COLLAGENEX PHARMACEUTICALS INC, S-1/A, 1997-04-02

COLLAGENEX PHARMACEUTICALS INC
S-1/A, 1997-04-02
PHARMACEUTICAL PREPARATIONS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 1997

REGISTRATION NO. 333-24151

================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

COLLAGENEX PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 2834 52-1758016
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

301 SOUTH STATE STREET
NEWTOWN, PENNSYLVANIA 18940
(215) 579-7388
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

BRIAN M. GALLAGHER, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
COLLAGENEX PHARMACEUTICALS, INC.
301 SOUTH STATE STREET
NEWTOWN, PENNSYLVANIA 18940
(215) 579-7388
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

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

COPIES TO:

<TABLE>
<S> <C>
DAVID J. SORIN, ESQ. ELLEN B. CORENSWET, ESQ.
CATHERINE M. VERNA, ESQ. LUCI STALLER ALTMAN, ESQ.
BUCHANAN INGERSOLL BROBECK, PHLEGER & HARRISON LLP
COLLEGE CENTRE 1633 BROADWAY
500 COLLEGE ROAD EAST 47TH FLOOR
PRINCETON, NEW JERSEY 08540 NEW YORK, NEW YORK 10019
(609) 987-6800 (212) 581-1600
</TABLE>

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION

APRIL 2, 1997

1,000,000 SHARES

[LOGO]

COMMON STOCK
------------------

All of the 1,000,000 shares of Common Stock offered hereby are being sold
by CollaGenex Pharmaceuticals, Inc. ("CollaGenex Pharmaceuticals" or the
"Company"). The Company's
Common Stock is quoted on the Nasdaq Stock Market's National Market (the "Nasdaq
National Market") under the symbol "CGPI." On March 27, 1997, the last reported
sale price of the Company's Common Stock was $15.00 per share.

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.

SEE "RISK FACTORS," PAGE 6.

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

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

<TABLE>
<S> <C> <C> <C>
================================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- ------------------------------------------------------------------------------------------------
Per Share.............................. $ $ $
- ------------------------------------------------------------------------------------------------
Total(2)............................... $ $ $
================================================================================================
</TABLE>

(1) Before deducting expenses of the offering estimated at $200,000 payable by
the Company.

(2) A stockholder of the Company, which is not an affiliate of the Company, has
granted the Underwriter a 30-day option to purchase up to 150,000 additional
shares of Common Stock solely to cover over-allotments, if any. To the
extent that the option is exercised, the Underwriter will offer the
additional shares at the Price to Public shown above. If the option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and proceeds to such stockholder will be
$ , $ , $ and $ , respectively. See
"Underwriting."

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

The shares of Common Stock are offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to the
right of the Underwriter to reject any order in whole or in part. It is expected
that delivery of the shares of Common Stock will be made at the offices of Alex.
Brown & Sons Incorporated, Baltimore, Maryland, on or about ,
1997.

ALEX. BROWN & SONS
INCORPORATED

THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE> 3

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the shares of Common Stock offered
hereby. This Prospectus, which forms a part of the Registration Statement, does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules filed therewith. For further information with respect to
the Company and the shares of Common Stock offered hereby, reference is made to
the Registration Statement and to such exhibits and schedules filed therewith.
Statements contained herein as to the content of any contract or other document
are not necessarily complete and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, and each such statement shall be deemed qualified in its entirety by
such reference. The Registration Statement and any amendments thereto, including
exhibits filed or incorporated by reference as a part thereof, are available for
inspection and copying at the Commission's offices as described in the following
paragraph.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, is required to file reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information can be
inspected and copied at the Public Reference Section of the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of filed reports, proxy statements and other information can
be obtained from the Public Reference Section of the Commission, Washington D.C.
20549, upon payment of prescribed rates or in certain cases by accessing the
Commission's World Wide Web site at http://www.sec.gov. The Common Stock of the
Company is traded on the Nasdaq National Market under the symbol CGPI, and such
reports, proxy statements and other information concerning the Company also can
be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington D.C. 20006.
------------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABLIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITER MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING".

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

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PROSPECTUS SUMMARY

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

THE COMPANY

CollaGenex Pharmaceuticals is engaged in the development and
commercialization of innovative, proprietary medical therapies for the treatment
of periodontal disease and other dental pathologies. The Company believes that
its initial drug, Periostat, will be the first orally administered, systemically
delivered pharmaceutical to treat periodontitis. Unlike existing treatments,
which focus on the bacterial infection associated with periodontitis, Periostat
inhibits the chronic progressive tissue degradation characteristic of the
disease. The Company 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 for Periostat in
August 1996. The NDA was accepted for filing by the United States Food and Drug
Administration in October 1996.

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

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

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

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

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complementary technologies and products; and (v) leverage the Company's core
technology through strategic partnering arrangements for non-dental
applications.

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

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.............. 1,000,000 shares
Common Stock to be outstanding after the 8,543,579 shares(1)
offering.......................................
Use of Proceeds.................................. For marketing expenses associated with new
product introduction; the establishment of
sales and marketing capabilities;
pharmaceutical development; and other
general corporate purposes, including
working capital
Nasdaq National Market Symbol.................... CGPI
</TABLE>

- ---------------
(1) Excludes 546,704 shares of Common Stock issuable upon the exercise of stock
options outstanding as of February 28, 1997 at a weighted average exercise
price of $5.27 per share, of which options to purchase 86,350 shares of
Common Stock are exercisable. See "Management -- Directors' Compensation"
and "-- Stock Option Plans."

Except as otherwise specified, all information in this Prospectus assumes
no exercise of the Underwriter's over-allotment option.

