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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 22, 2000.
REGISTRATION NO. 333-30142
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE AMENDMENT NO. 1
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CONNETICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-3173928
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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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. [ ]
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CALCULATION OF REGISTRATION FEE
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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
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Common Stock, $0.001 par value
per share................... 489,255 shares $14.1565 $6,926,138.40 $ (2)
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Total Shares.................. 489,255 $$6,926,138.40 $ (2)
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(1) Estimated solely for the purpose of computing the amount of the registration
fee, pursuant to Rule 457(c).
(2) Previously paid.
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.
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The information in this preliminary prospectus is not complete and may
be changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell nor does
it seek an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION MARCH 22, 2000
CONNETICS CORPORATION
489,255 SHARES OF COMMON STOCK
The stockholders named on page 34 are selling up to 489,255 shares of our
common stock. We will not receive any proceeds from the sale of shares offered
by the selling stockholders.
Our common stock is quoted on the Nasdaq National Market under the symbol
"CNCT." On March 17, 2000, the last reported sale price of our common stock was
$12.063 per share.
INVESTING IN OUR COMMON STOCK INVOLVES CERTAIN RISKS. SEE "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.
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TABLE OF CONTENTS
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Risk Factors................................................ 3
Forward Looking Statements.................................. 15
Trademarks.................................................. 16
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Price Range of Common Stock................................. 16
Business.................................................... 17
Issuance of Common Stock to Selling Stockholders............ 33
Selling Stockholders........................................ 34
Plan of Distribution........................................ 35
Legal Matters............................................... 36
Experts..................................................... 36
Where You Can Find Additional Information................... 36
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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. Investing in our common stock
involves a high degree of risk.
RISKS RELATED TO OUR BUSINESS
BECAUSE OUR PRODUCT LINE IS NEW AND LIMITED, OUR FUTURE SUCCESS IS DIFFICULT TO
PREDICT AND REVENUES MAY FLUCTUATE FROM PERIOD TO PERIOD.
Our product line is new and limited. 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.
If our operating results fall below the expectations of public market analysts
or investors, the price of our common stock may decline.
IF WE CONTINUE TO INCUR NET LOSSES FOR A PERIOD LONGER THAN WE ANTICIPATE, WE
MAY BE UNABLE TO ACHIEVE OR SUSTAIN PROFITABILITY.
We have lost money 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 may not 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 ConXn clinical trial for scleroderma 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.
IF WE DO NOT SUCCESSFULLY DEVELOP AND EXPLOIT THE PRODUCTS WE HAVE RIGHTS TO, WE
MAY NOT ACHIEVE THE REVENUE GROWTH WE ANTICIPATE.
A significant part of our business strategy is to exclusively license or
acquire marketed or late-stage development products in our targeted therapeutic
areas. This strategy has led to our acquisition of rights to ConXn, Luxiq, OLUX,
Actimmune, and Ridaura. If we are unable to effectively manage the integration
of products we acquire in the future into our product line, or if we cannot
market and sell such products successfully, our revenues will not grow or may
decline. In addition, if we acquire products that 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, we would fail to achieve anticipated revenue
growth and our stock price would likely decline. Furthermore, if the FDA
modifies existing guidelines
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for product development, the time and costs associated with the development of
products in our product line may increase, in which case we may not be able to
successfully develop our products at the rate we anticipate, or we may not be
able to develop them at all.
IF WE FAIL TO OBTAIN THE CAPITAL NECESSARY TO FUND OUR OPERATIONS, WE WILL BE
UNABLE TO CONTINUE OUR BUSINESS ACTIVITIES AS PLANNED.
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 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.
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 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. If adequate funds are unavailable from operations or additional
sources of financing, we may have to delay, reduce the scope of, or eliminate
one or more of our product development programs.
IF OUR CORPORATE PARTNERS ARE NO LONGER WILLING OR ABLE TO FUND THE DEVELOPMENT
OF OUR PRODUCT DEVELOPMENT, WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP OUR
PRODUCTS.
We depend 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. This reliance on third parties for our 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 occurs, we may not be able to successfully
develop our products at the rate we anticipate, or we may not be able to develop
them at all.
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BECAUSE IT IS DIFFICULT AND COSTLY TO PROTECT OUR PROPRIETARY RIGHTS, WE MAY NOT
BE ABLE TO PROTECT THEM.
Our commercial 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.
With respect to our relaxin patent portfolio, one of the European patents
licensed to us was opposed by a third party. The resulting decision in our favor
has been appealed, and it may not be upheld on appeal.
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.
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 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.
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.
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 harm 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.
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
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extent appropriate for the services provided during the course of the
relationship, shall be our exclusive property, other than inventions unrelated
to us and developed entirely on the individual's own time. 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.
WE DEPEND ON THIRD PARTIES TO PROTECT AND MAINTAIN OUR PATENT PORTFOLIO.
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. These applications may not result in
the issuance of any patents, and any issued patents may not provide significant
proprietary protection or may 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. 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.
The patents licensed to us, if challenged, may not 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. Additional patents may not issue, and
if they do, they may not 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 cause us to lose fundamental
intellectual property rights to relaxin. This would prohibit us from continuing
our relaxin development programs, which would seriously harm our business and
our future prospects.
WE ARE SUBJECT TO FOREIGN EXCHANGE RISKS IN SOME OF OUR CONTRACTS WHICH MAY
INCREASE OUR OPERATIONAL EXPENSES.
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. If the U.S. dollar depreciates against the schilling or
the pound, the payments that we must make will increase, which may harm our
financial condition.
In addition, 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, if 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.
If we enter into additional agreements or make product sales that are
denominated in foreign currencies, our foreign currency exchange risk would
increase.
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FAILURE TO ATTRACT, RETAIN AND MOTIVATE SKILLED PERSONNEL AND CULTIVATE KEY
STRATEGIC COLLABORATIONS WILL DELAY OUR PRODUCT DEVELOPMENT PROGRAMS AND OUR
BUSINESS DEVELOPMENT EFFORTS.
We depend on the principal members of our development and management
staffs, and our success depends on our continued ability to attract, retain and
motivate highly qualified management and scientific personnel. We depend on our
current management and key scientific and technical personnel, including Thomas
G. Wiggans, Chief Executive Officer and President. 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. Our inability to attract, retain or motivate the required number of
skilled and experienced management, operational and scientific personnel would
harm our business.
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 federal, state and local laws and regulations governing the use, storage,
handling and disposal of these materials and certain waste products. We cannot
completely eliminate the risk of accidental contamination or injury from these
materials. 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 increase, which could harm our business.
RISKS RELATED TO OUR PRODUCTS
IF CONXN, OUR RECOMBINANT HUMAN RELAXIN PRODUCT, FAILS IN ITS CLINICAL TRIALS
FOR THE TREATMENT OF SCLERODERMA, WE WILL NOT BE ABLE TO MARKET CONXN FOR THAT
DISEASE.
ConXn, the recombinant human relaxin product that we are developing, is
critical to our future success. Relaxin is a hormone that occurs naturally in
humans, and which we manufacture using recombinant processes. We are initially
studying ConXn for the treatment of diffuse scleroderma, a serious disease
involving the excessive formation of connective tissue. We initiated a pivotal
Phase II/III trial of ConXn for the treatment of diffuse scleroderma in February
1999, and completed patient enrollment in that trial in December 1999. To
complete the development of ConXn for scleroderma, we will need, at a minimum,
to:
- demonstrate the safety and efficacy of ConXn in this clinical study; and
- submit a biologics license application to the U.S. Food and Drug
Administration for the purpose of obtaining approval to market ConXn in
the United States.
