,572,249 shares of the Registrant's common stock were
outstanding, at $0.001 par value.
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CONNETICS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2000
and December 31, 1999 ............................................... 3
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2000 and 1999 ................... 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 ............................ 5
Notes to Condensed Consolidated Financial Statements ................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks ......... 23
PART II. OTHER INFORMATION
Item 5. Other Information ................................................... 23
Item 6. Exhibits and Reports on Form 8-K .................................... 23
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONNETICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,418 $ 8,460
Short-term investments 74,136 17,839
Accounts receivable, net 1,744 1,608
Other current assets 583 817
---------------------------
Total current assets 97,881 28,724
Property and equipment, net 1,577 1,505
Notes receivable from related parties 301 60
Deposits and other assets 121 121
---------------------------
Total assets $ 99,880 $ 30,410
===========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,973 $ 4,988
Accrued liabilities 2,796 1,596
Accrued process development expenses 1,530 3,296
Accrued payroll and related expenses 1,419 1,453
Current portion of notes payable and other liabilities 1,209 2,594
Current portion of capital lease obligations, capital loans and long-term debt -- 1,396
---------------------------
Total current liabilities 8,927 15,323
Non-current portion of capital lease obligations, capital loans and long-term debt 388 799
Stockholders' equity:
Common stock, treasury stock and additional paid-in capital 158,104 133,963
Deferred compensation (25) (39)
Accumulated deficit (124,066) (119,752)
Accumulated other comprehensive income 56,552 116
---------------------------
Total stockholders' equity 90,565 14,288
---------------------------
Total liabilities and stockholders' equity $ 99,880 $ 30,410
===========================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CONNETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
---------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues:
Product $ 5,657 $ 4,773 $ 15,118 $ 11,656
Contract 1,735 1,400 10,810 8,779
Sale of Actimmune revenue rights -- -- 5,218 --
---------------------- ----------------------
Total revenues 7,392 6,173 31,146 20,435
---------------------- ----------------------
Operating costs and expenses:
Cost of product revenues 719 1,628 2,979 4,279
License amortization -- 1,680 -- 5,040
Research and development 5,828 5,783 15,956 14,363
Selling, general and administrative 6,765 5,032 18,330 15,533
---------------------- ----------------------
Total operating costs and expenses 13,312 14,123 37,265 39,215
Interest and other income 663 193 2,012 833
Interest expense (38) (225) (207) (749)
---------------------- ----------------------
Net loss $ (5,295) $ (7,982) $ (4,314) $(18,696)
====================== ======================
Net loss per basic and dilutive shares $ (0.18) $ (0.37) $ (0.15) $ (0.88)
---------------------- ----------------------
Basic and dilutive shares used to calculate net loss 29,507 21,588 28,032 21,353
====================== ======================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CONNETICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,314) $(18,696)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 548 5,659
Amortization of deferred compensation & non-cash stock compensation 1,398 1,199
Changes in assets and liabilities:
Accounts receivable (136) (95)
Current and other assets (7) (199)
Current and other liabilities (2,685) 3,740
Other long-term liabilities -- (551)
----------------------
Net cash used by operating activities (5,196) (8,943)
----------------------
Cash flows from investing activities:
Purchases of short-term investments (13,523) (2,390)
Sales and maturities of short-term investments 13,661 5,267
Purchases of property and equipment (620) (1,116)
----------------------
Net cash (used in) provided by investing activities (482) 1,761
----------------------
Cash flows from financing activities:
Payment of notes payable (2,206) (4,100)
Payments on obligations under capital leases and capital loans (986) (360)
Proceeds from issuance of common stock, net 21,828 5,121
----------------------
Net cash provided by financing activities 18,636 661
----------------------
Net change in cash and cash equivalents 12,958 (6,521)
Cash and cash equivalents at beginning of period 8,460 14,708
----------------------
Cash and cash equivalents at end of period $ 21,418 $ 8,187
======================
Supplementary information:
Interest paid $ 207 $ 658
Financing activity:
Conversion of notes payable into common stock $ -- $ 719
Issuance of common stock as payment on accrued liabilities $ 888 $ --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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CONNETICS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
We have prepared the accompanying unaudited condensed consolidated
financial statements of Connetics Corporation ("Connetics") in accordance with
generally accepted accounting principles for interim financial information and
pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, the financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In our opinion, all adjustments, consisting of normal
recurring accrual adjustments, considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000.
These financial statements and notes should be read in conjunction with
audited financial statements and notes to those financial statements for the
year ended December 31, 1999 included in our Annual Report on Form 10-K.
2. EARNINGS PER SHARE
We compute basic earnings per share based on the weighted average number
of common shares outstanding during the period. Diluted earnings per share also
includes the incremental shares expected to be issued pursuant to the exercise
of in-the-money stock options and other potentially dilutive securities. The
number of incremental shares from the assumed issuance of stock options and
other potentially dilutive securities is calculated applying the treasury stock
method. Common stock equivalent shares are excluded from the computation when
there is a loss, as their effect is anti-dilutive. The following table sets
forth the computations for basic and diluted earnings per share.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(In thousands, except per share amounts) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings-
per share-
Net loss $ (5,295) $ (7,982) $ (4,323) $(18,696)
Denominator for basic and diluted
earnings per share 29,507 21,382 28,032 21,353
====================== ======================
Basic and dilutive loss per share $ (0.18) $ (0.37) $ (0.15) $ (0.88)
====================== ======================
</TABLE>
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3. COMPREHENSIVE INCOME (LOSS)
During the three and nine month periods ended September 30, 2000, total
comprehensive income amounted to $8.1 million and $52.1 million, respectively,
compared to a comprehensive loss of $8.0 million and $18.7 million for the
comparable periods in 1999. The components of comprehensive income (loss) for
the three and nine month periods ended September 30, 2000 and September 30, 1999
are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
(In thousands) 2000 1999 2000 1999
---------------------- ----------------------
<S> <C> <C> <C> <C>
Net loss $ (5,295) $ (7,982) $ (4,323) $(18,696)
Unrealized gain (loss) on securities 13,398 14 56,436 (10)
---------------------- ----------------------
Comprehensive income (loss) 8,103 $ (7,968) $ 52,113 $(18,706)
====================== ======================
</TABLE>
Accumulated other comprehensive income at September 30, 2000 and December 31,
1999 consisted of unrealized gains on securities of $56.7 million and $0.1
million, respectively.