4
<PAGE> 6

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

<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 10, 1992 YEAR ENDED DECEMBER 31,
(INCEPTION) TO -------------------------------------------
DECEMBER 31, 1992 1993 1994 1995 1996
----------------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues................... $ -- $ -- $ -- $ -- $ 400
Loss from operations....... (1,464) (2,526) (2,721) (5,183) (6,563)
Net loss................... (1,416) (2,483) (2,653) (5,269) (5,918)
Net loss allocable to
common stockholders..... (1,607) (2,834) (3,229) (6,028) (6,638)
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, 1996
---------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.............. $ 18,215 $ 32,115
Total assets................................................... 18,437 32,337
Deficit accumulated during the development stage............... (17,739) (17,739)
Total stockholders' equity..................................... 17,592 31,492
</TABLE>

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

(2) Adjusted to reflect the sale of 1,000,000 shares of Common Stock offered
hereby after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company. See "Use of Proceeds" and
"Capitalization."

5
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RISK FACTORS

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

Uncertainty Of FDA Approval of Periostat. Pharmaceutical products are
subject to stringent regulation by governmental authorities in the United States
and in other countries. Approval of Periostat by the United States Food and Drug
Administration ("FDA") is required before any marketing or sales of Periostat
may commence in the United States. The Company submitted a new drug application
("NDA") for Periostat 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. The FDA
review process can be lengthy and unpredictable, and the Company may encounter
delays or rejection of its NDA. NDAs submitted to the FDA take, on average, one
to three years to obtain approval. If questions arise during the FDA review
process, approval may take a significantly longer period of time. The Company
completed Phase III clinical trials for Periostat in December 1994 and, since
that time, until August 1996, was engaged in the preparation of its NDA and
discussions with the FDA regarding, among other things, additional pre-clinical
information to be submitted in the NDA. In late 1995, the FDA requested that the
Company conduct additional animal studies regarding certain effects associated
with the long-term dosing of doxycycline hyclate ("doxycycline"), a tetracycline
that is the active ingredient in Periostat, and that the data be included in the
Company's NDA submission. Such animal studies have been conducted and the
results included in the Company's NDA for Periostat. In addition, a post-
approval, post-marketing animal study related to long-term dosing of doxycycline
also was requested. There can be no assurance that the FDA will not require
additional pre-clinical or clinical supporting data or other information as a
condition of approval of Periostat. Moreover, if approval of Periostat is
granted, such approval may entail limitations on the indicated uses for which it
may be marketed. The Company has not received any indication from the FDA that
any limitations on the Company's proposed uses as contemplated by the Company's
proposed NDA will be imposed. There can be no assurance, however, that such
limitations will not be imposed. Failure to obtain FDA approval of a NDA for
Periostat would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Periostat" and
"-- Government Regulation."

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

Dependence on a Single Product. The Company has no product approved for
marketing in the United States or in any foreign country. The Company's future
revenues and profitability are critically dependent on the approval of the NDA
for Periostat and the Company's ability to successfully market and sell
Periostat. Although the Company seeks to market complementary therapeutic
products and diagnostic tests with Periostat, the Company expects that if the
FDA approves the Company's NDA for Periostat, substantially all of the Company's
product revenues will be derived from sales of Periostat. There can be no
assurance that the Company will receive FDA approval of Periostat. If the
Company receives FDA approval of Periostat, commercial success will depend on
acceptance of this treatment for periodontitis by periodontists, dental
practitioners, other

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health care providers, third-party payors and patients. The Company's inability
to obtain FDA approval of its NDA, to obtain market acceptance of Periostat, to
successfully commercialize Periostat or to obtain adequate third-party
reimbursement coverage would have a material adverse effect on the Company's
business, financial condition and results of operations.

Limited Operating History; History of Operating Losses; Uncertainty of
Future Profitability. The Company has a limited operating history. For the years
ended December 31, 1994, 1995 and 1996, the Company had net losses of
approximately $2.7 million, $5.3 million and $5.9 million, respectively. Such
losses have resulted primarily from the expenses associated with the Company's
pharmaceutical development program, the Periostat clinical trials and the
preparation of the NDA for submission to the FDA. As of December 31, 1996, the
Company had an accumulated deficit of approximately $17.7 million. The Company's
expansion of its operations, including establishment of a direct sales and
marketing organization in anticipation of possible FDA approval of a NDA, will
result in significant expenses over at least the next two years. The Company
does not expect to receive any significant revenues from Periostat or from any
other product in the foreseeable future, if at all, to offset these expenses.
There can be no assurance that the Company will receive FDA approval of its NDA,
that it will be able to market and sell Periostat successfully or that
profitability will ever be achieved. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition."

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

No Marketing or Sales Capability or History. The Company has no history in
marketing, distributing or selling pharmaceutical products in the dental market
or otherwise and intends to rely in the foreseeable future on third parties for
the marketing, distribution and sale of Periostat and any other products
marketed by the Company. If the Company determines to sell Periostat in the
United States other than through the use of marketing partners or independent
sales organizations or sales agents, the Company will need to establish a direct
sales force. No assurance can be given that such a marketing and sales
organization can be established successfully or that the Company's direct sales
force, if established, will succeed in promoting Periostat to the dental
community, patients and third-party payors and otherwise successfully marketing
Periostat. To the extent the Company relies on marketing partners or other
arrangements, the Company will be dependent upon the success of these outside
parties in performing their responsibilities. Although the Company believes that
such parties, if any, will have an economic motivation to perform successfully
their contractual responsibilities, the amount and timing of resources to be
devoted to these activities may not be within the Company's control. There can
be no assurance that such parties will perform their contractual obligations or
that the Company's reliance on others for the marketing of Periostat will not
result in

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unforeseen problems. If the requisite foreign regulatory approvals are obtained,
the Company intends to establish a network of sub-licensees or distributors to
market and sell Periostat outside of the United States. There can be no
assurance that the Company will be able to recruit and retain qualified sales
and marketing personnel and foreign sub-licensees or distributors or marketing
partners or that the Company's marketing and sales efforts will be successful.
Failure to establish successfully a marketing and sales organization, whether
directly or through third parties, would have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Marketing."