The current ConXn clinical trial may not be successful and we may not be
able to submit a biologics license application for ConXn. Even if the clinical
data support the submission of a biologics license application, the FDA may not
approve this application for the indications for which we submit. Furthermore,
we may encounter unforeseen delays in the regulatory approval process.
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IF WE ARE NOT ABLE TO DEMONSTRATE CLINICAL EFFICACY OF CONXN FOR THE TREATMENT
OF OTHER INDICATIONS, WE WILL BE UNABLE TO OBTAIN FDA APPROVAL FOR THOSE
DISEASES, AND WILL NOT BE ABLE TO MARKET CONXN FOR THOSE DISEASES.
Our current ConXn trials or future clinical trials may not demonstrate the
safety and efficacy of any products and may not result in approval to market
products. 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. 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 addition to the clinical trial for scleroderma, we are in earlier stages
of development of ConXn for other indications, including infertility and
peripheral vascular disease. We initiated two Phase I/II clinical trials to
study the effects of relaxin on infertility in December 1999. In March 2000, we
filed an investigational new drug application to commence clinical trials of
ConXn for the treatment of peripheral vascular disease. Even if ConXn is
successful in the treatment of scleroderma, the long-term potential of ConXn
rests with other indications, such as the ones we are studying. For ConXn to
succeed, we will need, at a minimum, to demonstrate the safety and efficacy of
ConXn in these clinical studies, and apply to the FDA to enter into pivotal
trials for these indications in the United States.
The current ConXn clinical trials may not be successful and we may not be
able to start any future trials or successfully complete them once started.
Furthermore, we may encounter unforeseen delays in the regulatory approval
process. 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.
IF LUXIQ AND OLUX DO NOT ACHIEVE OR SUSTAIN MARKET ACCEPTANCE, OUR REVENUES WILL
NOT INCREASE AND MAY NOT COVER OUR OPERATING EXPENSES.
We received marketing clearance from the FDA in March 1999 for the use of
Luxiq to treat mild to moderate scalp dermatoses. In July 1999, we submitted a
new drug application to the FDA for OLUX, a product for the treatment of
moderate to severe scalp dermatoses. We will not be able to begin selling OLUX
in the United States unless and until we receive FDA approval to market this
drug. Our future revenues will depend upon dermatologist and patient acceptance
of Luxiq, and OLUX if it receives regulatory clearance. Factors that could
affect acceptance of Luxiq and OLUX include:
- satisfaction with existing alternative therapies;
- the effectiveness of our sales and marketing efforts;
- undesirable and unforeseeable side effects; and
- the cost of the product as compared with alternative therapies.
Since Luxiq was only recently introduced, the potential long-term patient
acceptance of the product is uncertain. OLUX must receive FDA clearance before
we can sell in the United States, and, accordingly, we will be unable to begin
to assess acceptance of OLUX until we begin commercial sales.
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IF WE ARE UNABLE TO DEVELOP ALTERNATIVE DELIVERY SYSTEMS FOR CONXN, PATIENTS
THAT DO NOT SUFFER FROM SEVERE DISEASES MAY NOT BE WILLING TO USE THE CURRENT
DRUG DELIVERY SYSTEM.
In addition to demonstrating the safety and efficacy of ConXn in our
current clinical trials, 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 our 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. For these indications,
we may need 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, we may not be unable to market ConXn effectively for
indications that are not life threatening, such as infertility, and the
commercial potential of ConXn would be seriously harmed. Our inability to
develop ConXn to its full commercial potential would harm our future prospects
and revenue growth and our stock price would likely decline.
IF OUR CLINICAL TRIALS FAIL TO DEMONSTRATE THAT OUR PRODUCTS ARE SAFE AND
EFFECTIVE FOR THE TREATMENT OF THE DISEASES WE ARE TARGETING, THE FDA WILL NOT
PERMIT US TO MARKET OUR PRODUCTS FOR THOSE DISEASES.
In addition to ConXn, we have a pipeline of potential products that are all
subject to FDA review. 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, and future clinical trials may not
demonstrate the safety and efficacy of any products and may not result in
approval to market products.
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.
WE MAY BE UNABLE TO ENROLL SUFFICIENT PATIENTS TO COMPLETE OUR CLINICAL TRIALS.
The rate of completion of clinical trials depends 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. We may have difficulty obtaining patient enrollment or
clinical support to conduct our clinical trials as planned, and we may have to
expend substantial additional funds to obtain access to resources to conduct
clinical trials, or we may have to delay or modify our plans significantly.
These considerations may lead us to consider terminating ongoing clinical trials
or development of a product for a particular disease. 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, the FDA may
not approve those products for marketing.
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IF WE CANNOT MAINTAIN OUR REGULATORY APPROVALS, WE WILL BE UNABLE TO SELL OUR
PRODUCTS FOR THEIR INTENDED DISEASES.
The process of obtaining and maintaining regulatory approvals for
biological drug products such as ConXn, and for pharmaceutical products such as
Luxiq and OLUX, 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. 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. In addition, governmental
authorities could seize our inventory of products or force us to recall our
products already in the market if we fail to comply with FDA regulations.
MANUFACTURING DIFFICULTIES COULD DELAY COMMERCIALIZATION OF OUR PRODUCTS.
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. Our present or future
suppliers may not be able to comply with the applicable good manufacturing
practice regulations and other FDA regulatory requirements.
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. 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;
- SmithKline for Ridaura; and
- Genentech for Actimmune.
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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. Our third party manufacturers are also subject to
ongoing periodic inspection by the FDA and corresponding state and foreign
agencies for compliance with strictly enforced good manufacturing practices
regulations and similar foreign standards. We do not have control over our
third-party manufacturers' compliance with these regulations and standards. CCL
will need to pass an FDA inspection before we can be approved to sell OLUX. The
fact that a facility has passed inspection in the past does not guarantee that
it will pass future inspections.
In addition, we have entered into an agreement with CORD Logistics, Inc. to
distribute Luxiq, Ridaura and Actimmune. CORD's inability to continue to
distribute our products in an effective manner or our inability to maintain
sufficient personnel with the appropriate levels of experience to manage this
function would seriously harm our business.
WE RELY ON SEVERAL SOLE SOURCE MANUFACTURERS TO MAKE OUR PRODUCTS, AND
INTERRUPTIONS IN THE SUPPLY CHAIN COULD REDUCE THE AMOUNT OF PRODUCT AVAILABLE
FOR SALE.
Boehringer Ingelheim, SmithKline, and CCL Pharmaceuticals are our sole
source manufacturers for our products. We have not attempted to qualify
additional sources of supply for our other sole source products. If our sole
source manufacturers cannot provide us with our product requirements in a timely
and cost-effective manner, or if the product they are able to supply cannot meet
commercial requirements for shelf life, our sales of marketed products could be
reduced and we could suffer delays in the progress of clinical trials for
products under development. For example, SmithKline is in the process of
transferring manufacturing of Ridaura to a new facility. Any delay in the
transfer process could limit the availability of Ridaura, which would have a
direct impact on our revenues from sales of Ridaura.
RISKS RELATED TO OUR INDUSTRY
IF WE DO NOT OBTAIN GOVERNMENTAL APPROVALS FOR OUR PRODUCTS IN DEVELOPMENT, WE
CANNOT SELL THESE PRODUCTS.
All of our products under development will require regulatory approval by
the FDA before we are permitted to sell them in the United States. To do so, we
must show in preclinical and clinical trials that our products are safe and
effective. 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.
