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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission File No. 0-28308
COLLAGENEX PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1758016
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
301 South State Street, Newtown, Pennsylvania 18940
(Address of Principal Executive Offices) (Zip Code)
(215) 579-7388
(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
_____________________ ____________________
_____________________ ____________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
________________________________________________________________________________
(Title of Class)
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Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant: $49,544,955 at March 27, 1997 based on
the last sales price on that date.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of January 31, 1997:
Class Number of Shares
Common Stock, $.01 par value 7,535,533
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the registrant's definitive Proxy Statement for
its 1997 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
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TABLE OF CONTENTS
Item Page
PART I 1. Business.................................................. 1
2. Properties................................................ 17
3. Legal Proceedings......................................... 18
4. Submission of Matters to a Vote of Security Holders....... 18
PART II 5. Market for the Company's Common Equity
and Related Stockholder Matters........................... 18
6. Selected Financial Data................................... 20
7. Management's Discussion and Analysis of Results
of Operations and Financial Condition..................... 21
8. Financial Statements and Supplementary Data............... 23
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 23
PART III 10. Directors and Executive Officers of the Company........... 25
11. Executive Compensation.................................... 25
12. Security Ownership of Certain Beneficial Owners
and Management............................................ 25
13. Certain Relationships and Related Transactions............ 25
PART IV 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................................... 26
SIGNATURES................................................................ 27
EXHIBIT INDEX............................................................. 29
FINANCIAL DATA AND SCHEDULES.............................................. F-1
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PART I
ITEM 1. BUSINESS.
GENERAL
CollaGenex Pharmaceuticals, Inc. ("CollaGenex Pharmaceuticals" or the
"Company") 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
completed three pivotal Phase III clinical trials on Periostat. 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
submitted a new drug application ("NDA") for Periostat in August 1996. The NDA
was accepted for filing by the United States Food and Drug Administration (the
"FDA") in October 1996.
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
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technology is licensed on an exclusive basis from the Research Foundation of the
State University of New York at Stony Brook ("SUNY").
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.
Periostat is a registered trademark of the Company. All other trade
names referenced are the service marks, trademarks or registered trade names of
their respective companies or organizations.
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 health managed care organizations ("DHMOs") and dental
practitioners operating under capitated or fixed fee arrangements. The Company
also believes that Periostat is well positioned to meet the economic
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and therapeutic requirements of such DHMOs and dental practitioners by providing
a cost-effective therapy for periodontal disease management.
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
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 is pursuing the following strategy to achieve
this objective:
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 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 February 1997, the Company retained Innovative
Customer Solutions, Ltd. ("ICS"), a sales and marketing organization focused on
the dental industry, to assist in the U.S. launch of Periostat, subject to FDA
approval. ICS was formed by a group of executives who previously managed dental
pharmaceutical sales and marketing activities for a major consumer products
company. 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 July 1996, the Company executed a marketing and manufacturing
agreement with Boehringer Mannheim Italia SpA ("BMI"), the Italian subsidiary of
Boehringer Mannheim Group, pursuant to which BMI will have the exclusive right
to market Periostat in Italy, San Marino and The Vatican City. Furthermore, BMI
may manufacture Periostat on behalf of other European licensees and
distributors. The Company also intends to establish a dedicated dental sales
force to market Periostat to DHMOs in the United States.
Build Relationships with DHMOs. The Company intends to establish
relationships with selected DHMOs 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 DHMOs 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
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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 established research collaborations and
evaluation agreements with the National Cancer Institute (the "NCI"), Smith &
Nephew Research Limited ("Smith & Nephew"), Istituto Gentili and BMI. See
"--Other Potential Applications."
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 completed three pivotal Phase III clinical trials on
Periostat. 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 submitted a NDA for Periostat in August 1996. The
NDA was accepted for filing by the FDA in October 1996.
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.
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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 ALv, 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 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. The Company compiled the data, performed statistical analysis and
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conducted certain additional testing necessary to complete its NDA for
Periostat, which it submitted to the FDA in August 1996. The NDA was accepted
for filing by the FDA in October 1996. There can be no assurance that the
Company's NDA with respect to Periostat 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 SUNY. 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.
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The Company's license from SUNY also covers CMTs, 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. 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 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 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 preliminary results suggest that a number of the Company's
compounds show efficacy in these models.
In October 1996, the Company and the NCI executed a letter of intent to
formalize a collaborative research and development agreement pursuant to which
the NCI agreed to perform pharmacology, toxicology and Phase I clinical trials
using one of the Company's compounds for the prevention of cancer metastasis.
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In December 1996, the Company signed an agreement with BMI under which
BMI will conduct animal studies to evaluate the potential of certain of the
Company's compounds to treat metastatic cancer. The Company and BMI have agreed
that, if the results are favorable, they will begin good faith negotiations of a
license agreement.
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, 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. In June 1996, the
Company entered into a research agreement with Istituto Gentili, an Italian
pharmaceutical company, to evaluate the application of the Company's technology
in the field of osteoarthritis.
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.
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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 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 February 1997, the
Company retained ICS, a sales and marketing organization focused on the dental
industry, to assist in the U.S. launch of Periostat, subject to FDA approval.
ICS was formed by a group of executives who previously managed dental
pharmaceutical sales and marketing activities for a major consumer products
company. Such arrangement is terminable at will by either party. In addition,
the Company intends to establish a network of sub-licensees or distributors to
market and sell Periostat outside of the United States. For example, in July
1996, the Company executed a marketing and manufacturing agreement with BMI
pursuant to which BMI has the exclusive right to market Periostat in Italy, San
Marino and The Vatican City. The agreement provided for BMI to pay the Company a
nonrefundable license fee upon signing, which was paid in 1996, additional fees
upon the achievement of future milestones and royalties on future sales of
Periostat in Italy, San Marino and The Vatican City. The Company also intends
to establish a dedicated dental sales force, with expertise in sales and
third-party reimbursement, to market Periostat to DHMOs in 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
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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 inside sales and marketing
personnel. The Company has begun recruiting such personnel. There can be no
assurance, however, that the Company will be able to recruit and retain
qualified inside sales and marketing personnel, additional 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 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,
$3.6 million and $4.4 million, in 1994, 1995 and 1996, respectively. Of such
amounts, $0.6 million, $1.7 million and $1.8 million 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 supplied 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
good manufacturing practices ("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
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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."
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 license from the Research Foundation of the
State of New York at Stony Brook for all of its core technology (the "SUNY
License"). The SUNY License grants the Company an exclusive worldwide license to
SUNY's interests in certain patents and patent applications to make and sell
products employing tetracyclines that are designed or utilized to alter a
biological process. Thirteen U.S. patents held by SUNY and seven U.S. patent
applications held or jointly held by SUNY are licensed to the Company under the
SUNY License. One of the seven patent applications has been co-assigned to the
University of Miami, Florida, another patent application has been co-assigned to
Washington University, and a third patent application has been assigned to New
York University and Long Island Jewish Medical Center. 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"). The eleven 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 tetracyclines to enhance bone growth and inhibit
protein glycosylation. 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
11
<PAGE> 15
U.S. and foreign patents expire between 2004 and 2014. 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
results in the diversion of substantial financial, management and other
resources from the Company's other activities.