Dependence on Patents, Licenses and Proprietary Rights; Enforcement of
Rights. The Company's success will depend in part on its ability to obtain
patent protection for its technologies, products and processes, and to preserve
its trade secrets and operate without infringement of proprietary rights of
other parties both in the United States and in foreign countries. Because of the
substantial length of time and expense associated with bringing new products
through development to the marketplace, the pharmaceutical industry places
considerable importance on obtaining and maintaining patent and trade secret
protection for new technologies, products and processes. The Company depends on
a license from the Research Foundation of the State University of New York at
Stony Brook ("SUNY") for all of its core technology (the "SUNY License"). The
SUNY License grants the Company an exclusive worldwide license to 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"). SUNY did not apply in foreign countries for patents
corresponding to the Primary Patent but has obtained patents that correspond to
the Secondary Patent in Australia, Canada and certain European countries. A
patent application corresponding to the Secondary Patent is pending in Japan.
SUNY also has obtained patents in certain European countries, Canada and Japan
and has pending patent applications in certain other foreign countries which
correspond to its U.S. patents relating to methods of use of tetracyclines to
reduce bone loss. The Company's rights under the SUNY License are subject to
certain statutory rights of the U.S. government resulting from federal support
of research activities at SUNY. The failure to obtain and maintain patent
protection may mean that the Company will face increased competition in the
United States and in foreign countries. The SUNY License imposes various payment
and reporting obligations on the Company. Failure of the Company to comply with
these requirements could result in the termination of such license. The
termination of the SUNY License, or the failure to obtain and maintain patent
protection for the Company's technologies, would have a material adverse effect
on the Company's business, financial condition and results of operations. One of
the U.S. patents and a corresponding Japanese patent application licensed to the
Company under the SUNY License are owned jointly by SUNY and a Japanese company.
These patent rights, which expire in 2012, cover particular CMTs (the "Jointly
Owned CMTs") that were involved in research activities between SUNY and the
Japanese company. The Japanese company may have exclusive rights to these
Jointly Owned CMTs in Asia, Australia and New Zealand and may have a non-
exclusive right to exploit these Jointly Owned CMTs in other territories. These
Jointly Owned CMTs are not involved in the Company's Periostat product but
could, in the future, prove to be important for one or more of the Company's
other potential applications of its technology. If the Company does incorporate
the Jointly Owned CMTs in any future product, it may be precluded from marketing
these products in Asia, Australia and New Zealand and could experience increased
competition in other markets from the joint owner. There can be no assurance
that patent applications to which the Company holds rights will result in the
issuance of patents, that any

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

Dependence on Third-Party Suppliers. The Company does not have any
manufacturing facilities and does not intend to establish such facilities. The
Company currently relies on a single supplier of doxycycline, the active
ingredient in Periostat. This supplier produces a substantial portion of the
doxycycline used in the United States. There are relatively few alternative
sources of supply for doxycycline, and the Company may not be able to establish
additional or replacement suppliers of doxycycline quickly. Any interruption in
the supply of doxycycline would have a material adverse effect on the Company's
business, financial condition and results of operations. Periostat is currently
manufactured by a single contract manufacturer, which has made substantially all
of the Periostat used in the Company's clinical trials. To be successful,
Periostat must be manufactured in commercial quantities under good manufacturing
practices ("GMP") prescribed

9
<PAGE> 11

by the FDA and at an acceptable cost. The FDA periodically inspects
manufacturing facilities in the United States in order to assure compliance with
applicable GMP requirements. Foreign manufacturers also are inspected by the FDA
if their drugs are marketed in the United States. Failure of the Company's
foreign supplier of doxycycline or failure of the Company's manufacturer of
Periostat to comply with GMP regulations or other FDA regulatory requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company intends to utilize contract
manufacturers for the commercial manufacture of Periostat. There can be no
assurance that the Company will be able to enter into or maintain manufacturing
arrangements on acceptable terms, if at all. If the Company is not able to enter
into or maintain commercial manufacturing agreements, it could encounter delays
in introducing or supplying Periostat. There can be no assurance that any
contract manufacturers engaged by the Company in the future will perform their
contractual obligations or remain in compliance with GMP. See
"Business -- Manufacturing and Suppliers."

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

Uncertainty of New Product Development; Dependence on Collaborators. The
Company has several potential products for non-dental applications that are in
various preliminary stages of development and will require significant
additional research and development, clinical trials and appropriate regulatory
approval before any such products may be commercialized. All of the Company's
proposed products are based upon its core technology. There can be no assurance
that such technology will be applicable to the product applications being
pursued by the Company. The Company's strategy for the development and
commercialization of pharmaceuticals for non-dental applications is to establish
collaborations and licensing arrangements with third parties pursuant to which
the Company's collaborators likely will be responsible for pre-clinical testing
and human clinical trials, the preparation and submission of applications for
regulatory approval for potential pharmaceutical products and the manufacture
and commercialization of such products. The Company does not currently intend to
perform any of these activities with respect to any product involving non-dental
applications. The Company will, therefore, be dependent upon the expertise of
and dedication of sufficient resources by third parties to develop and
commercialize other products based on its core technology. There can be no
assurance that the Company will be able to establish collaborative or licensing
arrangements, that any such arrangements or licenses will be on terms favorable
to the Company, or that current or future collaborative or licensing
arrangements ultimately will be successful. Should any future collaborative
partner fail to develop successfully any drug candidate to which it has rights,
the Company's business could be materially adversely affected. In addition,
there can be no assurance that any such collaborators will not pursue
alternative technologies or drug candidates, either on their own or in
collaboration with others, as a means for developing treatments for the diseases
sought to be addressed by the Company's programs. See "Business -- Strategy,"
"-- Other Potential Applications" and "-- Research and Development."