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
biologics license application if the product is classified as a biologic, which
is a drug based on natural substances. The requirements for submission of these
applications and the FDA approval processes require substantial time and effort,
and the FDA may not grant approval on a timely basis or at all. 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. In addition, delays or rejections may be encountered during FDA review.
Even after such time and expenditures, we may not obtain regulatory approval.
Any regulatory approval of a product that is granted may limit the indicated
uses for which the product may be marketed.
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<PAGE> 13
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 foreign regulatory approval 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.
WE FACE INTENSE COMPETITION, WHICH MAY LIMIT OUR ABILITY TO BECOME PROFITABLE.
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 our products. Numerous
pharmaceutical and biotechnology companies and academic research groups
throughout the world are 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.
Physicians may not adopt our products over competing products, and our
products may not 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.
DISCOVERIES OR DEVELOPMENTS OF NEW TECHNOLOGIES BY ESTABLISHED DRUG COMPANIES OR
OTHERS MAY MAKE OUR PRODUCTS OBSOLETE.
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 ConXn for
scleroderma, infertility, peripheral vascular disease, or any other indication
that we target, or than Luxiq and OLUX for the treatment of scalp dermatoses, or
Ridaura for the treatment of rheumatoid arthritis. Even if we are successful in
developing effective drugs, our products may not compete effectively with other
available products or new products. Researchers are continually learning more
about diseases, which may lead to new technologies for treatment. 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.
Our competitors include fully integrated pharmaceutical companies and
biotechnology companies that currently have drug and target discovery efforts,
as well as universities and public and private
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<PAGE> 14
research institutions. Many of the organizations competing with us have
substantially greater capital resources, larger research and development staffs
and facilities, greater experience in drug development and in obtaining
regulatory approvals and greater marketing capabilities than we do.
For example, 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, other products
are under development for treatment of rheumatoid arthritis, and the number of
new products in this field is therefore likely to continue to increase.
Physicians may not continue to prescribe Ridaura over other rheumatoid arthritis
products, and Ridaura may not offer a cost-effective alternative to competing
therapies. We expect that sales of Ridaura will decline, which will cause our
revenues to decline.
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. Such governmental and third-party payors are
increasingly challenging the prices charged for medical products and services.
Our products may not be viewed 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. 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 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 and results of operations would suffer.
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 harm our business.
IF PRODUCT LIABILITY LAWSUITS ARE BROUGHT AGAINST US, WE MAY INCUR SUBSTANTIAL
LIABILITIES.
We face an inherent business risk of product liability claims. If losses
exceed our liability insurance coverage, we may incur substantial liabilities.
In particular, after commercial introduction of products, we may experience
losses due to product liability claims. Even if we are ultimately successful in
product liability litigation, such litigation would consume substantial amounts
of our financial and managerial resources, and might result in adverse
publicity, all of which would impair our business. Product liability insurance
is expensive and difficult to obtain and we may not be able to maintain our
product liability insurance at an acceptable cost, if at all. Our insurance may
not provide adequate coverage against potential claims or losses. Any claims
against us, regardless of their merit, could harm our business.
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<PAGE> 15
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 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.
The above factors may cause our stock price to fluctuate and the value of
your investment may decline significantly.
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 equity investment 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.
IF OUR OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS ACT TOGETHER, THEY MAY BE
ABLE TO CONTROL OUR MANAGEMENT AND OPERATIONS, ACTING IN THEIR BEST INTEREST AND
NOT NECESSARILY IN THE INTERESTS OF OTHER STOCKHOLDERS.
Our directors, executive officers and principal stockholders and their
affiliates currently beneficially own approximately 65% 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
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<PAGE> 16
advances their best interests and not necessarily those of other stockholders.
Such concentration of ownership may also have the effect of delaying, deferring
or preventing a change in control of our company.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW MAY
MAKE AN ACQUISITION OF US, WHICH MAY BE BENEFICIAL TO OUR STOCKHOLDERS, MORE
DIFFICULT.
Our board of directors has the authority to issue up to 5,000,000 shares of
undesignated preferred stock and to determine the rights, preferences,
privileges and restrictions of such shares without further vote or action by our
stockholders. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock could have the
effect of making it more difficult for third parties to acquire a majority of
our outstanding voting stock. We also have a stockholder rights plan, which
entitles existing stockholders to rights, including the right to purchase shares
of preferred stock, in the event of an acquisition of 15% or more of our
outstanding common stock, or an unsolicited tender offer for such shares. The
existence of the rights plan could delay, prevent, or make more difficult a
merger or tender offer or proxy contest involving us.
In addition, provisions of our charter documents, including a provision
eliminating the ability of stockholders to take actions by written consent, and
of Delaware law could delay or make difficult a merger, tender offer or proxy
contest involving us. Further, our stock option and purchase plans generally
provide for the assumption of such plans or substitution of an equivalent option
of a successor corporation or, alternatively, at the discretion of the board of
directors, exercise of some or all of the option stock, including non-vested
shares, or acceleration of vesting of shares issued pursuant to stock grants,
upon a change of control or similar event.
FORWARD-LOOKING STATEMENTS
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, these plans, intentions or expectations may not 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. You should recognize 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
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<PAGE> 17
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.
TRADEMARKS
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.
USE OF PROCEEDS
Connetics will not receive any proceeds from the sale of the shares of our
common stock by the selling stockholders in the offering.
DIVIDEND POLICY
We have not declared or paid cash dividends on our common stock in the past
and do not intend to pay dividends on our common stock in the foreseeable
future.
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 March 17, 2000).................... 17.88 7.63
1999
Fourth Quarter............................................ 10.25 4.06
Third Quarter............................................. 7.63 4.81
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
</TABLE>
The last reported sale price of our common stock on the Nasdaq National
Market on March 17, 2000 was $12.06. As of March 17, 2000, there were
approximately 171 stockholders of record of our common stock. Because many of
these shares are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of stockholders
represented by these record holders.
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<PAGE> 18
BUSINESS
OVERVIEW
We are developing a biotechnology product that has significant potential to
treat multiple diseases and we develop and commercialize pharmaceutical
products. Our biotechnology program focuses on the development of ConXn, a
recombinant form of a natural hormone called relaxin. Relaxin is known to reduce
the hardening, or fibrosis, of skin and organ tissue, to dilate existing blood
vessels and to stimulate new blood vessel growth. We currently have clinical
trials underway with ConXn for scleroderma and infertility and have submitted an
application with the FDA to commence Phase II trials for peripheral vascular
disease. 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. Our initial commercial focus is on
dermatology. If we receive FDA approval to commercialize ConXn, we intend to
expand our commercial efforts to the rheumatology, infertility and other
specialty medical markets.
We are building our business by developing ConXn for a number of
indications, and are conducting multiple clinical trials. These include a
pivotal Phase II/III trial for scleroderma and two Phase I/II trials for
infertility. In addition, in March 2000, we submitted an investigational new
drug application to initiate a Phase II clinical trial for the treatment of
peripheral vascular 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 ConXn 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 ConXn and have entered into three collaborative
relationships for this program for markets outside of the United States.
CONXN -- OUR RELAXIN DEVELOPMENT PROGRAM
OVERVIEW
ConXn is a cloned version of the natural hormone relaxin. Relaxin
circulates in the blood and has a broad spectrum of biological activities. It
plays a role during pregnancy in pelvic remodeling and increasing blood supply
to the fetus. Relaxin may also enhance the kidneys' ability to remove toxins
from the woman's body. In a non-pregnant state, administering relaxin stimulates
blood flow to oxygen-deprived tissue, and inhibits the hardening or fibrosis
associated with a number of diseases. Relaxin is in a category of hormones that
includes EPO, growth hormone and insulin which circulate in the blood in
response to specific stimuli. These hormones tend to have an excellent safety
profile since they circulate naturally in the blood and their sites of targeted
activity are separate from the site where they are produced. By contrast, some
biotechnology products that act locally tend to cause significant toxicities
when they are administered systemically, or into the bloodstream. In addition,
hormones in the category that relaxin is in are highly selective in their
biological actions. Given relaxin's biological properties and its strong safety
profile, the hormone has significant potential for the treatment of a variety of
human diseases.