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
12
<PAGE> 16
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 tends 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
13
<PAGE> 17
comparable regulatory authorities in other countries. These governmental
entities regulate, among other things, research and development activities
including animal and human testing, manufacturing, safety, effectiveness,
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 approval is uncertain. Many products that initially appear
promising ultimately do not reach the market because they are not found to be
safe and 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 (toxicology) 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 repeated. 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 provided in
an Investigational New Drug application ("IND") filed with the FDA. FDA
regulations provide that human clinical trials may begin 30 days following
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
14
<PAGE> 18
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 and tolerance, 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 with 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 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 rare or 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 safety and 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 further delineate 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 reproductive
effects and long-term dosing of doxycycline and that the data be included in the
Company's NDA submission. Such animal studies have been conducted and the
results included in the Company's NDA for Periostat. The FDA also requested that
a post-approval, post-marketing animal study related to long-term dosing and
carcinogenicity be conducted to satisfy the regulatory requirement for a
chronically administered drug.
The FDA may, in some circumstances, impose restrictions on the use of a
drug, compliance with which may be difficult and expensive. 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
15
<PAGE> 19
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. Periostat is being treated by the FDA as an "antibiotic"
and is being reviewed pursuant to Section 507 of the Federal Food, Drug and
Cosmetic Act. Therefore, the Company will have to rely solely on its patent
protection as Periostat will not be entitled to a three-year period of marketing
exclusivity before generic versions can be approved by the FDA for commercial
sale, and no patent-term extension will be available. 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 will require
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
16
<PAGE> 20
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.
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 December 31, 1996, the Company
employed nine 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.
ITEM 2. 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,
1997.
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<PAGE> 21
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to June 1996, there was no established market for the Company's
Common Stock. Since June 20, 1996, the Common Stock has traded on the Nasdaq
National Market ("NNM") under the symbol "CGPI."
The following table sets forth the high and low bid information for the
Common Stock for each of the quarters since the quarter ended June 30, 1996 as
reported on NNM. Such quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ---- ---
<S> <C> <C>
June 30, 1996 $10.25 $8.25
September 30, 1996 $11.25 $6.125
December 31, 1996 $11.75 $7.50
</TABLE>
As of January 31, 1997, the approximate number of holders of record of
the Common Stock was 56 and the approximate number of beneficial holders of the
Common Stock was 1,200.
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.
The following information relates to all securities of the Company sold
by the Company during the year ended December 31, 1996 which were not registered
under the Securities Act of 1933 (the "Act"):
18
<PAGE> 22
1. During 1996, the Company from time to time granted stock
options to employees, directors and consultants. The
following table sets forth certain information regarding
such 1996 grants:
<TABLE>
<CAPTION>
RANGE OF EXERCISE
NO. OF SHARES PRICES
------------- ------
<S> <C> <C>
1996............................................. 221,000 $2.00-$10.00
</TABLE>
2. During 1996, the Company from time to time issued stock to
employees, directors and consultants pursuant to the
exercise of stock options. The following table sets forth
certain information regarding such 1996 issuances:
<TABLE>
<CAPTION>
RANGE OF EXERCISE
NO. OF SHARES PRICES
------------- ------
<S> <C> <C>
1996........................................... 23,750 $0.20-$0.335
</TABLE>
No underwriter was employed by the Company in connection with the
issuance and sale of the securities described above. The Company claims that the
issuance and sale of all of the foregoing securities were exempt from
registration under either (i) Section 4(2) of the Act as transactions not
involving any public offering, or (ii) Rule 701 under the Act as transactions
made pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation. Appropriate legends were affixed to the stock
certificates issued in such transactions. All recipients had adequate access to
information about the Company.
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<PAGE> 23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data set forth below with respect
to the Company's consolidated statement of operations data for each of the years
in the three-year period ended December 31, 1996 and for the period from January
10, 1992 (inception) to December 31, 1996 and with respect to the consolidated
balance sheet data at December 31, 1995 and 1996 are derived from and are
qualified by reference to the audited consolidated financial statements and the
related notes thereto of the Company found at "Item 14. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K". The consolidated statement of
operations data for the period from January 10, 1992 (inception) to December 31,
1992 and for the year ended December 31, 1993 and the consolidated balance sheet
data as of December 31, 1992, 1993 and 1994 are derived from audited
consolidated financial statements not included in this Annual Report on Form
10-K. The following should be read in conjunction with and is qualified in its
entirety by, the Company's audited consolidated financial statements and related
notes thereto found at "Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K" and "Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition" which are included elsewhere in
this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
PERIOD FROM FOR THE PERIOD
JANUARY 10, 1992 YEARS ENDED DECEMBER 31, JANUARY 10, 1992
(INCEPTION) TO ----------------------------------------------- (INCEPTION) TO
DECEMBER 31, 1992 1993 1994 1995 1996 DECEMBER 31, 1996
----------------- ---- ---- ---- ---- -----------------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Licensing revenues $ -- $ -- $ -- $ -- $ 400 $ 400
Operating expenses:
Research and development 1,131 1,913 1,928 3,635 4,436 13,044
General and administrative 333 613 793 1,548 2,527 5,814
Loss from operations (1,464) (2,526) (2,721) (5,183) (6,563) (18,458)
Net loss (1,416) (2,483) (2,653) (5,269) (5,918) (17,739)
Net loss allocable to common
stockholders (1,607) (2,834) (3,229) (6,028) (6,638) (20,336)
-------- ------- ------- ------ -------- -------
Pro forma:
Net loss per share(1) $(1.10) $ (0.90)
Shares used in computing pro forma
net loss per share(1) 4,808 6,580
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments $ 2,112 $ 3,369 $ 617 $ 5,806 $ 18,215
Total assets 2,655 3,374 628 5,840 18,437
Mandatorily redeemable convertible
preferred stock 31 51 7,510 18,908 --
Deficit accumulated during
development stage (788) (3,732) (6,552) (11,820) (17,739)
Total stockholders' equity(deficit) 2,333 2,653 (7,581) (13,581) 17,592
</TABLE>
(1) See Note 2 of Notes to Financial Statements for information concerning
computation of pro forma net loss per share.
20
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
OVERVIEW
CollaGenex Pharmaceuticals, Inc. 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 product revenues and has
funded its operations primarily from the proceeds of its initial public offering
and through private placements of equity securities. Substantially all of the
Company's expenditures to date have been for pharmaceutical development
activities and general and administrative expenses.
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 has incurred losses each year since inception and had an
accumulated deficit of $17.7 million at December 31, 1996. The Company expects
to continue to incur losses over the next several years from expenditures on
drug development, marketing, manufacturing and administrative activities.