Extensive Government Regulation. Regulation by governmental entities in
the United States and other countries will be a significant factor in the
production and marketing of Periostat as well as

10
<PAGE> 12

any other pharmaceutical product developed by the Company or a collaborator of
the Company. Virtually all pharmaceutical products require regulatory approval
by government agencies prior to commercialization. In particular, human
pharmaceutical therapeutic products are subject to rigorous pre-clinical and
clinical testing and other approval procedures by the FDA and by foreign
regulatory authorities. Various federal and, in some cases, state statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage, record keeping and marketing of such pharmaceutical products. The
process of obtaining these approvals and the subsequent compliance with
appropriate federal and foreign statutes and regulations are time consuming and
require the expenditure of substantial resources. Generally, in order to gain
FDA approval, a company first must conduct pre-clinical studies in a laboratory
and in animal models to obtain preliminary information on a compound's efficacy
and to identify any safety problems. The results of these studies are submitted
as part of an Investigational New Drug ("IND") application that the FDA must
review before human clinical trials of an investigational drug can start.
Clinical trials are normally done in three phases and generally take two to five
years, but may take longer, to complete. After completion of clinical trials of
a new product, FDA and foreign regulatory authority marketing approval must be
obtained. NDAs submitted to the FDA take, on average, one to three years to
obtain approval. If questions arise during the FDA review process, approval may
take a significantly longer period of time. The testing and approval processes
require substantial time and effort and there can be no assurance that any
approval will be granted on a timely basis, if at all. Even if regulatory
clearances are obtained, a marketed product is subject to continual review, and
later discovery of previously unknown problems or failure to comply with the
applicable regulatory requirements may result in restrictions on the marketing
of a product or withdrawal of the product from the market as well as possible
civil or criminal sanctions. 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. For marketing
outside the United States, the Company also will be subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for pharmaceutical products. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely from country to
country. None of the Company's products has been approved for marketing in the
United States or elsewhere. No assurance can be given that the Company will be
able to obtain regulatory approval for any of such products. Failure to obtain
requisite governmental approvals or failure to obtain approvals of the scope
requested will delay or preclude the Company or its licensees or marketing
partners from marketing their products, or limit the commercial use of the
products, and thereby could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Government Regulation."

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

Uncertainty of Third-Party Reimbursement and Health Care Reform.
Successful commercialization of any pharmaceutical products the Company may
develop will depend, in part, upon the availability of reimbursement or funding
from third-party health care payors such as government and

11
<PAGE> 13

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

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

Future Capital Needs; Uncertainty of Additional Financing. There can be no
assurance that the net proceeds from this offering, together with the Company's
existing capital resources, will be adequate to fund the Company's operations
through at least 1998. The Company anticipates that it may be required to raise
additional capital over a period of several years in order to conduct its
operations. Such capital may be raised through additional public or private
financings, as well as collaborative arrangements, borrowings and other
available sources. The Company's capital requirements depend on numerous
factors, including the ability of the Company to obtain FDA approval of and
successfully commercialize Periostat, competing technological and market
developments, the ability of the Company to enter into collaborative
arrangements for the development, regulatory approval and commercialization of
other products, and the cost of filing, prosecuting, defending and enforcing
patent claims and other intellectual property rights. To the extent that
additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to the
Company's existing stockholders. There can be no assurance that additional
funding, if necessary, will be available on favorable terms, if at all. If
adequate funds are not available, the Company may be required to curtail
operations significantly or to obtain funds through entering into arrangements
with collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates, products or potential
markets that the Company would not otherwise relinquish. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition."

Shares Eligible for Future Sale and Potential Adverse Effect on Market
Price. Future sales of Common Stock in the public market following this
offering could adversely affect the market price

12
<PAGE> 14

of the Common Stock. Upon completion of this offering, the Company will have
8,543,579 shares of Common Stock outstanding, assuming no exercise of currently
outstanding options. Of these shares, the 1,000,000 shares sold in this offering
and the 2,000,000 shares offered and sold pursuant to the Company's initial
public offering of Common Stock consummated in June 1996 (plus any additional
shares sold upon exercise of the Underwriter's over-allotment option) will be
freely transferable without restriction under the Securities Act of 1933, as
amended (the "Securities Act"), unless they are held by "affiliates" of the
Company as that term is used under the Securities Act and the regulations
promulgated thereunder. Directors, officers and certain stockholders of the
Company, holding in the aggregate approximately 4,941,594 shares of Common
Stock, have agreed, subject to certain limited exceptions, not to sell or
otherwise dispose of any of the shares held by them as of the date of this
Prospectus for a period of 90 days after the date of this Prospectus without the
prior written consent of Alex. Brown & Sons Incorporated. At the end of such
90-day period, approximately 5,030,283 shares of Common Stock will be eligible
for immediate resale, subject to compliance with Rule 144. In addition, at the
end of such 90-day period, an aggregate of approximately 138,141 shares will be
eligible for immediate resale or issuable upon exercise of vested options,
subject to compliance with Rules 144 and 701. All remaining shares of Common
Stock outstanding will become eligible for sale at various times over a period
of less than two years and could be sold earlier if the holders exercise any
available registration rights. The holders of 4,712,624 shares of Common Stock
have the right in certain circumstances to require the Company to register their
shares under the Securities Act for resale to the public. If such holders, by
exercising their demand registration rights, cause a large number of shares to
be registered and sold in the public market, such sales could have an adverse
effect on the market price for the Company's Common Stock. If the Company were
required to include in a Company-initiated registration shares held by such
holders pursuant to the exercise of their piggyback registration rights, such
sales may have an adverse effect on the Company's ability to raise needed
capital. See "Management -- Stock Option Plans," "Description of Capital
Stock -- Registration Rights of Certain Holders and Rights of Participation in
Future Offerings," "Shares Eligible for Future Sale" and "Underwriting."

Possibility of Volatility of Stock Price. There can be no assurance that
an active public market for the Common Stock will be sustained after this
offering. The market prices for securities of life sciences companies have been
highly volatile and the market has experienced significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. Announcements of technological innovations or new commercial products
by the Company or its competitors, developments concerning proprietary rights,
including patents and litigation matters, publicity regarding actual or
potential results with respect to Periostat or other products under development,
regulatory developments in both the United States and foreign countries, general
market conditions, as well as fluctuations in the Company's revenues and
financial results and other factors, may have a significant impact on the market
price of the Common Stock. See "Price Range of Common Stock" and "Underwriting."