We believe the most significant near-term use of ConXn is for the treatment
of progressive systemic sclerosis, a severe form of scleroderma that is life
threatening and afflicts approximately 70,000 persons in the United States.
Scleroderma is a disease where skin and organs harden, or become fibrotic, with
unknown causes. We completed patient enrollment in a pivotal Phase II/III
clinical trial for the treatment of scleroderma in December 1999, and anticipate
announcing results of that trial in the fourth quarter of 2000.
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Infertility, peripheral vascular disease, cardiovascular disease, and
kidney disease represent opportunities for relaxin's other biologic properties,
namely, enhancing blood flow to oxygen-deprived tissues and enhancing kidney
function. There are two ways to increase blood flow to a specific region. The
first is by increasing the size of the blood vessel, or vasodilation, and the
second is by generating more blood vessels, or angiogenesis. Relaxin
accomplishes both through the induction of locally acting factors. In December
1999, we initiated enrollment in two Phase I/II clinical trials for the
treatment of infertility. In March 2000, we filed an investigational new drug
application to begin a Phase II clinical trial for the treatment of peripheral
vascular disease. We licensed the exclusive worldwide rights to develop and
commercialize recombinant human relaxin from Genentech, except for co-exclusive
rights with Genentech for reproductive indications. Our strategy has been to
retain U.S. rights for all potential indications for the drug.
The status of our relaxin development program is as follows:
<TABLE>
DISEASE STATUS MARKETING(1)
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
Scleroderma Pivotal Phase II/III trial Connetics -- United States and other
enrollment completed; results Medeva -- Europe
expected by year end 2000 Paladin -- Canada
Suntory -- Japan
- --------------------------------------------------------------------------------------------------
Infertility(2) Phase I/II trials ongoing Connetics -- United States and other
Medeva -- Europe
Paladin -- Canada
- --------------------------------------------------------------------------------------------------
Peripheral Investigational new drug application Connetics -- United States and other
vascular disease submitted, expect to initiate Medeva -- Europe
Phase II clinical trials by mid-2000 Paladin -- Canada
- --------------------------------------------------------------------------------------------------
Kidney failure Expect to initiate Phase II clinical Connetics -- United States and other
trials in late 2000 Medeva -- Europe
Paladin -- Canada
- --------------------------------------------------------------------------------------------------
Organ fibroses, Preclinical development Connetics -- United States and other
prevention of Medeva -- Europe
scarring Paladin -- Canada
- --------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
(1) We retain the rights to non-U.S. territories that are not the subject of
collaboration agreements.
(2) We have co-exclusive rights with Genentech for infertility and other
reproductive indications.
THE PRIMARY BIOLOGICAL ACTIVITIES OF RELAXIN
The biology of relaxin has been tested and analyzed by hundreds of
researchers since the 1950s. Relaxin was first identified over 70 years ago as a
substance that circulates in the blood stream during pregnancy. While we are
still learning about relaxin as a treatment for human disease, the multi-
faceted biological mechanisms of the hormone are well understood. Relaxin has
three principle biological activities:
- anti-fibrosis, or reducing the hardening and scarring of tissue;
- vasodilation, or expanding blood vessels; and
- angiogenesis, or stimulating the production of new blood vessels.
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These natural activities of the hormone may be useful for the treatment of a
variety of diseases. Because the biological effects of relaxin have been shown
to be independent of gender or reproductive state, relaxin has the potential to
have numerous therapeutic benefits in humans.
Anti-Fibrosis
Relaxin plays a key role in blocking the formation of excessive scar or
fibrotic tissue by regulating both the material that causes tissue scarring as
well as the material that breaks down scar tissue. Specifically, relaxin
decreases the production of collagen, which is the material that makes up scar
tissue. In addition, relaxin promotes collagen breakdown by stimulating the
production of collagenase, an enzyme that breaks down collagen, and by
decreasing the production of a known agent that blocks collagenase activity. In
preclinical studies, relaxin demonstrated a dose-dependent ability to inhibit
collagen accumulation in fibrosis models. In animal studies, relaxin has been
shown to inhibit organ fibroses in the lung and kidney, and to improve organ
function. These studies together, with the human data we have collected in
scleroderma patients, demonstrate that relaxin holds significant promise as an
anti-fibrotic agent in the treatment of various fibrotic diseases and disorders.
Vasodilation
Relaxin is known to induce vasodilation, the expansion of blood vessels, by
stimulating the secretion of nitric oxide into the blood stream. Nitric oxide
relaxes and expands blood vessels, enabling the vessels to carry more blood.
Renal vasodilation occurs during pregnancy and has been observed in various
animal studies after relaxin administration. In addition, recently published
research indicates that relaxin may be the hormone responsible for the dramatic
increases in kidney function that occur during a normal pregnancy. The
publication cites research in which relaxin treatment in animals significantly
increased the kidneys' ability to filter blood by 33%, and increased blood flow
to the kidney by 49%.
Angiogenesis
Angiogenesis refers to the creation of new blood vessels, which has shown
promise in animal models and human clinical trials for the treatment of
ischemic, or oxygen deprived, tissue. Vascular endothelial growth factor, or
VEGF, and basic fibroblast growth factor, or bFGF, have individually been shown
to promote angiogenesis in animal models and human studies of heart disease as
well as peripheral vascular disease. However, when bFGF and VEGF proteins are
administered systemically, they have been shown to cause a variety of adverse
side effects such as low blood pressure, irregular heartbeat, and reduced
cardiac output. Due to these toxicities, there is limited therapeutic value in
administering bFGF and VEGF directly into the bloodstream. In contrast, relaxin
induces angiogenesis selectively in animal models when it is introduced into the
bloodstream, because it stimulates the production of both VEGF and bFGF only at
the site where the tissue is oxygen-deprived, and not throughout the body.
Relaxin circulates in the blood naturally during pregnancy, and has an
established safety profile based on Phase II clinical trials. We believe,
therefore, that relaxin may have more potential to treat vascular diseases than
bFGF or VEGF. In addition, studies show that when VEGF and bFGF are both
stimulated, there is a synergistic therapeutic effect that is greater than when
either growth factor is present alone.
RELAXIN DEVELOPMENT PROGRAMS
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
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<PAGE> 21
the organs of the gastrointestinal tract. Scleroderma can cause extensive
disfigurement and quality of life impairment, often making it impossible for
patients to carry out the most routine daily functions. The disease also affects
lung and kidney function causing serious illness and, in the most severe cases,
death. 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 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
Phase II trial showed that the administration of 25 micrograms per kilogram of
body weight per day of ConXn caused a statistically significant (p = 0.04)
reduction in skin score the primary clinical endpoint, and positive trends were
seen in eleven other secondary disease parameters. Skin score is a physical
evaluation of a patient's skin measuring the thickness of the skin at 17 points
on the body. In the 25 micrograms per day group, 71% of the patients showed a 7
point or better improvement in skin score as compared to 37% of the patients
receiving placebo. A 7-point reduction in skin score represents approximately a
25% reduction in skin fibrosis. No patients receiving the 25 microgram dose got
worse while on therapy whereas 21% of the placebo treated patients worsened.