Statements contained or incorporated by reference in this Annual Report
on Form 10-K that are not based on historical fact are "forward-looking
statements" within the meaning of the Private Securities Reform Act of 1995.
Forward-looking statements may be identified by the use of forward looking
terminology such as "may," "will, "expect," "anticipate" or similar terms,
variations of such terms or the negative of those terms. This Form 10-K contains
forward-looking statements that involve risks and uncertainties. The Company's
business of developing pharmaceutical products is subject to a number of
significant risks, including risks inherent in research and development
activities and in conducting business in a highly regulated environment. The
success of the Company depends to a large degree upon obtaining FDA and foreign
regulatory approval to market products currently under development. There can be
no assurance that any of the Company's product candidates will be approved by
any regulatory authority for marketing in any jurisdiction or, if approved, that
any such products will be successfully commercialized by the Company. The
Company's actual results may differ materially from the results in the
forward-looking statements contained herein.
RESULTS OF OPERATIONS
From inception through December 31, 1996, the Company had no revenues
from product sales. The Company does not expect to generate any revenues from
product sales in 1997.
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<PAGE> 25
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 drug development and clinical trials. General and administrative
expenses consist primarily of personnel salaries and benefits, professional and
consulting fees, insurance, 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 commercial
infrastructure, primarily in sales, marketing and finance.
The Company earned $400,000 in licensing fee revenue during 1996.
This revenue resulted from the signing of a licensing agreement with Boehringer
Mannheim Italia ("BMI") pursuant to which BMI will distribute and manufacture
Periostat in Italy, San Marino and The Vatican City.
Years Ended December 31, 1996 and December 31, 1995
Research and development expenses increased from $3.6 million in 1995
to $4.4 million in 1996. This increase resulted from higher contract costs
associated with preparing and submitting a NDA for Periostat, including data
compilation, statistical analysis and validation of production processes.
General and administrative expenses increased from $1.5 million in 1995
to $2.5 million in 1996. This increase was due primarily to higher employee
compensation expenses due to the hiring of additional staff in finance and
commercial development, including a non-cash compensation charge of
approximately $0.1 million resulting from the grant of certain employee stock
options, and higher insurance and professional fees associated with becoming a
public company.
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.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in January 1992, the Company has financed its
operations through private placements of preferred stock and common stock and an
initial public offering of common stock aggregating $35.2 million. At December
31, 1996, the Company's cash, cash equivalents and short-term investments
totaled $18.2 million.
22
<PAGE> 26
The Company's working capital at December 31, 1996 was $17.5 million, an
increase of $12.2 million from December 31, 1995.
The Company had no debt outstanding (other than accounts payable and
accrued expenses) at December 31, 1996 and December 31, 1995. The Company has no
lines of credit.
From inception through December 31, 1996, the Company invested
approximately $75,000 in capital expenditures. The Company had no capital leases
outstanding at December 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 its existing capital resources, together with
the proceeds from its proposed offering of Common Stock anticipated to be
consummated in April 1996, will be adequate to fund the Company's operations
through at least 1998. There can be assurance, however, that such offering will
be consummated in this time frame, if at all. If such offering is not
consummated, the Company believes that its existing working capital 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 FDA approval of Periostat, if any, the size and scope
of its sales and marketing effort, 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. Over the long term, the Company's liquidity is dependent on market
acceptance of its products and technology.
As of December 31, 1996, the Company had available $13.2 million and
$3.0 million in net operating carryforwards to offset future federal and state
taxable income, respectively, if any, through the year 2011 and 1999,
respectively. In addition, the Company had research and experimentation tax
credits of approximately $0.1 million, which expire at various times through the
year 2011. As a result of past financings and the Company's initial public
offering in June 1996, the Company experienced ownership changes as defined by
rules enacted with the Tax Reform Act of 1986 (the "Act"). Accordingly, the
Company's ability to use its net operating loss and research and experimentation
credit carryforwards is subject to certain limitations as defined by the Act and
may be limited.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required to be filed pursuant to this Item 8
are appended to this Annual Report on Form 10-K. A list of the financial
statements filed herewith is found at "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
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
23
<PAGE> 27
31, 1993 does not cover the financial statements of the Company included in this
Annual Report on Form 10-K. 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 addressed to the Securities and Exchange
Commission stating their agreement with the above statements. Such letter
appears in Exhibit 16 to this Annual Report on Form 10-K.
24
<PAGE> 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information relating to the Company's directors, nominees for
election as directors and executive officers under the headings "Election of
Directors" and "Executive Officers" in the Company's definitive proxy statement
for the 1997 Annual Meeting of Stockholders is incorporated herein by reference
to such proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The discussion under the heading "Executive Compensation" in the
Company's definitive proxy statement for the 1997 Annual Meeting of Stockholders
is incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
for the 1997 Annual Meeting of Stockholders is incorporated herein by reference
to such proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 1997 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
25
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Financial Statements and
Schedules on Page F-1.
(a) (2) Financial Statement Schedules.
Reference is made to the Index to Financial Statements and
Schedules on Page F-1.
(a) (3) Exhibits.
Reference is made to the Index to Exhibits on Page 29.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the fiscal year
ended December 31, 1996.
26
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 28th day of March,
1997.
COLLAGENEX PHARMACEUTICALS, INC.
By:/s/ Brian M. Gallagher
----------------------------------------
Brian M. Gallagher, Ph.D., President
and Chief Executive Officer
27
<PAGE> 31
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Brian M. Gallagher, Ph.D. President, Chief Executive Officer and March 28, 1997
- --------------------------------- Director (Principal Executive Officer)
Brian M. Gallagher, Ph.D.
/s/ Nancy C. Broadbent Chief Financial Officer, Treasurer and March 28, 1997
- --------------------------------- Secretary (Principal Financial and
Nancy C. Broadbent Accounting Officer)
/s/ Helmer P.K. Agersborg, Ph. D. Chairman of the Board and Director March 28, 1997
- ---------------------------------
Helmer P.K. Agersborg, Ph.D.
/s/ James E. Daverman Director March 28, 1997
- ---------------------------------
James E. Daverman
/s/ Robert J. Easton Director March 28, 1997
- ---------------------------------
Robert J. Easton
/s/ Stephen W. Ritterbush, Ph.D. Director March 28, 1997
- ---------------------------------
Stephen W. Ritterbush, Ph.D.
/s/ Pieter J. Schiller Director March 28, 1997
- ---------------------------------
Pieter J. Schiller
/s/ Terence E. Winters, Ph.D. Director March 28, 1997
- ---------------------------------
Terence E. Winters, Ph.D.
/s/ Peter Barnett Director March 28, 1997
- ---------------------------------
Peter Barnett
</TABLE>
28
<PAGE> 32
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
3.1(a) Amended and Restated Certificate of Incorporation.
3.2(a) Amended and Restated Bylaws.