Anti-Takeover Effect of Certain Charter and By-Law Provisions and Delaware
Law. The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") authorizes the Board of Directors to issue,
without stockholder approval, 5,000,000 shares of Preferred Stock (the
"Preferred Stock") with voting, conversion and other rights and preferences that
could adversely affect the voting power or other rights of the holders of Common
Stock. The issuance of Preferred Stock or of rights to purchase Preferred Stock
could be used to discourage an unsolicited acquisition proposal. In addition,
the possible issuance of Preferred Stock could discourage a proxy contest, make
more difficult the acquisition of a substantial block of the Company's Common
Stock or limit the price that investors might be willing to pay in the future
for shares of the Company's Common Stock. The Certificate of Incorporation also
provides that: (i) the affirmative vote of the holders of at least 80% of the
voting power of all outstanding shares of the capital stock of the Company shall
be required to adopt, amend or repeal any provision of the bylaws of the
Company; (ii) stockholders of the Company may not take any action by written
consent; (iii) special meetings of stockholders may be called only by the
President, the Chairman of the

13
<PAGE> 15

Board or a majority of the Board of Directors and business transacted at any
such special meeting shall be limited to matters relating to the purposes set
forth in the notice of such special meeting; (iv) the Board of Directors, when
evaluating an offer related to a tender or exchange offer or other business
combination, is authorized to give due consideration to any relevant factors,
including the social, legal and economic effects upon employees, suppliers,
customers, creditors, the community in which the Company conducts its business,
and the economy of the state, region and nation; and (v) the affirmative vote of
the holders of at least 75% of the voting power of all outstanding shares of the
capital stock of the Company shall be required to amend the above provisions or
the limitation on director liability. The foregoing provisions of the
Certificate of Incorporation could have the effect of delaying, deterring or
preventing a change in control of the Company. In addition, the Company is
subject to Section 203 of the Delaware General Corporation Law which, subject to
certain exceptions, restricts certain transactions and business combinations
between a corporation and a stockholder owning 15% or more of the corporation's
outstanding voting stock (an "interested stockholder") for a period of three
years from the date the stockholder becomes an interested stockholder. These
provisions may have the effect of delaying or preventing a change of control of
the Company without action by the stockholders and, therefore, could adversely
affect the price of the Company's Common Stock. In the event of a merger or
consolidation of the Company with or into another corporation or the sale of all
or substantially all of the Company's assets in which the successor corporation
does not assume outstanding options or issue equivalent options, the Board of
Directors of the Company is required to provide accelerated vesting of
outstanding options. See "Description of Capital Stock -- Preferred Stock,"
"-- Anti-takeover Provisions" and "-- Limitation of Director Liability."

Control By Management and Existing Stockholders. Upon completion of this
offering, the Company's executive officers, directors and affiliated entities
together will beneficially own approximately 36.5% of the outstanding shares of
Common Stock. As a result, these stockholders, acting together, will be able to
control matters requiring approval by the stockholders of the Company, including
the election of directors. Such a concentration of ownership may have the effect
of delaying or preventing a change in control of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices. See "Principal Stockholders."

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

14
<PAGE> 16

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company are estimated to be approximately $13.9
million, based on an assumed offering price of $15.00 per share and after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company. The Company intends to use approximately $8.0 million of
the net proceeds of this offering for marketing expenses associated with new
product introduction and the establishment of its sales and marketing
capabilities, including development of a dental pharmaceutical sales force,
approximately $2.0 million for pharmaceutical development and the remainder for
general corporate purposes, including working capital. The amounts actually
expended for specific purposes may vary significantly depending upon numerous
factors, including the timing of the regulatory approval of Periostat, if any,
the size and type of sales force to be established, the terms of agreements
entered into with corporate partners, if any, and the results of research and
development and pre-clinical and clinical studies for other applications of the
Company's core technology, as well as technological advances by others and the
status of competitive products. The proceeds of this offering also may be used
to license or acquire technologies or products that complement the Company's
focus on dental pathologies, although the Company is not currently involved in
negotiations with respect to any such transactions.

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

15
<PAGE> 17

PRICE RANGE OF COMMON STOCK

The Common Stock of the Company has been included for quotation in the
Nasdaq National Market under the symbol "CGPI" since the Company's initial
public offering of Common Stock on June 20, 1996. Prior to that time, there was
no public market for the Common Stock. The following table sets forth the high
and low closing prices for the Common Stock for the periods indicated as
reported by the Nasdaq National Market:

<TABLE>
<CAPTION>
1996: HIGH LOW
------ ------
<S> <C> <C>
Second Quarter (from June 20, 1996).................................. $10.25 $ 8.25
Third Quarter........................................................ 11.25 6.13
Fourth Quarter....................................................... 11.75 7.50
1997:
First Quarter (through March 27, 1997)............................... $17.50 $ 8.00
</TABLE>

The prices shown above represent quotations among securities dealers, do
not include retail markups, markdowns or commissions and may not represent
actual transactions.

On March 27, 1997, the last reported sale price of the Common Stock was
$15.00 per share, and there were approximately 56 holders of record.

DIVIDEND POLICY

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

16
<PAGE> 18

CAPITALIZATION

The following table sets forth as of December 31, 1996 the actual
capitalization of the Company and the capitalization of the Company as adjusted
to reflect the sale of 1,000,000 shares of Common Stock offered hereby at an
assumed offering price of $15.00 per share and the anticipated application of
the estimated net proceeds therefrom:

<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
AS
ACTUAL ADJUSTED
-------------- --------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.......................................... $ -- $ --
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares
authorized; none issued and outstanding............ -- --
Common stock, $0.01 par value, 25,000,000 shares
authorized; 7,535,533 and 8,535,533 shares issued
and outstanding on an actual and as adjusted basis,
respectively(1).................................... 75 85
Additional paid-in capital............................ 35,552 49,442
Deferred compensation................................. (296) (296)
Deficit accumulated during development stage.......... (17,739) (17,739)
-------- --------
Total stockholders' equity....................... 17,592 31,492
-------- --------
Total capitalization.......................... $ 17,592 $ 31,492
======== ========
</TABLE>

- ---------------
(1) Excludes options to purchase 546,704 shares of Common Stock issuable upon
the exercise of stock options outstanding as of February 28, 1997 at a
weighted average exercise price of $5.27 per share, of which options to
purchase 86,350 shares of Common Stock are exercisable. See
"Management -- Stock Option Plans."