Patient lung function was a secondary parameter as measured by Forced Vital
Capacity. Diffuse scleroderma patients typically lose approximately 8% of lung
function every year. Over the duration of the six-month study, the patients
treated with placebo experienced a 3.8% decrease in lung function, compared to a
1.0% decrease in the patients receiving 25 micograms. This outcome demonstrated
a positive trend in slowing progression of loss of lung function, but was not
statistically significant. In addition to the 25 microgram and placebo groups,
in the Phase II trial we also evaluated a group of patients receiving a higher
daily dose of 100 micrograms per kilogram of body weight per day. The 100
microgram dose level was safe; however, we did not observe a significant
clinical effect versus placebo.
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 reducing fibrotic tissue and may serve as a treatment for scleroderma.
We completed enrollment of a 239-patient pivotal Phase II/III trial of ConXn for
the treatment of diffuse scleroderma 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 biologics license application to the FDA requesting
clearance to market ConXn for the treatment of scleroderma in 2001.
Infertility
Industry sources estimate that one out of six American couples is
infertile, with sixty percent of the cases being due to disorders in the woman.
One half of these problems in women are caused by pelvic factors, including how
receptive the endometrium is to implantation of an embryo. Recent technological
progress in the area of infertility, including the development of techniques for
controlled ovarian hyperstimulation and donor embryo transfers, has resulted in
approximately 75,000 births annually in the United States from assisted
reproductive technologies. However, despite the progress, a successful pregnancy
occurs in only approximately 20% of in vitro fertilization, or IVF, cycles
started. Two major causes of infertility are the failure of the embryo to
implant in the uterus, and failure of the embryo and fetus to receive adequate
blood flow to develop and grow.
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The promise of relaxin to treat infertility is based on its ability to
stimulate new blood vessel growth in the endometrium. We believe this mechanism
of action is due to relaxin's ability to induce VEGF, which is a potent
angiogenic agent, locally in the cells of the endometrium. Endometrial blood
flow is believed to be important in determining how receptive the endometrial
lining is to implantation of an embryo. We believe that, by enhancing
endometrial blood flow, relaxin treatment may increase the likelihood that an
embryo will successfully implant in the endometrium, and therefore would
increase pregnancy success rates. In addition, an increase in the rate of embryo
implantation would reduce the need for multiple embryo transfers in IVF cycles,
and hence reduce the costs and high frequency of multiple births from women
undergoing IVF treatments.
An analysis of relaxin levels produced by cultured ovarian cells obtained
from IVF subjects shows that relaxin levels are positively correlated with
implantation and full term pregnancy. Relaxin has been associated with placental
blood flow in the developing placenta in pregnant women. Other studies have
associated relaxin with the growth of new blood vessels in the endometrium of
monkeys. In addition, 72% of all women receiving relaxin in our scleroderma
clinical trial reported heavier than usual menstrual bleeding. Researchers have
correlated heavy menstrual bleeding with increased uterine artery blood flow.
Accordingly, we believe that ConXn may be useful in the treatment of
infertility. In December 1999, we initiated two Phase I/II clinical trials with
ConXn for the treatment of infertility. The trials have been designed to test
relaxin's ability to cause both increased blood flow to and thickening in the
endometrium, which may enhance implantation of the embryo. We are conducting
reproductive toxicology tests in animals in parallel with the Phase I/II trials
in anticipation of studying relaxin in women trying to get pregnant.
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 severe leg pain and debilitating ulcers due to
chronic oxygen deprivation of the lower extremities. In its more serious
manifestations, patients with PVD experience gangrene, which may result in
amputation of the affected limb. It is caused by a variety of serious medical
conditions, but the single most common cause is diabetes mellitus or Type II
diabetes. 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 an increasingly frequent medical problem.
The promise of relaxin to treat PVD is based on its ability to increase
blood flow to oxygen-deprived tissue through its vasodilatory and angiogenic
activities. Relaxin's vasodilatory property relates to its ability to stimulate
the secretion of nitric oxide at selective targets without side effects. Nitric
oxide is an agent known to cause vasodilation and improve vascularization, or
blood flow. There is evidence that nitric oxide synthesis is impaired in
patients with PVD, and restoration of nitric oxide levels in the blood vessels
by the administration of a known nitric oxide stimulator reduced the severe pain
experienced by PVD patients due to constricted blood vessels. Clinical studies
have shown that other agents that cause vasodilation, such as prostacyclin,
alleviated the acute symptoms of PVD and improved ulcer healing, but are also
associated with side effects, including low blood pressure. Although there are
drugs currently available for pain due to constricted blood vessels, surgery is
the only option available for more severe incidences. We believe that relaxin,
although it is administered systemically, may have a specific therapeutic effect
at the precise location where more blood flow is needed, and may have a positive
effect in the treatment of more severe incidences of the disease.
Relaxin may also be beneficial in treating PVD due to its angiogenic
activity. Relaxin stimulates the growth of new blood vessels at the site of
oxygen-deprived tissue through a several step process, further enhancing the
blood flow to the site of oxygen-deprived tissue. At this site, macrophages,
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which are cells that help fight infection and injury, become activated. Relaxin
is known to bind to activated macrophages, which in turn stimulates the
production of VEGF and bFGF. These two growth factors play a potent role in the
growth of new blood vessels.
Clinical trials using porcine relaxin for the treatment of PVD have been
published prior to the era of recombinant DNA technology. In these studies,
improved blood flow and healing of oxygen deprived ulcers was reported.
Forty-three patents were treated with porcine relaxin daily and efficacy was
judged either by skin temperature or blood flow to digits and segments. Mean
skin temperature, compared to baseline, increased over six months by
approximately 3(LOGO)C, indicating increased blood flow. Some patients
experienced healing of ulcers, typically within 3 months of therapy.
Additionally, patients with Raynaud's symptoms, or extreme sensitivity to cold
causing restriction of blood vessels, experienced improvement in their symptoms.
Finally, two patients taking relaxin who were known to have heart disease and
chest pain, had a dramatic decrease in their need for nitroglycerin tablets,
which stimulate the production of nitric oxide. Withdrawal of therapy or
conversion to a much less potent relaxin therapy resulted in recurrence of
symptoms and decline in skin temperatures.
We have recently submitted an investigational new drug application to the
FDA to initiate a Phase II clinical trial with ConXn to treat PVD. PVD affects
more than 5 million persons in the United States, and 2 million of those persons
are medically managed. Our PVD trial will also examine ConXn's effect in
treating kidney and cardiovascular disease, which are often present in PVD
patients.
Organ Fibroses
We believe that ConXn may have further potential in treating organ-specific
fibroses, such as kidney, pulmonary, and liver fibroses. Each of these fibrotic
conditions has a common cause, namely the production of excessive amounts of
collagen that the body is unable to break down adequately. Relaxin's ability to
interrupt the production of and to promote the breakdown of scarred or hardened
tissue may make it effective in the treatment of such diseases. Relaxin may have
potential for treating kidney fibrosis that occurs from diabetes and other
diseases leading to impairment of the kidney, which are currently treated with
steroids and angiotensin-converting enzyme inhibitors, commonly called ACE
inhibitors. We are also exploring the possibility of using relaxin to treat
cardiac diseases, specifically the scarring of the heart that occurs in heart
attacks, atherosclerosis and hypertension, as well as vessel blockage following
angioplasty. There may also be potential for the treatment of chronic
inflammation and scarring in the walls of the lungs, and fibrosis induced in the
liver by chronic hepatitis or cirrhosis of the liver.
