COLLAGENEX PHARMACEUTICALS INC, 424B1, 1996-06-21

COLLAGENEX PHARMACEUTICALS INC
424B1, 1996-06-21
PHARMACEUTICAL PREPARATIONS

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<PAGE> 1
Filed Pursuant to Rule 424B1
Registration No. 333-3582

2,000,000 SHARES

[COLLAGENEX LOGO]

COMMON STOCK
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All of the shares of Common Stock offered hereby are being sold by
CollaGenex Pharmaceuticals, Inc. ("CollaGenex Pharmaceuticals" or the
"Company"). Prior to this offering, there has been no public market for the
Common Stock of the Company. See "Underwriting" for the factors considered in
determining the initial offering price.

------------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS," PAGE 5.
------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Per Share...................... $10.00 $0.70 $9.30
- -------------------------------------------------------------------------------------------------
Total(2)....................... $20,000,000 $1,400,000 $18,600,000
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>

(1) Before deducting expenses of the offering estimated at $500,000.

(2) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $23,000,000,
$1,610,000 and $21,390,000, respectively. See "Underwriting."

------------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about June 25,
1996.

ALEX. BROWN & SONS VOLPE, WELTY & COMPANY
INCORPORATED

THE DATE OF THIS PROSPECTUS IS JUNE 20, 1996.
<PAGE> 2

PICTURES

[ARTIST'S RENDERING OF THE EFFECT OF PERIOSTAT ON PERIODONTAL DISEASE
PROGRESSION--UNCHANGED FROM PREVIOUS FILING.]

The Company intends to furnish its stockholders with annual reports
containing financial statements certified by its independent auditors and
quarterly reports containing unaudited financial information for the first three
quarters of each year.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

"Periostat(R)," "CollaGenex(TM)" and the Company's logo are United States
trademarks of the Company. All other trade names, trademarks or service marks
appearing in this Prospectus are the property of their respective owners and are
not the property of the Company.

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<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such differences include those discussed in "Risk
Factors."

THE COMPANY

CollaGenex Pharmaceuticals is engaged in the development and
commercialization of innovative, proprietary medical therapies for the treatment
of periodontal disease and other dental pathologies. The Company believes that
its initial drug, Periostat, will be the first orally administered, systemically
delivered pharmaceutical to treat periodontitis. Unlike existing treatments,
which focus on the bacterial infection associated with periodontitis, Periostat
inhibits the chronic progressive tissue degradation characteristic of the
disease. The Company has completed three pivotal Phase III clinical trials on
Periostat and plans to submit a new drug application for Periostat during 1996.
Based on these clinical trials, the Company believes that Periostat is a safe,
efficacious, cost-effective therapy for the long-term treatment of
periodontitis.

Periodontitis is a chronic disease characterized by the progressive loss of
attachment between the periodontal ligament and the surrounding alveolar bone,
ultimately resulting in tooth loss. According to industry data, in the United
States alone, an estimated one-third of all adults, or 67 million people, suffer
from some form of periodontitis. Approximately 13 million people seek
professional treatment annually for periodontal disease, resulting in over 17
million periodontal procedures and annual expenditures of approximately $6
billion. Due to the costs associated with the disease, the Company believes that
the treatment of periodontitis will be increasingly important to dental managed
care organizations and dental practitioners operating under capitated or fixed
fee arrangements.

Existing therapies and those treatments known to be under development for
periodontitis are designed primarily to treat the bacterial infection associated
with periodontitis on a short-term, periodic basis. These treatments include
mechanical and surgical techniques, prophylactic approaches, such as
mouthwashes, and locally-delivered pharmaceutical therapies. The Company
believes, however, that periodic treatments designed solely to fight bacterial
infection are inadequate and that such treatments would be considerably more
effective if augmented by a long-term pharmaceutical therapy, such as Periostat,
which inhibits connective tissue destruction.

The Company's core technology involves inhibiting the activity of certain
enzymes that destroy the connective tissues of the body. Connective tissues are
components of the body that form the structural basis for skin, bone, cartilage
and ligaments. In addition to periodontal disease, this core technology may be
applicable to other diseases and conditions characterized by the progressive
destruction of connective tissues of the body, such as cancer metastasis,
wounds, osteoarthritis, osteoporosis, rheumatoid arthritis and diabetic
nephropathy. The Company's core technology is licensed on an exclusive basis
from the Research Foundation of the State University of New York at Stony Brook.

The Company's primary objective is to become a leading provider of
innovative medical therapies for the treatment of periodontal disease and other
dental pathologies. The Company's strategy to achieve this objective is to: (i)
develop market acceptance of Periostat among periodontists, general dentists,
third-party payors and patients; (ii) establish a sales and marketing
organization; (iii) build relationships with dental managed care organizations;
(iv) acquire complementary technologies and products; and (v) leverage the
Company's core technology through strategic partnering arrangements for
non-dental applications.

The Company was incorporated in Delaware in January 1992 under the name
Collagenex, Inc. The Company's name was changed to CollaGenex Pharmaceuticals,
Inc. in April 1996. The Company's executive offices are located at 301 South
State Street, Newtown, PA 18940, and its telephone number is (215) 579-7388.

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<PAGE> 4

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered hereby......................... 2,000,000 shares
Common Stock to be outstanding after the offering... 7,514,283 shares(1)
Use of proceeds..................................... For marketing expenses associated with
new product introduction; the
establishment of sales and marketing
capabilities; pharmaceutical
development; and other general
corporate purposes, including working
capital
Nasdaq National Market symbol....................... CGPI
</TABLE>

- ---------------
(1) Excludes 288,500 shares of Common Stock issuable upon the exercise of stock
options outstanding as of March 31, 1996 at a weighted average exercise
price of $0.99 per share, of which options to purchase 66,837 shares of
Common Stock are exercisable. See "Management -- Directors' Compensation"
and "-- Stock Option Plans."

Except as otherwise specified, all information in this Prospectus: (i)
assumes no exercise of the Underwriters' over-allotment option; (ii) has been
adjusted to give effect to a one-for-two reverse stock split of the Company's
Common Stock effected on April 10, 1996; (iii) assumes the conversion of all
outstanding shares of Series A, Series B and Series C mandatorily redeemable
convertible preferred stock (the "Redeemable Preferred Stock") into an aggregate
of 5,199,124 shares of Common Stock upon the consummation of this offering; and
(iv) assumes an increase in the number of authorized shares of capital stock
upon the consummation of this offering. See "Description of Capital Stock" and
"Underwriting."

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS
PERIOD FROM ENDED
JANUARY 10, 1992 YEARS ENDED DECEMBER 31, MARCH 31,
(INCEPTION) TO ----------------------------- -----------------
DECEMBER 31, 1992 1993 1994 1995 1995 1996
----------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................... $ -- $ -- $ -- $ -- $ -- $ --
Operating loss............................. (1,464) (2,526) (2,721) (5,183) (1,332) (1,394)
Net loss................................... (1,416) (2,483) (2,653) (5,269) (1,343) (1,333)
Net loss allocable to common
stockholders............................. (1,607) (2,834) (3,229) (6,028) (1,487) (1,716)
Pro forma:
Net loss per share(1)...................... $ (1.10) $ (0.24)
Shares used in computing pro forma net loss
per share(1)............................. 4,808 5,546
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
------------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(2) ADJUSTED(2)(3)
--------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 4,968 $ 4,968 $ 23,124
Total assets................................................ 5,077 5,077 23,177
Mandatorily redeemable convertible preferred stock.......... 19,291 -- --
Deficit accumulated during the development stage............ (13,154) (13,154) (13,154)
Total stockholders' equity (deficit)........................ (15,216) 4,075 22,175
</TABLE>

- ---------------
(1) See Note 2 of Notes to Financial Statements for information concerning
computation of pro forma net loss per share.
(2) Gives effect to the automatic conversion of all issued and outstanding
shares of Redeemable Preferred Stock into 5,199,124 shares of Common Stock.
(3) Adjusted to reflect the sale of 2,000,000 shares of Common Stock offered
hereby after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company. See "Use of Proceeds" and
"Capitalization."

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<PAGE> 5

RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the shares
of Common Stock offered by this Prospectus.

Uncertainty Of FDA Approval of Periostat. Pharmaceutical products are
subject to stringent regulation by governmental authorities in the United States
and in other countries. Approval of Periostat by the United States Food and Drug
Administration ("FDA") is required before any marketing or sales of Periostat
may commence in the United States. There can be no assurance that the Company's
new drug application ("NDA") with respect to Periostat will be submitted in a
timely manner or, if so submitted, that it will be approved by the FDA on a
timely basis, or at all. The FDA review process can be lengthy and
unpredictable, and the Company may encounter delays or rejection of its NDA when
submitted. NDAs submitted to the FDA take, on average, one to three years to
obtain approval. If questions arise during the FDA review process, approval may
take a significantly longer period of time. The Company completed Phase III
clinical trials for Periostat in December 1994 and, since that time, has been
engaged in the preparation of its NDA and discussions with the FDA regarding,
among other things, additional pre-clinical information to be submitted in the
NDA. In late 1995, the FDA requested that the Company conduct additional animal
studies regarding certain effects associated with the long-term dosing of
doxycycline hyclate ("doxycycline"), a tetracycline that is the active
ingredient in Periostat, and that the data be included in the Company's NDA
submission. Such animal studies currently are being conducted. Any delay in the
completion of such studies would delay the Company's NDA submission and any such
delay, if extended, could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, a
post-approval, post-marketing animal study related to long-term dosing of
doxycycline also was requested. There can be no assurance that the FDA will not
require additional pre-clinical or clinical supporting data or other information
as a condition of approval of Periostat. Moreover, if approval of Periostat is
granted, such approval may entail limitations on the indicated uses for which it
may be marketed. The Company has not received any indication from the FDA that
any limitations on the Company's proposed uses as contemplated by the Company's
proposed NDA will be imposed. There can be no assurance, however, that such
limitations will not be imposed. Failure to obtain FDA approval of a NDA for
Periostat would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company believes
that Periostat will not be treated as an "antibiotic" drug by the FDA primarily
because the drug currently is under review by the Division of Dermatological and
Dental Drug Products, not by the Division of Anti-Infective Drug Products.
Therefore, the Company believes that Periostat will be subject to a three-year
period of exclusivity before generic versions may be approved by the FDA for
commercial sale, if the Company is first in obtaining FDA marketing approval for
an oral dosage form containing 20mg of doxycycline for the treatment of adult
periodontitis and the FDA determines that the clinical investigations conducted
by or for the Company are essential to approval of the marketing application.
There can be no assurance, however, that Periostat will not be treated as an
"antibiotic" or that the Company will be able to satisfy the other criteria for
obtaining three-year marketing exclusivity, in which case no exclusivity period
will be available. See "Business--Periostat" and "--Government Regulation."

Uncertainty of Market Acceptance of Periostat. The Company's growth and
success will depend on market acceptance of Periostat by periodontists, dental
practitioners, other health care providers, third-party payors and patients.
Market acceptance will depend, in part, on the Company's ability to demonstrate
to these parties the effectiveness of patient-administered pharmaceuticals for
the treatment of periodontal disease. Treatment of periodontal disease with
Periostat is based upon the long-term use of a sub-antibiotic dosage form of
doxycycline. This dosage form has not been approved for periodontal disease or
any other indication. There can be no assurance that practitioners will
prescribe Periostat. Even if Periostat were to gain market acceptance, sales of
Periostat would depend to a large extent on the availability of reimbursement
from third-party payors, including

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<PAGE> 6

managed dental care plans. There can be no assurance that the dental community
or third-party payors will accept Periostat as a cost-effective means for the
treatment of periodontal disease.

Dependence on a Single Product. The Company has no product approved for
marketing in the United States or in any foreign country. The Company's future
revenues and profitability are critically dependent on the approval of the NDA
for Periostat and the Company's ability to successfully market and sell
Periostat. Although the Company seeks to market complementary therapeutic
products and diagnostic tests with Periostat, the Company expects that if the
FDA approves the Company's NDA for Periostat, substantially all of the Company's
product revenues will be derived from sales of Periostat. The Company has not
yet filed its NDA for Periostat, and there can be no assurance that the Company
will receive FDA approval of Periostat. If the Company receives FDA approval of
Periostat, commercial success will depend on acceptance of this treatment for
periodontitis by periodontists, dental practitioners, other health care
providers, third-party payors and patients. The Company's inability to obtain
FDA approval of its NDA, to obtain market acceptance of Periostat, to
successfully commercialize Periostat or to obtain adequate third-party
reimbursement coverage would have a material adverse effect on the Company's
business, financial condition and results of operations.

Limited Operating History; History of Operating Losses; Uncertainty of
Future Profitability. The Company has a limited operating history. For the
period from January 10, 1992 (inception) to December 31, 1992, for the years
ended December 31, 1993, 1994 and 1995, and for the three months ended March 31,
1996, the Company had net losses of approximately $1.4 million, $2.5 million,
$2.7 million, $5.3 million and $1.3 million, respectively. Such losses have
resulted primarily from the expenses associated with the Company's
pharmaceutical development program, the Periostat clinical trials and the
preparation of the NDA for submission to the FDA. As of March 31, 1996, the
Company had an accumulated deficit of approximately $13.2 million. The Company's
expansion of its operations, including establishment of a direct sales and
marketing organization in anticipation of possible FDA approval of a NDA, will
result in significant expenses over at least the next two years. The Company
does not expect to receive any significant revenues from Periostat or from any
other product in the foreseeable future, if at all, to offset these expenses.
There can be no assurance that the Company will receive FDA approval of its NDA,
that it will be able to market and sell Periostat successfully or that
profitability will ever be achieved. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

Dependence on Scale-up and Management of Growth. To date, substantially
all of the activities of the Company, including research and development,
manufacturing of active drug ingredients and pharmaceuticals, clinical trials
and preparation of the NDA for Periostat have been performed primarily by third
parties on a contractual basis. As of March 31, 1996, the Company had only five
employees. In anticipation of the commercial introduction of Periostat, the
Company will need to increase significantly its number of employees and enhance
its management systems and procedures. In particular, if the Company does not
contract with marketing partners or independent sales organizations or sales
agents for the marketing of Periostat in the United States, the Company will
need to establish a direct sales force. Although the Company does not currently
plan to engage directly in research and development activities or chemical or
pharmaceutical manufacturing, there can be no assurance that the Company will
not undertake those activities in the future. Furthermore, there can be no
assurance that managing third parties with respect to a growing number of
business activities and operations will not place a significant burden on the
management and operations of the Company. There can be no assurance that the
Company will manage effectively its growth and any failure to do so could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Marketing."

No Marketing or Sales Capability or History. The Company has no history in
marketing, distributing or selling pharmaceutical products in the dental market
or otherwise and will have to develop a sales force or rely on marketing
partners or other arrangements with third parties for the

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<PAGE> 7

marketing, distribution and sale of Periostat and any other products marketed by
the Company. If the Company determines to sell Periostat in the United States
other than through the use of marketing partners or independent sales
organizations or sales agents, the Company will need to establish a direct sales
force. No assurance can be given that such a marketing and sales organization
can be established successfully or that the Company's direct sales force, if
established, will succeed in promoting Periostat to the dental community,
patients and third-party payors and otherwise successfully marketing Periostat.
If the Company relies on marketing partners or other arrangements, the Company
will be dependent upon the success of these outside parties in performing their
responsibilities. Although the Company believes that such parties, if any, will
have an economic motivation to perform successfully their contractual
responsibilities, the amount and timing of resources to be devoted to these
activities may not be within the Company's control. There can be no assurance
that such parties will perform their contractual obligations or that the
Company's reliance on others for the marketing of Periostat will not result in
unforeseen problems. If the requisite foreign regulatory approvals are obtained,
the Company intends to establish a network of sub-licensees or distributors to
market and sell Periostat outside of the United States. To date, no such network
has been established. There can be no assurance that the Company will be able to
recruit and retain qualified sales and marketing personnel and foreign
sub-licensees or distributors or marketing partners or that the Company's
marketing and sales efforts will be successful. Failure to establish
successfully a marketing and sales organization, whether directly or through
third parties, would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Marketing."

Dependence on Patents, Licenses and Proprietary Rights; Enforcement of
Rights. The Company's success will depend in part on its ability to obtain
patent protection for its technologies, products and processes, and to preserve
its trade secrets and operate without infringement of proprietary rights of
other parties both in the United States and in foreign countries. Because of the
substantial length of time and expense associated with bringing new products
through development to the marketplace, the pharmaceutical industry places
considerable importance on obtaining and maintaining patent and trade secret
protection for new technologies, products and processes. The Company depends on
a license from the Research Foundation of the State University of New York at
Stony Brook ("SUNY") for all of its core technology (the "SUNY License"). The
SUNY License grants the Company an exclusive worldwide license to make and sell
products employing tetracyclines that are designed or utilized to alter a
biological process. Eleven U.S. patents and four U.S. patent applications held
by SUNY are licensed to the Company under the SUNY License. The primary U.S.
patent claims methods of use of conventional tetracyclines to inhibit
pathologically excessive collagenolytic activity (the "Primary Patent"), while a
related U.S. patent claims methods of use of tetracyclines which have no
antibiotic activity (the "Secondary Patent"). SUNY did not apply in foreign
countries for patents corresponding to the Primary Patent but has obtained
patents that correspond to the Secondary Patent in Australia, Canada and certain
European countries. A patent application corresponding to the Secondary Patent
is pending in Japan. SUNY also has obtained patents in certain European
countries, Canada and Japan and has pending patent applications in certain other
foreign countries which correspond to its U.S. patents relating to methods of
use of tetracyclines to reduce bone loss. The Company's rights under the SUNY
License are subject to certain statutory rights of the U.S. government resulting
from federal support of research activities at SUNY. The failure to obtain and
maintain patent protection may mean that the Company will face increased
competition in the United States and in foreign countries. The SUNY License
imposes various payment and reporting obligations on the Company. Failure of the
Company to comply with these requirements could result in the termination of
such license. The termination of the SUNY License, or the failure to obtain and
maintain patent protection for the Company's technologies, would have a material
adverse effect on the Company's business, financial condition and results of
operations. One of the U.S. patents and a corresponding Japanese patent
application licensed to the Company under the SUNY License are owned jointly by
SUNY and a Japanese company. These patent rights, which expire in 2012, cover
particular CMTs (the "Jointly Owned CMTs") that were

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<PAGE> 8

involved in research activities between SUNY and the Japanese company. The
Japanese company may have exclusive rights to these Jointly Owned CMTs in Asia,
Australia and New Zealand and may have a non-exclusive right to exploit these
Jointly Owned CMTs in other territories. These Jointly Owned CMTs are not
involved in the Company's Periostat product but could, in the future, prove to
be important for one or more of the Company's other potential applications of
its technology. If the Company does incorporate the Jointly Owned CMTs in any
future product, it may be precluded from marketing these products in Asia,
Australia and New Zealand and could experience increased competition in other
markets from the joint owner. There can be no assurance that patent applications
to which the Company holds rights will result in the issuance of patents, that
any patents issued or licensed to the Company will not be challenged and held to
be invalid, or that any such patents will provide commercially significant
protection to the Company's technology, products and processes. Since patent
applications in the United States are maintained in secrecy until patents issue,
and since publication of discoveries in the scientific and patent literature
tend to lag behind actual discoveries by several months, the Company cannot be
certain that it was the first creator of inventions covered by pending patent
applications or that it was the first to file patent applications for such
inventions. In addition, there can be no assurance that others will not
independently develop substantially equivalent proprietary information not
covered by patents to which the Company owns rights or obtain access to the
Company's know-how, or that others will not be issued patents that may prevent
the sale of one or more of the Company's products, or require licensing and the
payment of significant fees or royalties by the Company to third parties in
order to enable the Company to conduct its business. In the event that any
relevant claims of third-party patents are upheld as valid and enforceable, the
Company could be prevented from selling its products or could be required to
obtain licenses from the owners of such patents. There can be no assurance that
such licenses would be available or, even if available, would be on terms
acceptable to the Company. The Company's failure to obtain these licenses would
have a material adverse effect on the Company's business, financial condition
and results of operations. Due to the general availability of generic
tetracyclines for use as antibiotics, the Company could become involved in
infringement actions to protect its patents, which could entail substantial
costs to the Company. Regardless of the outcome, defense and prosecution of
patent claims is expensive and time consuming, and results in the diversion of
substantial financial, management and other resources from the Company's other
activities. Although federal law prohibits the promotion or marketing of
pharmaceuticals for unauthorized uses, there can be no assurance that
practitioners will not prescribe or patients will not obtain generic forms of
doxycycline and divide the tablets into smaller doses instead of obtaining a
prescription for Periostat. The Company's success also is dependent upon
know-how, unpatentable trade secrets, and the skills, knowledge and experience
of its scientific and technical personnel. The Company requires all employees to
enter into confidentiality agreements that prohibit the disclosure of
confidential information to anyone outside the Company and require disclosure
and assignment to the Company of rights to their ideas, developments,
discoveries and inventions. In addition, the Company seeks to obtain such
agreements from its consultants, advisors and research collaborators. There can
be no assurance that adequate protection will be provided for the Company's
trade secrets, know-how or other proprietary information in the event of any
unauthorized use or disclosure. The Company occasionally provides information
and chemical compounds to research collaborators in academic institutions and
requests the collaborators to conduct tests in order to investigate certain
properties of the compounds. There can be no assurance that the academic
institutions will not assert intellectual property rights in the results of the
tests conducted by the research collaborators, or that the academic institutions
will grant licenses under such intellectual property rights to the Company on
acceptable terms. If the assertion of intellectual property rights by an
academic institution can be substantiated, failure of the academic institution
to grant intellectual property rights to the Company could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Patents, Trade Secrets and Licenses."

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Dependence on Third-Party Suppliers. The Company does not have any
manufacturing facilities and does not intend to establish such facilities. The
Company currently relies on a single supplier of doxycycline, the active
ingredient in Periostat. This supplier produces a substantial portion of the
doxycycline used in the United States. There are relatively few alternative
sources of supply for doxycycline, and the Company may not be able to establish
additional or replacement suppliers of doxycycline quickly. Any interruption in
the supply of doxycycline would have a material adverse effect on the Company's
business, financial condition and results of operations. Periostat is currently
manufactured by a single contract manufacturer, which has made substantially all
of the Periostat used in the Company's clinical trials. To be successful,
Periostat must be manufactured in commercial quantities under good manufacturing
practices ("GMP") prescribed by the FDA and at an acceptable cost. The FDA
periodically inspects manufacturing facilities in the United States in order to
assure compliance with applicable GMP requirements. Foreign manufacturers also
are inspected by the FDA if their drugs are marketed in the United States.
Failure of the Company's foreign supplier of doxycycline or failure of the
Company's manufacturer of Periostat to comply with GMP regulations or other FDA
regulatory requirements would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company intends to
utilize contract manufacturers for the commercial manufacture of Periostat.
There can be no assurance that the Company will be able to enter into or
maintain manufacturing arrangements on acceptable terms, if at all. If the
Company is not able to enter into or maintain commercial manufacturing
agreements, it could encounter delays in introducing or supplying Periostat.
There can be no assurance that any contract manufacturers engaged by the Company
in the future will perform their contractual obligations or remain in compliance
with GMP. See "Business--Manufacturing and Suppliers."