4.1(a) Registration Rights Agreement dated September 29, 1995 by
and among the Company and certain investors, as
supplemented.
4.2(a)(b) Letter dated December 16, 1993 re: certain rights of the
Company with respect to certain securities of the Company
owed by Brian M. Gallagher, Ph.D.
4.3(a) Fourth Investment Agreement as of September 29, 1995 by and
among the Company and certain Investors.
+10.1(a) Assignment of, Amendment to and Restatement of Agreement,
with all exhibits, as amended, and schedules, dated January
13, 1992 by and among the Company, Johnson & Johnson
Consumer Products, Inc. and Research Foundation of State
University of New York.
+10.2(a) Supply Agreement dated January 23, 1995 between the Company
and Hovione International Limited.
+10.3(a) Manufacturing Agreement as of April 12, 1996 by and between
the Company and Applied Analytical Industries, Inc.
10.4(a) Form of Non-Disclosure Agreement executed by all Employees
as employed from time to time.
10.5(a)(b) Form of Non-Competition Agreement executed by each of Brian
M. Gallagher, Ph.D., Nancy C. Broadbent and Robert A.
Ashley.
10.6(a) Form of Mutual Non-Disclosure Agreement executed by certain
consultants and research collaborators as retained from
time to time.
10.7(a)(b) Form of Indemnification Agreement executed by each of the
Company's directors and officers.
10.8(a) Forms of Consulting Agreement executed by each of Lorne M.
Golub and Thomas F. McNamara.
10.9(a) Form of Material Transfer Agreement between the Company and
Researchers.
29
<PAGE> 33
EXHIBIT NO. DESCRIPTION OF EXHIBIT
10.10 Lease Agreement dated September 5, 1995 between the Company
and Stocking Works Associates, (incorporated by reference
to the Company's Registration Statement on Form S-1 (File
Number 333-3582) which became effective on June 20, 1996)
as amended effective January 1, 1997 (such amendment filed
herewith).
10.11(a) Master Consulting Agreement dated September 19, 1994
between the Company and Quintiles, Inc.
10.12(a)(b) 1992 Stock Option Plan of the Company, as amended to date.
10.13(a)(b) 1996 Stock Plan of the Company.
10.14(a)(b) 1996 Non-Employee Director Stock Option Plan of the
Company.
+10.15(c) License Agreement dated July 18, 1996 by and between the
Company and Boehringer Manheim Italia.
11 Statement re: Computation of Per Share Earnings.
16(a) Letter re: Change in Certifying Accountants.
21 List of subsidiaries of the Registrant.
27 Financial Data Schedule for the year ended December 31,
1996.
- -------------
+ Confidential treatment has been requested and granted for a portion of
this Exhibit.
(a) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File Number 333-3582) which became effective on June 20, 1996.
(b) A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(c) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 which was filed on October 29,
1996.
30
<PAGE> 34
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Financial Statements
December 31, 1995 and 1996
(With Independent Auditors' Report Thereon)
F-1
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
CollaGenex Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of CollaGenex
Pharmaceuticals, Inc. and subsidiary (A Development Stage Enterprise) as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the years
in the three-year period ended December 31, 1996 and for the period from January
10, 1992 (inception) to December 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CollaGenex
Pharmaceuticals, Inc. and subsidiary (A Development Stage Enterprise) as of
December 31, 1995 and 1996, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1996 and
for the period from January 10, 1992 (inception) to December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Princeton, New Jersey
February 7, 1997
F-2
<PAGE> 36
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Balance Sheets
December 31, 1995 and 1996
<TABLE>
<CAPTION>
ASSETS 1995 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,806,435 $ 9,848,177
Short-term investments -- 8,366,736
Interest receivable -- 65,534
Prepaid expenses 7,282 88,443
------------ ------------
Total current assets 5,813,717 18,368,890
Equipment, net (note 3) 14,748 56,496
Other assets 11,520 11,158
------------ ------------
Total assets $ 5,839,985 $ 18,436,544
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 17,672 $ 45,434
Accrued expenses (note 4) 494,855 798,925
------------ ------------
Total current liabilities 512,527 844,359
------------ ------------
Mandatorily redeemable convertible preferred stock (at redemption value which
includes accreted dividends of $1,877,146 in 1995; converted into
5,199,124 common shares upon consummation of initial public offering in
1996) (note 5):
Series A convertible preferred stock, $0.01 par
value; 3,500,000 shares authorized, 3,133,000
shares issued and outstanding in 1995 4,169,813 --
Series B convertible preferred stock, $0.01 par
value; 2,000,000 shares authorized, 1,946,268
shares issued and outstanding in 1995 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 10,822,391 --
------------ ------------
18,908,106 --
Stockholders' equity (deficit) (notes 6 and 7):
Preferred stock, $0.01 par value, no shares authorized in
1995 and 5,000,000 in 1996, no shares outstanding in
1995 and 1996 -- --
Common stock, $0.01 par value; 6,725,000 shares authorized
in 1995 and 25,000,000 in 1996, 312,659 and 7,535,533
shares issued and outstanding in 1995 and 1996, respectively 3,127 75,356
Additional paid-in capital (deficit) (1,743,105) 35,551,459
Deferred compensation (note 7) (20,183) (295,825)
Deficit accumulated during the development stage (11,820,487) (17,738,805)
------------ ------------
Stockholders' equity (deficit) (13,580,648) 17,592,185
Commitments (notes 9, 10 and 12)
Total liabilities and stockholders' equity (deficit) $ 5,839,985 $ 18,436,544
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 37
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Operations
For the years ended December 31, 1994, 1995 and 1996
and for the period from January 10, 1992
(inception) to December 31, 1996
<TABLE>
<CAPTION>
For the
period from
January 10, 1992
Year ended December 31, (inception) to
--------------------------------------------------- December 31,
1994 1995 1996 1996
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
License revenues $ -- $ -- $ 400,000 $ 400,000
Operating expenses incurred in the
development stage:
Research and development
(notes 9 and 12) 1,927,991 3,635,374 4,436,296 13,043,991
General and administrative 792,961 1,547,997 2,527,179 5,813,852
------------ ------------ ------------ ------------
Total operating expenses 2,720,952 5,183,371 6,963,475 18,857,843
------------ ------------
Loss from operations (2,720,952) (5,183,371) (6,563,475) (18,457,843)
Other income (expense):
Interest income 67,487 58,917 645,157 863,146
Interest expense -- (144,108) -- (144,108)
------------ ------------ ------------ ------------
67,487 (85,191) 645,157 719,038
Net loss $ (2,653,465) $ (5,268,562) $ (5,918,318) $(17,738,805)
============ ============ ============ ============
Accretion of undeclared
dividends attributable to
mandatorily redeemable
convertible preferred stock $ 575,370 $ 759,801 $ 719,562 $ 2,596,708
============ ============ ============ ============
Net loss allocable to common
stockholders $ (3,228,835) $ (6,028,363) $ (6,637,880) $(20,335,513)
============ ============ ============ ============
Pro-forma net loss per share (notes 2
and 6) $ (1.10) $ (0.90)
============ ===========
Shares used in computing pro-forma