RELAXIN STRATEGIC AGREEMENTS
To date, we have entered into three strategic agreements 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 companies
are financially and commercially valuable as they offset much of the costs
associated with developing relaxin and will make it possible to commercialize
the product in geographical markets outside of our focus. In combination, the
three agreements 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 intend to retain rights for the United States. We
recently entered a collaborative research agreement with another company for the
development of a new delivery system for ConXn that may be more convenient than
the current pump delivery system.
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COMMERCIALIZATION AND DERMATOLOGY ACTIVITIES
We are currently selling three products targeted at specialty medical
markets, and developing others. These products include:
<TABLE>
<CAPTION>
PRODUCT DISEASE STATUS MARKETING
<S> <C> <C> <C>
Luxiq Mild to moderate scalp dermatoses Marketed Connetics -- North America
- ----------------------------------------------------------------------------------------------
OLUX Moderate to severe scalp New drug Connetics -- Worldwide
dermatoses application
submitted
- ----------------------------------------------------------------------------------------------
Liquipatch Various diseases of the skin In Connetics -- North
development America(1)
- ----------------------------------------------------------------------------------------------
Other foam Various diseases of the skin In Connetics -- North America
formulations development
- ----------------------------------------------------------------------------------------------
Ridaura Rheumatoid arthritis Marketed Connetics -- United States
- ----------------------------------------------------------------------------------------------
Actimmune Chronic granulomatous disease Marketed Connetics -- United States
until December 31, 2001
(royalties thereafter)
- ----------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
(1) Soltec reserved rights to certain specific Liquipatch formulations for North
America.
Our commercialization activities target specialty medical markets, which
are characterized by markets with large patient populations that are served by
relatively small, and therefore accessible, groups of treating physicians. In
our commercial business, we are offering products with clinically proven
therapeutic advantages and are providing quality customer service to physicians
through our experienced and focused sales and marketing staff. Our commercial
strategy permits us to effectively reach the majority of the treating
physicians. Currently, our primary commercial focus is on dermatology.
Approximately 6,000 of the 8,500 U.S. dermatologists account for 90% of the
prescriptions written by dermatologists.
Dermatological diseases often 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, and that the failure to
address those needs may decrease patient compliance. We have two foam-based
products for the treatment of scalp dermatoses: Luxiq, which we currently
market, and OLUX, which is undergoing FDA review. We believe that our
proprietary foam delivery system has significant treatment and cosmetic
advantages over conventional therapies for scalp dermatoses. These advantages
include improved efficacy due to higher absorption and more localized delivery
of the active agent. The unique foam formulation liquefies when applied to the
skin, and enables rapid penetration of the active dermatologic agent, thus
enhancing efficacy. When the foam is applied, it dries quickly, is not greasy,
and does not stain or have any odor. As a result, we believe that the
combination of the increased efficacy and the cosmetic elegance of the foam may
actually improve patient compliance and satisfaction.
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Luxiq Foam
Luxiq is a foam formulation of betamethasone valerate, a mid-potency
topical steroid which is prescribed for the treatment of mild to moderate
steroid responsive scalp dermatoses such as psoriasis, eczema and seborrheic
dermatitis. We licensed the North American rights from Soltec Research Pty Ltd.,
a subsidiary of F.H. Faulding & Co., Ltd., 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.
OLUX Foam
OLUX is a foam formulation of clobetasol propionate, a super high-potency
topical steroid which we are developing for the treatment of moderate to severe
steroid-responsive dermatoses of the scalp. We have licensed worldwide rights
from Soltec to develop and commercialize OLUX. In 1998, we completed a Phase III
clinical trial of approximately 190 scalp psoriasis patients, comparing 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, or
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.
Dermatology Product Pipeline
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, including aerosol foam formulations and Soltec's
patented Liquipatch technology. Similar to our foam delivery system for Luxiq
and OLUX, the new aerosol foams, including water-, ethanol- and petrolatum-based
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. Liquipatch is 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, with the potential of
being less irritating to the skin than other delivery systems. With this
agreement in place we are positioned to pursue simultaneous development of a
number of innovative products. We anticipate developing one or more new products
in the aerosol foam or Liquipatch formulations, by incorporating 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 expect to seek
partners for over-the-counter market opportunities and for development and
commercialization outside the United States.
Ridaura
Ridaura is an oral formulation of a 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. Over two million
individuals in the United States suffer from this disease. Ridaura is currently
indicated for adults with active rheumatoid arthritis who are not responsive to,
or are intolerant of, treatment with non-steroidal anti-inflammatory drugs.
Ridaura competes on the basis of clinical evidence that shows the drug slows the
progression of damage to joint tissue. Our 1999 sales of Ridaura declined to
approximately $5.7 million from $7.5 million in 1998. We believe that our sales
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<PAGE> 26
have declined over this time period, and are likely to continue to decline, in
part due to the introduction of several major rheumatoid arthritis therapies in
late 1998 and 1999.
Actimmune
In 1998, we licensed from Genentech exclusive rights to Actimmune,
interferon gamma, for the United States and Japan. 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. We formed a
subsidiary, InterMune Pharmaceuticals, Inc., to develop Actimmune for various
infections and fungal diseases. In April 1999, InterMune became an independent
company, and it has an exclusive license from us to develop Actimmune. We have
retained the commercial revenue rights for Actimmune for the treatment of
chronic granulomatous disease through December 31, 2001. Thereafter, InterMune
will pay us a royalty on Actimmune sales. 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.
SALES AND MARKETING
We have an experienced, highly productive sales and marketing organization.
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 into partnerships to manage product commercialization
activities. For example, 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. In addition, in March 1999,
we entered into agreements with MGI Pharma to provide sales support for Ridaura
and Luxiq to rheumatologists.
Our sales representatives focus on cultivating relationships of trust and
confidence with the physicians they call upon. 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 with contract sales representatives to
increase the frequency of our sales calls or to assist with the launch of
products. Currently, all of our product distribution activities are handled by
CORD in the United States. As of March 17, 2000, we had 51 people in our sales
and marketing organization, including over 40 sales representatives.
STRATEGIC AGREEMENTS
We have entered into numerous strategic development and commercialization
relationships that have substantially expanded our business. Our main reasons
for entering into strategic partnerships are to gain access to additional
product and market opportunities and to share the risk and financial cost of
developing products. These collaborations may help us to increase product sales
and marketing activities, and extend development and commercialization
activities to foreign markets.
Relaxin -- Biotechnology Product Development Agreements
Medeva PLC
In January 1999, we entered into an exclusive license agreement with Medeva
PLC 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
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<PAGE> 27
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.
Suntory
In April 1998, we entered into an exclusive license agreement with Suntory
for the development, commercialization and supply of relaxin for scleroderma in
Japan. Under the terms of the agreement, Suntory will pay up to 1.6 billion yen,
which we estimated to be up to $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.
Paladin Labs
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 $3.2 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.
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
indications, to make, have made, use, import and sell certain products derived
from recombinant human relaxin. Many of our relaxin patent rights are owned by
The Howard Florey Institute of Experimental Physiology and Medicine, and are
licensed to us through the agreements with Genentech. 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 Genentech to terminate the license. Upon termination, we could
be required to license our relaxin technology to Genentech, on a non-exclusive
basis.
Dermatology Program and Other Commercialized Products Agreements
Soltec
We are parties to four agreements with Soltec, a subsidiary of F.H.
Faulding & Co., Ltd., which give us exclusive rights to specified applications
of a broad range of unique topical delivery technologies, including several
distinctive aerosol foams. Our relationship with Soltec led to our development
of Luxiq, which we launched in April 1999, and to the development of OLUX. In
July 1999, we submitted a new drug application to the FDA for OLUX for the
treatment of moderate to severe scalp dermatoses. We anticipate conducting
parallel product development on several products over the next several years.