4. RESEARCH AND LICENSE AGREEMENTS
In January 1999, we entered into a development, commercialization and
supply agreement with Celltech Group, PLC (formerly Medeva PLC) of the United
Kingdom ("Celltech)") for certain therapeutic indications pertaining to relaxin.
Under the terms of the agreement, Medeva paid $8.0 million upon closing, which
included a $4.0 million contract fee and a $4.0 million equity investment. In
October 2000 Celltech informed Connetics that they are exercising their right to
terminate the relationship according to the contract. See Note 6 for further
discussion. We recorded $1.0 million and $8.0 million, respectively, for the
three and nine month periods ended September 30, 2000, and $1.0 million and $7.0
million, respectively, for the three and nine month periods ended September 30,
1999, in contract revenue under this agreement.
In July 1999, we entered into an exclusive license agreement with
Paladin Labs Inc. for the development and commercialization of relaxin in
Canada. Under the terms of the agreement, we may receive additional milestone
payments for the approval of additional indications for relaxin in Canada.
Paladin is responsible for all development and commercialization activities in
Canada, and will pay royalties on all sales of relaxin in Canada. For the three
and nine month periods ended September 30, 2000, we recorded $0.2 million and
$0.7 million, respectively, in contract revenue under this agreement.
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5. INTERMUNE PHARMACEUTICALS, INC.
In December 1995, we entered into a license agreement with Genentech,
Inc. to acquire exclusive U.S. development and marketing rights to interferon
gamma for dermatological indications. The cumulative effect of a number of
subsequent amendments to the original license agreement is to expand the fields
of use for which the license applies, and add Japan and Canada to the licensed
territory. Genentech manufactures and supplies Actimmune pursuant to a separate
supply agreement. We established a subsidiary, InterMune Pharmaceuticals, Inc.,
(InterMune), in 1998 to develop Actimmune for serious pulmonary and infectious
diseases and congenital disorders. In April 1999, InterMune became an
independent company, and in March 2000, InterMune went public. As of September
30, 2000, we held 1,049,445 shares of common stock of InterMune, which
represented approximately a 4.2% equity position in InterMune. Subsequent to
quarter end, Connetics has sold shares in InterMune. On June 27, 2000, we
assigned all of our rights and obligations under the license with Genentech and
the corresponding supply agreement to InterMune for a cash payment of $5.2
million. In addition, we hold an option to purchase the product rights for
potential dermatological applications of Actimmune and will receive royalties on
Actimmune sales recorded by InterMune after December 31, 2001.
6. SUBSEQUENT EVENTS
On October 8, 2000, Connetics announced that a Phase III trial
investigating recombinant human relaxin in the treatment of diffuse systemic
sclerosis, also known as scleroderma, did not meet its primary endpoint. Based
on the preliminary results, we will not pursue FDA approval of relaxin for the
treatment of scleroderma. Connetics will continue relaxin clinical development
programs in vascular diseases and infertility. In response to the outcome of the
scleroderma trial, both Celltech and Suntory LTD notified Connetics that they
will discontinue their collaborations with Connetics for the development of
relaxin in Europe and Japan, respectively. All rights to relaxin under these
agreements for Europe and Japan will revert to Connetics. The companies are in
the process of working out the specifics on how the two relationsips will be
discontinued. [The agreements do not contain a provision requiring us to refund
any of the monies received.]
On October 3, 2000, Connetics entered into an agreement with ALZA
Corporation (ALZA) to develop an advanced drug delivery system for relaxin. The
development work will focus on applying ALZA's implantable drug delivery
technology, or DUROS(R) system, to expand delivery options for relaxin. The
current delivery system for Connetics' relaxin formulation involves the use of
an external infusion pump.
7. LIQUIDITY AND FINANCIAL VIABILITY
Until the first quarter of fiscal year 2000, we lost money every year
since our inception. We may incur additional losses during the next few years.
Accordingly, we may need to raise additional funding in the future. 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. If we are
unable to successfully complete development and commercialization of relaxin, we
may never achieve profitability. If we need to raise additional money to fund
our operations, funding may not be available to us on acceptable terms, or at
all.
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8. RECENT ACCOUNTING PRONOUNCEMENTS
When we receive non-refundable fees in connection with collaborative
agreements, we have recognized the fees as revenue when received, when the
technology has been transferred and when all of our contractual obligations
relating to the fees had been fulfilled. In December 1999, the SEC issued Staff
Accounting Bulletin No. 101-Revenue Recognition in Financial Statements, or SAB
101. SAB 101 describes the SEC staff's position on the recognition of certain
non-refundable upfront fees received in connection with research collaborations.