Competition and Rapid Technological Change. Competition in the
pharmaceutical industry is intense. Many pharmaceutical companies are engaged in
research and development on disorders characterized by connective tissue
destruction and could focus such efforts on periodontal disease. Many of such
competitors have substantially greater financial, marketing, sales, distribution
and technical resources than the Company, and more experience in research and
development, clinical trials, regulatory matters, manufacturing and marketing
than the Company. Competitors of the Company and its potential collaborators may
develop products that compete successfully with the Company's products and may
develop and commercialize such products more rapidly than the Company or its
collaborators. The Company anticipates that it will face increased competition
in the future as new companies enter the market and new technologies become
available. The Company's technology may be rendered obsolete or uneconomical by
technological advances or entirely different approaches developed by one or more
of the Company's competitors. See "Business--Competition."

Uncertainty of New Product Development; Dependence on Collaborators. The
Company has several potential products for non-dental applications that are in
various preliminary stages of development and will require significant
additional research and development, clinical trials and appropriate regulatory
approval before any such products may be commercialized. All of the Company's
proposed products are based upon its core technology. There can be no assurance
that such technology will be applicable to the product applications being
pursued by the Company. The Company's strategy for the development and
commercialization of pharmaceuticals for non-dental applications is to establish
collaborations and licensing arrangements with third parties pursuant to which
the Company's collaborators likely will be responsible for pre-clinical testing
and human clinical trials, the preparation and submission of applications for
regulatory approval for potential pharmaceutical products and the manufacture
and commercialization of such products. The Company does not currently intend to
perform any of these activities with respect to any product involving non-dental
applications. The Company will, therefore, be dependent upon the expertise of
and dedication of sufficient resources by third parties to develop and
commercialize other products based on its core technology. There can be no
assurance that the Company will be able to establish collaborative or licensing
arrangements, that any such arrangements or licenses will be on

9
<PAGE> 10

terms favorable to the Company, or that current or future collaborative or
licensing arrangements ultimately will be successful. Should any future
collaborative partner fail to develop successfully any drug candidate to which
it has rights, the Company's business could be materially adversely affected. In
addition, there can be no assurance that any such collaborators will not pursue
alternative technologies or drug candidates, either on their own or in
collaboration with others, as a means for developing treatments for the diseases
sought to be addressed by the Company's programs. See "Business--Strategy,"
"--Other Potential Applications" and "--Research and Development."

Extensive Government Regulation. Regulation by governmental entities in
the United States and other countries will be a significant factor in the
production and marketing of Periostat as well as any other pharmaceutical
product developed by the Company or a collaborator of the Company. Virtually all
pharmaceutical products require regulatory approval by government agencies prior
to commercialization. In particular, human pharmaceutical therapeutic products
are subject to rigorous pre-clinical and clinical testing and other approval
procedures by the FDA and by foreign regulatory authorities. Various federal
and, in some cases, state statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, record keeping and marketing of such
pharmaceutical products. The process of obtaining these approvals and the
subsequent compliance with appropriate federal and foreign statutes and
regulations are time consuming and require the expenditure of substantial
resources. Generally, in order to gain FDA approval, a company first must
conduct pre-clinical studies in a laboratory and in animal models to obtain
preliminary information on a compound's efficacy and to identify any safety
problems. The results of these studies are submitted as part of an
Investigational New Drug ("IND") application that the FDA must review before
human clinical trials of an investigational drug can start. Clinical trials are
normally done in three phases and generally take two to five years, but may take
longer, to complete. After completion of clinical trials of a new product, FDA
and foreign regulatory authority marketing approval must be obtained. NDAs
submitted to the FDA take, on average, one to three years to obtain approval. If
questions arise during the FDA review process, approval may take a significantly
longer period of time. The testing and approval processes require substantial
time and effort and there can be no assurance that any approval will be granted
on a timely basis, if at all. Even if 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 as well as possible civil or criminal
sanctions. For marketing outside the United States, the Company also will be
subject to foreign regulatory requirements governing human clinical trials 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. None of the Company's products has been approved
for marketing in the United States or elsewhere. No assurance can be given that
the Company will be able to obtain regulatory approval for any of such products.
In addition, the Company believes that Periostat will not be treated as an
"antibiotic" drug by the FDA primarily because the drug currently is under
review by the Division of Dermatological and Dental Drug Products, not by the
Division of Anti-Infective Drug Products. Therefore, the Company believes that
Periostat will be subject to a three-year period of exclusivity before generic
versions may be approved by the FDA for commercial sale, if the Company is first
in obtaining FDA marketing approval for an oral dosage form containing 20mg of
doxycycline for the treatment of adult periodontitis and the FDA determines that
the clinical investigations conducted by or for the Company are essential to
approval of the marketing application. There can be no assurance, however, that
Periostat will not be treated as an "antibiotic" or that the Company will be
able to satisfy the other criteria for obtaining three-year marketing
exclusivity, in which case no exclusivity period will be available. Failure to
obtain requisite governmental approvals or failure to obtain approvals of the
scope requested will delay or preclude the Company or its licensees or marketing
partners from marketing their products, or limit the commercial use of the
products, and thereby could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Government Regulation."

10
<PAGE> 11

Dependence on Key Personnel. The Company is highly dependent on its
current management and scientific advisors and consultants. The loss of one or
more members of the Company's management or key scientific advisors and
consultants could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company does not maintain key
person life insurance on any of its management or scientific advisors and
consultants. The Company's success will depend in part on the continued service
of its management and key scientific advisors and consultants and its ability to
identify, hire and retain additional personnel. There is intense competition for
qualified personnel in the areas of the Company's activities and there can be no
assurance that the Company will be able to attract and retain such personnel
necessary for the development of the Company's business. Failure to attract and
retain key personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Employees" and "Management."

Uncertainty of Third-Party Reimbursement and Health Care
Reform. Successful commercialization of any pharmaceutical products the Company
may develop will depend, in part, upon the availability of reimbursement or
funding from third-party health care payors such as government and private
insurance plans, including dental managed care plans. Third-party payors are
continuing their efforts to contain or reduce the cost of health care through
various means. For example, third-party payors increasingly are challenging the
prices charged for medical products and services. In addition, significant
uncertainty exists as to the reimbursement status of newly approved
pharmaceutical products. There can be no assurance that third-party
reimbursement or funding will be available or will permit price levels
sufficient to realize an appropriate return on the Company's investment in its
pharmaceutical product development. The levels of revenues and profitability of
pharmaceutical companies including the Company also may be affected by the
continuing efforts of governmental and third-party payors to contain or reduce
the costs of health care through various means and the initiatives of
third-party payors with respect to the availability of reimbursement. For
example, in the United States, there have been, and the Company expects that
there will continue to be, a number of federal and state proposals to implement
similar governmental control. It is uncertain what legislative proposals may be
adopted or what actions federal, state or private payors for health care
products and services may take in response to any health care reform proposals
or legislation. In certain foreign markets, pricing or profitability of
prescription pharmaceuticals is subject to governmental control. Such proposals
or reforms also could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Marketing."

Product Liability; Lack of Product Liability Insurance. The Company's
business may be adversely affected by potential product liability risks inherent
in the testing, manufacturing and marketing of Periostat and other products
developed by the Company or its collaborators. There can be no assurance that
product liability claims will not be asserted against the Company, its
collaborators or licensees. The Company does not currently have product
liability insurance. The Company intends to obtain such insurance prior to
marketing Periostat or any other product. There can be no assurance, however,
that the Company will be able to obtain or maintain adequate product liability
insurance on acceptable terms or that such insurance will provide adequate
coverage against potential liabilities. Furthermore, there can be no assurance
that any collaborators or licensees of the Company will agree to indemnify the
Company, be sufficiently insured or have a net worth sufficient to satisfy
product liability claims. As a result, a product liability claim or recall could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Future Capital Needs; Uncertainty of Additional Financing. There can be no
assurance that the net proceeds from this offering, together with the Company's
existing capital resources, will be adequate to fund the Company's operations
through at least 1997. The Company anticipates that it may be required to raise
additional capital over a period of several years in order to conduct its
operations. Such capital may be raised through additional public or private
financings, as well as collaborative arrangements, borrowings and other
available sources. The Company's capital require-

11
<PAGE> 12

ments depend on numerous factors, including the ability of the Company to obtain
FDA approval of and successfully commercialize Periostat, competing
technological and market developments, the ability of the Company to enter into
collaborative arrangements for the development, regulatory approval and
commercialization of other products, and the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights. To
the extent that additional capital is raised through the sale of equity or
convertible debt securities, the issuance of such securities could result in
dilution to the Company's existing stockholders. There can be no assurance that
additional funding, if necessary, will be available on favorable terms, if at
all. If adequate funds are not available, the Company may be required to curtail
operations significantly or to obtain funds through entering into arrangements
with collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates, products or potential
markets that the Company would not otherwise relinquish. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Shares Eligible for Future Sale and Potential Adverse Effect on Market
Price. Future sales of Common Stock in the public market following this
offering could adversely affect the market price of the Common Stock. Upon
completion of this offering, the Company will have 7,514,283 shares of Common
Stock outstanding, assuming no exercise of currently outstanding options. Of
these shares, the 2,000,000 shares sold in this offering (plus any additional
shares sold upon exercise of the Underwriters' over-allotment option) will be
freely transferable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), unless they are held by "affiliates" of the
Company as that term is used under the Securities Act and the regulations
promulgated thereunder. Stockholders of the Company, holding in the aggregate
approximately 5,514,283 shares of Common Stock, have agreed, subject to certain
limited exceptions, not to sell or otherwise dispose of any of the shares held
by them as of the date of this Prospectus for a period of 180 days after the
date of this Prospectus without the prior written consent of Alex. Brown & Sons
Incorporated. At the end of such 180-day period, approximately 2,827,051 shares
of Common Stock will be eligible for immediate resale, subject to compliance
with Rule 144. In addition, an aggregate of approximately 140,218 shares will be
eligible for immediate resale or issuable upon exercise of vested options,
subject to compliance with Rules 144 and 701. All remaining shares of Common
Stock outstanding will become eligible for sale at various times over a period
of less than two years and could be sold earlier if the holders exercise any
available registration rights. The holders of 5,199,124 shares of Common Stock
have the right in certain circumstances to require the Company to register their
shares under the Securities Act for resale to the public. If such holders, by
exercising their demand registration rights, cause a large number of shares to
be registered and sold in the public market, such sales could have an adverse
effect on the market price for the Company's Common Stock. If the Company were
required to include in a Company-initiated registration shares held by such
holders pursuant to the exercise of their piggyback registration rights, such
sales may have an adverse effect on the Company's ability to raise needed
capital. See "Management--Stock Option Plans," "Description of Capital
Stock--Registration Rights of Certain Holders and Rights of Participation in
Future Offerings," "Shares Eligible for Future Sale" and "Underwriting."

No Prior Public Market For Common Stock; Possibility of Volatility of Stock
Prices. Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after this offering. The initial offering
price was determined by negotiations between the Company and the Underwriters
and is not necessarily indicative of the market price at which the Common Stock
of the Company will trade after this offering. The market prices for securities
of life sciences companies have been highly volatile and the market has
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. Announcements of technological
innovations or new commercial products by the Company or its competitors,
developments concerning proprietary rights, including patents and litigation
matters, publicity regarding actual or potential results with respect to
Periostat or other products under development, regulatory developments in both
the United States and foreign countries, general market conditions, as well as

12
<PAGE> 13

fluctuations in the Company's revenues and financial results and other factors,
may have a significant impact on the market price of the Common Stock. See
"Underwriting."

Anti-Takeover Effect of Certain Charter and By-Law Provisions and Delaware
Law. The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without stockholder approval, 5,000,000 shares of Preferred Stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of Common Stock. The issuance of
Preferred Stock or of rights to purchase Preferred Stock could be used to
discourage an unsolicited acquisition proposal. In addition, the possible
issuance of Preferred Stock could discourage a proxy contest, make more
difficult the acquisition of a substantial block of the Company's Common Stock
or limit the price that investors might be willing to pay in the future for
shares of the Company's Common Stock. The Certificate of Incorporation also
provides that: (i) the affirmative vote of the holders of at least 80% of the
voting power of all outstanding shares of the capital stock of the Company shall
be required to adopt, amend or repeal any provision of the bylaws of the
Company; (ii) stockholders of the Company may not take any action by written
consent; (iii) special meetings of stockholders may be called only by the
President, the Chairman of the Board or a majority of the Board of Directors and
business transacted at any such special meeting shall be limited to matters
relating to the purposes set forth in the notice of such special meeting; (iv)
the Board of Directors, when evaluating an offer related to a tender or exchange
offer or other business combination, is authorized to give due consideration to
any relevant factors, including the social, legal and economic effects upon
employees, suppliers, customers, creditors, the community in which the Company
conducts its business, and the economy of the state, region and nation; and (v)
the affirmative vote of the holders of at least 75% of the voting power of all
outstanding shares of the capital stock of the Company shall be required to
amend the above provisions or the limitation on director liability. The
foregoing provisions of the Certificate of Incorporation could have the effect
of delaying, deterring or preventing a change in control of the Company. In
addition, the Company is subject to Section 203 of the Delaware General
Corporation Law which, subject to certain exceptions, restricts certain
transactions and business combinations between a corporation and a stockholder
owning 15% or more of the corporation's outstanding voting stock (an "interested
stockholder") for a period of three years from the date the stockholder becomes
an interested stockholder. These provisions may have the effect of delaying or
preventing a change of control of the Company without action by the stockholders
and, therefore, could adversely affect the price of the Company's Common Stock.
In the event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets in
which the successor corporation does not assume outstanding options or issue
equivalent options, the Board of Directors of the Company is required to provide
accelerated vesting of outstanding options. See "Description of Capital
Stock--Preferred Stock," "--Anti-takeover Provisions" and "--Limitation of
Director Liability."

Control By Management and Existing Stockholders. Upon completion of this
offering, the Company's executive officers, directors and affiliated entities
together will beneficially own approximately 63.2% of the outstanding shares of
Common Stock (60.8% if the Underwriters' over-allotment option is exercised in
full). As a result, these stockholders, acting together, will be able to control
matters requiring approval by the stockholders of the Company, including the
election of directors. Such a concentration of ownership may have the effect of
delaying or preventing a change in control of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices. See "Principal Stockholders."

Dilution. Purchasers of the shares of Common Stock offered hereby will
experience immediate and substantial dilution in the net tangible book value of
their investment from the initial offering price. Additional dilution will occur
upon exercise of outstanding options. See "Dilution" and "Shares Eligible for
Future Sale."

13
<PAGE> 14

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company are estimated to be approximately $18.1
million ($20.9 million if the Underwriters' over-allotment option is exercised
in full), based on an initial offering price of $10.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses. The Company intends to use approximately $12 million of the net
proceeds of this offering for marketing expenses associated with new product
introduction and the establishment of its sales and marketing capabilities,
including development of a dental pharmaceutical sales force, approximately $5
million for pharmaceutical development and the remainder for general corporate
purposes, including working capital. The amounts actually expended for specific
purposes may vary significantly depending upon numerous factors, including the
timing of the regulatory approval of Periostat, if any, the size and type of
sales force to be established, the terms of agreements entered into with
corporate partners, if any, and the results of research and development and
pre-clinical and clinical studies for other applications of the Company's core
technology, as well as technological advances by others and the status of
competitive products. The proceeds of this offering also may be used to license
or acquire technologies or products that complement the Company's focus on
dental pathologies, although the Company is not currently involved in
negotiations with respect to any such transactions.

Pending such uses, the Company intends to invest the net proceeds of this
offering in short-term, investment-grade, interest-bearing instruments. The
Company has not and does not propose to engage in activities in a manner or to
an extent which would require it to register as an investment company under the
Investment Company Act of 1940.

DIVIDEND POLICY

The Company has never declared or paid any dividends on its capital stock.
The Company intends to retain any earnings to fund future growth and the
operation of its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future.

14
<PAGE> 15

CAPITALIZATION

The following table sets forth the capitalization of the Company: (i) as of
March 31, 1996; (ii) on a pro forma basis to give effect to the conversion of
all outstanding shares of Redeemable Preferred Stock into 5,199,124 shares of
Common Stock; and (iii) on a pro forma as adjusted basis to give effect to the
sale by the Company of 2,000,000 shares of Common Stock offered hereby at an
initial offering price of $10.00 per share, after deducting the underwriting
discounts and commissions and estimated offering expenses payable by the Company
and the application of the estimated net proceeds therefrom.

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt............................................. $ -- $ -- $ --
Mandatorily redeemable convertible preferred stock at
redemption value (which includes accreted dividends of
$2,260,343); $0.01 par value, 10,850,000 shares
authorized, 10,398,248 shares issued and outstanding
(none authorized on a pro forma basis)................... 19,291 -- --
Stockholders' equity (deficit):
Preferred stock, $0.01 par value, none authorized
(5,000,000 shares authorized on a pro forma basis);
none issued and outstanding on an actual, pro forma
and pro forma as adjusted basis....................... -- -- --
Common stock, $0.01 par value, 6,725,000 shares
authorized (25,000,000 shares authorized on a pro
forma basis); 315,159, 5,514,283 and 7,514,283 shares
issued and outstanding on an actual, pro forma and pro
forma as adjusted basis, respectively(1).............. 3 55 75
Additional paid-in capital (deficit)..................... (1,765) 17,474 35,554
Deferred compensation.................................... (300) (300 ) (300)
Deficit accumulated during development stage............. (13,154) (13,154 ) (13,154)
-------- -------- --------
Total stockholders' equity (deficit)................ (15,216) 4,075 22,175
-------- -------- --------
Total capitalization............................. $ 4,075 $ 4,075 $ 22,175
======== ======== ========
</TABLE>

- ---------------
(1) Excludes options to purchase 288,500 shares of Common Stock issuable under
the Company's 1992 Stock Option Plan (the "1992 Plan") upon the exercise of
stock options outstanding as of March 31, 1996 at a weighted average
exercise price of $0.99 per share, of which options to purchase 66,837
shares of Common Stock are exercisable. See "Management--Stock Option
Plans."

15
<PAGE> 16

DILUTION

The pro forma net tangible book value of the Company as of March 31, 1996
was approximately $4.1 million, or $0.74 per share of Common Stock. "Pro forma
net tangible book value per share" is equal to the Company's total tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding, and gives effect to the conversion into Common Stock of all shares
of Redeemable Preferred Stock outstanding at March 31, 1996. After giving effect
to the sale by the Company of 2,000,000 shares of Common Stock in this offering
(at the initial offering price and after deducting underwriting discounts and
commissions and estimated offering expenses), the pro forma net tangible book
value of the Company as of March 31, 1996 would have been $22.2 million, or
$2.95 per share of Common Stock. This represents an immediate increase in net
tangible book value per share of $2.21 to existing stockholders and immediate
dilution in net tangible book value of $7.05 per share to new investors. The
following table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Public offering price per share........................................... $ 10.00
Pro forma net tangible book value per share at March 31, 1996........... $ 0.74
Increase per share attributable to new investors........................ 2.21
-----
Pro forma net tangible book value per share after the offering(1)......... 2.95
------
Net tangible book value dilution per share to new investors............... $ 7.05
======
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and by investors purchasing shares offered by the Company hereby:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)...... 5,514,283 73.4% $16,596,589 45.4% $ 3.01
New investors................. 2,000,000 26.6 20,000,000 54.6 10.00
--------- ------- ----------- -------
Total............... 7,514,283 100.0% $36,596,589 100.0%
========= ====== ============ ======
</TABLE>

- ---------------
(1) Excludes options to purchase 288,500 shares of Common Stock issuable under
the 1992 Plan upon the exercise of stock options outstanding as of March 31,
1996 at a weighted average exercise price of $0.99 per share, of which
options to purchase 66,837 shares of Common Stock are exercisable.
Additional dilution will occur upon exercise of outstanding options. In
addition, an aggregate of 859,000 shares of Common Stock will be available
for issuance pursuant to the 1996 Stock Plan (the "1996 Stock Plan") and the
1996 Non-Employee Director Stock Option Plan (the "Non-Employee Director
Plan"). See "Management--1996 Non-Employee Director Stock Option Plan" and
"--Stock Option Plans."

16
<PAGE> 17

SELECTED FINANCIAL DATA

The selected financial data set forth below with respect to the Company's
statement of operations data for the three years ended December 31, 1995 and
with respect to the balance sheet data at December 31, 1994 and 1995 are derived
from and are qualified by reference to the audited financial statements and the
related notes thereto included elsewhere in this Prospectus. The statement of
operations data for the period from January 10, 1992 (inception) to December 31,
1992 are derived from audited financial statements not included in this
Prospectus. The selected financial data as of March 31, 1996, for the three
months ended March 31, 1995 and 1996 and for the period from January 10, 1992
(inception) to March 31, 1996 have been derived from the unaudited financial
statements of the Company, which are included elsewhere in this Prospectus. The
unaudited financial data include all adjustments consisting only of normal,
recurring adjustments that the Company considers necessary for fair presentation
of the financial position and results of operations for these periods. The
results of operations for the three months ended March 31, 1996 are not
necessarily indicative of the results for any future period or for the full year
ended December 31, 1996. The following should be read in conjunction with the
financial statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing elsewhere in this
Prospectus:

<TABLE>
<CAPTION>
THREE MONTHS
PERIOD FROM ENDED FOR THE PERIOD
JANUARY 10, 1992 YEARS ENDED DECEMBER 31, MARCH 31, JANUARY 10, 1992
(INCEPTION) TO --------------------------- ------------------- (INCEPTION)
DECEMBER 31, 1992 1993 1994 1995 1995 1996 TO MARCH 31, 1996
----------------- ------- ------- ------- ------- ------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues............... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses:
Research and
development........ 1,131 1,913 1,928 3,635 1,090 976 9,583
General and
administrative..... 333 613 793 1,548 242 418 3,705
------ ------ ------ ------ ------ ------ ------
Operating loss......... (1,464) (2,526) (2,721) (5,183) (1,332) (1,394) (13,288)
Net loss............... (1,416) (2,483) (2,653) (5,269) (1,343) (1,333) (13,154)
Net loss allocable to
common stockholders.. (1,607) (2,834) (3,229) (6,028) (1,487) (1,716) (15,414)
Pro forma(2):
Net loss per
share(1)............. $ (1.10) $ (0.24)
Shares used in
computing pro forma
net loss per share... 4,808 5,546
</TABLE>

<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
-------------------- MARCH 31,
1994 1995 1996
------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................. $ 617 $ 5,806 $ 4,968
Total assets.............................................................. 628 5,840 5,077
Mandatorily redeemable convertible preferred stock........................ 7,510 18,908 19,291
Deficit accumulated during development stage.............................. (6,552) (11,820) (13,154)
Total stockholders' equity (deficit)...................................... (7,581) (13,581) (15,216)
</TABLE>

- ---------------
(1) See Note 2 of Notes to Financial Statements for information concerning
computation of pro forma net loss per share.

(2) Gives effect to the conversion of all issued and outstanding shares of
Redeemable Preferred Stock into 5,199,124 shares of Common Stock.

17
<PAGE> 18

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include those discussed in "Risk Factors."

OVERVIEW

The Company began operations in January 1992 and is engaged in the
development and commercialization of innovative, proprietary medical therapies
for the treatment of periodontal disease and other dental pathologies. Since
inception, the Company has had no revenues and has funded its operations
primarily through the issuance of Common Stock and Redeemable Preferred Stock
aggregating $16.6 million. Substantially all of the Company's expenditures to
date have been for pharmaceutical development activities and general and
administrative expenses.