Under a comprehensive collaboration agreement that we entered into with
Soltec in December 1999, we paid Soltec $1 million in cash and stock, and may
make future milestone, development and royalty payments. We also have
obligations to develop new products incorporating the licensed technology on
timelines agreed to by the parties, and we will pay royalties on our net sales
on those products if and when they are approved for sale in the licensed
territory. We also
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agreed to pay Soltec an annual fee in exchange for continuing research and the
rights to future product formulations that Soltec may develop.
InterMune Pharmaceuticals
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. 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 adding Japan to the licensed territory. We are
also parties to a supply agreement with Genentech in which they will manufacture
and supply Actimmune to us. We established a subsidiary, InterMune, in 1998 to
develop Actimmune for serious pulmonary and infectious diseases and congenital
disorders. In April 1999, InterMune became an independent company. We currently
hold 1,049,445 shares of redeemable convertible preferred stock of InterMune,
which represents approximately a 7% equity position in InterMune. On February 2,
2000, InterMune filed a registration statement for its initial public offering.
Upon successful completion of the initial public offering, the stock we hold in
InterMune is convertible share-for-share into common stock of InterMune, and we
will receive an additional $1,000,000 in cash or stock of InterMune. We will
receive additional cash and equity payments over the next two years. InterMune
assumed our obligations under the license with Genentech and the corresponding
supply agreement pursuant to which Genentech manufactures and supplies Actimmune
to us. We will retain commercial rights to and revenue from Actimmune for
chronic granulomatous disease until December 31, 2001 and receive a royalty on
Actimmune sales thereafter. In addition, we hold an option to purchase the
product rights for potential dermatological applications of Actimmune.
MGI Pharma
In March 1999, we entered into two agreements with MGI Pharma. Under the
terms of the agreements, MGI Pharma will promote Ridaura and Luxiq to the
rheumatology market in the United States. These arrangements take advantage of
MGI Pharma's specialty sales force that calls on rheumatologists in the United
States, and allows us to focus our attention on the dermatology marketplace.
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.
Many of our relaxin patent rights are licensed from The Howard Florey
Institute of Experimental Physiology and Medicine through a sublicense from
Genentech. We also have an 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. Under the agreement, we
provide annual research funding to the Florey Institute for up to five years or
until the date of the first sale of a relaxin product, whether it is sold by us
or by our licensees. We have also agreed to pay the Florey Institute a portion
of revenues received from corporate collaborators. If we fail to use our best
efforts to commercialize relaxin, the Florey Institute could terminate our
rights to the Florey Institute patents.
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Our relaxin patent portfolio includes pending applications and issued
patents in the United States and various international equivalents which we own
or license from others. 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. Recently, new biological activities of relaxin have
been elucidated, and we are pursuing methods of treatment patents with our
academic collaborators. Moreover, 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. We may not be successful on appeal. An adverse decision could
result in a requirement that our licensor amend the language of the patent in
ways that we cannot currently predict, and would require us to reassess the
strength of that patent after it was amended.
With respect to patent applications that we or our licensors have filed,
and patents issued to us or our licensors, we cannot give any assurances that:
- any of our or our licensors' patent applications will issue as patents;
- any such issued patents will provide competitive advantage to us; or
- our competitors will not successfully challenge or circumvent any such
issued patents.
Our interferon gamma patent portfolio includes issued U.S. patents and
other pending U.S. applications. Our interferon gamma patent portfolio is
licensed to InterMune, but we receive revenue and royalty payments pursuant to
our agreement with InterMune. The issued interferon gamma patents begin to
expire in 2009. The interferon gamma portfolio covers compositions of matter,
pharmaceutical compositions, and methods of treatment.
In addition to patent coverage, 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 by a
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. 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.
We encourage ongoing scientific research on relaxin by making samples of
recombinant human relaxin available for medical or scientific research studies.
To preserve our rights to the recombinant
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protein and to the technology in general, we require each recipient of relaxin
samples to sign a materials transfer agreement. 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. Such third parties may attempt to patent their work
and, if patents are issued, that they would be available to license to us.
MANUFACTURING
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. Boehringer Ingelheim manufactures relaxin for us for
clinical and commercial uses under a long-term contract. Luxiq and OLUX are
currently manufactured for us by CCL Pharmaceuticals. Actimmune is manufactured
by Genentech. Ridaura is manufactured by SmithKline under an agreement with an
initial term through December 2001.
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
developing or marketing. Numerous pharmaceutical and biotechnology companies and
academic research groups throughout the world are engaged in research and
development efforts with respect to therapeutic products targeted at diseases or
conditions that we are also addressing. We believe ConXn provides opportunities
for treatment of life threatening diseases for which there are few or no current
alternatives. In addition, we believe that the principal competitive factors in
our industry include:
- ability to obtain timely regulatory approvals from the FDA and similar
foreign regulatory agencies;
- operational competence in developing, protecting, manufacturing and
marketing products;
- managerial competence in identifying and pursuing product in-licensing
and acquisition opportunities; 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 before others are able to develop competitive products.
With regard to Ridaura, there are numerous products on the market, and
under development, for the treatment of rheumatoid arthritis. We believe that
our Ridaura sales declined in 1999 in part due to the competition of new
rheumatoid arthritis therapies introduced by Hoechst Marion Roussel, Immunex
Corporation and Monsanto Company.
Many of our existing or potential competitors, particularly large
pharmaceutical companies, have substantially greater financial, technical and
human resources than we do. 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
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products. Accordingly, our competitors may succeed in obtaining FDA approval for
products more rapidly than we do.
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. We expect that all of our pharmaceutical products will
require regulatory approval by governmental agencies before we can commercialize
them. 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 investigational new drug applications, or 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.
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
biologics license application if the product is classified as a biologic. We
must receive FDA clearance before we can commercialize the product.
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The testing and approval processes require substantial time and effort and
approval may not be granted on a timely basis, if at all. The FDA can take
between one and two years to review new drug applications and biologics license
applications, 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 new drug
application or biologics license application for that product. We could
encounter similar delays in other countries. We may not obtain regulatory
approval for any products that we develop, even after committing such time and
expenditures to the process. 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 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 "orphan drug" status of
ConXn may provide us with seven years of market exclusivity in the United States
if ConXn is the first recombinant relaxin product approval for the treatment of
progressive systemic sclerosis. Although this status would prevent other
sponsors from obtaining clearance of the same product for the same indication,
or the same product for other indications, it would not prevent sponsors from
seeking or receiving clearance of other types of products to treat the same
indication. One of the requirements for us to maintain orphan drug status will
be that we are able to manufacture a sufficient supply of the drug. We are
dependent on Boehringer Ingelheim for the manufacture of relaxin on a commercial
scale, and any failure by Boehringer Ingelheim to meet its commitments could
jeopardize our period of exclusivity in the U.S. 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, the benefits of
the existing statute may not remain in effect.
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. Medicare, Medicaid, health maintenance organizations and other
third-party payers may not authorize or otherwise budget such reimbursement.
Such governmental and third party payers are increasingly challenging the prices
charged for medical products and services. Our products, once marketed, may not
be viewed 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. 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 that federal and state legislation related to health care reform or
lowering pharmaceutical costs will pass. Our ability to develop or commercialize
our product candidates may also be adversely affected to the extent that these
or other proposals or reforms have a material adverse effect on our ability to
secure
31
<PAGE> 33
funding for development, or on the business, financial condition and
profitability of other companies that are prospective collaborators for certain
of our product candidates. 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, we cannot completely eliminate the risk of accidental contamination
or injury from these materials. 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 our operations, business and future profitability could
be adversely affected.