We are currently evaluating the impact of SAB 101 upon our recorded revenue from
existing collaborative agreements. We plan to change our method of accounting
effective January 1, 2000 to recognize such fees over the term of the related
agreement. The cumulative effect is expected to be recognized in our financial
statements in the year to date presentation for the quarter ended December 31,
2000. The cumulative effect, if any, would be recorded as deferred revenue and
would be recognized as revenue over the remaining term of the respective
collaborative research and development agreements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative Financial
Instruments and for Hedging Activities," or SFAS 133, which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and is not anticipated to have an impact on our
results of operations or financial condition as we hold no derivative financial
instruments and do not currently engage in hedging activities.
In March 2000, the FASB issued interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB
25," or FIN 44. This interpretation clarifies (1) the definition of employee for
purposes of applying Opinion 25, (2) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (3) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (4)
the accounting for an exchange of stock compensation awards in a business
combination. This interpretation is effective July 1, 2000, but certain
conclusions in this interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. To the extent that this interpretation
covers events occurring during the period after December 15, 1998, or January
12, 2000, but before the effective date of July 1, 2000, the effects of applying
this interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of FIN 44 does not have a material impact on our financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This MD&A should be read in conjunction with the MD&A included in our
Annual Report on Form 10-K for the year ended December 31, 1999, and with the
unaudited condensed consolidated financial statements and notes to financial
statements included in this report. Except for historical information, the
discussion in this report contains forward-looking statements that involve risks
and uncertainties. When used in this report, the words "anticipate," "believe,"
"estimate," "will," "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, these
plans, intentions, or expectations may not be achieved. Some of the factors
that, in our view, could cause actual results to differ are discussed under the
caption "Factors That May Affect Future-Results, Financial Condition and the
Market Price of Securities" and in our Annual Report on Form 10-K. Our
historical operating results are not necessarily indicative of the results to be
expected in any future period.
OVERVIEW
We are developing a biotechnology product that has potential to treat
multiple diseases and we develop and commercialize pharmaceutical products. Our
biotechnology product is a recombinant form of a natural hormone called relaxin.
In addition, we currently market three products targeted at specialty medical
markets. Specialty medical markets are characterized by markets with large
patient populations that are served by relatively small, and therefore more
accessible, groups of treating physicians.
We are building our business by developing relaxin for a number of
indications, and are conducting multiple clinical trials. On October 8, 2000, we
announced that our pivotal trial for scleroderma failed to reach its primary
endpoint. We are in earlier stage clinical trials of relaxin for the treatment
of infertility and peripheral arterial disease. In our commercial business, we
are offering products with clinically proven therapeutic advantages and are
providing quality customer service to physicians through our experienced sales
and marketing staff. By pursuing a dual business model of developing relaxin for
a variety of significant markets, while at the same time commercializing our
current products, we believe we have a diversified and balanced strategy. We
maintain North American rights for relaxin and have entered into collaborative
relationships for this program for markets outside of the United States. In
October 2000, our partners in Japan and Europe notified us that they would
terminate our agreements with them for the development of relaxin. Consequently,
the rights for relaxin in Japan and Europe will be returned to us. We recognized
$1.0 and $0.0 million for the three months ended September 30, 2000 and 1999
respectively under the terms of these agreements. For the nine months ended
September 30, 2000 and 1999 we recognized $6.0 and $0.9 million respectively
under the terms of these agreements.
In May 2000, the FDA granted us clearance to market OLUX(TM) Foam
(clobetasol propionate) 0.05% for the treatment of moderate to severe scalp
dermatoses. We launched OLUX on November 6, 2000.
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RESULTS OF OPERATIONS
REVENUES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
Revenues (In thousands) 2000 1999 2000 1999
--------------------- ---------------------
<S> <C> <C> <C> <C>
Product:
Luxiq $ 2,856 $ 1,364 $ 7,703 $ 4,015
Ridaura 2,801 2,035 5,517 4,285
Actimmune -- 1,374 1,898 3,356
--------------------- ---------------------
Total product revenues 5,657 4,773 15,118 11,656
Contract:
Celltech 1,000 1,000 8,000 7,000
Suntory Ltd. -- -- -- 879
F.H. Faulding & Co., Ltd. 485 -- 510 --
Paladin Labs, Inc. 200 400 650 400
InterMune -- -- 1,500 500
Immune Response Corp. 50 -- 150 --
--------------------- ---------------------
Total contract revenues 1,735 1,400 10,810 8,779
--------------------- ---------------------
Sale of InterMune Revenue Rights -- -- 5,218 --
--------------------- ---------------------
Total revenues $ 7,392 $ 6,173 $ 31,146 $ 20,435
===================== =====================
</TABLE>
Our product revenues for the three and nine month periods ended
September 30, 2000, were $5.7 million and $15.1 million, respectively, compared
to $4.7 million and $11.7 million for the three and nine month periods ended
September 30, 1999. The increase in total product revenues was due to continued
sales growth of Luxiq, which we began marketing in April 1999. Although Ridaura
sales increased quarter over quarter, we believe that Ridaura will experience
decreased sales for the remainder of 2000 due to competition from new and
existing products. As part of the June 27, 2000 agreement with InterMune, we did
not record Actimmune sales beginning with the second quarter of 2000.
Contract revenues for the three and nine month periods ended September
30, 2000 were $1.7 million and $10.8 million, respectively, compared to $1.4
million and $8.8 million for the three and nine month periods ended September
30, 1999. Each quarter includes $1.0 million representing reimbursement by
Celltech for research and developments costs. The increase in contract revenue
for the three month period ended September 30, 2000, is mainly due to the one-
time licensing fee payment from Faulding based on an agreement signed in April
2000. The increase in contract revenues for the nine months ended September 30,
2000 over the same period in 1999 reflects $1.5 million paid by InterMune in
connection with our sublicense agreement, one-time $0.5 million Faulding
licensing fees and a one-time $5.0 million payment from Celltech in connection
with our agreement for the development of relaxin. We expect contract revenues
to fluctuate significantly depending on when and whether our partners or we
achieve milestones under existing agreements, and on new business opportunities
that we may identify.