The Company's core technology was developed at SUNY. In 1985, SUNY granted
certain rights to Johnson & Johnson ("J&J") to license such technology. Over the
next several years, J&J conducted and funded Phase I and II clinical trials on
Periostat. Following a strategic decision by J&J not to pursue the dental
pharmaceutical business, in January 1992 J&J assigned to the Company its rights
to the technology, including the rights to Periostat. The Company has completed
Phase III clinical trials on Periostat and plans to submit a NDA to the FDA
during 1996.

Since inception, the Company has operated with a minimal number of
employees. Substantially all pharmaceutical development activities, including
clinical trials, have been contracted to independent contract research and other
organizations. The Company anticipates that it will significantly increase the
number of its employees over the next several years, primarily in the selling,
general and administrative areas, in anticipation of regulatory approval and
market commercialization of Periostat.

The Company does not expect to generate any revenues from product sales for
several years. No assurance can be given, however, that product sales will be
achieved for several years or at all. Successful future operations will depend
on the Company's ability to develop, obtain regulatory approval for and
commercialize its products.

The Company has incurred losses each year since inception and had an
accumulated deficit of $13.2 million at March 31, 1996. The Company expects to
continue to incur losses over the next several years from expenditures on
clinical, product development, marketing and administrative activities.

RESULTS OF OPERATIONS

From inception through March 31, 1996, the Company had no revenues.
Operating expenses consist of research and development expenses and general and
administrative expenses. Research and development expenses consist primarily of
funds paid to contract research organizations for the provision of services and
materials for clinical trials and, to a lesser extent, for research grants paid
to SUNY and other research institutions. General and administrative expenses
consist primarily of personnel salaries and benefits, professional and
consulting fees, facilities and general office expenses. The Company anticipates
that selling, general and administrative expenses will increase during the next
several years due to the expansion of its corporate infrastructure, primarily in
sales, marketing and finance.

Three Months Ended March 31, 1996 and March 31, 1995

Research and development expenses decreased from $1.1 million for the three
months ended March 31, 1995 to $1.0 million for the three months ended March 31,
1996. This decrease resulted

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primarily from lower expenses for the data compilation and statistical analyses
of the results of the Phase III clinical trials on Periostat.

General and administrative expenses increased from $0.2 million for the
three months ended March 31, 1995 to $0.4 million for the three months ended
March 31, 1996. This increase was due primarily to higher employee compensation
expense, including a non-cash compensation charge of approximately $0.1 million
resulting from the grant of certain employee stock options and to higher
consulting and legal expenses.

Years Ended December 31, 1995 and December 31, 1994

Research and development expenses increased from $1.9 million in 1994 to
$3.6 million in 1995, primarily due to higher costs associated with completing
the Phase III clinical trials on Periostat, including extensive data compilation
and statistical analysis of such data.

General and administrative expenses increased from $0.8 million in 1994 to
$1.5 million in 1995, primarily due to an increase in the number of employees,
higher facilities expenses resulting from the Company's relocation in the fourth
quarter of 1994 and higher legal and accounting fees in 1995.

Years Ended December 31, 1994 and December 31, 1993

Research and development expenses remained consistent at $1.9 million in
1993 and 1994. Contract research expenses for clinical trials increased from
1993 to 1994, which were offset by a decline in both patent expenses and the
costs of producing materials for the clinical trials.

General and administrative expenses increased from $0.6 million in 1993 to
$0.8 million in 1994, primarily due to higher personnel expenses resulting from
the hiring of new employees during 1994 and higher professional and consulting
fees.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception in January 1992, the Company has financed its
operations primarily through private placements of Redeemable Preferred Stock
and Common Stock totalling $16.6 million. At March 31, 1996, the Company's cash
and cash equivalents aggregated $5.0 million. The Company's working capital at
March 31, 1996 was $4.0 million, a decrease of $1.3 million from December 31,
1995.

The Company had no debt outstanding (other than accounts payable and
accrued expenses) at March 31, 1996 and December 31, 1995. The Company has no
lines of credit.

From inception through March 31, 1996, the Company expended approximately
$39,000 in capital expenditures. The Company had no capital leases outstanding
at March 31, 1996. Although the Company anticipates higher levels of equipment
and facilities-related expenditures in the foreseeable future, such future
expenditures are not anticipated to be material.

The Company expects that the proceeds from this offering, together with the
Company's existing capital resources, will be adequate to fund the Company's
operations through at least 1997. The Company's future capital requirements and
the adequacy of its available funds will depend on many factors, including the
timing of the Company's NDA submission on Periostat to the FDA, regulatory
approval for Periostat, if any, the size and type of sales force to be
established, the terms of agreements entered into with corporate partners, if
any, and the results of research and development and pre-clinical and clinical
studies for other applications of the Company's core technology.

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ACCOUNTING FOR EMPLOYEE STOCK OPTIONS

In October 1995, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
which established financial accounting and reporting standards for stock based
employee compensation plans. Companies are encouraged, but not required, to
adopt a new method that accounts for stock compensation awards based on their
fair value using an option pricing model. Companies that adopt this new standard
are required to make pro forma disclosures of net income as if the fair
value-based method of accounting required by this standard had been applied. The
requirements of this standard are effective for fiscal year 1996. The Company
expects to adopt the pro forma disclosure requirements. The adoption of such pro
forma disclosure requirements is not expected to have a material impact on the
Company's future financial position or results of operations.

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BUSINESS

OVERVIEW

CollaGenex Pharmaceuticals is engaged in the development and
commercialization of innovative, proprietary medical therapies for the treatment
of periodontal disease and other dental pathologies. The Company believes that
its initial drug, Periostat, will be the first orally administered, systemically
delivered pharmaceutical to treat periodontitis. Unlike existing treatments,
which focus on the bacterial infection associated with periodontitis, Periostat
inhibits the chronic progressive tissue degradation characteristic of the
disease. The Company has completed three pivotal Phase III clinical trials on
Periostat and plans to submit a NDA for Periostat during 1996. Based on these
clinical trials, the Company believes that Periostat is a safe, efficacious,
cost-effective therapy for the long-term treatment of periodontitis.

The Company's core technology involves inhibiting the activity of certain
enzymes that destroy the connective tissues of the body. Connective tissues are
components of the body that form the structural basis for skin, bone, cartilage
and ligaments. In addition to periodontal disease, this core technology may be
applicable to other diseases and conditions characterized by the progressive
destruction of connective tissues of the body. The Company's core technology is
licensed on an exclusive basis from SUNY.

INDUSTRY BACKGROUND

Periodontitis is a chronic disease characterized by the progressive loss of
attachment between the periodontal ligament and the surrounding alveolar bone,
ultimately resulting in tooth loss. According to industry data, in the United
States alone, an estimated one-third of all adults, or 67 million people, suffer
from some form of periodontitis. The cost of treating periodontitis can be
considerable due to the frequent treatments required. Approximately 13 million
people seek professional treatment annually for periodontal disease, resulting
in over 17 million periodontal procedures and annual expenditures of
approximately $6 billion.

The primary treatment for periodontal disease is mechanical intervention,
known as scaling and root planing ("SRP"), in which bacterial plaque is removed
from the supra- and sub-gingival tooth surfaces (above and below the gumline)
using a metal scraper or ultrasound scaling device. Alternatively, in more
severe periodontal disease, the gums are partially removed by a surgical
procedure to reduce pocket depth around the tooth and to improve the
effectiveness of home oral hygiene techniques. These treatments are designed to
treat bacterial infection associated with periodontitis on a short-term,
periodic basis and are performed by both periodontists and general dentists.

As a result of the chronic nature of periodontitis and the short-term
nature of existing therapies, patients require frequent treatments. In addition,
patients are commonly referred to a specialist for such treatments. Periodontal
disease is, therefore, among the more expensive dental pathologies to treat, and
the Company believes that the treatment of periodontitis will be increasingly
important to dental managed care organizations ("DMOs") and dental practitioners
operating under capitated or fixed fee arrangements. The Company also believes
that Periostat is well positioned to meet the economic and therapeutic
requirements of such DMOs and dental practitioners by providing a cost-effective
therapy for periodontal disease management.

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Increased competition within the dental profession has created rapid
adoption of new technologies. The Company believes that a new safe, painless,
efficacious and cost-effective treatment will facilitate efforts by
periodontists and dentists to attract and retain patients with periodontal
disease.

STRATEGY

Develop Market Acceptance of Periostat. The Company will seek to gain
broad market acceptance of Periostat as a safe, painless, efficacious and
cost-effective therapy for periodontitis among periodontists, general dentists,
third-party payors and patients. The Company plans to implement educational and
awareness campaigns through the dissemination of scientific, clinical and
patient outcomes data on Periostat. In addition, the Company intends to seek
American Dental Association ("ADA") endorsement of Periostat.

Establish a Sales and Marketing Organization. The Company intends to
establish a dedicated dental sales force to market Periostat to DMOs in the
United States. The Company also plans to market Periostat to both periodontists
and general dentists in the United States through one or more of a direct sales
force, independent sales representatives or a strategic partner. In addition,
the Company intends to establish a network of sub-licensees or distributors to
market and sell Periostat outside of the United States.

Build Relationships with DMOs. The Company intends to establish
relationships with selected DMOs by demonstrating the potential long-term
savings that could result from more effective disease management through the use
of Periostat, including early intervention for mild-to-moderate periodontitis.
The Company believes that acceptance by DMOs of Periostat as a cost-effective
therapy for the treatment of periodontal disease will offer a platform for
practitioner education and influence general acceptance by dental practitioners.

Acquire Complementary Technologies and Products. The Company is actively
seeking to broaden its dental product line by in-licensing or acquiring
high-quality diagnostic and therapeutic dental products complementary to
Periostat. This would enable the Company to provide an integrated dental product
line and leverage the Company's sales and marketing organization. In March 1996,
the Company licensed on an exclusive, worldwide basis a proprietary formulation
to treat gingivitis, a disease characterized by inflammation of the gums.

Leverage Core Technology Through Strategic Partnering Arrangements. The
Company intends to develop and commercialize non-dental therapeutic applications
of its core technology through the establishment of corporate partnering
arrangements. The Company has initiated a collaboration with the National Cancer
Institute relating to cancer metastasis and has entered into an evaluation
agreement relating to wound healing with Smith & Nephew Research Limited, a
major U.K.-based wound treatment company.

PERIOSTAT

The Company's primary focus to date has been on the development of
Periostat, which the Company believes will be the first orally administered,
systemically delivered pharmaceutical to treat adult periodontitis. Periostat, a
20mg dose of doxycycline, is a unique sub-antibiotic dosage strength that
inhibits the chronic progressive tissue degradation characteristic of
periodontal disease without exerting any anti-microbial effect. Periostat is
intended to be taken orally by the patient, on an extended basis, between dental
visits. Doxycycline is an active ingredient of several FDA-approved drugs and
has been in use for approximately 30 years for the treatment of microbial
infections and, along with other tetracyclines, has a well established safety
record. The Company has completed three pivotal Phase III clinical trials on
Periostat and plans to submit a NDA for Periostat

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during 1996. Based on these clinical trials, the Company believes that Periostat
is a safe, efficacious, cost-effective therapy for the long-term treatment of
periodontitis.

The Company's Phase III clinical trials consisted of three parallel,
separate, multi-centered, placebo-controlled, double-blinded clinical trials in
patients with adult periodontal disease. A total of 436 patients were enrolled
in the three clinical trials at 11 dental schools across the United States.
These clinical trials were managed by an independent contract research
organization and were conducted over a 12-month period. In each trial, patients
were randomly assigned into groups that were administered Periostat or placebo
capsules. At the outset of these trials, baseline measurements were taken of
each of the clinical endpoints to be studied and each patient received a dental
cleaning. Subsequent measurements were obtained at regular intervals and an
additional dental cleaning was carried out after six months. Data were analyzed
using conventional statistical techniques to establish whether significant
differences existed between the Periostat-dosed groups and those receiving
placebo by comparing data obtained at 12 months with baseline measurements. A
confidence level of not less than 95% was used to establish whether
statistically significant differences existed in clinical endpoints.

The primary clinical endpoint of the clinical trials was the measurement of
changes in clinical attachment level ("ALv"), a parameter defining the integrity
of the connective tissue that anchors the tooth to the alveolar bone. This
endpoint is the one most often recognized by the FDA to determine the validity
of a claim for therapy of periodontal disease. The Company utilized two
independent techniques in the clinical trials to measure ALv, manual probing and
automated probing. Using the manual probing technique, ALv was measured at six
separate probing sites around each tooth, regardless of whether disease was
present or active. Therefore, in a typical mouth with 30 teeth, approximately
180 probing sites were measured. In contrast, using the automated probing
technique, ALv was measured at only a subset of probing sites that exhibited
active moderate-to-severe disease at the outset of the study.

Each of the Phase III clinical trials demonstrated statistically
significant improvements in ALv. The data observed using the manual probing
technique revealed that the Periostat group exhibited an average improvement in
ALv of 40% and 21% in probing sites with mild-to-moderate disease and severe
disease, respectively, when compared with the placebo group. Similarly, the data
from the subset of probing sites with active moderate-to-severe disease measured
with the automated probe revealed that the Periostat group exhibited a greater
than three-fold improvement in ALv when compared with the placebo group.

Another significant primary clinical endpoint, the percentage of all
probing sites that deteriorated by a clinically significant threshold of change,
was studied using only the manual probe. Periostat was found to reduce the
percentage of probing sites that deteriorated by a clinically significant
amount. In addition, in those probing sites with normal attachment level,
mild-to-moderate periodontal disease and severe periodontal disease, Periostat
reduced the progression of the disease by 32%, 46% and 55%, respectively.

Several other secondary clinical endpoints were measured and analyzed using
the manual probing technique during the course of the Company's Phase III
clinical trials. These included probing pocket depth (the distance from the
gumline to the base of the periodontal pocket), the extent to which the gums
bled when the periodontal pocket was probed (a common screen for the severity of
periodontal disease) and the loss of alveolar bone (measured using a complex
x-ray technique known as digital subtraction radiography). All of these
secondary clinical endpoints generally exhibited statistically significant
improvements in each of the three clinical trials and in the combined data.

A further subset of the trials involved the measurement of ALv following
SRP. SRP was conducted during the course of the study on certain probing sites
exceeding a pre-defined threshold of attachment loss. Analysis of the data
derived from this subset demonstrated that the placebo group required SRP on
five times as many probing sites as the group receiving Periostat. Furthermore,
the

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combination of SRP with Periostat exhibited a greater than three-fold
improvement in ALv when compared to SRP alone. This finding is being further
evaluated by the Company in additional clinical studies.

The Company's three pivotal Phase III clinical trials were completed in
December 1994. Since that time, the Company has been compiling the data,
performing statistical analysis and conducting the additional testing necessary
to complete its NDA for Periostat, which it plans to submit during 1996. There
can be no assurance that the Company's NDA with respect to Periostat will be
submitted in a timely manner or, if so submitted, that it will be approved by
the FDA on a timely basis, or at all. Failure to obtain FDA approval of a NDA
for Periostat would have a material adverse effect on the Company's business,
financial condition and results of operations.

TECHNOLOGY

The Company's core technology involves the pharmaceutical modulation of the
activity of a broad class of enzymes known as matrix metalloproteinases
("MMPs"). MMPs are responsible for the normal turnover of collagen and other
proteins that are integral components of a variety of connective tissues such as
skin, bone, cartilage and ligaments.

Under normal physiological conditions, the natural breakdown of collagen is
regulated by the interaction between the degradative properties of MMPs and a
group of naturally occurring biomolecules called tissue inhibitors of
metalloproteinases ("TIMPs"), which modulate the level of MMP activity. In many
pathological conditions, however, the balance between collagen production and
degradation is disrupted resulting in the excessive loss of tissue collagen, a
process called collagenolysis. One such example is the progressive destruction
of the periodontal ligament and alveolar bone in periodontal disease. Similar
degradative activity is associated with other disorders and conditions such as
cancer metastasis, wounds, osteoarthritis, osteoporosis, rheumatoid arthritis
and diabetic nephropathy.

The Company's core technology is licensed on an exclusive basis from SUNY
and results from the research of Drs. Lorne M. Golub and Thomas F. McNamara and
their colleagues at the State University of New York at Stony Brook. These
researchers demonstrated that tetracyclines can significantly reduce the
pathologically excessive collagen degradation associated with periodontal
disease. They also were able to demonstrate that this result was unrelated to
the antibiotic properties of tetracyclines. Furthermore, they demonstrated that
the administration of doses of antibiotic tetracyclines well below the dosage
levels necessary to destroy microbes (sub-antibiotic doses) was still effective
in preventing the loss of connective tissue in models of periodontal disease.
Studies published in scientific journals support the hypothesis that the
mechanism of action for this activity is the result, in part, of the direct
binding of tetracyclines to certain metal binding sites associated with the MMP
structure.

Although commercially available antibiotic tetracyclines show effective
anti-collagenolytic potential, long-term administration of these compounds at
normal antibiotic doses can result in well-known complications of long-term
antibiotic therapy, such as gastrointestinal disturbance, overgrowth of yeast
and fungi, and the emergence of antibiotic-resistant bacteria. The Company's
Phase III clinical trials using Periostat demonstrated that the administration
of sub-antibiotic doses of doxycycline over a 12-month period exerted no
anti-microbial effects. Thus, the use of this dosage strength provides the
anti-collagenolytic effects without the complications of long-term antibiotic
therapies.

The Company's license from SUNY also covers a broad class of tetracyclines
that have been chemically modified to retain and enhance their
anti-collagenolytic properties but which have had the structural elements
responsible for their antibiotic activity removed ("CMTs"). These compounds,
which lack any antibiotic activity, have shown potential in a number of
pre-clinical models of excessive connective tissue breakdown. The Company's
current research and development programs are focused on the use of CMTs in drug
therapies for potential applications where more

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potent doses of tetracyclines may enhance the efficacy of the treatment. See
"-- Other Potential Applications."

OTHER POTENTIAL APPLICATIONS

The Company's research and discoveries relating to CMTs have yielded other
potential therapeutic programs which the Company intends to develop and
commercialize through the establishment of corporate partnering arrangements.
The Company believes that its core technology may be utilized to develop
therapies for other diseases and conditions which, like periodontal disease, are
characterized by the progressive destruction of connective tissues of the body,
such as cancer metastasis, wounds, osteoarthritis, osteoporosis, rheumatoid
arthritis and diabetic nephropathy.

Cancer Metastasis

Cancer metastasis is the spread of cancer cells from a diseased organ to
the lymphatic or circulatory system, where such cells then migrate throughout
the body causing cancer to develop in other organs. Tumor cell invasion is a
complex process that involves the destruction of the basement membrane, or
structural support tissue, of the lymphatic or circulatory system, and the
migration of tumor cells to secondary sites, followed by proliferation of these
cells. Data from recent pre-clinical studies sponsored by the Company at two
major universities suggest that several of the Company's CMT drug candidates
have potent activity in models of cancer invasion.

These studies also demonstrated that the inhibition of certain MMP activity
by conventional tetracyclines and CMTs results in a decreased ability of tumor
cells to invade the lung in models of metastasis. In addition, CMTs have been
shown to modulate the specific type of MMP isolated from human lung cancer
cells, the activity of which has been correlated with the metastatic potential
of tumors. Pre-clinical studies are in progress in animal models of metastasis,
and initial results suggest that a number of the Company's compounds show
efficacy in these models.

The National Cancer Institute (the "NCI") has informed the Company that it
intends to perform pharmacology, toxicology and Phase I clinical trials using
one of the Company's CMTs for the prevention of cancer metastasis. The Company
currently is negotiating the terms and conditions of a collaborative research
and development agreement with the NCI.

Wound Repair

The repair of the connective tissue in response to acute injury involves
the remodeling of collagen and related proteins. The Company has generated data
in pre-clinical studies conducted at SUNY which suggest the potential utility of
certain of its compounds in facilitating this process. To further explore this
application, the Company has entered into an evaluation agreement with Smith &
Nephew Research Limited ("Smith & Nephew"), a major U.K.-based wound treatment
company, pursuant to which Smith & Nephew will seek to validate the preliminary
efficacy data developed at SUNY in the field of wound repair. The Company has
granted to Smith & Nephew a right of first negotiation with respect to certain
compounds in the field of wound repair.

Osteoarthritis

Osteoarthritis is a progressive, degenerative joint disease involving the
breakdown of the synovial cartilage in the joint. Trauma, resulting in joint
instability, most often is the cause of this disease, which results in the
gradual destruction of bone and especially of collagen. Several pre-clinical
studies carried out by the Company in collaboration with a major teaching
hospital and other institutions have demonstrated that the use of the Company's
compounds inhibit the loss of synovial cartilage in the joint.

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Osteoporosis

Osteoporosis is characterized by reductions in both the amount and strength
of bone tissue due to the loss of calcium from the bone, resulting in
susceptibility to fracture. A pre-clinical study carried out by the Company in
collaboration with a major university demonstrated that many of the Company's
CMTs inhibit bone resorption, or the loss of bone tissue, in various
experimental models.

Rheumatoid Arthritis

Rheumatoid arthritis is a chronic inflammatory joint disease with many
pathophysiological similarities to periodontal disease. Substantial evidence
implicates collagenase, an MMP, as a cause of bone, joint and tissue destruction
in this disease. Several animal studies carried out by the Company and SUNY in
collaboration with a major teaching hospital have demonstrated that the use of
the Company's CMTs significantly reduced radiographic evidence of cartilage and
bone destruction in the joint that correlated with the normalization of MMP
activity.

Diabetic Nephropathy

Nephropathy is one of the most serious secondary complications of diabetes.
This condition results in the progressive loss of kidney function, requiring
dialysis or a kidney transplant to maintain survival, and frequently leads to
end-stage renal disease. The destruction observed in diabetic nephropathy is
associated with elevated levels of MMPs which degrade the basement membrane of
the kidney, causing it to lose its ability to effectively act as a filter. An
early indicator of kidney disease is proteinuria, which is the excretion of
protein in the urine. Animal model studies conducted by SUNY have shown that the
administration of CMTs significantly reduces the severity of proteinuria and the
Company believes such administration reduces the collagenolytic activity in the
glomerulus, which is the structure within the kidney that prevents proteinuria.

MARKETING

The Company intends to establish a dedicated dental sales force, with
expertise in sales and third-party reimbursement, to market Periostat to DMOs in
the United States. The Company also plans to market Periostat to both
periodontists and general dentists in the United States through one or more of a
direct sales force, independent sales representatives or a strategic partner. In
addition, the Company intends to establish a network of sub-licensees or
distributors to market and sell Periostat outside of the United States. In order
to provide an integrated dental product line and leverage the Company's sales
and marketing organization, the Company is actively seeking to in-license or
acquire high-quality diagnostic and therapeutic dental products complementary to
Periostat.

The Company plans to implement a broad-based marketing program with special
emphasis on educational programs through the dissemination of scientific,
clinical and patient outcomes data on Periostat and periodontal disease. These
marketing programs will focus on establishing broad market acceptance of
Periostat among periodontists, general dentists, third-party payors and
patients. In addition, the Company intends to seek ADA endorsement of Periostat.

The commercial success of Periostat will be dependent, in part, upon the
availability of government or private third-party reimbursement for the product.
Prior to approving coverage for a new drug product, most third-party payors
require evidence that the product is safe and effective, not experimental or
investigational. The Company believes that third-party reimbursement may be
available for Periostat. The Company, however, currently has no history in
obtaining reimbursement in the United States or other countries.

The Company currently does not have any sales and marketing personnel.
There can be no assurance that the Company will be able to recruit and retain
qualified sales and marketing

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personnel, foreign sub-licensees or distributors or marketing partners or that
the Company's marketing and sales efforts will be successful.