net loss per share (notes 2 and 6) 4,807,876 6,580,419
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 38
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficit)
For the period from January 10, 1992
(inception) through December 31, 1996
<TABLE>
<CAPTION>
Common stock Additional
----------------------- paid-in
Number Par capital
of shares value (deficit)
--------- ----- ---------
<S> <C> <C> <C>
Issuance of common stock in exchange for technology
license in January 1992 at inception 54,552 $ 546 $ 10,364
Issuance of common stock in exchange for consulting services 7,500 75 14,925
Issuance of common stock in exchange for technology
license in November 1992 24,396 244 4,635
Accretion of undeclared dividends on mandatorily
redeemable convertible preferred stock (note 5) -- -- (190,903)
Net loss -- -- --
---------- ------- -----------
Balance, December 31, 1992 86,448 865 (160,979)
Accretion of undeclared dividends on mandatorily
redeemable convertible preferred stock (note 5) -- -- (351,072)
Net loss -- -- --
---------- ------- -----------
Balance, December 31, 1993 86,448 865 (512,051)
Exercise of common stock options ($0.20 per share)
(note 7) 75,969 760 14,771
Issuance of common shares to an executive officer at
$0.335 per share in November 1994 (note 7) 125,000 1,250 40,625
Accretion of undeclared dividends on mandatorily
redeemable convertible preferred stock (note 5) -- -- (575,370)
Net loss -- -- --
---------- ------- -----------
Balance, December 31, 1994 287,417 2,875 (1,032,025)
Exercise of common stock options ($0.20 per share) (note 7) 25,242 252 5,471
Deferred compensation resulting from grant of options (note 7) -- -- 43,250
Amortization of deferred compensation (note 7) -- -- --
Accretion of undeclared dividends on mandatorily redeemable
convertible preferred stock (note 5) -- -- (759,801)
Net loss -- -- --
---------- ------- -----------
Balance, December 31, 1995 312,659 3,127 (1,743,105)
Exercise of common stock options ($0.20-$0.335 per share) (note 7) 23,750 238 5,544
Issuance of common stock at $10 per share in conjunction with the
Initial Public Offering, net of issuance costs 2,000,000 20,000 18,006,905
Accretion of undeclared dividends on mandatorily redeemable
convertible preferred stock (note 5) -- -- (719,562)
Conversion of mandatorily redeemable convertible preferred stock
into common stock in conjunction with the Initial Public 5,199,124 51,991 19,575,677
Offering
Deferred compensation resulting from grant of options (note 7) -- -- 426,000
Amortization of deferred compensation -- -- --
Net loss -- -- --
------- -----------
Balance, December 31, 1996 $7,535,533 $75,356 $35,551,459
========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
Deficit
accumulated Total
during the stockholders'
Deferred development equity
compensation stage (deficit)
------------ ----- ---------
<S> <C> <C> <C>
Issuance of common stock in exchange for technology
license in January 1992 at inception $ -- $ -- $ 10,910
Issuance of common stock in exchange for consulting services -- -- 15,000
Issuance of common stock in exchange for technology
license in November 1992 -- -- 4,879
Accretion of undeclared dividends on mandatorily
redeemable convertible preferred stock (note 5) -- -- (190,903)
Net loss -- (1,415,703) (1,415,703)
--------- ------------ -----------
Balance, December 31, 1992 -- (1,415,703) (1,575,817)
Accretion of undeclared dividends on mandatorily
redeemable convertible preferred stock (note 5) -- -- (351,072)
Net loss -- (2,482,757) (2,482,757)
--------- ------------ -----------
Balance, December 31, 1993 -- (3,898,460) (4,409,646)
Exercise of common stock options ($0.20-$0.335 per share)
(note 7) -- -- 15,531
Issuance of common shares to an executive officer at
$0.335 per share in November 1994 (note 7) -- -- 41,875
Accretion of undeclared dividends on mandatorily
redeemable convertible preferred stock (note 5) -- -- (575,370)
Net loss -- (2,653,465) (2,653,465)
--------- ------------ -----------
Balance, December 31, 1994 -- (6,551,925) (7,581,075)
Exercise of common stock options ($0.20-$0.335 per share) (note 7) -- -- 5,723
Deferred compensation resulting from grant of options (note 7) (43,250) -- --
Amortization of deferred compensation (note 7) 23,067 -- 23,067
Accretion of undeclared dividends on mandatorily redeemable
convertible preferred stock (note 5) -- -- (759,801)
Net loss -- (5,268,562) (5,268,562)
--------- ------------ -----------
Balance, December 31, 1995 (20,183) (11,820,487) (13,580,648)
Exercise of common stock options ($0.20-$0.335 per share) (note 7) -- -- 5,782
Issuance of common stock at $10 per share in conjunction with the
Initial Public Offering, net of issuance costs -- -- 18,026,905
Accretion of undeclared dividends on mandatorily redeemable
convertible preferred stock (note 5) -- -- (719,562)
Conversion of mandatorily redeemable convertible preferred stock
into common stock in conjunction with the Initial Public -- -- 19,627,668
Offering
Deferred compensation resulting from grant of options (note 7) (426,000) -- --
Amortization of deferred compensation 150,358 -- 150,358
Net loss -- (5,918,318) (5,918,318)
--------- ------------ -----------
Balance, December 31, 1996 $(295,825) $(17,738,805) 17,592,185
========= ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 39
COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARY
(A Development Stage Enterprise)-
Consolidated Statements of Cash Flows For the years ended December 31, 1994,
1995 and 1996 and for the period from January 10, 1992 (inception) to
December 31, 1996
<TABLE>
<CAPTION>
Years ended December 31,
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,653,465) $ (5,268,562) $ (5,918,318)
Adjustments to reconcile net loss to net cash used
in operating activities:
Noncash research and development expense -- -- --
Compensation expense -- 23,067 150,358
Noncash consulting expense -- -- --
Accrued interest converted to preferred stock -- 121,187 --
Depreciation and amortization expense 1,225 3,617 17,051
Change in assets and liabilities:
Increase in interest receivable -- -- (65,534)
Increase in prepaid expenses -- (7,282) (81,161)
Increase in other assets (2,040) (7,328) (770)
Increase (decrease) in accounts payable (64,396) (514,602) 27,762
Increase (decrease) in accrued expenses (85,171) 328,216 304,070
----------- ------------ ------------
Net cash used in operating activities (2,803,847) (5,321,687) (5,566,542)
Cash flows from investing activities:
Organizational costs -- -- --
Capital expenditures (5,834) (11,758) (57,667)
Proceeds from the sale of short-term investments -- -- 3,923,142
Purchase of short-term investments -- -- (12,289,878)
----------- ------------ ------------
Net cash used in investing activities (5,834) (11,758) (8,424,403)
Cash flows from financing activities:
Proceeds from issuance of common stock 57,406 5,723 18,032,687
Proceeds from issuance of preferred stock -- 7,613,273 --
Proceeds from issuance of promissory notes -- 3,028,500 --
Repayment of promissory note -- (125,000) --
----------- ------------ ------------
Net cash provided by financing activities 57,406 10,522,496 18,032,687
Net increase (decrease) in cash and cash equivalents (2,752,275) 5,189,051 4,041,742
Cash and cash equivalents at beginning of period 3,369,659 617,384 5,806,435
----------- ------------ ------------
Cash and cash equivalents at end of period $ 617,384 $ 5,806,435 $ 9,848,177
=========== ============ ============
Supplemental disclosure of cash flows information:
Cash paid for interest $ -- $ 22,921 $ --