InterMune purchased the remaining United States commercial rights and
revenue to Actimmune on June 23, 2000. As part of the transaction, InterMune
paid $5.2 million which included the prepayment of a $1.0 million obligation
owed in 2002. Prior to this transaction,
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Connetics had the right to book revenue based on a fixed amount of unit sales in
the years 1999, 2000 and 2001. Beginning with the quarter ended June 30, 2000,
InterMune will record all Actimmune revenue and related expenses.
Our cost of product revenues includes the costs of Luxiq, Ridaura and
Actimmune, royalty payments on these products based on a percentage of our
product revenues, and product freight and distribution costs from our
distributor. We recorded cost of product revenues of $0.7 million and $3.0
million, respectively for the three and nine month periods ended September 30,
2000, compared to $1.6 million and $4.3 million for the three and nine month
periods ended September 30, 1999. The decrease in cost of product revenues for
the first nine months of 2000 over the first nine months of 1999 is primarily
due to the reversal of costs associated with Actimmune revenue sold to InterMune
effective as of March 31, 2000. In addition, we recorded $1.7 million of
amortization expense associated with the acquisition of product rights to
Ridaura in the first quarter of 1999, thus resulting in a decrease in cost for
the same period ended September 30, 2000.
RESEARCH AND DEVELOPMENT
Research and development expenses were $5.8 million for the three month
period ended September 30, 2000 and $16.0 million for the nine month period
ended September 30, 2000, compared to $5.8 million and $14.4 million for the
comparable periods in 1999. The increase in expenses from the nine months ended
September 30, 2000 over the nine months ended September 30, 1999 was due to:
- continued manufacturing scale-up of relaxin;
- initiation of long-term study in connection with conducting the Phase
III trial of relaxin for the treatment of scleroderma;
- increasing personnel in our development organization; and
- initiating clinical development of relaxin for the treatment of
infertility
We expect research and development expenses to remain consistent over
the next few quarters, due to the impact of the removal of the majority of
expenses related to relaxin for scleroderma manufacturing and the ramp up of
relaxin clinical trial activities for new disease indications.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $6.8 million
for the three month period ended September 30, 2000 and $18.3 million for the
nine month period ended September 30, 2000, compared to $5.0 million and $15.5
million for the comparable periods in 1999. We expect selling, general and
administrative expenses to increase slightly during the remainder of fiscal 2000
due to:
- expenses associated with launching OLUX in the fourth quarter of
2000; and
- increasing personnel in our sales and marketing and clinical
organizations.
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INTEREST INCOME (EXPENSE)
Interest and other income were $0.6 million for the three month period
ended September 30, 2000, and $2.0 million for the nine month period ended
September 30, 2000, compared with $0.2 million and $0.8 million for the
comparable periods in 1999. The increase in interest income was due to realized
gains from the sale of marketable securities and higher interest income from
higher cash and short-term investment balances. Interest expense was $0.1
million for the three month period ended September 30, 2000 and $0.2 million for
the nine month period ended September 30, 2000, compared with $0.2 million and
$0.8 million for the comparable periods in 1999. The decrease in interest
expense resulted from lower interest expense associated with lower balances
outstanding for obligations under capital leases, loans, and notes payable.
NET LOSS
Net loss was $5.3 million for the three month period ended September 30,
2000 and $4.3 million for the nine month period ended September 30, 2000
compared to a net loss of $8.0 million and $18.7 million for the comparable
periods in 1999. The decrease in net losses was primarily attributable to an
increase in Luxiq product revenue and the following non-recurring revenue items:
- a one-time $5.0 million contract payment and $1.0 million quarterly
development payment from Celltech in connection with our agreement for
the development of relaxin; and
- the sale on June 27, 2000 of Actimmune revenue rights for $5.2 million
to InterMune and a one-time payment of $1.5 million in connection with
our exclusive sublicense agreement with InterMune.
We expect to incur losses for the remainder of 2000 and the foreseeable
future. These losses are expected to fluctuate from period to period based on
timing of product revenues, clinical material purchases, clinical trial
expenses, and possible acquisitions of new products and technologies.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily through proceeds from
equity financings, collaborative arrangements with corporate partners and bank
loans. At September 30, 2000, cash, cash equivalents and short-term investments
and non-current marketable securities totaled $95.6 million compared to $26.3
million at December 31, 1999. Our cash reserves are held in a variety of
interest-bearing instruments including high-grade corporate bonds, commercial
paper and money market accounts.
Cash flows from operating activities. Cash used in operations for the
nine month periods ended September 30, 2000, and 1999, was $5.2 million and $8.9
million, respectively. Net loss of $4.3 million for the first nine months of
2000 was affected by non-cash charges of $0.6 million of depreciation and
amortization expense and $1.4 million non-cash compensation expense. Cash
outflow for the first nine months of 2000 was primarily for operating activities
which included a $2.7 million increase and $ 3.7 million reduction in accounts
payable and accrued process development expense, respectively, partially offset
by a higher accrued liabilities balance.
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Cash flows from investing activities. Investing activities used $0.5
million in cash during the nine month period ended September 30, 2000, due in
part to sales of $13.7 million of short-term investments offset by $13.5 million
of short term investment purchases.