RESEARCH AND DEVELOPMENT

The Company conducts a broad-based research and drug discovery program
through its collaborations with corporate partners, researchers, universities,
medical institutions and leading scientists. Pharmaceutical development
activities are carried out primarily by contract research organizations at the
direction of the Company. Historically, the Company's research has focused on
the inhibition of collagenolytic activity with particular emphasis on
periodontal disease. The Company maintains an ongoing research relationship with
SUNY relating to tetracyclines, including CMTs, and their effect on connective
tissue disorders. The Company receives certain proprietary rights to inventions
or discoveries that arise as a result of this research. The Company's current
research and development objective is to develop additional products utilizing
its CMT technology. See "--Technology" and "--Other Potential Applications."

The Company has entered into an agreement with a contract research
organization pursuant to which such entity performs a majority of the Company's
clinical development, data management and regulatory affairs activities. Either
party may terminate such agreement on 90 days prior written notice. The
Company's research and development expenditures were approximately $1.9 million,
$1.9 million and $3.6 million in 1993, 1994 and 1995, respectively, and $976,000
for the three months ended March 31, 1996. Of such amounts, $0, $629,000,
$1,679,000 and $450,000 were incurred under this agreement for such periods.

MANUFACTURING AND SUPPLIERS

The Company relies on third-party contract manufacturers to produce
doxycycline, the active drug ingredient in Periostat, and for the commercial
manufacturing of Periostat. The Company has entered into a manufacturing
agreement with Applied Analytical Industries, Inc. ("AAI"), in Wilmington, North
Carolina for the manufacture of Periostat. AAI supplies a portion of the
products used in the Company's Phase III clinical trials. This agreement, which
requires the Company to purchase minimum amounts of Periostat, terminates three
years from the date of the initial product launch and automatically extends for
consecutive one-year periods unless 12-month prior written notice is provided
before the expiration of the applicable term. AAI is required to comply with GMP
requirements.

The Company has entered into a supply agreement with Hovione International
Limited ("Hovione") pursuant to which the active ingredient in Periostat,
doxycycline, is supplied by Hovione from its offshore facilities. Hovione
supplies a substantial portion of the doxycycline used in the United States from
two independent, FDA-registered and approved facilities, providing for a back-up
supply in the event that one facility is unable to manufacture. The supply
agreement is in effect until January 25, 2000 and will automatically renew for
successive two-year periods unless, 90 days prior to the expiration of any such
periods, either party gives the other party written notice of termination. In
addition, in the event of a default, uncured for 90 days, the non-defaulting
party can terminate the agreement effective immediately at the end of such
90-day period. The Company relies on Hovione as its sole supplier of
doxycycline.

There can be no assurance that the Company will be able to enter into or
maintain supply or manufacturing agreements on acceptable terms, if at all. In
the event that the Company is unable to obtain sufficient quantities of
doxycycline or Periostat on commercially reasonable terms, or in a timely
manner, or if the Company's suppliers fail to comply with GMP, the Company's
business, financial condition and results of operations would be materially
adversely affected. See "--Government Regulation."

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PATENTS, TRADE SECRETS AND LICENSES

The Company's success will depend in part on patent and trade secret
protection for its technologies, products and processes, and on its ability to
operate without infringement of proprietary rights of other parties both in the
United States and in foreign countries. Because of the substantial length of
time and expense associated with bringing new products through development to
the marketplace, the pharmaceutical industry places considerable importance on
obtaining and maintaining patent and trade secret protection for new
technologies, products and processes.

The Company depends on the SUNY License for all of its core technologies.
The SUNY License grants the Company an exclusive worldwide license to make and
sell products employing tetracyclines that are designed or utilized to alter a
biological process. Eleven U.S. patents and four U.S. patent applications held
by SUNY are licensed to the Company under the SUNY License. The Primary Patent
claims methods of use of conventional tetracyclines to inhibit pathologically
excessive collagenolytic activity, while the Secondary Patent claims methods of
use of tetracyclines which have no antibiotic activity. The nine other U.S.
patents relate to the compositions of certain chemically modified tetracyclines
with anti-collagenolytic properties, methods of use of tetracyclines to reduce
bone loss and methods of use of teracyclines to enhance bone growth. SUNY did
not apply in foreign countries for patents corresponding to the Primary Patent
but has obtained patents that correspond to the Secondary Patent in Australia,
Canada and certain European countries. A patent application corresponding to the
Secondary Patent is pending in Japan. SUNY also has obtained patents in certain
European countries, Canada and Japan and has pending patent applications in
certain other foreign countries which correspond to its U.S. patents relating to
methods of use of tetracyclines to reduce bone loss. All of SUNY's U.S. and
foreign patents expire between 2004 and 2012. The Company's rights under the
SUNY License are subject to certain statutory rights of the U.S. government
resulting from federal support of research activities at SUNY. The failure to
obtain and maintain patent protection may mean that the Company will face
increased competition in the United States and in foreign countries. The SUNY
License is terminable by SUNY on 90 days prior notice only upon the Company's
failure to make timely payments, reimbursements or reports, if the failure is
not cured by the Company within 90 days. The termination of the SUNY License, or
the failure to obtain and maintain patent protection for the Company's
technologies, would have a material adverse effect on the Company's business,
financial condition and results of operations.

One of the U.S. patents and a corresponding Japanese patent application
licensed to the Company under the SUNY License are owned jointly by SUNY and a
Japanese company. These patent rights, which expire in 2012, cover particular
CMTs (the "Jointly Owned CMTs") that were involved in research activities
between SUNY and the Japanese company. The Japanese company may have exclusive
rights to these Jointly Owned CMTs in Asia, Australia and New Zealand and may
have a non-exclusive right to exploit these Jointly Owned CMTs in other
territories. These Jointly Owned CMTs are not involved in the Company's
Periostat product but could, in the future, prove to be important for one or
more of the Company's other potential applications of its technology. If the
Company does incorporate the Jointly Owned CMTs in any future product, it may be
precluded from marketing these products in Asia, Australia and New Zealand and
could experience increased competition in other markets from the joint owner.

In consideration of the license granted to the Company, the Company: (i)
issued to SUNY 78,948 shares of Common Stock; and (ii) has agreed to pay SUNY
royalties on the net sales of products employing tetracyclines, with minimum
annual royalty payments per year. The term of the license is: (i) until the
expiration of the last to expire of the licensed patents in each country; or
(ii) until 20 years from the first commercial sale of any collagenase
inhibition-related product by the Company for know-how, at which time the
Company has a fully paid, non-exclusive license.

The Company intends to enforce its patent rights against third-party
infringers. Due to the general availability of generic tetracyclines for use as
antibiotics, the Company could become involved in infringement actions, which
could entail substantial costs to the Company. Regardless of the outcome,
defense and prosecution of patent claims is expensive and time consuming, and

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<PAGE> 29

results in the diversion of substantial financial, management and other
resources from the Company's other activities. Although federal law prohibits
the promotion or marketing of pharmaceuticals for unauthorized uses, there can
be no assurance that practitioners will not prescribe or patients will not
obtain generic forms of doxycycline and divide the tablets into smaller doses
instead of obtaining a prescription for Periostat.

The patent positions of pharmaceutical firms, including the Company, are
generally uncertain and involve complex legal and factual questions.
Consequently, as to the patent applications licensed to it, even though the
Company currently is prosecuting such patent applications with U.S. and foreign
patent offices, the Company does not know whether any of such applications will
result in the issuance of any additional patents or, if any additional patents
are issued, whether they will provide significant proprietary protection or will
be circumvented or invalidated. Since patent applications in the United States
are maintained in secrecy until patents issue, and since publication of
discoveries in the scientific and patent literature tend to lag behind actual
discoveries by several months, the Company cannot be certain that it was the
first creator of inventions covered by pending patent applications or that it
was the first to file patent applications for such inventions.

There can be no assurance that patent applications to which the Company
holds rights will result in the issuance of patents, that any patents issued or
licensed to the Company will not be challenged and held to be invalid, or that
any such patents will provide commercially significant protection to the
Company's technology, products and processes. In addition, there can be no
assurance that others will not independently develop substantially equivalent
proprietary information not covered by patents to which the Company owns rights
or obtain access to the Company's know-how, or that others will not be issued
patents which may prevent the sale of one or more of the Company's products, or
require licensing and the payment of significant fees or royalties by the
Company to third parties in order to enable the Company to conduct its business.
In the event that any relevant claims of third-party patents are upheld as valid
and enforceable, the Company could be prevented from selling its products or
could be required to obtain licenses from the owners of such patents. There can
be no assurance that such licenses would be available or, if available, would be
on terms acceptable to the Company. The Company's failure to obtain these
licenses would have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company's success also is dependent upon know-how, unpatentable trade
secrets, and the skills, knowledge and experience of its scientific and
technical personnel. The Company requires all employees to enter into
confidentiality agreements that prohibit the disclosure of confidential
information to anyone outside the Company and require disclosure and assignment
to the Company of their ideas, developments, discoveries and inventions. In
addition, the Company seeks to obtain such agreements from its consultants,
advisors and research collaborators. There can be no assurance that adequate
protection will be provided for the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use or disclosure. The
Company occasionally provides information and chemical compounds to research
collaborators in academic institutions, and requests that the collaborators
conduct tests in order to investigate certain properties of the compounds. There
can be no assurance that the academic institutions will not assert intellectual
property rights in the results of the tests conducted by the research
collaborators, or that the academic institutions will grant licenses under such
intellectual property rights to the Company on acceptable terms. If the
assertion of intellectual property rights by an academic institution can be
substantiated, failure of the academic institution to grant intellectual
property rights to the Company could have a material adverse effect on the
Company's business, financial condition and results of operations.

GOVERNMENT REGULATION

The Company's activities and product candidates are subject to extensive
and rigorous regulation by a number of governmental entities in the United
States, primarily the FDA, and by comparable authorities in other countries.
These governmental entities regulate, among other things, research and
development activities and the testing, manufacture, safety, effectiveness,

29
<PAGE> 30

labeling, storage, record keeping, approval, advertising, promotion,
distribution and sale of prescription drug products. Different types of FDA
regulation apply to various drug products, depending upon whether they are
marketed only upon the order of a physician (prescription drugs) or
over-the-counter, are biological or antibiotic drugs or are controlled drugs,
such as narcotics. Product development and approval within this regulatory
framework takes a number of years, involves the expenditure of substantial
resources and is uncertain. Many products that initially appear promising
ultimately do not reach the market because they are not found to be safe or
effective, as demonstrated by testing required by government regulation during
the development process. In addition, there can be no assurance that this
regulatory framework will not change or that additional regulation will not
arise at any stage of the Company's product development that may affect
approval, delay an application or require additional expenditure by the Company.
Moreover, even if approval is obtained, failure to comply with present or future
regulatory requirements, or new information adversely reflecting on the safety
or effectiveness of the approved drug, can lead to FDA withdrawal of approval to
market the product. Failure to comply with applicable FDA and other regulatory
requirements can result in sanctions being imposed on the Company or the
manufacturers of its products, including warning letters, product recalls or
seizures, injunctions, refusals to permit products to be imported into or
exported out of the United States, refusals of the FDA to grant pre-market
approval of drugs or to allow the Company to enter into government supply
contracts, withdrawals of previously approved marketing applications and
criminal prosecutions.

The activities required before a new drug product may be marketed in the
United States begin primarily with pre-clinical testing. Pre-clinical tests
include laboratory evaluation of product chemistry and other characteristics and
animal studies to assess the potential safety and efficacy of the product as
formulated. Many pre-clinical studies are regulated by the FDA under Good
Laboratory Practice ("GLP") regulations. Violations of these regulations can, in
some cases, lead to invalidation of the studies, requiring such studies to be
replicated. The Company's pre-clinical studies were conducted in accordance with
GLP regulations.

The entire body of pre-clinical development work necessary to administer
investigational drugs to human volunteers or patients is summarized in an IND
submission to the FDA. FDA regulations provide that human clinical trials may
begin 30 days following submission and receipt of an IND, unless the FDA advises
otherwise or requests additional information, clarification or additional time
to review the IND submission. There is no assurance that the submission of an
IND will eventually allow a company to commence clinical trials. Once trials
have commenced, the FDA may stop the trials, or particular types of trials, by
placing a "clinical hold" on such trials because of concerns about, for example,
the safety of the product being tested or the adequacy of the trial design. Such
holds can cause substantial delay and, in some cases, may require abandonment of
a product. Clinical testing involves the administration of the drug to healthy
human volunteers or to patients under the supervision of a qualified principal
investigator, usually a physician, pursuant to a FDA reviewed protocol. Each
clinical study is conducted under the auspices of independent Institutional
Review Boards ("IRBs") at the institutions at which the study will be conducted.
An IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution. Human clinical trials
typically are conducted in three sequential phases, but the phases may overlap.
Phase I trials consist of testing the product in a small number of patients or
normal volunteers, primarily for safety, in one or more dosages, as well as
characterization of a drug's pharmacokinetic and/or pharmacodynamic profile. In
Phase II, in addition to safety, the efficacy of the product is evaluated in a
patient population. Phase III trials typically involve additional testing for
safety and clinical efficacy and an expanded population at geographically
dispersed sites. A clinical plan, or "protocol," accompanied by the approval of
an IRB, must be submitted to the FDA prior to commencement of each clinical
trial. All patients involved in the clinical trial must provide informed consent
prior to their participation.

A company seeking FDA approval to market a new drug must file a NDA with
the FDA pursuant to the Federal Food, Drug and Cosmetic Act. In addition to
reports of the pre-clinical and clinical

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<PAGE> 31

trials conducted under the FDA-approved IND, the NDA includes information
pertaining to the preparation of the drug substance, analytical methods, drug
product formulation, details on the manufacture of finished products as well as
proposed product packaging and labeling. Submission of a NDA does not assure FDA
approval for marketing. The application review process generally takes one to
three years to complete, although reviews of treatments for cancer and other
life-threatening diseases may be accelerated or expedited. However, the process
may take substantially longer if, among other things, the FDA has questions or
concerns about the safety or efficacy of a product. In general, the FDA requires
at least two properly conducted, adequate and well-controlled clinical studies
demonstrating efficacy with sufficient levels of statistical assurance. However,
additional information may be required. For example, the FDA also may request
long-term toxicity studies or other studies relating to product safety or
efficacy. Notwithstanding the submission of such data, the FDA ultimately may
decide that the application does not satisfy its regulatory criteria for
approval. Finally, the FDA may require additional clinical tests following NDA
approval to confirm safety and efficacy (Phase IV clinical trials).

In late 1995, the FDA requested that the Company conduct additional animal
studies regarding certain effects associated with the long-term dosing of
doxycycline and that the data be included in the Company's NDA submission. Such
animal studies currently are being conducted. Any delay in the completion of
such studies would delay the Company's NDA submission and any such delay, if
extended, could have a material adverse effect on the Company's business,
financial condition and results of operations. The FDA also requested that a
post-approval, post-marketing animal study related to long-term dosing be
conducted.

The FDA may, in some circumstances, impose restrictions on the use of a
drug, which restrictions may be difficult and expensive to administer. Product
approvals may be withdrawn if compliance with regulatory requirements is not
maintained or if problems occur after the product reaches the market. After a
product is approved for a given indication in a NDA, subsequent new indications
or dosages for the same product are reviewed by the FDA by the filing of a NDA
supplement. The NDA supplement is much more focused than the NDA and deals
primarily with safety and effectiveness data related to the indication or
dosage, and labeling information for the new indication. Finally, the FDA
requires reporting of certain information that becomes known to a manufacturer
of an approved drug.

The FDA does not permit a manufacturer or distributor to market or promote
an approved drug product for an unapproved "off label" use or dosage level.
Therefore, any company that markets or promotes doxycycline for use in the
treatment of adult periodontitis in an unapproved dosage level (for example, a
50mg scored tablet) without first obtaining FDA approval for such use and dosage
would be subject to regulatory action. Generally, the FDA, under its "practice
of medicine" policy, does not prohibit a physician, dentist or other licensed
practitioner from prescribing an approved drug product for an unapproved use or
dosage. Nor does the FDA generally regulate the practice of pharmacy where the
pharmacist fills a prescription issued by a licensed practitioner for an
individual patient. There can be no assurance that the FDA or a state agency
regulating the practice of medicine would initiate regulatory action against a
licensed practitioner for prescribing doxycycline in the currently available
dosage for use in the treatment of adult periodontitis.

The Drug Price Competition and Patent Term Restoration Act of 1984 provides
for abbreviated approval requirements for generic drugs, exclusivity protection
for innovative products that prevents FDA approval of generic versions, and
patent extension for a certain period of time that it takes to obtain FDA
approval. The Company believes that Periostat will be treated by the FDA as a
"new drug," rather than as an "antibiotic," primarily because the drug currently
is under review by the Division of Dermatological and Dental Drug Products, not
by the Division of Anti-Infective Drug Products. Therefore, Periostat may be
entitled to a three-year period of marketing exclusivity before generic versions
can be approved by the FDA for commercial sale if the Company is first in
obtaining FDA marketing approval for an oral dosage form containing 20mg of
doxycycline for the treatment of adult periodontitis and the FDA determines that
the clinical investigations conducted by or for the

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<PAGE> 32

Company are essential to approval of the marketing application. There can be no
assurance, however, that Periostat will not be treated by the FDA as an
"antibiotic" or that the Company will be able to satisfy the other criteria for
obtaining three-year marketing exclusivity, in which case no exclusivity period
or patent-term extension will be available. In this case, the Company would have
to rely solely on its patent protection. In addition, the Company will be
subject to certain user fees that the FDA is authorized to collect under the
Prescription User Fees Act of 1992 for reviewing NDAs and other marketing
applications.

Among the requirements for product approval is the requirement that the
prospective manufacturer conform to GMP regulations. In complying with the GMP
regulations, manufacturers must continue to expend time, money and effort in
product, record-keeping and quality control to assure that the product meets
applicable specifications and other requirements. The FDA periodically inspects
manufacturing facilities in the United States in order to assure compliance with
applicable GMP requirements. Foreign manufacturers also are inspected by the FDA
if their drugs are marketed in the United States. Failure of the Company's
foreign supplier of the active ingredient used in the manufacture of the
Company's products or failure of the Company's manufacturer of its finished
dosage form products to comply with the GMP regulations or other FDA regulatory
requirements would have a material adverse effect on the Company's business,
financial condition or results of operations.

The product testing and approval process is likely to take a substantial
number of years and involves expenditure of substantial resources. There can be
no assurance that any approval will be granted on a timely basis, or at all. The
FDA also may require post-marketing testing and surveillance to monitor the
record of the product and continued compliance with regulatory requirements.
Upon approval, a prescription drug may only be marketed for the approved
indications in the approved dosage forms and at the approved dosage. Adverse
experiences with the product must be reported to the FDA.

In addition to the applicable FDA requirements, the Company is subject to
foreign regulatory authorities governing clinical trials and drug sales. Whether
or not FDA approval has been obtained, approval of a pharmaceutical product by
the comparable regulatory authorities of foreign countries must be obtained
prior to the commencement of marketing of the product in those countries. The
approval process varies from country to country and the time required may be
longer or shorter than that required for FDA approval.

COMPETITION

The pharmaceutical industry is subject to intense competition as well as
rapid and significant technological change. While the Company believes that
there are no other products for the treatment of periodontal disease which
operate through systemic delivery of therapeutics designed to reduce connective
tissue destruction, the Company is aware of companies that have developed or are
developing products that may compete in the same market. The Company believes
that a significant competitive factor is the relative speed with which the
Company can complete the approval process and, if Periostat is approved, supply
commercial quantities of the product to the market. In addition, the Company
expects that competition in the periodontal area will be based on other factors,
including product efficacy, safety, cost-effectiveness, ease of use, patient
discomfort, availability, price and patent position.

Many of the Company's potential competitors have substantially greater
financial, technical and human resources than the Company and may be better
equipped to develop, manufacture and market products. These companies may
develop and introduce products and processes competitive with or superior to
those of the Company.

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<PAGE> 33

EMPLOYEES

The Company historically has relied upon consultants to perform many of its
operating activities and has outsourced its manufacturing, clinical trials, NDA
preparation and other activities. As of March 31, 1996, the Company employed
five persons. Each of its management personnel has had prior experience with
pharmaceutical, biotechnology or medical products companies. The Company intends
to increase its sales and marketing staff and to continue to outsource many of
the activities which it historically has outsourced. None of the Company's
employees are covered by collective bargaining agreements. All of the Company's
employees are covered by confidentiality agreements. The Company considers
relations with its employees to be excellent. See "Management -- Indemnification
Agreements and Non-Competition, Non-Disclosure and Invention Assignment
Agreements."

PROPERTIES

The Company owns no real property. The Company leases 2,700 square feet of
office space in Newtown, Pennsylvania. The Company's facility contains all of
its executive and administrative offices. This lease expires on December 31,
1996.

LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings.

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<PAGE> 34

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Helmer P.K. Agersborg, Ph.D........ 67 Chairman of the Board
Brian M. Gallagher, Ph.D........... 48 President, Chief Executive Officer and Director
Robert A. Ashley................... 38 Vice President, Commercial Development
Nancy C. Broadbent................. 41 Chief Financial Officer, Treasurer and Secretary
Robert J. Easton(1)................ 51 Director
James E. Daverman(2)............... 46 Director
Stephen W. Ritterbush, Ph.D.(1)(2)... 49 Director
Pieter J. Schiller(2).............. 58 Director
Terence E. Winters, Ph.D.(1)....... 54 Director
</TABLE>

- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.

All executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified. All
directors hold office until the next annual meeting of stockholders and until
their successors shall have been duly elected and qualified. There are no family
relationships among any of the executive officers and directors of the Company.

Dr. Agersborg has been Chairman of the Company's Board of Directors since
March 1992 and served as its Chief Executive Officer and President until April
1994. Dr. Agersborg also serves as President and Chief Executive Officer of
Afferon Corporation, Fieldcastle, Inc. and Maret Corporation, having joined such
companies in September 1992, January 1992 and September 1994, respectively. Each
of such companies engages in pharmaceutical development. From May 1988 until his
retirement in June 1990, Dr. Agersborg was the President of Wyeth-Ayerst
Laboratories Division of American Home Products Corporation ("AHP"). Prior to
that, his responsibilities with AHP included the development of NDA submissions
with the FDA.

Dr. Gallagher joined the Company in April 1994 as President and Chief
Executive Officer and was elected to the Board of Directors in November 1994.
From 1988 until joining the Company, Dr. Gallagher was employed by Bristol-Myers
Squibb Company ("BMS") and its predecessor, Squibb Corporation, in various
executive positions including strategic planning, worldwide product and business
development and marketing. Since 1991, Dr. Gallagher was Vice President and
General Manager of Squibb Diagnostics, the in vivo imaging pharmaceutical
division where he was responsible for drug development, including filing NDAs
with the FDA and other regulatory authorities worldwide. Prior to that, Dr.
Gallagher served for ten years with E.I. DuPont de Nemours & Co. in a variety of
pharmaceutical research, development, marketing and business management
positions.

Mr. Ashley joined the Company in September 1994 as Vice President,
Commercial Development. From 1989 until joining the Company, he was employed by
BMS and its predecessor, Squibb Corporation, in various positions including
product development, commercial and business development and, most recently, as
Director, Business Development where he was responsible for the worldwide
product and market development of several new drugs. From 1979 to 1989, Mr.
Ashley held various positions at Amersham International (UK) Ltd., including
research, development, manufacturing, sales and marketing positions, as well as
worldwide product development and product launch positions.