DILUTION

The net tangible book value of the Company as of February 28, 1997 was
approximately $16.7 million, or $2.21 per share of Common Stock. "Net tangible
book value per share" is equal to the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale by the Company of 1,000,000 shares of Common Stock in
this offering (at the assumed offering price and after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company), the pro forma net tangible book value of the Company as of February
28, 1997 would have been $30.6 million, or $3.58 per share of Common Stock. This
represents an immediate increase in net tangible book value per share of $1.37
to existing stockholders and immediate dilution in net tangible book value of
$11.42 per share to new investors. The following table illustrates the per share
dilution:

<TABLE>
<S> <C> <C>
Public offering price per share........................................... $15.00
Net tangible book value per share at February 28, 1997.................. $2.21
Increase per share attributable to new investors........................ 1.37
Pro forma net tangible book value per share after the offering............ 3.58
------
Net tangible book value dilution per share to new investors............... $11.42
======
</TABLE>

17
<PAGE> 19

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 included elsewhere in this Prospectus. 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 Prospectus. The
following should be read in conjunction with the financial statements and notes
thereto and "Management's Discussion and Analysis of Results of Operations and
Financial Condition" appearing elsewhere in this Prospectus:

<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 10, 1992 YEAR ENDED DECEMBER 31, JANUARY 10, 1992
(INCEPTION) TO --------------------------------- (INCEPTION) TO
DECEMBER 31, 1992 1993 1994 1995 1996 DECEMBER 31, 1996
----------------- ------ ------ ------ ------ -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
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.

18
<PAGE> 20

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

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

OVERVIEW

CollaGenex Pharmaceuticals 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.

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. 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.

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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. 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 the proceeds from this offering, together with the
Company's existing capital resources, will be adequate to fund the Company's
operations through at least 1998. 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.

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BUSINESS

OVERVIEW

CollaGenex Pharmaceuticals is engaged in the development and
commercialization of innovative, proprietary medical therapies for the treatment
of periodontal disease and other dental pathologies. The Company believes that
its initial drug, Periostat, will be the first orally administered, systemically
delivered pharmaceutical to treat periodontitis. Unlike existing treatments,
which focus on the bacterial infection associated with periodontitis, Periostat
inhibits the chronic progressive tissue degradation characteristic of the
disease. The Company 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.

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

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meet the economic 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

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 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 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."

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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.

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.

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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
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,

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overgrowth of yeast and fungi, and the emergence of antibiotic-resistant
bacteria. The Company's Phase III clinical trials using Periostat demonstrated
that the administration of sub-antibiotic doses of doxycycline over a 12-month
period exerted no anti-microbial effects. Thus, the use of this dosage strength
provides the anti-collagenolytic effects without the complications of long-term
antibiotic therapies.

The Company's license from SUNY also covers 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.

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

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& 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.

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

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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 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

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purchase minimum amounts of Periostat, terminates three years from the date of
the initial product launch and automatically extends for consecutive one-year
periods unless 12-month prior written notice is provided before the expiration
of the applicable term. AAI is required to comply with GMP requirements.

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

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

PATENTS, TRADE SECRETS AND LICENSES

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

The Company depends on the SUNY License for all of its core technology. 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 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

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<PAGE> 30

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
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

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<PAGE> 31

patents. There can be no assurance that such licenses would be available or, if
available, would be on terms acceptable to the Company. The Company's failure to
obtain these licenses would have a material adverse effect on the Company's
business, financial condition and results of operations.

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

GOVERNMENT REGULATION

The Company's activities and product candidates are subject to extensive
and rigorous regulation by a number of governmental entities in the United
States, primarily the FDA, and by comparable 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,

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<PAGE> 32

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 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 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

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<PAGE> 33

for the same product are reviewed by the FDA by the filing of a NDA supplement.
The NDA supplement is much more focused than the NDA and deals primarily with
safety and effectiveness data related to the indication or dosage, and labeling
information for the new indication. Finally, the FDA requires reporting of
certain information that becomes known to a manufacturer of an approved drug.

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

The Drug Price Competition and Patent Term Restoration Act of 1984 provides
for abbreviated approval requirements for generic drugs, exclusivity protection
for innovative products that prevents FDA approval of generic versions, and
patent extension for a certain period of time that it takes to obtain FDA
approval. 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
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.

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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.

FACILITIES

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.

LEGAL PROCEEDINGS

The Company is not a party to any legal proceedings.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

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

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------- --- --------------------------------------
<S> <C> <C>
Helmer P.K. Agersborg, Ph.D. ........... 68 Chairman of the Board
Brian M. Gallagher, Ph.D. .............. 49 President and Chief Executive Officer
and Director
Robert A. Ashley........................ 39 Vice President, Commercial Development
Nancy C. Broadbent...................... 41 Chief Financial Officer, Treasurer and
Secretary
Peter R. Barnett, D.M.D. ............... 45 Director
Robert J. Easton(1)..................... 52 Director
James E. Daverman(2).................... 47 Director
Stephen W. Ritterbush, Ph.D.(1)(2)...... 50 Director
Pieter J. Schiller(2)................... 59 Director
Terence E. Winters, Ph.D.(1) ........... 54 Director
</TABLE>

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

(2) Member of Audit Committee.

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

Dr. Agersborg has been Chairman of the Company's Board of Directors since
March 1992 and served as its Chief Executive Officer and President until March
1994. Dr. Agersborg also serves as President and Chief Executive Officer of
Afferon Corporation and Maret Corporation, having joined such companies in
September 1992 and September 1994, respectively. Dr. Agersborg has also served
as director of Lidak Pharmaceutical since October 1992. Each of such companies
engages in pharmaceutical development. From May 1987 until his retirement in
June 1990, Dr. Agersborg was the President of Wyeth-Ayerst Research Division of
American Home Products Corporation. Prior to that, and beginning in 1975, he was
a Vice President, and then an Executive Vice President, of Wyeth-Ayerst
Laboratories Research Division.