Cash flows from financing activities. Cash provided by financing
activities for the nine months ended September 30, 2000 included $21.8 million
of cash proceeds from the issuance of stock, offset by $3.2 million of note and
lease payments. Of the $21.8 million of cash proceeds, $20.0 million relates to
a private placement of 2,000,000 shares of Connetics' unregistered common stock.
Working Capital. Working capital increased by $18.6 million to $32.0
million at September 30, 2000 from $13.4 million at December 31, 1999. The
increase in working capital was due to a $20.0 million private placement of our
common stock and the $5.2 million sale of Actimmune rights to InterMune,
partially offset by cash used for operations.
At September 30, 2000, we had an aggregate of $1.6 million in future
obligations of principal payments under capital leases, loans, long-term debt
and other obligations, of which $1.2 million is to be paid within one year.
We have an equity line agreement with Kepler Capital LLC. In connection
with that agreement, which expires December 1, 2000, we are required to sell
$0.5 million of our common stock to Kepler approximately every 90 days if our
stock meets certain volume restrictions and trades above $10.00 per share. In
addition, we may elect to draw down approximately $2.0 million every 90 days if
our stock trades above $7.00 per share. Our stock met the restrictions in the
first three quarters of 2000. In that connection, we issued 58,438 shares to
Kepler at a purchase price of $8.556 on February 10, 2000, we issued 41,562
shares to Kepler with a purchase price of $7.8585 on June 28, 2000, a warrant
for 22,063 with an exercise price of $7.8585 on June 28, 2000, and a warrant for
33,099 shares with an exercise price of $15.12 on September 27, 2000. Overall we
have generated $0.8 million in cash from this agreement for the nine months
ended September 30, 2000.
In addition, on December 1, 2000, we will be required under the terms of
the Structured Equity Line Agreement to issue Kepler Capital a warrant to
purchase up to an additional 25,427 shares of our common stock. This warrant
will expire on December 1, 2005 and the exercise price will equal to 110% of the
closing price of our common stock as quoted on the Nasdaq National Market on
December 1, 2000. The exact number of shares subject to the December 2000
warrant will be calculated using a formula set forth in the Structured Equity
Line Agreement.
Finally, also in connection with the Structured Equity Line Agreement,
we are required to issue an additional 3,105 shares of common stock to Kepler
Capital on December 1, 2000 under certain anti-dilution provisions of the
Structured Equity Line Agreement. Of these shares, 2,726 shares will be issued
at a purchase price of $8.1195 per share and 379 shares will be issued at a
purchase price of $7.4737 per share.
We believe our existing cash, cash equivalents and short-term
investments, cash generated from product sales and collaborative arrangements
with corporate partners, will be
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<PAGE> 15
sufficient to fund our operating expenses, debt obligations and capital
requirements through at least the next 12 months.
Except for the equity line agreement discussed above, we have no
commitments for any additional financing. If we need to raise additional money
to fund our operations, funding may not be available to us on acceptable terms,
or at all. 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND THE MARKET PRICE
OF SECURITIES
Please also read Items 1 and 3 in our 1999 Annual Report on Form 10-K
where we have described our business and the challenges and risks we may face in
the future.
Our results of operation have varied widely in the past, and they could
continue to vary significantly from quarter to quarter due to a number of
factors, including those listed below. Any shortfall in revenues would have an
immediate impact on our earnings per share, which could adversely affect the
market price of our common stock. Our operating expenses, which include sales
and marketing, research and development and general and administrative expenses,
are based on our expectations of future revenues and are relatively fixed in the
short term. Accordingly, if revenues fall below our expectations, we will not be
able to reduce our spending rapidly in response to such a shortfall. Due to the
foregoing factors, we believe that quarter-to-quarter comparisons of our results
of operations are not a good indication of our future performance.
RISKS RELATED TO OUR BUSINESS
IF WE DO NOT SUSTAIN PROFITABILITY, STOCKHOLDERS MAY LOSE THEIR INVESTMENT.
Until the first quarter of fiscal year 2000, we lost money every year
since our inception. We had net losses of $26.6 million in 1998 and $27.3
million in 1999. Our accumulated deficit was $124.1 million at September 30,
2000. We may incur additional losses during the next few years. If we do not
sustain the profitability we achieved in the first two quarters of fiscal year
2000, our stock price may decline.
IF WE DO NOT OBTAIN THE CAPITAL NECESSARY TO FUND OUR OPERATIONS, WE WILL BE
UNABLE TO DEVELOP OR MARKET OUR PRODUCTS.
We currently believe that our available cash resources will be
sufficient to fund our operating and working capital requirements for the next
18 months. Accordingly, we may need to raise additional funds through public or
private financings, strategic relationships or other arrangements. 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. If we are
unable to successfully complete development and commercialization of relaxin, we
may never achieve profitability.
IF WE FAIL TO PROTECT OUR PROPRIETARY RIGHTS, COMPETITORS MAY BE ABLE TO USE OUR
TECHNOLOGIES, WHICH WOULD WEAKEN OUR COMPETITIVE POSITION, REDUCE OUR REVENUES
AND INCREASE OUR COSTS.
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<PAGE> 16
Our commercial success depends in part on our ability and the ability of
our licensors to protect our technology and processes.
The foam technology used in our Luxiq(R) and OLUX(TM) products is
covered by one issued patent. In addition, the patents in our relaxin patent
portfolio begin to expire in 2002 in foreign countries and 2005 in the United
States. Patent expiration dates range from 2002 to 2017. Additional patents may
not issue, and if they do, they may not be sufficient to protect our relaxin
products.