=========== ============ ============
Supplemental schedule of noncash financing activities:
Conversion of promissory notes to preferred stock $ -- $ 2,903,500 $ --
Deferred compensation -- 43,250 426,000
Accretion of undeclared dividends attributable to mandatorily redeemable
convertible preferred stock 575,370 759,801 719,562
Conversion of mandatorily redeemable convertible preferred stock to
common stock -- -- 19,627,668
Preferred stock issued in connection with technology license agreements -- -- --
=========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
For the period from
January 10, 1992
(inception) to
December 31, 1996
-----------------
<S> <C>
Cash flows from operating activities:
Net loss $(17,738,805)
Adjustments to reconcile net loss allocable to
common shareholders to net cash used in
operating activities:
Noncash research and development expense 513,789
Compensation expense 173,425
Noncash consulting expense 15,000
Accrued interest converted to preferred stock 121,187
Depreciation and amortization expense 23,764
Change in assets and liabilities:
Increase in interest receivable (65,534)
Increase in prepaid expenses (88,443)
Increase in other assets (11,159)
Increase (decrease) in accounts payable 45,434
Increase (decrease) in accrued expenses 798,925
------------
Net cash used in operating activities (16,212,417)
Cash flows from investing activities:
Organizational costs (5,000)
Capital expenditures (75,259)
Proceeds from the sale of short-term investments 3,923,142
Purchase of short-term investments (12,289,878)
------------
Net cash used in investing activities (8,446,995)
Cash flows from financing activities:
Proceeds from issuance of common stock 18,095,816
Proceeds from issuance of preferred stock 13,508,273
Proceeds from issuance of promissory notes 3,028,500
Repayment of promissory note (125,000)
------------
Net cash provided by financing activities 34,507,589
Net increase (decrease) in cash and cash equivalents 9,848,177
Cash and cash equivalents at beginning of period --
------------
Cash and cash equivalents at end of period $ 9,848,177
============
Supplemental disclosure of cash flows information:
Cash paid for interest $ 22,921
============
Supplemental schedule of noncash financing activities:
Conversion of promissory notes to preferred stock $ 2,903,500
Deferred compensation 469,250
Accretion of undeclared dividends attributable to mandatorily redeemable
convertible preferred stock 2,596,708
Conversion of mandatorily redeemable convertible preferred stock to
common stock 19,627,668
Preferred stock issued in connection with technology license agreements 498,000
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 40
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements
December 31, 1995 and 1996
(1) BUSINESS
CollaGenex Pharmaceuticals, Inc. ("CollaGenex Pharmaceuticals" or the
"Company") was incorporated in Delaware on January 10, 1992. The
Company is a development stage pharmaceutical enterprise engaged in the
development and commercialization of innovative, proprietary medical
therapies for the treatment of periodontal disease and other dental
pathologies. The Company has funded its operations primarily from the
proceeds of public and private placements of its equity securities.
The accompanying consolidated financial statements include the results
of operations of the Company and its wholly-owned subsidiary
(CollaGenex International, Ltd.) for the period from January 10, 1992
(inception) to December 31, 1996. All intercompany accounts and
transactions have been eliminated in consolidation.
The Company's business of developing pharmaceutical products is subject
to a number of significant risks, including risks inherent in research
and development activities and in conducting business in a highly
regulated environment. The success of the Company depends to a large
degree upon obtaining FDA and foreign regulatory approval to market
products currently under development. There can be no assurance that
any of the Company's product candidates will be approved by any
regulatory authority for marketing in any jurisdiction. The Company has
not generated any product revenues and has not experienced positive
cash flow from operations. The Company's further development will
require significant additional financing. The Company's deficit
accumulated during the development stage aggregated $17,738,805 through
December 31, 1996.
(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 invested in obligations of the U.S.
Government and in commercial paper which bears minimal risk. The
carrying amount of cash and cash equivalents approximates its fair
value due to its short-term nature. To date, the Company has not
experienced any significant losses on its cash equivalents.
F-7
<PAGE> 41
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.
SHORT-TERM INVESTMENTS
Short-term investments consist of U.S. Government obligations and
corporate debt securities with original maturities greater than three
months. In accordance with Statement of Financial Accounting Standards
No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and
Equity Securities," the company classifies its short-term investments
as available for sale. Available for sale securities are recorded at
the approximate fair value of the investments based on quoted market
prices at December 31, 1996. The Company considers all of its current
investments to be available for sale.
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.
REVENUE RECOGNITION - LICENSES
Revenue from license agreements is recognized when the related
milestones are met by the Company and when all of the Company's
significant performance obligations under the terms of the license have
been satisfactorily completed.
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.
F-8
<PAGE> 42
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.
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 consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amount reported in the
consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages but does not require companies to
record compensation cost for stock-based employee compensation plans at
fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any,
of the market price of the Company's stock at the date of grant over
the amount an individual must pay to acquire the stock. Such amounts
are amortized over the respective vesting periods of the option grant.
EQUITY SECURITY TRANSACTIONS
Prior to the Company's initial public offering consummated in June 1996
(the "IPO"), the Board of Directors had established the fair value of
common shares, Series A, B and C mandatorily redeemable convertible
preferred stock, and common 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. Subsequent to the IPO, fair market value is
determined based on the quoted market price of the Company's stock.
F-9
<PAGE> 43
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT.
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 significant losses on its cash equivalents and money market funds.
PRO-FORMA NET LOSS PER SHARE
For periods subsequent to the Company's IPO, pro-forma net loss per
share is calculated by dividing the net loss by the weighted average
number of common shares outstanding for the respective periods adjusted
for the dilutive effect, if any, of common stock equivalents which
consist of stock options using the treasury stock method. Common stock
equivalents that are anti-dilutive are excluded from pro-forma net loss
per share calculations subsequent to the IPO.