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<PAGE> 35

Ms. Broadbent joined the Company in March 1996 as Chief Financial Officer,
Treasurer and Secretary. From October 1994 until joining the Company, Ms.
Broadbent served as Senior Vice President, Chief Financial Officer and director
of Human Genome Sciences, Inc., a biotechnology company. From January 1993 to
October 1994, she served as Vice President and Chief Financial Officer of
Cangene Corporation, a biopharmaceutical company. From January 1992 through
December 1992, Ms. Broadbent served as an independent financial consultant. From
March 1990 to December 1991, she was employed by Baring Brothers & Co., Inc.,
initially as Senior Vice President and then as Executive Director, Corporate
Finance. Prior to that, Ms. Broadbent served for nine years in corporate finance
positions with Salomon Brothers, Inc and PaineWebber Incorporated.

Mr. Easton has been a director of the Company since November 1993. He is
Managing Director of The Wilkerson Group, Inc., a major health care consulting
firm, where he has served in such capacity since 1986. Mr. Easton is a former
President of the Biomedical Marketing Association.

Mr. Daverman has been a director of the Company since November 1995. He is
a managing general partner of Marquette Venture Partners ("MVP"), a venture
capital investment company, and has been with MVP since January 1987. Mr.
Daverman is a general partner of Marquette Management Partners, the general
partner of Marquette Venture Partners, L.P. and a general partner of MG II,
L.P., the general partner of Marquette Venture Partners II, L.P. and MVP II
Affiliates Fund, L.P. He is a member of the Board of Directors of the Technology
Advisory Group of the Technology Management Office of the University of
Michigan. Mr. Daverman is a member of the Board of Directors of PCS Development
Corporation.

Dr. Ritterbush has been a director of the Company since its founding in
January 1992. He is managing general partner of Fairfax Partners/The Venture
Fund of Washington, L.P., a venture capital fund, which he co-founded in 1989.

Mr. Schiller has been a director of the Company since September 1995. He
joined Advanced Technology Ventures ("ATV"), a venture capital fund, in
September 1986 and is currently a general partner of various ATV funds. He is a
director of Anthra Pharmaceuticals, Afferon Corporation, Avicenna Systems
Corporation, HealthShare Technology, Inc. and Novoste Corporation.

Dr. Winters has been a director of the Company since its founding in
January 1992. He is a general partner of Columbine Venture Funds, a venture
capital fund, of which he was a founder in 1983. He also serves as a director of
Afferon Corporation, Maret Corporation and Melanotan Corporation.

The Board of Directors has a Compensation Committee, which approves
salaries and incentive compensation for executive officers of the Company and
which administers the Company's stock option plans, and an Audit Committee,
which reviews the results and scope of the audit and other services provided by
the Company's independent accountants.

CLINICAL ADVISORY BOARD

The Company's Clinical Advisory Board (the "CAB") consists of individuals
with recognized expertise in the fields of periodontal disease, general dental
science, biochemistry and related fields who advise the Company principally
about clinical affairs. Members of the CAB consult and meet with Company
management informally and at periodic meetings. All members of the CAB are
employed by employers other than the Company and have commitments to or
consulting or advisory agreements with other entities that limit their
availability to the Company. These companies also may be competitors of the
Company. Although members of the CAB may devote significant time and energy to
the affairs of the Company, no member of the CAB is expected to devote more than
a small portion of his time to the Company. The following persons are members of
the Company's CAB:

Timothy Blieden, D.D.S., M.S., Ph.D. Dr. Blieden is an Assistant Professor
in the Department of Periodontology at the Eastman Dental Center, University of
Rochester where he is a Clinical Instructor of Graduate Periodontics. Dr.
Blieden has conducted numerous research studies for

35
<PAGE> 36

pharmaceutical companies evaluating anti-plaque and anti-microbial oral rinse
products and host modulating agents for the treatment of periodontitis. Dr.
Blieden received his D.D.S. from Loyola University, Chicago and his M.S. and
Ph.D. in Immunology from the University of Rochester. Dr. Blieden also maintains
a private periodontal practice in Rochester.

Jack Caton, D.D.S., M.S. Dr. Caton is the Chair and Professor in the
Department of Periodontology at the Eastman Dental Center, University of
Rochester. Dr. Caton has served on the Executive Council of the American Academy
of Periodontology and recently was elected Secretary of such academy. Dr. Caton
has conducted many studies evaluating various treatment modalities for
periodontitis and other diseases involving the periodontium. Dr. Caton received
his D.D.S. from the University of California at San Francisco and his M.S. in
Periodontology from the University of Rochester. He is a Diplomate and former
Chairman of the American Board of Periodontology. Dr. Caton also maintains a
private periodontal practice in Rochester.

Sebastian Ciancio, D.D.S. Dr. Ciancio is the Chairman of the Department of
Periodontics and Clinical Professor of Pharmacology in the Schools of Medicine
and Dental Medicine at the State University of New York at Buffalo. Dr. Ciancio
has served as President, American Academy of Periodontology and Chairman,
Council on Dental Therapeutics, American Dental Association. Dr. Ciancio has
conducted many studies evaluating a variety of treatment modalities for diseases
of the periodontium. He is also a Diplomate of the American Board of
Periodontology and has authored and contributed to many dental textbooks. Dr.
Ciancio also held the rank of Captain in the U.S. Army Dental Corps. Dr. Ciancio
received his D.D.S. and Certificate in Periodontology from the State University
of New York at Buffalo.

Chester W. Douglas, D.M.D., Ph.D., M.P.H. Dr. Douglas is the Chairman of
the Department of Oral Health Policy in the School of Dental Medicine and
Professor in the Department of Epidemiology in the School of Public Health at
Harvard University. Dr. Douglas has served as President, Vice President and
Treasurer of the American Board of Public Health Association. Dr. Douglas has
over 60 publications in the areas of dental and periodontal policy and
pharmacoeconomics. Dr. Douglas received his D.M.D. from Temple University and
his Ph.D. and M.P.H. from the University of Michigan.

Lorne M. Golub, D.M.D., M.S. Dr. Golub is a Professor in the Department of
Oral Biology and Pathology and Associate Dean for Research in the School of
Dental Medicine at the State University of New York at Stony Brook. Dr. Golub is
known for his research on gingival crevicular fluid analytes and tissue
destructive proteinases in gingival collagen metabolism and the discovery of the
anti-collagenolytic activity of tetracycline analogs. Dr. Golub has won several
awards for his research including the MERIT award from the National Institute of
Dental Research, an Academic Excellence award from New York State and the
Birnberg Dental Research Award from Columbia University. He has authored over
180 publications in various dental, medical and biologic journals and most
recently, he was the co-editor of a text on collagenase inhibitors published by
the New York Academy of Sciences. Dr. Golub received his D.M.D. and M.S. from
the University of Manitoba and his Certificate in Periodontology from Harvard
University.

M. John Novak, B.D.S., L.D.S., M.S., Ph.D. Dr. Novak is Chairman and
Associate Professor of the Department of Periodontics at the University of
Pittsburgh. Dr. Novak has conducted numerous studies of treatments for diseases
of the periodontium and basic immunology and microbiology research relating to
periodontal disease. He is a Diplomate of the American Board of Periodontology.
Dr. Novak received his B.D.S. from the University of London, his L.D.S. from the
Royal College of Surgeons and his M.S. and Ph.D. in Microbiology from the
University of Rochester.

Alan M. Polson, D.D.S., D.M.D., L.D.S., M.S., M.A. Dr. Polson is currently
the Chairman of the Department of Periodontology and the D. Walter Cohen
Professor of Periodontics in the School of Dental Medicine at the University of
Pennsylvania. Dr. Polson has served as President, Periodontal Research Group,
American Association of Dental Research, and Vice President and Director of
Clinical Research, Atrix Laboratories. Dr. Polson has conducted many periodontal
research studies

36
<PAGE> 37

and is the author of over 200 publications. He also is a Diplomate of the
American Board of Periodontology. Dr. Polson received his D.D.S. from the
University of London, his D.M.D. from the University of Pennsylvania, his L.D.S.
from the Royal College of Surgeons, his M.S. in Periodontology from the
University of Rochester and his M.A. from the University of Pennsylvania.

DIRECTORS' COMPENSATION

Helmer P.K. Agersborg is paid $36,000 per year for his services as Chairman
of the Board. The Wilkerson Group, Inc. receives $1,500 per meeting for each
meeting of the Board of Directors attended by Mr. Easton. No other directors
receive cash compensation for services on the Board of Directors. The Company
provides reimbursement to directors for reasonable and necessary expenses
incurred in connection with attendance at meetings of the Board of Directors and
other Company business.

In addition, the Company granted to Dr. Agersborg options to purchase
60,625, 28,084 and 22,500 shares of Common Stock on March 1, 1992, September 1,
1993 and March 1, 1995, respectively, at exercise prices of $0.20, $0.20 and
$0.335, respectively. Of such options, an aggregate of 88,709 have been
exercised. The remaining options vested to the extent of 7,500 shares on March
1, 1996 and will vest to the extent of 7,500 shares on each of March 1, 1997 and
1998. The Company granted to Mr. Easton options to purchase 7,500 shares of
Common Stock on each of January 1, 1994 and October 1, 1995 at exercise prices
of $0.20 and $1.20, respectively. Of such options, 7,500 have been exercised and
the remaining 7,500 vest to the extent of 2,500 shares per year commencing
October 1, 1996.

1996 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

On March 22, 1996, the Board of Directors approved and, on March 29, 1996,
the stockholders adopted, the Company's Non-Employee Director Plan. The
Non-Employee Director Plan currently provides for the grant of options to
purchase a maximum of 109,000 shares of Common Stock of the Company to
non-employee directors of the Company.

Each person who is a director of the Company on the effective date of the
Company's initial public offering or who becomes a director of the Company
thereafter, and who is not also an employee or officer of the Company, shall be
granted, on the effective date or the date on which he or she becomes a
director, whichever is later, an option to purchase 10,000 shares of Common
Stock, at an exercise price per share equal to the then fair market value of the
shares. No subsequent grants are permitted to such individuals under the
Non-Employee Director Plan. All options become exercisable in five equal annual
installments commencing one year after the date of grant provided that the
optionee then remains a director at the time of vesting of the installments. The
right to exercise annual installments of options will be reduced proportionately
based on the optionee's actual attendance at directors' meetings if the optionee
fails to attend at least 80% of the directors' meetings held in any calendar
year. The term of each option will be for a period of ten years from the date of
grant, unless sooner terminated in accordance with the Non-Employee Director
Plan. Options may not be transferred except by will or by the laws of descent
and distribution or pursuant to a domestic relations order and are exercisable
to the extent vested at any time prior to the scheduled expiration date of the
option. The Non-Employee Director Plan terminates on the earlier of March 28,
2006 or at such time as all shares of Common Stock currently or hereafter
reserved for issuance shall have been issued.

EXECUTIVE COMPENSATION

The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to the Company's Chief
Executive Officer and the only other executive officer of the Company whose
aggregate cash compensation exceeded $100,000 (collectively, the "Named
Executives") during the year ended December 31, 1995.

37
<PAGE> 38

SUMMARY COMPENSATION TABLE(1)

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
---------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#)
--------------------------- ---- -------- ------- ---------------
<S> <C> <C> <C> <C>
Brian M. Gallagher, Ph.D., President and
Chief Executive Officer(2).............. 1995 $225,000 $50,000 100,000
Robert A. Ashley, Vice President,
Commercial Development.................. 1995 120,000 10,000 37,500
</TABLE>

- ---------------
(1) The costs of certain benefits are not included because they did not exceed,
in the case of each Named Executive, the lesser of $50,000 or 10% of the
total annual salary and bonus reported in the above table.
(2) In November 1994, Dr. Gallagher purchased 125,000 shares of the Company's
restricted Common Stock at $0.335 per share. Such shares are subject to
vesting and the Company's repurchase right and right of first refusal. Of
such shares, 25,000 vested immediately, an aggregate of 64,596 have vested
to date and the remaining 60,404 will vest in equal monthly portions over
the next 29 months. Pursuant to the Company's repurchase right, the Company
may repurchase any of Dr. Gallagher's unvested shares, at a purchase price
of $0.335 per share, at the time of termination of his service. Pursuant to
the Company's right of first refusal, the Company may buy back Dr.
Gallagher's vested shares at $0.335 per share, if Dr. Gallagher is
terminated for cause, and at the current market value per share, if he is
terminated for any other reason. At December 31, 1995, Dr. Gallagher held
52,092 shares of restricted Common Stock with a year-end value of $190,197
based on the value of the Common Stock as of such date ($4.00 per share),
less the purchase price per share paid for such shares ($0.335 per share).

OPTION GRANTS IN 1995

The following table sets forth information concerning individual grants of
stock options made pursuant to the Company's 1992 Plan during 1995 to each of
the Named Executives. The Company has never granted any stock appreciation
rights.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL POTENTIAL REALIZABLE VALUE
SECURITIES OPTIONS MARKET AT ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED EXERCISE PRICE ON STOCK PRICE APPRECIATION
OPTIONS TO EMPLOYEES OR BASE THE DATE FOR OPTION TERM(3)
GRANTED IN FISCAL PRICE OF GRANT EXPIRATION --------------------------
NAME (#)(1) YEAR(%)(2) ($/Sh) ($/Sh) DATE 0% ($) 5% ($) 10% ($)
---- ---------- ------------ -------- --------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brian M. Gallagher, Ph.D. ... 50,000 34% $ 1.20 N/A 10/01/05 $ -- $37,734 $ 95,625
50,000 34 0.335 $1.20 10/15/05 43,250 80,984 138,875
Robert A. Ashley............. 37,500 25 1.20 N/A 10/01/05 -- 28,300 71,718
</TABLE>

- ---------------
(1) Such options were granted pursuant to and in accordance with the Company's
1992 Plan. See "-- Stock Option Plans."
(2) Based on an aggregate of 148,000 options granted to employees in 1995,
including options granted to Named Executives.
(3) Based on a grant date fair market value of $1.20 per share. Potential
realizable value is based on the assumption that the price per share of
Common Stock appreciates at the assumed annual rate of stock appreciation
for the option term. The assumed 0%, 5% and 10% annual rates of appreciation
(compounded annually) over the term of the option are set forth in
accordance with the rules and regulations adopted by the Securities and
Exchange Commission and do not represent the Company's estimate of stock
price appreciation.

38
<PAGE> 39

The following table sets forth information concerning each exercise of
options during 1995 by each of the Named Executives and the fiscal year-end
value of unexercised in-the-money options.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT FISCAL
FISCAL YEAR-END(#) YEAR-END ($)(1)
--------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Brian M. Gallagher, Ph.D. ........ 26,667 73,333 $97,735 $ 225,515
Robert A. Ashley.................. 9,375 65,625 34,360 208,078
</TABLE>

- ---------------
(1) Based on the fair market value of the Common Stock at December 31, 1995 of
$4.00 per share, less the exercise price payable for such shares.

STOCK OPTION PLANS

The Company's 1992 Plan was adopted by the Board of Directors and approved
by the stockholders of the Company on February 20, 1992 and March 1, 1992,
respectively. A total of 288,500 shares of Common Stock currently are reserved
for issuance upon exercise of options granted under the 1992 Plan.

Pursuant to the 1992 Plan, on March 1, 1996, the Company granted to Nancy
C. Broadbent, the Company's Chief Financial Officer, an option to purchase
60,000 shares of Common Stock of the Company at an exercise price of $2.00 per
share. Upon the grant date, 20% of such shares vested and an additional 20% will
vest in each year commencing on the first anniversary of the date of grant.

The 1996 Stock Plan was adopted by the Board of Directors and approved by
the stockholders of the Company on March 22, 1996 and March 29, 1996,
respectively. A total of 750,000 shares are reserved for issuance upon the
exercise of options and/or stock purchase rights granted under the 1996 Stock
Plan, none of which have been granted. Those eligible to receive stock option
grants or stock purchase rights under the 1996 Stock Plan include employees,
non-employee directors and consultants. The 1996 Stock Plan is administered by
the Compensation Committee of the Board of Directors of the Company, which is
comprised solely of outside directors.

Subject to the provisions of the 1996 Stock Plan, the administrator of the
1996 Stock Plan has the discretion to determine the optionees and/or grantees,
the type of options to be granted (incentive stock options ("ISOs") or
non-qualified stock options ("NQSOs")), the vesting provisions, the terms of the
grants and such other related provisions as are consistent with the 1996 Stock
Plan. The exercise price of an ISO may not be less than the fair market value
per share of the Common Stock on the date of grant or, in the case of an
optionee who beneficially owns 10% or more of the outstanding capital stock of
the Company, not less than 110% of the fair market value per share on the date
of grant. The exercise price of a NQSO may not be less than 85% of the fair
market value per share of the Common Stock on the date of grant or, in the case
of an optionee who beneficially owns 10% or more of the outstanding capital
stock of the Company, not less than 110% of the fair market value per share on
the date of grant. The purchase price of shares issued pursuant to stock
purchase rights may not be less than 50% of the fair market value of such shares
as of the offer date of such rights.

The options terminate not more than ten years from the date of grant,
subject to earlier termination on the optionee's death, disability or
termination of employment with the Company, but provide that the term of any
options granted to a holder of more than 10% of the outstanding shares of
capital stock may be no longer than five years. Options are not assignable or
otherwise transferable except by will or the laws of descent and distribution.
In the event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets in
which the successor corporation does not assume outstanding options or issue
equivalent options, the Board of Directors of the Company is required to provide
accelerated vesting of outstanding options. The 1996 Stock Plan terminates on
March 21, 2006.

39
<PAGE> 40

INDEMNIFICATION AGREEMENTS AND NON-COMPETITION, NON-DISCLOSURE AND INVENTION
ASSIGNMENT AGREEMENTS

The Company has executed indemnification agreements with each of its
executive officers and directors pursuant to which the Company has agreed to
indemnify such parties to the full extent permitted by law, subject to certain
exceptions, if such party becomes subject to an action because such party is a
director, officer, employee, agent or fiduciary of the Company.

Each of the Company's employees has agreed to maintain the confidentiality
of Company information, to assign inventions to the Company and, for a period of
two years after termination of employment, not to solicit any person who is
employed by the Company or was employed by the Company at any time during the
year prior to the termination of such employee.

In addition, each of Dr. Gallagher, Ms. Broadbent and Mr. Ashley have
agreed that during the term of his or her employment and for a period of two
years thereafter, such person will not directly or indirectly provide services
to or for any business engaged in research regarding the development,
manufacture, testing, marketing or sale of collagenase inhibiting drugs for
application in periodontal disease or any other application which, during the
period of such person's employment with the Company, is either marketed or in
advanced clinical development by the Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee consists of Robert J. Easton, Stephen W.
Ritterbush, Ph.D. and Terence E. Winters, Ph.D. There are no Compensation
Committee Interlocks.

In January and November 1992, the Company sold an aggregate of 3,133,000
shares of Series A Redeemable Preferred Stock at a price of $1.00 per share. In
September and November 1993, the Company sold an aggregate of 1,946,268 shares
of Series B Redeemable Preferred Stock at a price of $1.675 per share. In
September and November 1995, the Company sold an aggregate of 5,318,980 shares
of Series C Redeemable Preferred Stock at a price of $2.00 per share. All shares
of Series A, Series B and Series C Redeemable Preferred Stock outstanding as of
the consummation of this offering will be automatically converted into shares of
Common Stock on a one-for-two basis. The purchasers of the Series A, Series B
and Series C Redeemable Preferred Stock included the following members of the
Compensation Committee and entities affiliated with such persons:

<TABLE>
<CAPTION>
NUMBER OF COMMON STOCK
EQUIVALENTS(1)
----------------------------------
SERIES A SERIES B SERIES C
-------- -------- --------
<S> <C> <C> <C>
Columbine Venture Fund, II, L.P. (Dr. Winters).............. 416,667 238,806 313,855
Longbow Partners (Mr. Easton)............................... -- -- 14,366
Fairfax Partners/The Venture Fund of Washington, L.P. (Dr.
Ritterbush)............................................... 416,667 29,850 --
</TABLE>

- ---------------
(1) Relates only to shares attributable to the issuance and sale by the Company
of shares of Series A, Series B and Series C Redeemable Preferred Stock and
excludes other issuances and sales to such stockholders, if any, since the
Company's inception. See "Principal Stockholders."

The shares of Common Stock issuable upon conversion of the Series A, Series
B and Series C Redeemable Preferred Stock are entitled to certain registration
rights and certain rights to participate in certain future offerings undertaken
by the Company. See "Description of Capital Stock -- Registration Rights of
Certain Holders and Rights of Participation in Future Offerings."

Dr. Ritterbush formerly served, without compensation, as Treasurer of the
Company.

Mr. Easton received an option to purchase 7,500 shares of Common Stock on
each of January 1, 1994 and October 1, 1995 at exercise prices of $0.20 and
$1.20, respectively. See "--Directors' Compensation."

40
<PAGE> 41

CERTAIN TRANSACTIONS

In January and November 1992, the Company sold an aggregate of 3,133,000
shares of Series A Redeemable Preferred Stock at a price of $1.00 per share. In
September and November 1993, the Company sold an aggregate of 1,946,268 shares
of Series B Redeemable Preferred Stock at a price of $1.675 per share. In
September and November 1995, the Company sold an aggregate of 5,318,980 shares
of Series C Redeemable Preferred Stock at a price of $2.00 per share. All shares
of Series A, Series B and Series C Redeemable Preferred Stock outstanding as of
the consummation of this offering will be automatically converted shares of
Common Stock on a one-for-two basis. The purchasers of the Series A, Series B
and Series C Redeemable Preferred Stock included the following 5% stockholders,
directors and entities affiliated with directors:

<TABLE>
<CAPTION>
NUMBER OF COMMON STOCK
EQUIVALENTS(1)
----------------------------------
SERIES A SERIES B SERIES C
-------- -------- --------
<S> <C> <C> <C>
DIRECTORS AND ENTITIES AFFILIATED WITH DIRECTORS
Advanced Technology Ventures III, L.P. (Mr. Schiller)....... -- 223,880 166,419
Marquette Venture Partners II, L.P. and MVP II Affiliates
Fund, L.P. (Mr. Daverman)................................. 166,667 447,760 301,886
OTHER 5% STOCKHOLDERS
Johnson & Johnson Development Corporation................... 486,500 -- 317,829
Innocal, L.P................................................ -- -- 375,000
Delphi Ventures III, L.P. and Delphi Investments III,
L.P. ..................................................... -- -- 625,000
</TABLE>

For information with respect to Mr. Easton and Drs. Ritterbush and Winters,
each a member of the Compensation Committee, see "Management -- Compensation
Committee Interlocks and Insider Participation."

The Board of Directors of the Company has adopted a policy requiring that
any future transactions between the Company and its officers, directors,
principal stockholders and their affiliates be on terms no less favorable to the
Company than could be obtained from unrelated third parties and that any such
transactions be approved by a majority of the disinterested members of the
Company's Board of Directors.