DEVELOPMENT
We have several products that require clinical and manufacturing
development, including our ConXn, OLUX and other dermatology products. 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 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
32
<PAGE> 34
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.
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
The shares being registered by this registration statement for the selling
stockholders consist of the following:
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, which expires
December 1, 2000, we have agreed to register certain shares of our common stock
that may be issued in the event that the equity line is drawn upon. We are
required to sell $500,000 of our common stock to Kepler approximately every 90
days pursuant to the terms of the Equity Line Agreement 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. In addition, we may elect to draw down approximately $2,000,000 every
90 days, if our stock trades above $7.00 per share. We are registering
additional shares covered by this prospectus to satisfy any obligation we 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 our common stock
to Dr. Vandenbark.
33
<PAGE> 35
SELLING STOCKHOLDERS
The following table sets forth certain information as of March 17, 2000
with respect to each selling stockholder. 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. Except as indicated
otherwise in the footnotes below, and subject to community property laws where
applicable, we believe 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.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
BEFORE OFFERING AFTER OFFERING(1)
SHARES OFFERED ------------------- -------------------
NAME OF SELLING STOCKHOLDER HEREBY(1) NUMBER PERCENT NUMBER PERCENT
--------------------------- -------------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Kepler Capital LLC(2)...................... 400,000 108,438 * 108,438 *
Soltec Research Pty Ltd.(3)................ 80,154 0 * 0 *
Arthur A. Vandenbark(4).................... 9,101 14,839 * 14,839 *
Total................................. 489,255 73,277 * 73,277 *
</TABLE>
- -------------------------
* Less than 1%. Percentages are based on 27,232,728 shares outstanding at March
17, 2000.
(1) Assumes the sale of all shares offered by this prospectus and no other
purchases or sales of our 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 458,438 shares as to which Jeffrey Devers, President of Kepler
Capital LLC, may be deemed to be the beneficial owner. Mr. Devers disclaims
beneficial ownership of such shares. Includes 58,438 shares of common stock
issued pursuant to the Structured Equity Line Agreement, and warrants to
purchase 50,000 shares of common stock which are currently exercisable or
will become exercisable on or before May 16, 2000 by Kepler Capital LLC.
(3) Soltec Research Pty Ltd. is a subsidiary of F.H. Faulding & Co., Ltd., a
public company. Faulding may be deemed to be the beneficial owner of such
shares.
(4) Includes 14,839 options to purchase shares of common stock which are
currently exercisable or will become exercisable on or before May 16, 2000
by Dr. Vandenbark.
34
<PAGE> 36
PLAN OF DISTRIBUTION
The selling stockholders or their pledgees, donees, transferees, or other
successors-in-interest may sell the shares of our common stock 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. We 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. Sales may be made 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.
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. In
addition, shares held by Soltec may also qualify for sale pursuant to Regulation
S.
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 us that during such time as the
selling stockholders may be engaged in the attempt to sell shares registered
under this prospectus, that they will:
(1) not engage in any stabilization activity in connection with any of
our securities;
(2) 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
(3) not bid for or purchase any of our securities or any rights to
acquire Connetics' securities, or attempt to induce any person to purchase
any of our securities or rights to acquire securities other than as
permitted under the Exchange Act.
The selling stockholders and any broker-dealers, agents, underwriters or
any other persons who participate with them in the distribution of the shares of
our common stock, may be deemed to be "underwriters" within the meaning of
Section 2(11) of 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, we have agreed to maintain the effectiveness of
this registration statement until two years after the effective date of this
registration statement; provided however that if our counsel provides an opinion
to the requesting holders, based on factual representations provided
35
<PAGE> 37
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 we 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
we amend or supplement this registration statement and prospectus to indicate
that we have agreed to extend such period of effectiveness.
We have 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 Morrison &
Foerster LLP, Denver, Colorado.
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, 1999 and 1998, 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.
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
36
<PAGE> 38
prospectus is part of a registration statement on Form S-3 we filed with the SEC
(Registration No. 333-30142). The documents we incorporate by reference are:
1. Connetics' annual report on Form 10-K for the fiscal year ended December
31, 1999.
2. Connetics' Registration Statement on Form 8-A dated May 23, 1997, which
contains a description of our capital stock.
3. 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.
37
<PAGE> 39
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..................................... 15,000.00
Printing expenses........................................... 5,000.00
Accounting fees and expenses................................ 8,000.00
Miscellaneous expenses...................................... 2,000.00
----------
Total..................................................... $32,202.23
==========
</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-4).
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.
(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
II-1
<PAGE> 40
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 15 above or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted against the registrant by such director, officer
or controlling person in connection with the securities being registered
hereunder, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
II-2
<PAGE> 41
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 20th day of March, 2000.
CONNETICS CORPORATION
By: /s/ JOHN L. HIGGINS
------------------------------------
John L. Higgins
Vice President,
Finance and Administration
and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* President, Chief Executive Officer March 20, 2000
- ------------------------------------------ (Principal Executive Officer) and
Thomas G. Wiggans Director
/s/ JOHN L. HIGGINS Vice President, Finance and March 20, 2000
- ------------------------------------------ Administration and Chief Financial
John L. Higgins Officer (Principal Financial and
Accounting Officer)
* Chairman of the Board of Directors March 20, 2000
- ------------------------------------------
G. Kirk Raab
* Director March 20, 2000
- ------------------------------------------
Alexander E. Barkas, Ph.D.
* Director March 20, 2000
- ------------------------------------------
Eugene A. Bauer, M.D.
* Director March 20, 2000
- ------------------------------------------
Brian H. Dovey
* Director March 20, 2000
- ------------------------------------------
John C. Kane
* Director March 20, 2000
- ------------------------------------------
Thomas D. Kiley
* Director March 20, 2000
- ------------------------------------------
Joseph J. Ruvane, Jr.
*By /s/ JOHN L. HIGGINS March 20, 2000
-------------------------------------
John L. Higgins,
Attorney-in-fact
</TABLE>
II-3
<PAGE> 42
EXHIBIT INDEX
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
5.1 Form of Opinion of Morrison & Foerster LLP
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2 Consent of Counsel (included in Exhibit 5.1)
24.1* Power of Attorney
</TABLE>
- -------------------------
* previously filed
<PAGE> 1
EXHIBIT 5.1
FORM OF OPINION OF COUNSEL
March __, 2000
Connetics Corporation
3400 West Bayshore Road
Palo Alto, CA 94303
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-3
(Registration No. 333-30142) (the "Registration Statement"), relating to the
registration under the Securities Act of 1933, as amended (the "Act"), of
589,255 shares of your common stock, $.001 par value per share (the "Shares").
In connection therewith, we have reviewed certain of your corporate records and
proceedings taken in connection with the authorization and issuance of the
Shares, and such other factual and legal matters as we have considered necessary
for purposes of this opinion.
Based on and subject to the foregoing, we are of the opinion that the
Shares, when issued and sold in the manner referred to in the Registration
Statement, will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in such Registration Statement. This consent does not constitute
a consent under Section 7 of the Act, and in consenting to the reference to our
firm under such heading we have not certified any part of the Registration
Statement and do not otherwise come within the categories of persons whose
consent is required under Section 7 or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
-------------------------------
Morrison & Foerster LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
the Registration Statement (Form S-3 No. 333-30142) 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
14, 2000, with respect to the consolidated financial statements of Connetics
Corporation included in its Annual Report (Form 10-K) for the year ended
December 31, 1999, filed with the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 17, 2000