With regard to patent applications that we or our licensors have filed,
or patents issued to us or our licensors:
- any pending patent applications may not issue as patents;
- our competitors may successfully challenge or circumvent our patents;
or
- any patents which exist or are issued may not provide us with a
competitive advantage.
In addition, others may obtain patents that contain claims which cover
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.
Under these circumstances, we may not be able to obtain a license to
such intellectual property on favorable terms, if at all. We may not succeed in
any attempt to redesign our products or processes to avoid infringement.
A judgment adverse to us in any patent interference, litigation or other
proceeding arising in connection with these patent applications could materially
harm our business. In addition, the costs of any such proceeding may be
substantial whether or not we are successful.
OUR CURRENT PRODUCT REVENUE WILL NOT COVER THE COST OF FULLY DEVELOPING AND
COMMERCIALIZING RELAXIN.
Product revenue from sales of our marketed products does not cover the
full cost of developing relaxin and other products in our pipeline.
Historically, we have depended on licensing agreements with our corporate
partners to successfully develop and commercialize our products. We also
generate revenue by licensing our products to third parties for specific
territories and indications. Our reliance on licensing arrangements with third
parties carries several risks, including the possibilities that:
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<PAGE> 17
- a product development contract may expire or a relationship may be
terminated, and we will not be able to attract a satisfactory
alternative corporate partner within a reasonable time;
- a corporate 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 occurs, we may not be able to successfully develop our
products.
WE DEPEND ON THIRD PARTIES TO PROTECT AND MAINTAIN OUR PATENT PORTFOLIO.
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. 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.
IF WE DO NOT SUCCESSFULLY COMMERCIALIZE RELAXIN, WE MAY LOSE FUNDAMENTAL
INTELLECTUAL PROPERTY RIGHTS TO THE PRODUCT.
Licenses with Genentech, Inc. and The Howard Florey Institute of
Experimental Physiology and Medicine 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 cause us to lose fundamental intellectual property rights to
relaxin. This would prohibit us from continuing our relaxin development
programs.
WE ARE SUBJECT TO FOREIGN EXCHANGE RISKS WHICH MAY INCREASE OUR OPERATIONAL
EXPENSES.
We make payments to Boehringer Ingelheim for the production of relaxin
in Austrian schillings, and to CCL Pharmaceuticals for the production of Luxiq
and OLUX in pounds sterling. If the U.S. dollar depreciates against the
schilling or the pound, the payments that we must make will increase, which will
increase our expenses. We do not currently hedge our foreign currency exposure
related to these Agreements.
WE RELY ON OUR EMPLOYEES AND CONSULTANTS TO KEEP OUR TRADE SECRETS CONFIDENTIAL.
We rely on trade secrets and proprietary know-how. We require each of
our employees, consultants and advisors to execute a confidentiality agreement
providing that all proprietary information developed or made known to the
individual during the course of the relationship will be kept confidential and
not used or disclosed to third parties except in specified circumstances. The
agreements also provide that all inventions conceived by an employee, consultant
or advisor, to the extent appropriate for the services provided during the
course of the relationship, shall be our exclusive property, other than
inventions unrelated to us and developed entirely on the
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<PAGE> 18
individual's own time. These agreements may not provide meaningful protection or
adequate remedies for misappropriation of our trade secrets in the event of
unauthorized use or disclosure of such information.
OUR USE OF HAZARDOUS MATERIALS EXPOSES US TO THE RISK OF ENVIRONMENTAL
LIABILITIES, AND WE MAY INCUR SUBSTANTIAL ADDITIONAL COSTS TO COMPLY WITH
ENVIRONMENTAL LAWS.
Our research and development activities involve the controlled use of
hazardous materials, chemicals and various radioactive materials. We are subject
to laws and regulations governing the use, storage, handling and disposal of
these materials and certain waste products. In the event of accidental
contamination or injury from these materials, we could be liable for any damages
that result and any liability could exceed our resources. We may also be
required to incur significant costs to comply with environmental laws and
regulations as our research activities increase.
RISKS RELATED TO OUR PRODUCTS
IF WE DO NOT OBTAIN AND MAINTAIN GOVERNMENTAL APPROVALS FOR OUR PRODUCTS, WE
CANNOT SELL THESE PRODUCTS FOR THEIR INTENDED DISEASES.
The process of obtaining and maintaining regulatory approvals for
pharmaceutical and biological drug products, and obtaining and maintaining
regulatory approvals to market these products for new indications, is lengthy,
expensive and uncertain. The manufacturing and marketing of drugs are subject to
continuing FDA and foreign regulatory review, and later discovery of previously
unknown problems with a product, manufacturing process or facility may result in
restrictions, including withdrawal of the product from the market. To obtain
approval, we must show in preclinical and clinical trials that our products are
safe and effective.
After we complete the clinical trials for a product, we must file a new
drug application if the product is classified as a new drug, or a biologics
license application if the product is classified as a biologic, which is a drug
based on natural substances. The FDA approval processes require substantial time
and effort, the FDA continues to modify product development guidelines, and the
FDA may not grant approval on a timely basis or at all. Clinical trial data can
be the subject of differing interpretation, and the FDA has substantial
discretion in the approval process. The FDA may not interpret our clinical data
the way we do. The FDA may also require additional clinical data to support
approval. The FDA can take between one and two years to review new drug
applications and biologics license applications, or longer if significant
questions arise during the review process. Even after such time and
expenditures, we may not obtain regulatory approval or the approval we get may
have strict limitations.
In particular, relaxin is critical to our future success. On October 8,
2000, we announced that our clinical trial of relaxin for the treatment of
diffuse scleroderma, a serious disease involving the excessive formation of
connective tissue, failed to meet its primary endpoint. We are in earlier stages
of clinical development of relaxin for other indications, including infertility
and the treatment of blocked or restricted blood vessels in the arms and legs.