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

Mr. Ashley joined the Company in September 1994 as Vice President,
Commercial Development. From 1989 until joining the Company, he was employed by
BMS and its predecessor, Squibb Corporation, in various positions including
product development, commercial and business development and, most recently, as
Director, Business Development where he was responsible for the worldwide
product and market development of several new drugs. From 1979 to 1989, Mr.
Ashley

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<PAGE> 36

held various positions at Amersham International (U.K.) Ltd., including
research, development, manufacturing, sales and marketing positions, as well as
worldwide product development and product launch positions.

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

Dr. Barnett has been a director of the Company since February 1997. He is
Senior Vice President and Chief Operating Officer of United Dental Care, Inc., a
managed dental benefits firm, where he has served in such capacity since January
1995. From August 1994 to January 1995, Dr. Barnett was Executive Director of
Prudential DMO, and from March 1993 to August 1994, he served as an independent
consultant in the managed care field. From January 1985 to March 1993, Dr.
Barnett was a Senior Vice President with Pearle Vision, Inc.

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

Mr. Daverman has been a director of the Company since November 1995. He is
a managing general partner of Marquette Venture Partners ("MVP"), a venture
capital investment company which he co-founded in 1987. Mr. Daverman is a
general partner of Marquette Management Partners, the general partner of
Marquette Venture Partners, L.P. and a general partner of MG II, L.P., the
general partner of Marquette Venture Partners II, L.P. and MVP II Affiliates
Fund, L.P. He is a member of the Board of Directors of the Technology Advisory
Group of the Technology Management Office of the University of Michigan. Mr.
Daverman is a member of the Board of Directors of Endocardial Solutions, Inc.
and numerous privately held companies.

Dr. Ritterbush has been a director of the Company since its founding in
January 1992. He is managing general partner of Fairfax Partners/The Venture
Fund of Washington, L.P., a venture capital fund, which he co-founded in 1989.
Dr. Ritterbush serves as a director and is on the compensation committee of the
Board of Directors of Apache Medical Systems, Inc.

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

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

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

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<PAGE> 37

CLINICAL ADVISORY BOARD

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

Timothy Blieden, D.D.S., M.S., Ph.D. Dr. Blieden is an Assistant Professor
in the Department of Periodontology at the Eastman Dental Center, University of
Rochester where he is a Clinical Instructor of Graduate Periodontics. Dr.
Blieden has conducted numerous research studies for pharmaceutical companies
evaluating anti-plaque and anti-microbial oral rinse products and host
modulating agents for the treatment of periodontitis. Dr. Blieden received his
D.D.S. from Loyola University, Chicago and his M.S. and Ph.D. in Immunology from
the University of Rochester. Dr. Blieden also maintains a private periodontal
practice in Rochester.

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

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

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

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

36
<PAGE> 38

Academy of Sciences. Dr. Golub received his D.M.D. and M.S. from the University
of Manitoba and his Certificate in Periodontology from Harvard University.

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

Alan M. Polson, D.D.S., D.M.D., L.D.S., M.S., M.A. Dr. Polson is currently
the Chairman of the Department of Periodontology and the D. Walter Cohen
Professor of Periodontics in the School of Dental Medicine at the University of
Pennsylvania. Dr. Polson has served as President, Periodontal Research Group,
American Association of Dental Research, and Vice President and Director of
Clinical Research, Atrix Laboratories. Dr. Polson has conducted many periodontal
research studies and is the author of over 200 publications. He also is a
Diplomate of the American Board of Periodontology. Dr. Polson received his
D.D.S. from the University of London, his D.M.D. from the University of
Pennsylvania, his L.D.S. from the Royal College of Surgeons, his M.S. in
Periodontology from the University of Rochester and his M.A. from the University
of Pennsylvania.

DIRECTORS' COMPENSATION

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

In addition, the Company granted to Dr. Agersborg options to purchase
60,625, 28,084 and 22,500 shares of Common Stock on March 1, 1992, September 1,
1993 and March 1, 1995, respectively, at exercise prices of $0.20, $0.20 and
$0.335, respectively. Of such options, an aggregate of 88,709 have been
exercised. The remaining options vested to the extent of 7,500 shares on March
1, 1996 and will vest to the extent of 7,500 shares on each of March 1, 1997 and
1998. The Company granted to Mr. Easton options to purchase 7,500 shares of
Common Stock on each of January 1, 1994 and October 1, 1995 at exercise prices
of $0.20 and $1.20, respectively. Of such options, 7,500 have been exercised and
the remaining 7,500 vest to the extent of 2,500 shares per year commencing
October 1, 1996. On the effective date of the Company's IPO, pursuant to the
Non-Employee Plan, each non-employee director of the Company was granted an
option to purchase 10,000 shares of Common Stock, at an exercise price per share
equal to $10.00. On November 22, 1996, the Board of Directors of the Company
granted, subject to stockholder approval of the proposed amendment to the Plan
contained herein, options to purchase an additional 15,000 shares of Common
Stock to each non-employee director of the Company, at an exercise price per
share equal to $9.75. All such options become exercisable in five equal annual
installments commencing one year after the date of grant provided that the
optionee then remains a director at the time of vesting of the installments. The
right to exercise annual installments of options will be reduced proportionately
based on the optionee's actual attendance at directors' meetings if the optionee
fails to attend at least 80% of the directors' meetings held in any calendar
year.

NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

On March 22, 1996, the Board of Directors approved and, on March 29, 1996,
the stockholders adopted, the Company's Non-Employee Director Plan. The
Non-Employee Director Plan currently

37
<PAGE> 39

provides for the grant of options to purchase a maximum of 109,000 shares of
Common Stock of the Company to non-employee directors of the Company.