41
<PAGE> 42

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1996, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by (i) each
person who is known to the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's directors and
Named Executives, and (iii) all current directors and executive officers of the
Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
NUMBER OF SHARES OF SHARES(2)
COMMON STOCK --------------------------------
BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING
--------------------- --------------- --------------
<S> <C> <C> <C>
Columbine Venture Fund II, L.P.
6155 N. Scottsdale Road, Suite 100
Scottsdale, Arizona 85250................ 969,328 17.6% 12.9%
Marquette Venture Partners II, L.P. and MVP
II Affiliates Fund, L.P.
520 Lake Cook Road, Suite 450
Deerfield, Illinois 60015................ 916,313(3) 16.6 12.2
Johnson & Johnson Development Corporation
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08937.......... 804,329 14.6 10.7
Delphi Ventures III, L.P. and
Delphi Investments III, L.P.
3000 Sand Hill Road
Building 1, Suite 135
Menlo Park, California 94025............. 625,000(4) 11.3 8.3
Fairfax Partners/The Venture Fund of
Washington, L.P.
1568 Spring Hill Road, Suite 200
McLean, Virginia 22102................... 446,517 8.1 5.9
Advanced Technology Ventures III, L.P.
10 Post Office Square
Boston, Massachusetts 02109.............. 390,299 7.1 5.2
Innocal, L.P.
Park 80 West/Plaza One
Saddle Brook, New Jersey 07662........... 375,000 6.8 5.0
Brian M. Gallagher, Ph.D................... 155,834(5) 2.8 2.1
Robert A. Ashley........................... 9,375(6) * *
Helmer P.K. Agersborg, Ph.D................ 96,209(7) 1.7 1.3
James E. Daverman.......................... 916,313(8) 16.6 12.2
Robert J. Easton........................... 29,366(9) * *
Stephen W. Ritterbush, Ph.D................ 446,517(10) 8.1 5.9
Pieter J. Schiller......................... 390,299(11) 7.1 5.2
Terence E. Winters, Ph.D................... 969,328(12) 17.6 12.9
All current directors and executive
officers as a group (9 persons).......... 3,025,241(13) 54.3 39.9
</TABLE>

- ---------------
* Less than one percent
(1) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons named in the table have sole
voting and investment power with respect to all shares.
(2) Applicable percentage of ownership is based on 5,514,283 shares of Common
Stock outstanding on March 31, 1996 and 7,514,283 shares of Common Stock
outstanding after the completion of this offering.
(3) Includes 890,860 shares and 25,453 shares owned by Marquette Venture
Partners II, L.P. and MVP II Affiliates Fund, L.P., respectively.
(4) Includes 613,946 shares and 11,054 shares owned by Delphi Ventures III,
L.P. and Delphi Investments III, L.P., respectively.
(5) Of such shares, 125,000 are subject to certain rights of first refusal held
by the Company, of which 60,404 also are subject to repurchase by the
Company. See "Management -- Executive Compensation." Includes 30,834 shares
of Common Stock underlying options which are exercisable as of March 31,
1996 or 60 days after such date.

42
<PAGE> 43

(6) Includes 9,375 shares of Common Stock underlying options which are
exercisable as of March 31, 1996 or 60 days after such date.
(7) Includes 7,500 shares of Common Stock underlying options which are
exercisable as of March 31, 1996 or 60 days after such date.
(8) James E. Daverman is co-founding general partner of Marquette Venture
Partners II, L.P. and MVP II Affiliates Fund, L.P. and, as such, has the
power to vote or direct the vote of and to dispose of or direct the
disposition of the shares owned by Marquette Venture Partners II, L.P. and
MVP II Affiliates Fund, L.P. Mr. Daverman expressly disclaims beneficial
ownership of such shares, except as to his proportionate interest in
Marquette Venture Partners II, L.P. and MVP II Affiliates Fund, L.P.
(9) Includes 20,278 shares of Common Stock held by Longbow Partners of which
Robert J. Easton is a general partner. Mr. Easton expressly disclaims
beneficial ownership of such shares, except as to his proportionate
interest in Longbow Partners.
(10) Stephen W. Ritterbush, Ph.D. is a general partner of Fairfax Partners/The
Venture Fund of Washington, L.P. and, as such, has the power to vote or
direct the vote of and to dispose of or direct the disposition of the
shares owned by Fairfax Partners/The Venture Fund of Washington, L.P. Dr.
Ritterbush expressly disclaims beneficial ownership of such shares, except
as to his proportionate interest in Fairfax Partners/The Venture Fund of
Washington, L.P.
(11) Pieter J. Schiller is a general partner of Advanced Technology Ventures
III, L.P. and, as such, has the power to vote or direct the vote of and to
dispose of or direct the disposition of the shares owned by Advanced
Technology Ventures III, L.P. Mr. Schiller expressly disclaims beneficial
ownership of such shares, except as to his proportionate interest in
Advanced Technology Ventures III, L.P.
(12) Terence E. Winters, Ph.D. is a general partner of Columbine Venture Fund
II, L.P. and, as such, has the power to vote or direct the vote of and to
dispose of or direct the disposition of the shares owned by Columbine
Venture Fund II, L.P. Dr. Winters expressly disclaims beneficial ownership
of such shares, except as to his proportionate interest in Columbine
Venture Fund II, L.P.
(13) See Notes 5 through 12. Also includes 12,000 shares of Common Stock
underlying options which are exercisable as of March 31, 1996 or 60 days
after such date, held by an executive officer of the Company not
individually listed.

43
<PAGE> 44

DESCRIPTION OF CAPITAL STOCK

At the closing of this offering, the Company's authorized capital stock
will consist of 25,000,000 shares of Common Stock, $0.01 par value, and
5,000,000 shares of undesignated Preferred Stock, $0.01 par value (the
"Preferred Stock").

COMMON STOCK

Holders of shares of Common Stock are entitled to one vote for each share
held of record on matters to be voted on by the stockholders of the Company.
Holders of shares of Common Stock will be entitled to receive dividends, subject
to the senior rights of preferred stockholders, if any, when, as and if declared
by the Board of Directors (see "Dividend Policy") and to share ratably in the
assets of the Company legally available for distribution to its stockholders in
the event of the liquidation, dissolution or winding-up of the Company. Holders
of Common Stock have no preemptive, subscription, redemption or conversion
rights. All of the issued and outstanding shares of Common Stock are, and all
shares of Common Stock to be sold in this offering will be, duly authorized,
validly issued, fully paid and nonassessable.

At March 31, 1996, there were 5,514,283 shares of Common Stock issued and
outstanding and held of record by 26 stockholders and options to purchase an
aggregate of 288,500 shares of Common Stock were outstanding.

PREFERRED STOCK

The Company's Board of Directors may without further action by the
Company's stockholders, from time to time, direct the issuance of shares of
Preferred Stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. The holders of Preferred
Stock would normally be entitled to receive a preference payment in the event of
any liquidation, dissolution or winding-up of the Company before any payment is
made to the holders of the Common Stock. The Company does not presently intend
to issue any series of Preferred Stock.

The overall effect of the ability of the Company's Board of Directors to
issue Preferred Stock may be to render more difficult the accomplishment of
mergers or other takeover or change-in-control attempts. To the extent that this
ability has this effect, removal of the Company's incumbent Board of Directors
and management may be rendered more difficult. Further, this may have an adverse
impact on the ability of stockholders of the Company to participate in a tender
or exchange offer for the Common Stock and in so doing diminish the market value
of such stock. See "Risk Factors--Control by Management and Existing
Stockholders" and "--Anti-takeover Effect of Certain Charter and By-law
Provisions and Delaware Law."

REGISTRATION RIGHTS OF CERTAIN HOLDERS AND RIGHTS OF PARTICIPATION IN FUTURE
OFFERINGS

In September 1995, the Company and the holders of the Company's Series A,
Series B and Series C Redeemable Preferred Stock entered into a Registration
Rights Agreement (the "Rights Agreement") pursuant to which the Company has
granted certain registration rights to such stockholders. Pursuant to the Rights
Agreement, at any time beginning six months after the effective date of this
offering, the holders of at least a majority of the Common Stock issued upon the
conversion of the Series A, Series B and Series C Redeemable Preferred Stock
(the "Registrable Securities") have the right, subject to certain restrictions
set forth in the Rights Agreement, to require that the Company register the
Registrable Securities requested by such holders at the Company's expense (on no
more than two occasions) on either a Form S-1, Form S-2 or Form S-3 Registration
Statement under the Securities Act. The Company is not, however, required to
register any Registrable Securities unless such shares represent at least 10% of
the Company's outstanding shares of Common Stock, or, if less than 10%, if the
anticipated aggregate offering price exceeds $1,000,000.

After the Company has qualified for the use of Form S-3 under the
Securities Act, the holders of Registrable Securities have the right to an
unlimited number of registrations on such form. The Company is not, however,
required to effect such a registration unless the requesting holders reasonably
anticipate having an aggregate disposition price of at least $500,000.

44
<PAGE> 45

Also pursuant to the Rights Agreement, if, at any time during the
seven-year period commencing on the effective date of this offering, the Company
proposes to register any of its Common Stock under the Securities Act for sale
to the public, the holders of the Registrable Securities have unlimited
piggyback registration rights at the Company's expense, subject to certain
restrictions set forth in the Rights Agreement.

Also in September 1995, the Company granted to the holders of Redeemable
Preferred Stock certain rights to participate in certain future offerings
undertaken by the Company. Such rights to participate require that, with certain
exceptions including but not limited to an underwritten public offering, any
time the Company proposes to issue, sell or exchange, or reserve therefor, any
securities, the Company must first offer to sell to each of the holders of
Redeemable Preferred Stock their respective pro rata share of such securities at
a price and on terms identical to the price and terms of the securities proposed
to be issued, sold or exchanged in the applicable offering.

LIMITATION OF DIRECTOR LIABILITY

The Certificate of Incorporation of the Company limits the liability of
directors of the Company to the Company or its stockholders to the fullest
extent permitted by Delaware law. Specifically, directors of the Company will
not be personally liable for money damages for breach of a duty as a director,
except for liability: (i) for any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the Delaware General Corporation Law, which relates to unlawful
declarations of dividends or other distributions of assets to stockholders or
the unlawful purchase of shares of the corporation; or (iv) for any transaction
from which the director derived an improper personal benefit. See
"Management -- Indemnification Agreements and Non-Competition, Non-Disclosure
and Invention Assignment Agreements."

ANTI-TAKEOVER PROVISIONS

The Company is governed by the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute prohibits
a publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. A "business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more of
the corporation's voting stock. In addition, the Company is authorized to issue
up to 5,000,000 shares of Preferred Stock, with rights, preferences and other
designations, including voting rights, to be determined by the Board of
Directors. Furthermore, the Certificate of Incorporation also provides that: (i)
the affirmative vote of the holders of at least 80% of the voting power of all
outstanding shares of the capital stock of the Company shall be required to
adopt, amend or repeal any provision of the bylaws of the Company; (ii)
stockholders of the Company may not take any action by written consent; (iii)
special meetings of stockholders may be called only by the President, the
Chairman of the Board or a majority of the Board of Directors and business
transacted at any such special meeting shall be limited to matters relating to
the purposes set forth in the notice of such special meeting; (iv) the Board of
Directors, when evaluating an offer related to a tender or exchange offer or
other business combination, is authorized to give due consideration to any
relevant factors, including the social, legal and economic effects upon
employees, suppliers, customers, creditors, the community in which the Company
conducts its business, and the economy of the state, region and nation; and (v)
the affirmative vote of the holders of at least 75% of the voting power of all
outstanding shares of the capital stock of the Company shall be required to
amend the above provisions or the limitation on director liability. The Delaware
statute, the undesignated authorized Preferred Stock and the foregoing
provisions of the Certificate of Incorporation may discourage certain types of
transactions involving an actual or potential change in control of the Company
and could have the effect of delaying, deterring or preventing a change in
control of the Company. In addition, in the

45
<PAGE> 46

event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets in
which the successor corporation does not assume outstanding options or issue
equivalent options, the Board of Directors of the Company is required to provide
accelerated vesting of outstanding options.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.

46
<PAGE> 47

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have outstanding
7,514,283 shares of Common Stock. Of these shares, the 2,000,000 shares sold in
this offering will be freely transferable by persons other than "affiliates" of
the Company without restriction or further registration under the Securities
Act. The remaining 5,514,283 shares of Common Stock outstanding are "restricted
securities" (the "Restricted Shares") within the meaning of Rule 144 under the
Securities Act and may not be sold in the absence of registration under the
Securities Act unless an exemption from registration is available, including an
exemption afforded by Rule 144.

Current stockholders holding in the aggregate 5,514,283 shares of Common
Stock have entered into "lock-up" agreements with a Representative of the
Underwriters, providing that, subject to certain exceptions, they will not
offer, sell or otherwise dispose of any shares of Common Stock for a period of
180 days after the date of this Prospectus without the prior written consent of
Alex. Brown & Sons Incorporated, acting as a Representative of the Underwriters.
Following the expiration of the "lock-up" period, approximately 2,827,051 of the
Restricted Shares will be eligible for resale in the public market pursuant to
Rule 144, subject to certain limitations described below. All remaining shares
of Restricted Shares will become eligible for sale over a period of less than
two years and could be sold earlier if the holders exercise any available
registration rights. The holders of 5,199,124 shares of Common Stock have the
right in certain circumstances to require the Company to register their shares
under the Securities Act for resale to the public.

Rule 144, as currently in effect, provides that an affiliate of the Company
or a person (or persons whose sales are aggregated) who has beneficially owned
Restricted Shares for at least two years but less than three years is entitled
to sell, commencing 90 days after the date of this Prospectus, within any
three-month period, a number of shares that does not exceed the greater of one
percent of the then outstanding shares of Common Stock (75,143 shares
immediately after this offering) or the average weekly trading volume in the
Common Stock during the four calendar weeks preceding such sale. Sales under
Rule 144 also are subject to certain manner-of-sale provisions, notice
requirements and the availability of current public information about the
Company. However, a person who is not an "affiliate" of the Company at any time
during the three months preceding a sale, and who has beneficially owned
Restricted Shares for at least three years, is entitled to sell such shares
under Rule 144 without regard to the limitations described above.

The Securities and Exchange Commission has proposed certain amendments to
Rule 144 that would reduce by one year the holding period required for shares
subject to Rule 144 to become eligible for resale in the public market. This
proposal, if adopted, would substantially increase the number of shares of
Common Stock eligible for immediate resale following the expiration of the
lock-up agreements, with a potential adverse effect on the market price. No
assurance can be given concerning whether or when such proposal will be adopted
by the Securities and Exchange Commission.

As of the date of this Prospectus, there were outstanding options to
purchase an aggregate of 288,500 shares of Common Stock. All optionholders have
entered into "lock-up" agreements. Giving effect to vesting provisions limiting
the exercisability of all of the outstanding options and the "lock-up" period,
an additional 140,218 shares of Common Stock will be eligible for immediate
resale or issuable upon exercise of vested options, subject to compliance with
Rules 144 and 701 under the Securities Act (relating to the sale of shares
issuable under certain compensatory stock plans).

Since there has been no public market for shares of the Common Stock prior
to this offering, the Company is unable to predict the effect that sales made
pursuant to Rules 144 or 701, or otherwise, may have on the prevailing market
price at such times for shares of the Common Stock. Nevertheless, sales of a
substantial amount of the Common Stock in the public market, or the perception
that such sales could occur, could adversely affect market prices. See "Risk
Factors--Shares Eligible for Future Sale and Potential Adverse Effect on Market
Price."

47
<PAGE> 48

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and Volpe, Welty & Company, have severally
agreed to purchase from the Company the following respective numbers of shares
of Common Stock at the initial public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ---------
<S> <C>
Alex. Brown & Sons Incorporated.................................................. 720,000
Volpe, Welty & Company........................................................... 480,000
Hambrecht & Quist LLC............................................................ 80,000
Montgomery Securities............................................................ 80,000
Morgan Stanley & Co. Incorporated................................................ 80,000
Oppenheimer & Co., Inc. ......................................................... 80,000
Dominick & Dominick, Incorporated................................................ 60,000
Johnston, Lemon & Co. Incorporated............................................... 60,000
Josephthal Lyon & Ross Incorporated.............................................. 60,000
C.L. King & Associates, Inc. .................................................... 60,000
Parker/Hunter Incorporated....................................................... 60,000
Scott & Stringfellow, Inc. ...................................................... 60,000
Van Kasper & Company............................................................. 60,000
H.C. Wainwright & Co., Inc. ..................................................... 60,000
---------
Total............................................................................ 2,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
of such shares are purchased.

The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $0.40 per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share to certain other dealers. After the
initial public offering, the offering price and other selling terms may be
changed by the Representatives of the Underwriters.

The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 2,000,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,000,000 shares are being offered.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.

Stockholders of the Company, holding in the aggregate 5,514,283 shares of
Common Stock and options to purchase 112,476 shares of Common Stock, have agreed
not to offer, sell or otherwise

48
<PAGE> 49

dispose of any of such Common Stock for a period of 180 days after the date of
this Prospectus without the prior consent of Alex. Brown & Sons Incorporated.
See "Shares Eligible for Future Sale."

Certain officers of Volpe, Welty & Company own in the aggregate 8,750
shares of Common Stock of the Company.

The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.

Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock has been determined by negotiation between the Company and the
Representatives of the Underwriters. Among the factors considered in such
negotiations were prevailing market conditions, the results of operations of the
Company in recent periods, the market capitalizations and stages of development
of other companies which the Company and the Representatives of the Underwriters
believed to be comparable to the Company, estimates of the business potential of
the Company, the present state of the Company's development and other factors
deemed relevant.

LEGAL MATTERS

The validity of the issuance of the Common Stock offered hereby will be
passed upon for the Company by Buchanan Ingersoll, Princeton, New Jersey.
Certain legal matters in connection with the offering will be passed upon for
the Underwriters by Brobeck, Phleger & Harrison LLP, New York, New York.

EXPERTS

The financial statements of CollaGenex Pharmaceuticals, Inc. (A Development
Stage Enterprise) as of December 31, 1994 and 1995 and for each of the years in
the three-year period ended December 31, 1995 and for the period from January
10, 1992 (inception) to December 31, 1995 have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.

The statements in this Prospectus under the captions "Risk
Factors--Dependence on Patents, License and Proprietary Rights; Enforcement of
Rights" and "Business--Patents, Trade Secrets and Licenses" and other references
herein concerning patents and proprietary rights have been examined and passed
upon for the Company by Hoffmann & Baron, Jericho, New York, and are included in
reliance upon such examination and upon the authority of such counsel as experts
on patents and proprietary rights.

On January 19, 1996, the Company selected KPMG Peat Marwick LLP to act as
independent accountants for the Company and informed the prior auditors, the
Company's independent accountants since January 1994, of its decision. The
former auditors' report on the Company's financial statements for the period
from January 10, 1992 (inception) to December 31, 1993 does not cover the
financial statements of the Company included in this Prospectus. In connection
with its audit for the period from January 10, 1992 (inception) to December 31,
1993, there were no disagreements with the prior auditors on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedures. The prior auditors' report on the Company's financial
statements for the period from January 10, 1992 (inception) to December 31, 1993
contained no adverse opinion or disclaimer of opinion and was not modified or
qualified as to uncertainty, audit scope, or accounting principles. The decision
to change accountants was approved by the Board of the Directors of the Company.
The prior auditors have furnished the Company with a letter

49
<PAGE> 50

addressed to the Securities and Exchange Commission (the "Commission") stating
their agreement with the above statements.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act, with respect to the
shares of Common Stock offered hereby. This Prospectus, which forms a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement and the exhibits and schedules filed therewith. For
further information with respect to the Company and the shares of Common Stock
offered hereby, reference is made to the Registration Statement and to such
exhibits and schedules filed therewith. Statements contained herein as to the
content of any contract or other document are not necessarily complete and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, and each such statement shall
be deemed qualified in its entirety by such reference.

The Registration Statement and the exhibits and schedules thereto may be
inspected without charge at the principal office of the Commission at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such documents may be obtained from the Public
Reference Section of the Commission, at prescribed rates.

50
<PAGE> 51

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report......................................................... F-2
Financial Statements:
Balance Sheets as of December 31, 1994 and 1995.................................... F-3
Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and
for the period from January 10, 1992 (inception) to December 31, 1995........... F-4
Statements of Stockholders' Equity (Deficit) for the period from January 10, 1992
(inception) to December 31, 1992 and for the years ended December 31, 1993, 1994
and 1995........................................................................ F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and
for the period from January 10, 1992 (inception) to December 31, 1995........... F-6
Notes to Financial Statements...................................................... F-7
Condensed Financial Statements (unaudited):
Condensed Balance Sheets as of March 31, 1996 (unaudited).......................... F-17
Condensed Statements of Operations for the three months ended March 31, 1995 and
1996 and for the period from January 10, 1992 (inception) to March 31, 1996
(unaudited)..................................................................... F-18
Condensed Statements of Stockholders' Equity (Deficit) for the period from January
10, 1992 (inception) to December 31, 1992, for the years ended December 31,
1993, 1994 and 1995 and for the three months ended March 31, 1996 (unaudited)... F-19
Condensed Statements of Cash Flows for the three months ended March 31, 1995 and
1996 and for the period from January 10, 1992 (inception) to March 31, 1996
(unaudited)..................................................................... F-20
Notes to Condensed Financial Statements (unaudited)................................ F-21
</TABLE>

F-1
<PAGE> 52

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
CollaGenex Pharmaceuticals, Inc.:

We have audited the accompanying balance sheets of CollaGenex
Pharmaceuticals, Inc. (A Development Stage Enterprise) as of December 31, 1994
and 1995, and the related statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1995 and for the period from January 10, 1992 (inception) to
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CollaGenex Pharmaceuticals,
Inc. (A Development Stage Enterprise) as of December 31, 1994 and 1995, and the
results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 1995 and for the period from January 10,
1992 (inception) to December 31, 1995, in conformity with generally accepted
accounting principles.