For relaxin to succeed, we will need, at a minimum, to demonstrate that relaxin
is safe and effective in one of these clinical studies.
To market our products in countries outside of the United States, we and
our partners must obtain similar approvals from foreign regulatory bodies. The
foreign regulatory approval
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<PAGE> 19
process includes all of the risks associated with obtaining FDA approval, and
approval by the FDA does not ensure approval by the regulatory authorities of
any other country. The process of obtaining these approvals is time consuming
and requires the expenditure of substantial resources.
IF LUXIQ AND OLUX DO NOT ACHIEVE OR SUSTAIN MARKET ACCEPTANCE, OUR REVENUES WILL
NOT INCREASE AND MAY NOT COVER OUR OPERATING EXPENSES.
Our future revenues will depend upon dermatologist and patient
acceptance of Luxiq and OLUX. Factors that could affect acceptance of Luxiq and
OLUX include:
- satisfaction with existing alternative therapies;
- the effectiveness of our sales and marketing efforts;
- undesirable and unforeseeable side effects; and
- the cost of the product as compared with alternative therapies.
Since we have only had approval to sell Luxiq for one year, and OLUX was
only approved on May 26, 2000, we cannot predict the potential long-term patient
acceptance of either product.
IF WE ARE UNABLE TO DEVELOP ALTERNATIVE DELIVERY SYSTEMS FOR RELAXIN, PATIENTS
THAT DO NOT SUFFER FROM SEVERE DISEASES MAY NOT BE WILLING TO USE THE CURRENT
DRUG DELIVERY SYSTEM.
In addition to demonstrating that relaxin is safe and effective in our
current clinical trials, we must meet several additional major development
objectives for relaxin. In particular, we may need to develop an alternative
means of delivering the drug. In our current clinical trials, relaxin is being
delivered through the use of an infusion pump. For a serious and life
threatening condition, this method of delivery may be acceptable. However, for
the indications we are studying, such as treatment of infertility and peripheral
arterial disease, we may need to develop an alternative delivery system. 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 relaxin, we may be unable to market
relaxin effectively for indications that are not life threatening, such as
infertility, and the commercial potential of relaxin would be seriously harmed.
Our inability to develop relaxin to its full commercial potential would harm our
future prospects and revenue growth and our stock price would likely decline.
WE RELY ON THIRD PARTIES TO CONDUCT CLINICAL TRIALS FOR OUR PRODUCTS, AND THOSE
THIRD PARTIES MAY NOT PERFORM SATISFACTORILY.
We do not have the ability to independently conduct clinical studies,
and we rely on third parties to perform this function. If these third parties do
not perform satisfactorily, we may not be able to locate acceptable replacements
or enter into favorable agreements with them, if at all. If we are unable to
rely on clinical data collected by others, we could be required to repeat
clinical trials, which could significantly delay commercialization and require
significantly greater capital.
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<PAGE> 20
MANUFACTURING DIFFICULTIES COULD DELAY COMMERCIALIZATION OF OUR PRODUCTS.
We depend on third parties to manufacture our products, and each product
is manufactured by a sole source manufacturer. Boehringer Ingelheim Austria
GmbH, SmithKline Beecham, and CCL Pharmaceuticals are our sole source
manufacturers for our products. All of our contractors 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. If our sole source manufacturers
cannot provide us with our product requirements in a timely and cost-effective
manner, if the product they are able to supply cannot meet commercial
requirements for shelf life, or if they are not able to comply with the
applicable good manufacturing practice regulations and other FDA regulatory
requirements, our sales of marketed products could be reduced and we could
suffer delays in the progress of clinical trials for products under development.
We do not have control over our third-party manufacturers' compliance with these
regulations and standards.
IF WE ARE UNABLE TO CONTRACT WITH THIRD PARTIES TO MANUFACTURE AND DISTRIBUTE
OUR PRODUCTS IN SUFFICIENT QUANTITIES, ON A TIMELY BASIS, OR AT AN ACCEPTABLE
COST, WE MAY BE UNABLE TO MEET DEMAND FOR OUR PRODUCTS AND MAY LOSE POTENTIAL
REVENUES.
We have no manufacturing or distribution facilities for any of our
products. Instead, we contract with third parties to manufacture our products
for us. We have manufacturing agreements with the following companies:
- Boehringer Ingelheim Austria GmbH for relaxin;
- CCL Pharmaceuticals, a Division of CCL Industries Limited, a U.K.
corporation, for Luxiq and OLUX; and
- SmithKline for Ridaura.
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 will suffer.
In addition, we have entered into an agreement with CORD Logistics, Inc.
to distribute Luxiq and Ridaura. If CORD is unable to continue to distribute our
products in an effective manner or if we are unable to maintain sufficient
personnel with the appropriate levels of experience to manage this function, we
may be unable to meet the demand for our products and we may lose potential
revenues.
RISKS RELATED TO OUR INDUSTRY
WE FACE INTENSE COMPETITION, WHICH MAY LIMIT OUR COMMERCIAL OPPORTUNITIES AND
OUR ABILITY TO BECOME PROFITABLE.
The pharmaceutical and biotechnology industries are highly competitive.
Products and therapies currently on the market or under development could
compete directly with some of our
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<PAGE> 21
products. Numerous pharmaceutical and biotechnology companies and academic
research groups are engaged in research and development efforts with respect to
therapeutic products targeted at diseases or conditions addressed by us. Our
commercial opportunities will be reduced or eliminated if our competitors
develop and market products that are more effective, have fewer or less severe
adverse side effects or are less expensive than our products. 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 developing and marketing
products either that are more effective than those that we may develop, alone or
with our collaborators, or that are marketed before any products we develop are
marketed. 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.