For periods prior to the Company's IPO, all common and common
equivalent shares issued during the twelve-month period prior to the
IPO at prices below the anticipated IPO price are presumed to have been
issued in contemplation of the IPO and have been included in the
calculation of pro-forma net loss per share as if they were outstanding
for all periods presented (using the treasury stock method and an
initial public offering price of $10.00 per share). The calculation of
shares used in computing pro-forma net loss per share also included all
series of mandatorily redeemable convertible preferred stock, assuming
conversion into shares of common stock (using the if-converted method)
from their respective original dates of issuance.
(3) EQUIPMENT
Equipment consists of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------ -----
<S> <C> <C>
Computer and office equipment $17,592 $75,259
Less accumulated depreciation 2,844 18,763
------- -------
$14,748 $56,496
======= =======
</TABLE>
F-10
<PAGE> 44
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(4) ACCRUED EXPENSES
Accrued expenses consist of the following at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Contracted development costs $222,445 $376,151
Professional and consulting fees 191,540 228,452
Payroll and related costs 54,963 83,750
Disposal costs for expired research
and development supplies 20,000 19,087
Miscellaneous taxes -- 46,000
Royalties -- 12,500
Other 5,907 32,985
-------- --------
$494,855 $798,925
======== ========
</TABLE>
(5) 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 9 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).
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.
F-11
<PAGE> 45
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(5) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, CONT.
The holders of Series A, Series B and Series C were originally 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. Such amounts
have been accreted in the accompanying consolidated financial
statements for the respective historical periods in which they
accumulated. In June 1996, upon the closing of the IPO, all issues of
the mandatorily redeemable convertible preferred stock were converted
into 5,199,124 common shares, and all undeclared dividends previously
accreted were forfeited. All rights with respect to the above noted
securities ceased.
(6) STOCKHOLDERS' EQUITY
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 stock option plan. All common share, per share and
pro forma amounts in the accompanying consolidated financial statements
have been retroactively restated to reflect this reverse stock split.
On June 20, 1996, the Company completed an initial public offering of
2,000,000 shares of its common stock at $10 per share. Net proceeds to
the Company after underwriting fees and all related expenses were
$18,026,905.
(7) STOCK OPTION PLANS
The 1992 Stock Option Plan, as amended, (the "1992 Plan") provided for
the granting of incentive and nonstatutory options to directors,
employees and consultants to purchase up to 121,228 shares, which was
increased to 300,000 and 425,000 in 1993 and 1995, respectively, and
reduced to 291,000 in 1996, of the Company's common stock at a price,
for the incentive options, not less than the fair market value on the
date of grant. Such options are exercisable for a period of 10 years
and generally vest over a four year period. All such 291,000 options
available under the 1992 Plan were granted by April 1996. As of
December 31, 1995, 47,103 options granted under the 1992 Plan were
exercisable at a weighted average exercise price of $0.29 per share. As
of December 31, 1996, 93,104 options granted under the 1992 Plan were
exercisable at a weighted average exercise price of $0.79 per share.
The weighted average contractual life of options outstanding is 8.6
years.
F-12
<PAGE> 46
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(7) STOCK OPTION PLANS, CONT.
The 1992 Plan activity is summarized below:
<TABLE>
<CAPTION>
1992 Plan
Exercise price
Shares per share
------ ---------
<S> <C> <C> <C>
January 10, 1992 (inception) -- $ --
Granted 63,125 0.20
Cancelled -- --
-------
Balance, December 31, 1992 63,125 0.20
Granted 36,836 0.20
Exercised -- --
-------
Balance, December 31, 1993 99,961 0.20
Granted 56,750 0.20-0.335
Exercised (75,969) 0.20
-------
Balance, December 31, 1994 80,742 0.20-0.335
Granted 178,000 0.335-1.20
Exercised (25,242) 0.20
-------
Balance, December 31, 1995 233,500 0.20-1.20
Granted 60,000 2.00
Exercised (23,750) 0.20-0.335
-------
Balance, December 31, 1996 269,750 $ 0.20-2.00
=======
</TABLE>
The 1996 Stock Option Plan (the "1996 Plan") provides for the granting
of incentive and nonstatutory options to employees and consultants to
purchase up to 750,000 options of the Company's common stock at a
price, for the incentive options, not less than the fair market value
on the date of grant. Incentive and nonstatutory options granted to
individuals owning more than 10% of the voting power of all classes of
stock at the time of grant must have an exercise price no less than
110% of the fair market value on the date of grant. Incentive options
to purchase 4,500 shares of the Company's common stock at an exercise
price of $9.75 per share were granted under the 1996 Plan as of
December 31, 1996, and no options were exercisable. The weighted
average contractual life of options outstanding is 10 years. Such
options are exercisable for a period of 10 years and generally vest
over a four year period.
F-13
<PAGE> 47
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(7) STOCK OPTION PLANS, CONT.
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 Director
Plan"). Under this plan, 109,000 shares of common stock are reserved
for issuance at an exercise price equal to the fair market value on the
date of grant. As of December 31, 1996, options to purchase 125,000
shares of the Company's common stock were issued to non-employee
directors at exercise prices ranging from $9.75 - $10.00 per share, and
no options were exercisable. Certain of these grants exceeded limits
for shares available for grant and are subject to shareholder approval.
The weighted average contractual life of options outstanding is 9.8
years. Such options vest 20% per annum commencing one year from the
grant date.
In May and June of 1996 11,000 options were granted to employees at an
exercise price of $2.00 per share. These grants were not issued under
the terms of any of the above Plans. All options granted to employees
subsequent to the IPO were granted under the 1996 Plan. As of December
31, 1996 none of these options were exercisable. The weighted average
contractual life of options outstanding is 9.5 years.
The Company applies APB Opinion No. 25 in accounting for its stock
option plans and, accordingly, no compensation expense has been
recognized in the consolidated financial statements for stock options
issued at exercise prices equal to the fair market value on the date of
grant. Deferred compensation of $43,250 and $426,000 has been recorded
in 1995 and 1996, respectively, for options granted prior to the
Company's initial public offering where the estimated fair market value
of the Company's stock on the date of the grant exceeded the exercise
price of such options. Such deferred compensation is being amortized to
compensation expense ($23,067 in 1995 and $150,358 in 1996) in the
accompanying consolidated statement of operations over the respective
vesting periods of such grants.
The weighted average fair values of stock options granted during 1995
and 1996 were $0.79 and $6.78 per share, respectively, on the date of
grant. Such fair values were
determined using the Black-Scholes option pricing model and are based
on the following assumptions: in 1995, an expected dividend yield of
0%, a risk-free interest rate of 6.5%, a volatility rate of 60% and an
expected option life of seven years; in 1996, an expected dividend
yield of 0%, a risk-free interest rate of 7.5%, a volatility rate of
60% and an expected average option life of seven years.
At December 31, 1996, there were 745,500 shares available for grant
under the 1996 Plan and none under the Non-Employee Director Plan or
the 1992 Plan.
F-14
<PAGE> 48
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(7) STOCK OPTION PLANS, CONT.