KPMG Peat Marwick LLP

Princeton, New Jersey
March 29, 1996, except as to the first paragraph of Note 14,
which is as of April 10, 1996, and the third paragraph
of Note 6, and the fifth and last paragraph of Note 14,
which are as of June 19, 1996

F-2
<PAGE> 53

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

BALANCE SHEETS
DECEMBER 31, 1994 AND 1995

PRO FORMA
1995
1994 1995 (NOTE 14)
----------- ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 617,384 $ 5,806,435 $ 5,806,435
Prepaid expenses................................ -- 7,282 7,282
----------- ------------ ------------
Total current assets.......................... 617,384 5,813,717 5,813,717
Equipment, net (note 3)........................... 5,611 14,748 14,748
Other assets...................................... 5,188 11,520 11,520
----------- ------------ ------------
Total assets.................................. $ 628,183 $ 5,839,985 $ 5,839,985
=========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable (note 5)....................... $ 532,274 $ 17,672 $ 17,672
Accrued expenses (note 4)....................... 166,639 494,855 494,855
----------- ------------ ------------
Total current liabilities..................... 698,913 512,527 512,527
----------- ------------ ------------
Mandatorily redeemable convertible preferred stock
(at redemption value which includes accreted
dividends of $1,117,345 and $1,877,146 in 1994
and 1995, respectively) (notes 6, 7 and 10);
(converts into 5,199,124 pro forma common shares
upon consummation of the offering contemplated
herein):
Series A convertible preferred stock, $0.01 par
value; 3,500,000 shares authorized, 3,133,000
shares issued and outstanding................. 3,887,843 4,169,813 --
Series B convertible preferred stock, $0.01 par
value; 2,000,000 shares authorized, 1,946,268
shares issued and outstanding................. 3,622,502 3,915,902 --
Series C convertible preferred stock, $0.01 par
value; 5,350,000 shares authorized, 5,318,980
shares issued and outstanding in 1995 (none in
1994)......................................... -- 10,822,391 --
----------- ------------ ------------
7,510,345 18,908,106 --
----------- ------------ ------------
Common stockholders' equity (deficit) (notes 8 and
10):
Common stock, $0.01 par value; 6,725,000 shares
authorized in 1994 and 1995, 287,417 and
312,659 shares issued and outstanding in 1994
and 1995, respectively; (5,511,783 pro forma
shares upon conversion)....................... 2,875 3,127 55,118
Additional paid-in capital (deficit) (note
10)........................................... (1,032,025) (1,743,105) 17,113,010
Deferred compensation (note 8).................. -- (20,183) (20,183)
Deficit accumulated during the development
stage......................................... (6,551,925) (11,820,487) (11,820,487)
----------- ------------ ------------
Common stockholders' equity (deficit)......... (7,581,075) (13,580,648) 5,327,458
----------- ------------ ------------
Commitments (notes 10, 11, 13 and 14)
Total liabilities and stockholders' equity
(deficit)................................... $ 628,183 $ 5,839,985 $ 5,839,985
=========== ============ ============
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE> 54

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 10, 1992 (INCEPTION)
TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
JANUARY 10,
1992
(INCEPTION)
YEARS ENDED DECEMBER 31, TO
--------------------------------------- DECEMBER 31,
1993 1994 1995 1995
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues.............................. $ -- $ -- $ -- $ --
----------- ----------- ----------- ------------
Operating expenses incurred in the
development stage:
Research and development (notes
10 and 13)..................... 1,913,526 1,927,991 3,635,374 8,607,695
General and administrative (note
5)............................. 612,706 792,961 1,547,997 3,286,673
----------- ----------- ----------- ------------
Total operating expenses.... 2,526,232 2,720,952 5,183,371 11,894,368
Other income (expense):
Interest income..................... 43,475 67,487 58,917 217,989
Interest expense (note 7)........... -- -- (144,108) (144,108)
----------- ----------- ----------- ------------
43,475 67,487 (85,191) 73,881
----------- ----------- ----------- ------------
Net loss.............................. $(2,482,757) $(2,653,465) $(5,268,562) $(11,820,487)
=========== =========== =========== ============
Accretion of undeclared dividends
attributable to mandatorily
redeemable convertible preferred
stock............................ $ 351,072 $ 575,370 $ 759,801 $ 1,877,146
=========== =========== =========== ============
Net loss allocable to common
stockholders........................ $(2,833,829) $(3,228,835) $(6,028,363) $(13,697,633)
=========== =========== =========== ============
Pro forma net loss per share (note 2)
(unaudited)......................... $ (1.10)
===========
Shares used in computing pro forma net
loss per share (note 2)
(unaudited)......................... 4,807,876
===========
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE> 55

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JANUARY 10, 1992 (INCEPTION) TO DECEMBER 31, 1992
AND FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

<TABLE>
<CAPTION>
COMMON STOCK DEFICIT
----------------------- ADDITIONAL ACCUMULATED DURING COMMON
NUMBER OF PAR PAID-IN DEFERRED THE DEVELOPMENT STOCKHOLDERS'
SHARES VALUE CAPITAL COMPENSATION STAGE EQUITY (DEFICIT)
--------- ----------- ----------- ------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock in
exchange for technology license
in January 1992, at inception
(note 10)...................... 54,552 546 10,364 $ -- $ -- $ 10,910
Issuance of common stock in
exchange for consulting
services (note 8).............. 7,500 75 14,925 -- -- 15,000
Issuance of common stock in
exchange for technology license
in November 1992 (note 10)..... 24,396 244 4,635 -- -- 4,879
Accretion of undeclared dividends
on mandatorily redeemable
convertible preferred stock
(note 6)....................... -- -- (190,903) -- -- (190,903)
Net loss......................... -- -- -- -- (1,415,703) (1,415,703)
------- ----------- ----------- -------- ------------ ------------
Balance, December 31, 1992......... 86,448 865 (160,979) -- (1,415,703) (1,575,817)
Accretion of undeclared dividends
on mandatorily redeemable
convertible preferred stock
(note 6)....................... -- -- (351,072) -- -- (351,072)
Net loss......................... -- -- -- -- (2,482,757) (2,482,757)
------- ----------- ----------- -------- ------------ ------------
Balance, December 31, 1993......... 86,448 865 (512,051) -- (3,898,460) (4,409,646)
Exercise of common stock options
in September through November
1994 ($0.20-$0.335 per share)
(note 8)....................... 75,969 760 14,771 -- -- 15,531
Issuance of common shares to an
executive officer at $0.335 per
share in November 1994
(note 8)....................... 125,000 1,250 40,625 -- -- 41,875
Accretion of undeclared dividends
on mandatorily redeemable
convertible preferred stock
(note 6)....................... -- -- (575,370) -- -- (575,370)
Net loss......................... -- -- -- -- (2,653,465) (2,653,465)
------- ----------- ----------- -------- ------------ ------------
Balance, December 31, 1994......... 287,417 2,875 (1,032,025) -- (6,551,925) (7,581,075)
Exercise of common stock options
in February through April 1995
($0.20 per share) (note 8)..... 20,242 202 3,846 -- -- 4,048
Deferred compensation resulting
from:
Grant of options (note 8)...... -- -- 43,250 (43,250) -- --
Amortization of deferred
compensation (note 8)........ -- -- -- 23,067 -- 23,067
Exercise of common stock options
in November 1995 ($0.335 per
share) (note 8)................ 5,000 50 1,625 -- -- 1,675
Accretion of undeclared dividends
on mandatorily redeemable
convertible preferred stock
(note 6)....................... -- -- (759,801) -- -- (759,801)
Net loss......................... -- -- -- -- (5,268,562) (5,268,562)
------- ----------- ----------- -------- ------------ ------------
Balance, December 31, 1995......... 312,659 $ 3,127 $(1,743,105) $(20,183) $(11,820,487) $(13,580,648)
======= =========== =========== ======== ============ ============
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE> 56

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND FOR THE PERIOD FROM JANUARY 10, 1992 (INCEPTION)
TO DECEMBER 31, 1995

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
JANUARY 10,
1992
YEARS ENDED DECEMBER 31, (INCEPTION) TO
--------------------------------------- DECEMBER 31,
1993 1994 1995 1995
------------ ----------- ----------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss allocable to common stockholders.... $(2,833,829) $(3,228,835) $(6,028,363) $(13,697,633)
Adjustments to reconcile net loss allocable
to common stockholders to net cash used in
operating activities:
Accretion of undeclared dividends
attributable to mandatorily redeemable
convertible preferred stock.............. 351,072 575,370 759,801 1,877,146
Non-cash research and development
expense.................................. -- -- -- 513,789
Compensation expense....................... -- -- 23,067 23,067
Non-cash consulting expense................ -- -- -- 15,000
Accrued interest converted to preferred
stock.................................... -- -- 121,187 121,187
Depreciation and amortization expense...... 998 1,225 3,617 6,713
Change in assets and liabilities:
(Increase) decrease in prepaid
expenses.............................. 2,040 -- (7,282) (7,282)
(Increase) decrease in other assets...... 1,019 (2,040) (7,328) (10,389)
Increase (decrease) in accounts
payable............................... 269,439 (64,396) (514,602) 17,672
Increase (decrease) in accrued
expenses.............................. 206,810 (85,171) 328,216 494,855
----------- ----------- ----------- ------------
Net cash used in operating
activities.......................... (2,002,451) (2,803,847) (5,321,687) (10,645,875)
----------- ----------- ----------- ------------
Cash flows from investing activities:
Organizational costs......................... -- -- -- (5,000)
Capital expenditures......................... -- (5,834) (11,758) (17,592)
----------- ----------- ----------- ------------
Net cash used in investing
activities.......................... -- (5,834) (11,758) (22,592)
----------- ----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock.... 3,260,000 -- 7,613,273 13,508,273
Proceeds from issuance of common stock....... -- 57,406 5,723 63,129
Proceeds from issuance of promissory notes... -- -- 3,028,500 3,028,500
Repayment of promissory note................. -- -- (125,000) (125,000)
----------- ----------- ----------- ------------
Net cash provided by financing
activities.......................... 3,260,000 57,406 10,522,496 16,474,902
----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents.................................. 1,257,549 (2,752,275) 5,189,051 5,806,435
Cash and cash equivalents at beginning of
period....................................... 2,112,110 3,369,659 617,384 --
----------- ----------- ----------- ------------
Cash and cash equivalents at end of period..... $ 3,369,659 $ 617,384 $ 5,806,435 $ 5,806,435
=========== =========== =========== ============
Supplemental disclosure of cash flows
information -- cash paid for interest........ $ -- $ -- $ 22,921 $ 22,921
=========== =========== =========== ============
Supplemental schedule of non-cash financing
activities:
Conversion of promissory notes to preferred
stock.................................... $ -- $ -- $ 2,903,500 $ 2,903,500
=========== =========== =========== ============
Deferred compensation...................... $ -- $ -- $ 43,250 $ 43,250
=========== =========== =========== ============
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE> 57

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995

(1) ORGANIZATION AND BUSINESS ACTIVITIES

CollaGenex Pharmaceuticals, Inc. ("CollaGenex Pharmaceuticals" or the
"Company") was incorporated in Delaware on January 10, 1992. The Company is a
development stage pharmaceutical company engaged in the development and
commercialization of innovative, proprietary medical therapies for the treatment
of periodontal disease and other dental pathologies.

The accompanying financial statements include the results of operations of
the Company for the period from January 10, 1992 (inception) to December 31,
1995.

The Company licensed its core technology from the Research Foundation of
the State University of New York at Stony Brook ("SUNY"), a minority stockholder
of the Company in exchange for common stock. The cost of obtaining such
technology was charged by the Company to research and development expense in the
accompanying statements of operations (note 10).

The Company is currently in the development stage and is devoting
substantially all of its efforts towards conducting pharmaceutical development,
raising capital, obtaining regulatory approval for products under development
and recruiting personnel. In the course of its activities, the Company has
sustained operating losses and expects such losses to continue over at least the
next several years.

The Company plans to finance its operations with a combination of the
initial public offering contemplated herein ("Offering"), revenues from future
product sales, license payments and payments from strategic research and
development arrangements. The Company has not generated positive cash flows from
operations, and there are no assurances that the Company will be successful in
obtaining an adequate level of financing for the long-term development and
commercialization of its planned products. In the near term, if the Offering is
not consummated, the Company believes that its current financial resources and
anticipated sources of liquidity should fund operations based on a reduced level
of planned research and development and administrative activities necessary to
achieve its short-term objectives.

The Company has not generated any revenues and has not yet achieved
profitable operations. There is no assurance that profitable operations, if
achieved, could be sustained on a continuing basis. In addition, development
activities and the commercialization of proprietary medical therapies for the
diagnosis and treatment of periodontal disease will require significant
additional financing. The Company's deficit accumulated during the development
stage aggregated $11,820,487 through December 31, 1995, and it expects to incur
substantial and increasing losses in future periods. Reference is made to "Risk
Factors" appearing elsewhere in this Prospectus, which contains a detailed
description of the risks associated with the Company's business. Further, the
Company's future operations are dependent on the success of the Company's
research and commercialization efforts and, ultimately, upon regulatory approval
and market acceptance of the Company's products.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents. All cash
and cash equivalents are held in United States financial institutions and money
market funds. The carrying amount of cash and cash equivalents approximates its
fair value due to its short-term nature.

F-7
<PAGE> 58

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Equipment

Equipment, consisting of computer and office equipment, is recorded at
cost. Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, generally three to five years. Expenditures for
repairs and maintenance are expensed as incurred.

Patent Costs

Patent application and maintenance costs are expensed as incurred.

Licensed Technology

Costs incurred in obtaining the license rights to technology in the
research and development stage are expensed as incurred.

Research and Development

Research and product development costs are expensed as incurred.

Accounting for Income Taxes

Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when such
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits which are
not expected to be realized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the period that such tax rate changes
are enacted.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") which presents companies with the alternative of
retaining the current accounting for stock-based compensation or adopting a new
accounting method based on the estimated fair value of equity instruments
granted to employees during the year. Companies that do not adopt the fair value
based method of accounting will be required to adopt the disclosure provisions
of SFAS 123 commencing in 1996. The Company expects to continue applying its
current accounting principles and upon adoption in 1996 will present the
required footnote disclosures.

Equity Security Transactions

Since inception, the Board of Directors has established the fair value of
common shares, Series A, B and C mandatorily redeemable convertible preferred
stock, stock options and warrants based upon facts and circumstances existing at
the dates such equity transactions occurred, including the price at which equity
instruments were sold to independent third parties.

F-8
<PAGE> 59

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reverse Stock Split

The Company effected a one-for-two reverse stock split of its common stock
on April 10, 1996 (note 14). All common share, per share and pro forma per share
amounts in the accompanying financial statements have been retroactively
adjusted to reflect this reverse stock split. Preferred stock amounts have not
been retroactively adjusted to reflect the common stock reverse split.

Concentration of Credit Risks

The Company invests its excess cash in deposits with major U.S. financial
institutions and money market funds. The Company has established guidelines
relative to diversification and maturities that maintain safety and liquidity.
To date, the Company has not experienced any losses on its cash equivalents and
money market funds.

Pro Forma Net Loss Per Share (unaudited)

Pro forma net loss per share was calculated by dividing the net loss by the
weighted average number of common shares outstanding for the respective periods
adjusted for the dilutive effect of common stock equivalents which consist of
stock options using the treasury stock method. Pro forma net loss per share
gives effect to certain adjustments described below including the aforementioned
reverse stock split.

Pursuant to Securities and Exchange Commission ("SEC") Staff Accounting
Bulletins and SEC Staff policy, common and common equivalent shares issued
during the twelve-month period prior to the proposed initial public offering at
prices below the anticipated initial public offering price are presumed to have
been issued in contemplation of the initial public offering and have been
included in the calculation as if they were outstanding for all periods
presented (using the treasury stock method and an assumed initial public
offering price of $10.00 per share).

Pursuant to the policy of the SEC staff, the calculation of shares used in
computing pro forma net loss per share also includes all series of mandatorily
redeemable preferred stock that will convert into shares of common stock upon
completion of the Offering (using the if-converted method) from their respective
original dates of issuance.

(3) EQUIPMENT

Equipment is comprised of the following at December 31, 1994 and 1995:

<TABLE>
<CAPTION>
1994 1995
------ -------
<S> <C> <C>
Computer and office equipment............................................. $5,834 $17,592
Less accumulated depreciation............................................. 223 2,844
------ -------
$5,611 $14,748
====== =======
</TABLE>

F-9
<PAGE> 60

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(4) ACCRUED EXPENSES

Accrued expenses consist of the following at December 31, 1994 and 1995:

<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Contracted clinical research........................................... $ 81,450 $ 222,445
Professional and consulting fees....................................... -- 191,540
Payroll and related costs.............................................. 85,189 54,963
Disposal costs for expired research and development supplies........... -- 20,000
Other.................................................................. -- 5,907
-------- --------
$ 166,639 $ 494,855
======== ========
</TABLE>

(5) RELATED PARTY TRANSACTIONS

The Company shared office space for the period January 1, 1993 through
November 15, 1994 with another company that is related through common ownership.
Transactions with this company were principally limited to the sharing of
expenses associated with maintaining an office and payroll. Net expenses charged
to the Company amounted to approximately $44,000 for each of the years ended
December 31, 1993 and 1994 (none in 1995) and $88,000 for the period from
January 10, 1992 (inception) to December 31, 1995. At December 31, 1994, $34,000
of this amount was outstanding to the aforementioned company and is included in
accounts payable in the accompanying balance sheet. Such amount was paid during
1995.

(6) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

The Company completed the sale of its Series A, Series B and Series C
mandatorily redeemable convertible preferred stock ("Series A, Series B and
Series C," respectively) in 1992, 1993 and 1995 at per share prices of $1.00,
$1.675 and $2.00, respectively (see note 10 regarding certain Series A shares
issued in connection with the acquisition of certain technology). Aggregate net
cash proceeds from such equity transactions totaled $13,508,273 ($16,532,960
after conversion of promissory notes and accrued interest to preferred stock).

The holders of Series A, Series B and Series C are entitled to cumulative
dividends at a rate of 9% of the original purchase price per share on the date
of issuance, if and when declared. Cumulative dividends in arrears at December
31, 1995 were $1,036,813, $655,902 and $184,431 for the Series A, B and C
preferred stock, respectively. Such amounts have been accreted in the
accompanying financial statements for the respective periods in which they
accumulated. Accordingly, such amounts have been included in the redemption
value of Series A, B and C mandatorily redeemable preferred stock in the
accompanying balance sheets in accordance with SEC Topic 3-C. Upon consummation
of the Offering, all undeclared dividends as noted above cease to accrue and all
rights with respect thereto cease. No dividends or other distributions can be
declared or paid on other types of capital stock until all dividends on the
Series A, Series B and Series C have been paid. As of December 31, 1995, no such
dividends have been declared.

The holders of the Series A, Series B and Series C are entitled to
liquidation preferences over all other types of capital stock in accordance with
the following preference amounts: the holders of Series A, B and C are entitled
to receive, for each share, $1.00, $1.675 and $2.00, respectively, plus an
amount equal to the total of all declared, accrued and unpaid dividends thereon.
In addition, each share of Series A, Series B and Series C is convertible into
$0.01 par value common stock at a conversion ratio of one-for-two, subject to
adjustments, as defined. Further, such conversion

F-10
<PAGE> 61

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(6) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
becomes mandatory immediately prior to the closing of an initial public offering
for the sale of the Company's common stock at a price per share of not less than
$12.00 (amended to $8.00 per share on June 19, 1996) (see Note 14) and aggregate
gross sales proceeds of not less than $12,000,000, such as the Offering.
Dividends on Series A, Series B and Series C referred to above do not convert
unless declared in accordance with the terms of such stock. No such dividends
have been declared by the Company through December 31, 1995.

Commencing September 1, 2000, the Company is required to redeem 25% of the
then outstanding Series A, Series B and Series C at a redemption price equal to
$1.00, $1.675, and $2.00 per share, respectively, plus an amount equal to the
total of all accumulated and unpaid dividends thereon. Such a redemption may be
waived by affirmative votes of at least 60% of the then outstanding holders of
Series A, Series B or Series C. The remainder of the shares are required to be
redeemed in 25% increments on September 1, 2001, 2002 and 2003. Each holder of
Series A, Series B and Series C has the number of votes equal to the numbers of
shares of common stock into which the preferred stock is then convertible. Due
to the mandatory redemption feature, these securities are classified at their
redemption value (which includes accreted dividends of $1,877,146 at December
31, 1995) outside of stockholders' equity (deficit) in the accompanying balance
sheets.

Future mandatory redemptions of Series A, Series B and Series C redeemable
convertible preferred stock are as follows:

<TABLE>
<S> <C>
1996.......................................... $ --
1997.......................................... --
1998.......................................... --
1999.......................................... --
2000.......................................... 4,727,027
Thereafter.................................... 14,181,079
------------
$ 18,908,106
============
</TABLE>

(7) BRIDGE FINANCING -- RELATED PARTIES

During 1995, the Company issued convertible promissory notes in the
principal amount of $3,028,500 to various Series A and Series B preferred
stockholders. The convertible promissory notes bore interest at 10% per annum
with maturity dates of February and July 1996. Principal plus accrued interest
on the convertible promissory notes totaling $3,024,687 were converted into
1,512,344 shares of Series C mandatorily redeemable convertible preferred stock
in September 1995 in accordance with the terms of the financing agreement upon
the closing of the Series C mandatorily redeemable convertible preferred stock
sale. One convertible promissory note aggregating $131,952 (principal plus
accrued interest) was repaid to the note holder in September 1995. In connection
with the bridge financing, the Company issued an aggregate of 192,382 bridge
warrants which gave the holders the right to purchase shares of Series C
mandatorily redeemable convertible preferred stock at an exercise price of $2.00
per share for a period of 10 years from the bridge warrant issuance. These
bridge warrants were canceled without exercise immediately prior to the closing
of the Series C mandatorily redeemable convertible preferred stock sale in
September 1995.

F-11
<PAGE> 62

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(8) COMMON STOCK AND COMMON STOCK OPTIONS

In April 1992, the Company issued 7,500 shares of common stock in exchange
for consulting services performed on behalf of the Company estimated at $15,000.
Such amount was charged to operations in 1992.

In November 1994, 125,000 shares of common stock were issued to an
executive officer for a price of $0.335 per share, the estimated fair market
value of such stock at that time, as determined by the Board of Directors.

In November 1995, the Board of Directors authorized that Class A common
stock, of which no shares had been issued, and Class B common stock be
designated into one new class called "common stock." Class A and Class B common
shares had the same rights as common stock. Class B common stock issued through
November 1995 is referred to as common stock in the accompanying financial
statements and related footnotes.

In 1992, the Company adopted the 1992 Stock Option Plan (the "1992 Plan")
whereby incentive and nonstatutory stock options may be granted to directors,
employees, and consultants to purchase an aggregate of 121,228 (increased to
300,000 and 425,000 in 1993 and 1995, respectively) shares of the Company's
common stock. The incentive stock options are to be granted at no less than fair
market value at the date of grant, as determined by the Board of Directors. The
nonstatutory option prices are to be determined by the Board of Directors and
may be less than the fair market value. The options are exercisable for a period
of 10 years after the date of grant and generally vest over a four-year period
(note 14).

A summary of activity under the 1992 Plan from January 10, 1992 (inception)
to December 31, 1995 is as follows:

<TABLE>
<CAPTION>
PRICE
SHARES PER SHARE
------- -------------
<S> <C> <C>
January 10, 1992 (inception)...................................... -- --
Granted......................................................... 63,125 $0.20
Cancelled....................................................... (2,500) 0.20
-------
Balance, December 31, 1992........................................ 60,625 0.20
Granted......................................................... 36,836 0.20
Exercised....................................................... -- --
-------
Balance, December 31, 1993........................................ 97,461 0.20
Granted......................................................... 56,750 0.20-0.335
Exercised....................................................... (75,969) 0.20-0.335
-------
Balance, December 31, 1994........................................ 78,242 0.20-0.335
Granted......................................................... 178,000 0.335-1.20
Exercised....................................................... (25,242) 0.20-0.335
-------
Balance, December 31, 1995 (note 14).............................. 231,000 $0.20-1.20
========
Shares exercisable at December 31, 1995 (note 14)................. 47,103 $0.20-0.335
========
</TABLE>

An executive officer of the Company was granted an option to acquire 50,000
shares of common stock at $0.335 per share in October 1995. Such option vested
50% upon date of grant with the remainder vesting ratably on a monthly basis
over the ensuing 30 months. The difference between the estimated fair value of
$1.20 per share (as determined by the Board of Directors) and the

F-12
<PAGE> 63

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(8) COMMON STOCK AND COMMON STOCK OPTIONS (CONTINUED)
exercise price at the grant date has been recorded as deferred compensation
($43,250) and is being amortized over the aforementioned vesting period.
Compensation expense for the year ended December 31, 1995 aggregated $23,067.

A newly hired executive officer of the Company was granted an option to
acquire 60,000 shares of common stock at $2.00 per share in March 1996. Such
option vested 20% upon date of grant with the remainder vesting ratably on an
annual basis over the ensuing four years. The difference between the estimated
fair value of $8.00 per share (as determined by the Board of Directors) and the
exercise price at the grant date has been recorded as deferred compensation
($360,000) in the first quarter of 1996 and is being amortized over the
aforementioned vesting period.