Physicians may not adopt our products over competing products, and our
products may not offer an economically feasible alternative to existing modes of
therapy.
IF THIRD PARTY PAYORS WILL NOT PROVIDE COVERAGE OR REIMBURSE PATIENTS FOR THE
USE OF OUR PRODUCTS, OUR REVENUES AND PROFITABILITY WILL SUFFER.
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. Medicare, Medicaid, health maintenance organizations and
other third-party payers may not authorize or otherwise budget for the
reimbursement of our products. In addition, they may not view our products as
cost-effective and reimbursement may not be available to consumers or may not be
sufficient to allow our products to be marketed on a competitive basis.
Likewise, legislative proposals to reform health care or reduce government
programs could result in lower prices for or rejection of our products. Changes
in reimbursement policies or health care cost containment initiatives that limit
or restrict reimbursement for our products may cause our revenues to decline.
IF PRODUCT LIABILITY LAWSUITS ARE BROUGHT AGAINST US, WE MAY INCUR SUBSTANTIAL
COSTS.
The testing and marketing of pharmaceutical products entails an inherent
risk of product liability. Our insurance may not provide adequate coverage
against potential product liability claims or losses, and insurance coverage may
not continue to be available to us on reasonable terms or at all. Even if we are
ultimately successful in product liability litigation, the litigation
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<PAGE> 22
would consume substantial amounts of our financial and managerial resources, and
might create adverse publicity, all of which would impair our ability to
generate sales.
RISKS RELATED TO OUR STOCK
OUR STOCK PRICE IS VOLATILE AND THE VALUE OF YOUR INVESTMENT IN OUR STOCK COULD
DECLINE IN VALUE.
The market prices for securities of biotechnology companies like our
company have been and are likely to continue to be highly volatile. As a result,
investors in these companies often buy at very high prices only to see the price
drop substantially a short time later, resulting in an extreme drop in value in
the stock holdings of these investors. In addition, the volatility could result
in securities class action litigation. Any litigation would likely result in
substantial costs, and divert our management's attention and resources.
IF OUR OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS ACT TOGETHER, THEY MAY BE
ABLE TO CONTROL OUR MANAGEMENT AND OPERATIONS AND THEY MAY MAKE DECISIONS THAT
ARE NOT IN THE BEST INTERESTS OF OTHER STOCKHOLDERS.
Our directors, executive officers and principal stockholders and their
affiliates currently beneficially own in the aggregate approximately 55% of our
outstanding common stock. Accordingly, they collectively have the ability to
determine the election of all of our directors and to determine the outcome of
most corporate actions requiring stockholder approval. They may exercise this
ability in a manner that advances their best interests and not necessarily those
of other stockholders. This concentration of ownership may also have the effect
of delaying, deferring or preventing a change in control of our company, even if
the change in control would be beneficial to other stockholders.
OUR CHARTER DOCUMENTS AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD DELAY OR
PREVENT AN ACQUISITION OF US, EVEN IF THE ACQUISITION WOULD BE BENEFICIAL TO OUR
STOCKHOLDERS.
Our certificate of incorporation authorizes our board of directors to
issue undesignated preferred stock and to determine the rights, preferences,
privileges and restrictions of the preferred stock without further vote or
action by our stockholders. The issuance of preferred stock could make 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. Other provisions of Delaware law and of our
charter documents, including a provision eliminating the ability of stockholders
to take actions by written consent, could also 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.
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<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We make payments to Boehringer Ingelheim for the production of relaxin
in Austrian schillings, and to CCL Pharmaceuticals for the production of Luxiq
and OLUX in pounds sterling. If the U.S. dollar depreciates against the
schilling or the pound, the payments that we must make will increase, which will
increase our expenses. We have a bank loan that is sensitive to movement in
interest rates. Interest income from out investments is sensitive to changes in
the general level of U.S. interest rates, particularly since the majority of our
investments are in short-term instruments. Due to the nature of our short-term
investments, we have concluded that we face no material market risk exposure.
Therefore, no quantitative tabular disclosures are required.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
ALZA Agreement. On October 3, 2000, Connetics entered into an agreement
with ALZA Corporation (ALZA) to develop an advanced drug delivery system for
relaxin. The development work will focus on applying ALZA's implantable drug
delivery technology, or DUROS(R) system, to expand delivery options for relaxin.
The current delivery system for Connetics' relaxin formulation involves the use
of an external infusion pump.
Sale of InterMune Stock. After InterMune announced earnings for the
third quarter of 2000, Connetics began to sell some of its holdings in
InterMune. As of November 13, 2000, we held approximately 240,000 shares of
common stock of InterMune, which represents approximately a 1.9% equity position
in InterMune.
OLUX Commercialization. On November 6, 2000, we announced that we had
begun shipping OLUX. In May 2000, the FDA granted us clearance to market OLUX
Foam (clobetasol propionate) 0.05% for the treatment of moderate to severe scalp
dermatoses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27.1 Financial Data Schedule (EDGAR-filed version only).
(b) Reports on Form 8-K.
We filed a current report on Form 8-K on July 18, 2000, with respect to
the private placement of 2,010,000 shares of our common stock on June 20, 2000.
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<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONNETICS CORPORATION
By: /s/ JOHN L. HIGGINS
--------------------------------------
John L. Higgins
Exec. Vice President, Finance and
Administration and Chief Financial
Officer
Date: November 14, 2000
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<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------------------------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