Had the Company determined compensation cost for options granted during
1995 and 1996 under SFAS 123 based on the fair value at the grant date,
the Company's net loss would have been increased to the pro forma
amounts shown below:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net loss:
As reported $5,268,562 $ 5,918,318
Pro forma 5,279,737 6,009,817
Net loss per share:
As reported $ 1.10 $ 0.90
Pro forma 1.10 0.91
</TABLE>
Pro forma net loss reflects only options granted in 1995 and 1996.
Consequently, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
loss amounts presented above because compensation cost is incurred
under SFAS 123 over the respective vesting period of such options, and
options granted by the Company prior to January 1, 1995 are not
reflected in the pro forma net loss figures above.
(8) INCOME TAXES
At December 31, 1996, the Company had available net operating loss
("NOL") carryforwards of approximately $13,200,000 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 2011 and 1999, respectively. The Company also has research
and development tax credit carryforwards of approximately $131,000 for
federal income tax reporting purposes which are available to reduce
federal income taxes, if any, through 2011.
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 and the IPO.
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.
F-15
<PAGE> 49
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(8) INCOME TAXES, CONT.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at
December 31, 1995 and 1996 are presented below:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Capitalized start-up costs $ 933,010 $ 1,557,864
Net operating loss carryforwards 3,390,313 5,669,500
Tax credit carryforward 98,271 130,771
Recognition of accrued expense for
financial statement reporting
purposes but not for income tax
reporting purposes 121,800 151,743
----------- -----------
Total gross deferred tax assets 4,543,394 7,509,878
Less valuation allowance (4,542,453) (7,505,124)
----------- -----------
Total deferred tax assets 941 4,754
Deferred tax liability:
Equipment, due to difference in
depreciation (941) (4,754)
Total gross deferred tax liability (941) (4,754)
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
</TABLE>
The net change in the total valuation allowance for the years ended
December 31, 1995 and 1996 were increases of approximately $1,851,000
and $2,963,000 respectively, related primarily to additional net
operating losses incurred by the Company.
(9) TECHNOLOGY LICENSE
At the time of its formation 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 at an issuance price of $1.00 per
F-16
<PAGE> 50
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(9) TECHNOLOGY LICENSE, CONT.
share 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
consolidated statement of operations in connection with these common
and preferred 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 of
$15,750 in 1994 and $50,000 in both 1995 and 1996.
In addition, the Company is required to reimburse SUNY for certain
patent related costs, as well as to support certain additional research
efforts in 1997.
(10) 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.
In April 1995, 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.
(11) 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 annual 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 or 1996 in accordance
with the terms of the 401(k) Plan.
F-17
<PAGE> 51
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements, Continued
(12) CONTRACT RESEARCH AGREEMENT
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,
$1,766,000 and $4,074,000 for the years ended December 31, 1994, 1995,
1996 and the period from January 10, 1992 (inception) to December 31,
1996, respectively.
F-18
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this ____ day of March,
1997.
COLLAGENEX PHARMACEUTICALS, INC.
By:_____________________________________
Brian M. Gallagher, Ph.D., President
and Chief Executive Officer
<PAGE> 53
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
- ---------------------------------- President, Chief Executive Officer March ____, 1997
Brian M. Gallagher, Ph.D. and Director (Principal Executive
Officer)
- ---------------------------------- Chief Financial Officer, Treasurer March ____, 1997
Nancy C. Broadbent and Secretary (Principal Financial
and Accounting Officer)
- ---------------------------------- Chairman of the Board and March ____, 1997
Helmer P.K. Agersborg, Ph.D. Director
- ---------------------------------- Director March ____, 1997
James E. Daverman
- ---------------------------------- Director March ____, 1997
Robert J. Easton
- ---------------------------------- Director March ____, 1997
Stephen W. Ritterbush, Ph.D.
- ---------------------------------- Director March ____, 1997
Pieter J. Schiller
- ---------------------------------- Director March ____, 1997
Terence E. Winters, Ph.D.
- ---------------------------------- Director March ____, 1997
Peter Barnett
</TABLE>
<PAGE> 1
EXHIBIT 10.10
ADDENDUM TO LEASE AGREEMENT
BETWEEN STOCKING WORKS ASSOCIATES
and
COLLAGENEXINC.
THIS AGREEMENT, entered this day of 15 October, 1996, by and between
Stocking Works Associates, a Pennsylvania Limited Partnership (hereinafter
"Landlord") and Collagenex Inc., a Delaware Corporation, (hereinafter "Tenant")
provides:
1. Landlord and Tenant entered into a Lease Agreement dated September 5,
1995 ("the Lease Agreement") whereby Tenant would lease the third floor at 301
South State Street, Newtown, PA, for a period of one (1) year commencing on
January 1, 1996, and terminating on December 31, 1996.
2. Tenant now wishes to extend said Lease Agreement for one additional
year commencing January 1, 1997 and terminating on December 31, 1997.
3. Landlord hereby agrees to extend the term of said Lease Agreement as
set forth herein provided Tenant agrees to continue to be bound by the terms
and conditions set forth in the September 5, 1995 Lease Agreement.
INTENDING to be legally bound hereby, and for good and valuable
consideration herein recited and otherwise paid, the parties hereto set their
hands and seals the first date above written:
WITNESS: LANDLORD:
Stocking Works Associates
By:
- ----------------------------- --------------------------------
Kenneth S. Sweet
TENANT:
Collagenex Inc.
/s/ Carol Nielsen By: /s/ Nancy C. Broadbent
- ----------------------------- --------------------------------
<PAGE> 1
Exhibit 11
Statement re Computation of Per Share Earnings (Loss)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995
<S> <C> <C>
Net Loss for computing pro forma net income
per share ..................................... $(5,918,318) $(5,268,562)
=========== ===========
Pro forma weighted average common shares
outstanding .................................... 6,572,104 3,354,371
Shares of common stock assumed to be issued upon
exercise of common stock options & warrants to
purchase common stock using treasury stock
method, including "cheap" options and warrants
as outstanding for all periods ................. 8,315 1,453,505
---------- ----------
Shares used in computing pro forma net loss
per share ...................................... 6,580,419 4,807,876
========== ==========
Pro forma net loss per share ..................... $(0.90) $(1.10)
===== =====
</TABLE>
<PAGE> 1
Exhibit 21
Subsidiaries of the Registrant
CollaGenex International, Ltd. (Europe)
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 9,848
<SECURITIES> 8,367
<RECEIVABLES> 66
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,369
<PP&E> 75
<DEPRECIATION> 19
<TOTAL-ASSETS> 18,437
<CURRENT-LIABILITIES> 844
<BONDS> 0
0
0
<COMMON> 75
<OTHER-SE> 17,517
<TOTAL-LIABILITY-AND-EQUITY> 18,437
<SALES> 0
<TOTAL-REVENUES> 400
<CGS> 0
<TOTAL-COSTS> 6,963
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,918)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,918)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,918)
<EPS-PRIMARY> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