(9) INCOME TAXES

At December 31, 1995, the Company had available net operating loss
carryforwards ("NOL") of approximately $9,000,000 and $3,000,000 for federal and
state income tax reporting purposes, respectively, which are available to offset
future federal and state taxable income, if any, through 2010 and 1998,
respectively. The Company also has research and development tax credit
carryforwards of approximately $98,000 for federal income tax reporting purposes
which are available to reduce federal income taxes, if any, through 2010.

The Tax Reform Act of 1986 (the "Act") provides for a limitation on the
annual use of NOL and research and development tax credit carryforwards
(following certain ownership changes, as defined by the Act) that could
significantly limit the Company's ability to utilize these carryforwards. The
Company has experienced various ownership changes, as defined by the Act, as a
result of past financings as well as the Offering. Accordingly, the Company's
ability to utilize the aforementioned carryforwards may be limited.
Additionally, because U.S. tax laws limit the time during which these
carryforwards may be applied against future taxes, the Company may not be able
to take full advantage of these attributes for federal income tax purposes.

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at December 31,
1994 and 1995 are presented below:

<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Capitalized start-up costs................................... $ 304,524 $ 933,010
Net operating loss carryforwards............................. 2,288,807 3,390,313
Tax credit carryforward...................................... 83,724 98,271
Recognition of accrued expense for financial statement
reporting purposes but not for income tax reporting
purposes.................................................. 14,388 121,800
----------- -----------
Total gross deferred tax assets........................... 2,691,443 4,543,394
Less valuation allowance..................................... (2,691,443) (4,542,453)
----------- -----------
Total deferred tax assets................................. -- 941
Deferred tax liability:
Equipment, due to difference in depreciation................. -- (941)
----------- -----------
Total gross deferred tax liability........................ -- (941)
----------- -----------
Net deferred taxes........................................ $ -- $ --
=========== ===========
</TABLE>

F-13
<PAGE> 64

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(9) INCOME TAXES (CONTINUED)
The net change in the total valuation allowance for the years ended
December 31, 1993, 1994 and 1995 were increases of approximately $1,030,000,
$1,410,000 and $1,851,000 respectively, related primarily to additional net
operating losses incurred by the Company.

(10) TECHNOLOGY LICENSE

Contemporaneous with the formation of the Company in 1992, the Company
entered into an agreement with SUNY whereby the Company received an option to
acquire a certain technology license. In return for this option, the Company
issued to another party (which had previously licensed the technology from SUNY)
498,000 shares of Series A mandatorily redeemable convertible preferred stock
and issued SUNY 54,552 shares of common stock. In November 1992, the Company
issued an additional 24,396 shares of common stock to SUNY in accordance with
the terms of the technology license in order to maintain SUNY's ownership at 5%
(which requirement ceased upon the Company having raised $3,000,000 of
financing). The Company recorded a $513,789 charge to research and development
expense in the 1992 statement of operations in connection with these stock
issuances.

The Company's option to acquire the license was exercised in 1994 and
remains in effect for a period not to exceed 20 years from the date of the first
sale of product incorporating the technology under license or the last to expire
of the licensed patents in each country. The Company is liable to SUNY for
annual royalty fees based on net sales, if any, as defined in the agreement. A
minimum annual royalty is required for the duration of the technology license.
The Company paid royalties in 1994 and 1995 aggregating $15,750 and $50,000,
respectively.

The Company also agreed to pay $200,000 relating to certain research and
development programs at SUNY in connection with the aforementioned license. The
$200,000 was paid in five installments of $40,000 with the final installment
being paid in April 1994. Such costs have been charged to operations in the
accompanying statements of operations totaling $80,000, $40,000, none and
$200,000 for the years ended December 31, 1993, 1994 and 1995 and the period
from January 10, 1992 (inception) to December 31, 1995, respectively.

The agreement also requires the Company to reimburse SUNY for costs
incurred in connection with preparing, filing and maintaining certain patents
and patent applications associated with the licensed technology. During the
years ended December 31, 1993, 1994, 1995 and the period from January 10, 1992
(inception) to December 31, 1995, such costs amounted to approximately $182,000,
$44,000, $177,000 and $429,000, respectively, and are reflected in the
accompanying statements of operations.

The Company has also committed to support certain additional research
efforts at SUNY. The amounts paid to SUNY for these research efforts aggregated
$80,000 in 1995 (none in 1993 and 1994). The Company has remaining commitments
to SUNY with respect to such additional research efforts aggregating $80,000 per
year during 1996 and 1997.

(11) COMMITMENTS

In January 1995, the Company entered into an exclusive supply agreement
with a vendor to purchase a principal raw material component required for its
product that is currently under development. This supply agreement expires in
January 2000 with automatic two-year renewal periods. There are no minimum
purchase commitments applicable to such agreement.

F-14
<PAGE> 65

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(12) 401(k) SALARY REDUCTION PLAN

In January 1995, the Company adopted a 401(k) Salary Reduction Plan (the
"401(k) Plan") available to all employees meeting certain eligibility
requirements. The 401(k) Plan permits participants to contribute up to 15% of
their salary not to exceed the limits established by the Internal Revenue Code.
All contributions made by participants vest immediately in the participant's
account. The Company did not make any "matching contributions" in 1995 in
accordance with the terms of the 401(k) Plan.

(13) CONTRACT RESEARCH AGREEMENTS

From November 1992 through 1994, the Company entered into a contract
research agreement with a company to provide certain clinical monitoring, data
management, statistical analysis and regulatory services on behalf of the
Company. The Company was billed by the research company as such contract
research services were performed. Costs incurred under this agreement aggregated
approximately $1,509,000, $46,000, none and $1,958,000 for the years ended
December 31, 1993, 1994 and 1995 and the period from January 10, 1992
(inception) to December 31, 1995, respectively.

In September 1994, the Company entered into a contract research agreement
with another research company to provide certain clinical monitoring, data
management, statistical analysis and regulatory services on behalf of the
Company. The Company is billed by the research company as research services are
performed. Costs incurred under this agreement aggregated approximately
$629,000, $1,679,000 and $2,308,000 for the years ended December 31, 1994, 1995
and the period from January 10, 1992 (inception) to December 31, 1995,
respectively.

(14) SUBSEQUENT EVENTS

Reverse Stock Split

On April 10, 1996, the Company effected a one-for-two reverse stock split
of all outstanding shares of common stock including shares issuable under any
share option plan. All common share, per share and pro forma per share amounts
in the accompanying financial statements have been retroactively restated to
reflect this reverse stock split.

Amendment of 1992 Stock Option Plan and Adoption of 1996 Stock Option Plan

In March 1996, the Board of Directors authorized an amendment to the 1992
Plan reducing the number of shares underlying such plan to 291,000 shares,
stating that no further options may be granted under the 1992 Plan and,
ultimately, that the 1992 Plan will terminate upon the expiration or exercise of
all options currently issued but unexercised (note 8). Further, it approved the
1996 Stock Option Plan (the "1996 Plan") allowing the granting of incentive
stock options and nonstatutory stock options aggregating 750,000 options to
employees and consultants. The incentive stock options are to be granted at an
exercise price no less than the fair market value at the date of grant, except
for employees who own more than 10% of the voting power of all classes of stock
at the time of grant. The exercise price for options granted to these employees
must be at least 110% of the fair market value at the date of grant. The
nonstatutory options are to be granted at an exercise price of at least 110% of
the fair market value at the date of grant for all individuals who own more than
10% of the voting power of all classes of stock at the time of grant. Any other
nonstatutory options granted must have exercise prices of no less than 85% of
the fair market value at the date of grant.

F-15
<PAGE> 66

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(14) SUBSEQUENT EVENTS (CONTINUED)

Adoption of 1996 Non-employee Director Stock Option Plan

In March 1996, the Board of Directors approved a nonqualified plan for the
issuance of stock options to non-employee directors under the Non-Employee
Director Stock Option Plan (the "Non-Employee Directors' Plan"). Directors who
are employees of the Company are not eligible to receive stock options under the
Non-Employee Directors' Plan. Under the Non-Employee Directors' Plan, 109,000
shares of common stock are reserved for issuance at an exercise price equal to
fair market value on the date of grant. Such options vest 20% per year
commencing one year from the date of grant.

Initial Public Offering

In March 1996, the Board of Directors authorized the filing of a
registration statement for the Offering with the Securities and Exchange
Commission for the sale of 2,150,000 shares of common stock. If the Offering is
consummated under terms presently anticipated, all shares of Series A, Series B
and Series C mandatorily redeemable convertible preferred stock outstanding as
of the closing date of the offering will be automatically converted into shares
of common stock on a one-for-two basis, and no dividends will be payable with
respect to such preferred stock.

On June 19, 1996, the Board of Directors authorized a reduction in the
number of shares of common stock to be sold in the offering from 2,150,000
shares to 2,000,000 shares.

Pro Forma Balance Sheet

The unaudited pro forma balance sheet as of December 31, 1995 reflects the
conversion of the existing 10,398,248 shares of mandatorily redeemable
convertible preferred stock into 5,199,124 shares of common stock (effected for
the one-for-two reverse common stock split), which conversion is contingent upon
the closing of the Offering.

Preferred Stock and Common Stock

In March 1996, the Board of Directors authorized and, in April 1996 the
stockholders approved, an amendment to the Restated Certificate of
Incorporation. Upon consummation of the Offering, the Company will be authorized
to issue up to 25,000,000 shares of common stock, $0.01 par value, and 5,000,000
shares of preferred stock, $0.01 par value.

Commitment

In April 1996, the Company entered into a manufacturing agreement for the
manufacture of Periostat. Under the terms of this agreement, the Company is
obligated to annual minimum purchase commitments with such vendor for three
years following the date of initial product launch, as defined.

Mandatorily Redeemable Convertible Preferred Stock

On June 19, 1996, more than 60% of the holders of Series A, Series B and
Series C mandatorily redeemable convertible preferred stock approved an
amendment to the respective Series A, B and C agreements to reduce the price per
share upon which the mandatory conversion of the preferred stock shall occur
upon the closing of an initial public offering for the sale of the Company's
common stock from not less than $12.00 to not less than $8.00 per share.

F-16
<PAGE> 67

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED BALANCE SHEETS
MARCH 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA
MARCH 31, MARCH 31,
1996 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 4,967,629 $ 4,967,629
Prepaid expenses........................................... -- --
Deferred offering costs.................................... 56,662 56,662
------------ ------------
Total current assets............................... 5,024,291 5,024,291
Equipment, net............................................... 35,911 35,911
Other assets................................................. 17,238 17,238
------------ ------------
Total assets....................................... $ 5,077,440 $ 5,077,440
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................... $ 382,437 $ 382,437
Accrued expenses........................................... 620,000 620,000
------------ ------------
Total current liabilities.......................... 1,002,437 1,002,437
------------ ------------
Mandatorily redeemable convertible preferred stock (at
redemption value which includes accreted dividends of
$2,260,343 in 1996); (converts into 5,199,124 pro forma
common shares upon consummation of the offering
contemplated herein):

Series A convertible preferred stock, $0.01 par value;
3,500,000 shares authorized, 3,133,000 shares issued and
outstanding............................................. 4,240,306 --

Series B convertible preferred stock, $0.01 par value;
2,000,000 shares authorized, 1,946,268 shares issued and
outstanding............................................. 3,989,252 --

Series C convertible preferred stock, $0.01 par value;
5,350,000 shares authorized, 5,318,980 shares issued and
outstanding............................................. 11,061,745 --
------------ ------------
19,291,303 --
Common stockholders' equity (deficit):
Common stock, $0.01 par value; 6,725,000 shares authorized,
315,159 shares issued and outstanding in 1996 (5,514,283
pro forma shares upon conversion)....................... 3,152 55,143
Additional paid-in capital (deficit)....................... (1,765,827) 17,473,485
Deferred compensation...................................... (300,020) (300,020)
Deficit accumulated during the development stage........... (13,153,605) (13,153,605)
------------ ------------
Common stockholders' equity (deficit).............. (15,216,300) 4,075,003
------------ ------------
Commitments
Total liabilities and stockholders' equity
(deficit)........................................ $ 5,077,440 $ 5,077,440
============= =============
</TABLE>

See accompanying notes to unaudited condensed financial statements.

F-17
<PAGE> 68

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
AND FOR THE PERIOD FROM JANUARY 10, 1992 (INCEPTION)
TO MARCH 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
JANUARY 10,
THREE MONTHS ENDED 1992
MARCH 31, (INCEPTION) TO
--------------------------- MARCH 31,
1995 1996 1996
----------- ----------- --------------
<S> <C> <C> <C>
Revenues....................................... $ -- $ -- $ --
----------- ----------- -------------
Operating expenses incurred in the development
stage:
Research and development..................... 1,089,674 975,742 9,583,437
General and administrative................... 242,104 418,233 3,704,906
----------- ----------- -------------
Total operating expenses............. 1,331,778 1,393,975 13,288,343
Other income (expense):
Interest income.............................. 9,155 60,857 278,846
Interest expense............................. (20,274) -- (144,108)
----------- ----------- -------------
(11,119) 60,857 134,738
----------- ----------- -------------
Net loss....................................... $(1,342,897) $(1,333,118) $ (13,153,605)
=========== =========== =============
Accretion of undeclared dividends
attributable to mandatorily redeemable
convertible preferred stock............... $ 143,843 $ 383,197 $ 2,260,343
=========== =========== =============
Net loss allocable to common stockholders...... $(1,486,740) $(1,716,315) $ (15,413,948)
=========== =========== =============
Pro forma net loss per share................... $ (0.24)
===========
Shares used in computing pro forma net loss per
share........................................ 5,545,896
===========
</TABLE>

See accompanying notes to unaudited condensed financial statements.

F-18
<PAGE> 69

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JANUARY 10, 1992 (INCEPTION) TO DECEMBER 31, 1992,
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995,
AND FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL DEFICIT ACCUMULATED COMMON
NUMBER OF PAR PAID-IN DEFERRED DURING THE STOCKHOLDERS'
SHARES VALUE CAPITAL COMPENSATION DEVELOPMENT STAGE EQUITY (DEFICIT)
--------- ------ ----------- ------------ -------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock in exchange
for technology license in January
1992, at inception................ $54,552 $ 546 $ 10,364 $ -- $ -- $ 10,910
Issuance of common stock in exchange
for consulting services........... 7,500 75 14,925 -- -- 15,000
Issuance of common stock in exchange
for technology license in November
1992.............................. 24,396 244 4,635 -- -- 4,879
Accretion of undeclared dividends on
mandatorily redeemable convertible
preferred stock................... -- -- (190,903) -- -- (190,903)
Net loss............................ -- -- -- -- (1,415,703) (1,415,703)
------ -------- --------- ------------ ------------ ------------
Balance, December 31, 1992............ 86,448 865 (160,979) -- (1,415,703) (1,575,817)
Accretion of undeclared dividends on
mandatorily redeemable convertible
preferred stock................... -- -- (351,072) -- -- (351,072)
Net loss............................ -- -- -- -- (2,482,757) (2,482,757)
------ -------- --------- ------------ ------------ ------------
Balance, December 31, 1993............ 86,448 865 (512,051) -- (3,898,460) (4,409,646)
Exercise of common stock options in
September through November 1994
($0.20-$0.335 per share).......... 75,969 760 14,771 -- -- 15,531
Issuance of common shares to an
executive officer at $0.335 per
share in November 1994............ 125,000 1,250 40,625 -- -- 41,875
Accretion of undeclared dividends on
mandatorily redeemable convertible
preferred stock................... -- -- (575,370) -- -- (575,370)
Net loss............................ -- -- -- -- (2,653,465) (2,653,465)
------ -------- --------- ------------ ------------ ------------
Balance, December 31, 1994............ 287,417 2,875 (1,032,025) -- (6,551,925) (7,581,075)
Exercise of common stock options in
February through April 1995 ($0.20
per share)........................ 20,242 202 3,846 -- -- 4,048
Deferred compensation resulting
from:
Grant of options.................. -- -- 43,250 (43,250) -- --
Amortization of deferred
compensation.................... -- -- -- 23,067 -- 23,067
Exercise of common stock options in
November 1995 ($0.335 per
share)............................ 5,000 50 1,625 -- -- 1,675
Accretion of undeclared dividends on
mandatorily redeemable convertible
preferred stock................... -- -- (759,801) -- -- (759,801)
Net loss............................ -- -- -- -- (5,268,562) (5,268,562)
------ -------- --------- ------------ ------------ ------------
Balance, December 31, 1995............ 312,659 3,127 (1,743,105) (20,183) (11,820,487) (13,580,648)
Deferred compensation resulting
from:
Grant of options (unaudited)...... -- -- 360,000 (360,000) -- --
Amortization of deferred
compensation (unaudited)........ -- -- -- 80,163 -- 80,163
Exercise of common stock options in
March 1996 ($0.20 per share)
(unaudited)....................... 2,500 25 475 -- -- 500
Accretion of undeclared dividends on
mandatorily redeemable convertible
preferred stock (unaudited)....... -- -- (383,197) -- -- (383,197)
Net loss (unaudited)................ -- -- -- -- (1,333,118) (1,333,118)
------ -------- --------- ------------ ------------ ------------
Balance, March 31, 1996 (unaudited)... 315,159 $3,152 $(1,765,827) $ (300,020) $(13,153,605) $(15,216,300)
====== ======== ========= ============ ============ ============
</TABLE>

See accompanying notes to unaudited condensed financial statements.

F-19
<PAGE> 70

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
AND FOR THE PERIOD FROM JANUARY 10, 1992 (INCEPTION)
TO MARCH 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
THREE MONTHS ENDED JANUARY 10,
MARCH 31, 1992
-------------------------- (INCEPTION)
TO MARCH 31,
1995 1996 1996
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss allocable to common stockholders............. $(1,486,740) $(1,716,315) $(15,413,948)
Adjustments to reconcile net loss to net cash
used in operating activities:
Accretion of undeclared dividends attributable to
mandatorily redeemable convertible preferred
stock............................................ 143,843 383,197 2,260,343
Non-cash research and development expense........... -- -- 513,789
Compensation expense................................ -- 80,163 103,230
Non-cash consulting expense......................... -- -- 15,000
Accrued interest converted to preferred stock....... -- -- 121,187
Depreciation and amortization expense............... 166 983 7,696
Change in assets and liabilities:
(Increase) decrease in prepaid expenses.......... (22,215) 7,282 --
Increase in deferred offering costs.............. -- (56,662) (56,662)
Increase in other assets......................... -- (6,047) (16,436)
Increase (decrease) in accounts payable.......... (144,219) 364,765 382,437
Increase in accrued expenses..................... 64,011 125,145 620,000
----------- ----------- ------------
Net cash used in operating activities............... (1,445,154) (817,489) (11,463,364)
----------- ----------- ------------
Cash flows from investing activities:
Organizational costs.................................. -- -- (5,000)
Capital expenditures.................................. (3,196) (21,817) (39,409)
----------- ----------- ------------
Net cash used in investing activities............... (3,196) (21,817) (44,409)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock............. -- -- 13,508,273
Proceeds from issuance of common stock................ 500 500 63,629
Proceeds from issuance of promissory notes............ 2,000,000 -- 3,028,500
Repayment of promissory note.......................... -- -- (125,000)
----------- ----------- ------------
Net cash provided by financing activities........... 2,000,500 500 16,475,402
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents.... 552,150 (838,806) 4,967,629
Cash and cash equivalents at beginning of period........ 617,384 5,806,435 --
----------- ----------- ------------
Cash and cash equivalents at end of period.............. $ 1,169,534 $ 4,967,629 $ 4,967,629
=========== =========== ============
Supplemental disclosure of cash flows information --
cash paid for interest................................ -- -- $ 22,921
=========== =========== ============
Supplemental schedule of non-cash financing activities:
Conversion of promissory notes plus accrued
interest to preferred stock......................... $ -- $ -- $ 2,903,500
=========== =========== ============
Deferred compensation................................. $ -- $ 360,000 $ 403,250
=========== =========== ============
</TABLE>

See accompanying notes to unaudited condensed financial statements.

F-20
<PAGE> 71

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1995 AND 1996
(UNAUDITED)

(1) BASIS OF PRESENTATION

The unaudited condensed financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission and in accordance with generally accepted
accounting principles. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These unaudited financial statements should be read in conjunction
with the 1995 financial statements and notes thereto.

In the opinion of the Company's management, the accompanying unaudited
condensed financial statements have been prepared on a basis substantially
consistent with the audited financial statements and contain adjustments, all of
which are of a normal recurring nature, necessary to present fairly its
financial position as of March 31, 1996 and its results of operations and cash
flows for the three months ended March 31, 1995 and 1996 and for the period
January 10, 1992 (inception) to March 31, 1996. Interim reports are not
necessarily indicative of results for the full fiscal year.

(2) DEFERRED OFFERING COSTS

The deferred offering costs associated with the Offering will be recorded
as a reduction of stockholders' equity (deficit) if the Offering is consummated.
If the Offering is not consummated, the deferred offering costs will be charged
to operations.

(3) APPROVAL OF INITIAL PUBLIC OFFERING/CONVERSION OF PREFERRED STOCK

In March 1996, the Board of Directors authorized the Company to file a
registration statement with the Securities and Exchange Commission permitting
the Company to sell approximately 2,150,000 shares (2,472,500 shares if the
underwriters' over-allotment option is exercised in full) of its common stock at
a price per share to be negotiated. If the Offering is consummated under the
terms presently anticipated, all of the Series A, Series B and Series C
mandatorily redeemable convertible preferred stock outstanding at March 31, 1996
will automatically convert on a one-for-two basis into 5,199,124 shares of
common stock. The pro forma (unaudited) balance sheet as of March 31, 1996
reflects the conversion of the Series A, Series B and Series C mandatorily
redeemable convertible preferred stock into shares of common stock, which
conversion is contingent upon the closing of the Offering.

On June 19, 1996, the Board of Directors authorized a reduction in the
number of shares of common stock to be sold in the Offering from 2,150,000
shares to 2,000,000 shares (2,300,000 shares if the Underwriters' over-allotment
option is exercised in full).

(4) AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION

In March 1996, the Board of Directors authorized and, in April 1996 the
stockholders approved, an amendment to the Restated Certificate of
Incorporation. Upon consummation of the Offering, the Company will be authorized
to issue up to 25,000,000 shares of common stock $0.01 par value, and 5,000,000
shares of preferred stock $0.01 par value.

F-21
<PAGE> 72

COLLAGENEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)

(5) COMMON STOCK OPTIONS

(6) COMMITMENT

(7) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

F-22
<PAGE> 73

- ------------------------------------------------------
- ------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 14
Dividend Policy....................... 14
Capitalization........................ 15
Dilution.............................. 16
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 21
Management............................ 34
Certain Transactions.................. 41
Principal Stockholders................ 42
Description of Capital Stock.......... 44
Shares Eligible for Future Sale....... 47
Underwriting.......................... 48
Legal Matters......................... 49
Experts............................... 49
Additional Information................ 50
Index to Financial Statements......... F-1
</TABLE>

------------------

UNTIL JULY 15, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

- ------------------------------------------------------
- ------------------------------------------------------

2,000,000 SHARES

[COLLAGENEX LOGO]

COMMON STOCK

-------------------
PROSPECTUS
-------------------

ALEX. BROWN & SONS
INCORPORATED

VOLPE, WELTY & COMPANY

June 20, 1996
- ------------------------------------------------------
- ------------------------------------------------------