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

On November 22, 1996, the Board of Directors adopted, subject to
stockholder approval, amendments to the Non-Employee Director Plan to, among
other things: (i) increase the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the Non-Employee Director
Plan from 109,000 to 300,000 shares; (ii) increase the number of shares of
Common Stock underlying the automatic option grants to new non-employee
Directors from 10,000 to 25,000 shares; and (iii) provide for the grant of
options to purchase an additional 15,000 shares of Common Stock to each
non-employee director who previously received, upon the effectiveness of the
Company's initial public offering in June 1996, an automatic grant of options to
purchase 10,000 shares of Common Stock under the Non-Employee Director Plan. In
the event the stockholders do not approve such amendments, any grants made
pursuant to the proposed amendments will be terminated.

EXECUTIVE COMPENSATION

Summary of Compensation in 1996 and 1995

The following table sets for the information concerning compensation for
services in all capacities awarded to, earned by or paid to the Company's Chief
Executive Officer and each other executive officer of the Company whose
aggregate cash compensation exceeded $100,000 (collectively, the "Named
Executives") during the years ended December 31, 1995 and 1996.

38
<PAGE> 40

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL SECURITIES
COMPENSATION(1) UNDERLYING
-------------------- OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (#)
- ---------------------------------------------- ----- -------- ------- ------------
<S> <C> <C> <C> <C>
Brian M. Gallagher, Ph.D.(2).................. 1996 $225,000 $50,000 --
President and Chief Executive Officer 1995 225,000 50,000 100,000
Robert A. Ashley.............................. 1996 139,961 30,000 --
Vice President, Commercial Development 1995 120,000 10,000 37,500
Nancy C. Broadbent(3)......................... 1996 137,500 30,000 60,000
Chief Financial Officer, Treasurer and 1995 -- -- --
Secretary
</TABLE>

- ---------------
(1) The costs of certain benefits are not included because they did not exceed,
in the case of each Named Executive, the lesser of $50,000 or 10% of the
total annual salary and bonus reported in the above table.

(2) In November 1994, Dr. Gallagher purchased 125,000 shares of the Company's
restricted Common Stock at $0.335 per share. Such shares are subject to
vesting and the Company's repurchase right and right of first refusal. Of
such shares, 25,000 vested immediately, an aggregate of 81,250 have vested
to date and the remaining 43,750 will vest in equal monthly portions over
the next 21 months. Pursuant to the Company's repurchase right, the Company
may repurchase any of Dr. Gallagher's unvested shares, at a purchase price
of $0.335 per share, at the time of termination of his service. Pursuant to
the Company's right of first refusal, the Company may buy back Dr.
Gallagher's vested shares at $0.335 per share, if Dr. Gallagher is
terminated for cause, and at the current market value per share, if he is
terminated for any other reason. At December 31, 1996, Dr. Gallagher held
77,083 shares of restricted Common Stock with a year-end value of $626,302
based on the value of the Common Stock as of such date ($8.125 per share),
less the purchase price per share paid for such shares ($0.335 per share).

(3) Ms. Broadbent joined the Company in March 1996 as Chief Financial Officer,
Treasurer and Secretary.

OPTION GRANTS IN 1996

The following table sets forth the information concerning individual grants
of stock options made pursuant to the Company's 1992 Plan during 1996 to the
Named Executives. The Company has never granted any stock appreciation rights.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION
OPTIONS EMPLOYEES OR TERM(3)
GRANTED IN FISCAL BASE PRICE EXPIRATION ---------------------
NAME (#)(1) YEAR(2) ($/SH) DATE 5% 10%
- ---------------------- ---------- ------------- ---------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Brian M. Gallagher.... -- -- -- -- -- --
Robert A. Ashley...... -- -- -- -- -- --
Nancy C. Broadbent.... 60,000 79% $ 2.00 03/01/06 $75,467 $191,249
</TABLE>

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

(1) Such options were granted pursuant to and in accordance with the Company's
1992 Plan. See "-- Stock Option Plans."

(2) Based on an aggregate of 75,500 options granted to employees in 1996,
including options to Named Executives.

(3) Based on a grant date fair market value of $2.00 per share.

39
<PAGE> 41

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

The following table sets forth information concerning each exercise of
options during 1996 by each of the Named Executives and the fiscal year-end
value of unexercised in-the-money options.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS AT IN-THE-MONEY
FISCAL OPTIONS AT
SHARES YEAR-END FISCAL
ACQUIRED ON (#) YEAR-END(1)
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (#) REALIZED UNEXERCISABLE UNEXERCISABLE
- ------------------------- ----------- -------- --------------------- ----------------
<S> <C> <C> <C> <C>
Brian M. Gallagher....... -- -- 49,167/50,833 $372,199/363,552
Robert A. Ashley......... 18,750 $181,219 9,375/46,875 64,922/340,829
Nancy C. Broadbent....... -- -- 12,000/48,000 73,500/294,000
</TABLE>

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

(1) Based on a year-end fair market value of the underlying securities equal to
$8.13, less the exercise price payable for such shares.

STOCK OPTION PLANS

The Company's 1992 Plan was adopted by the Board of Directors and approved
by the stockholders of the Company on February 20, 1992 and March 1, 1992,
respectively. A total of 268,750 shares of Common Stock currently are reserved
for issuance upon exercise of options granted under the 1992 Plan.

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

The 1996 Stock Plan was adopted by the Board of Directors and approved by
the stockholders of the Company on March 22, 1996 and March 29, 1996,
respectively. A total of 750,000 shares are reserved for issuance upon the
exercise of options and/or stock purchase rights granted under the 1996 Stock
Plan, 125,000 of which have been granted. Those eligible to receive stock option
grants or stock purchase rights under the 1996 Stock Plan include employees,
non-employee directors and consultants. The 1996 Stock Plan is administered by
the Compensation Committee of the Board of Directors of the Company, which is
comprised solely of outside directors.

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

The options terminate not more than ten years from the date of grant,
subject to earlier termination on the optionee's death, disability or
termination of employment with the Company, but provide that the term of any
options granted to a holder of more than 10% of the outstanding shares

40
<PAGE> 42

of capital stock may be no longer than five years. Options are not assignable or
otherwise transferable except by will or the laws of descent and distribution.
In the event of a merger or consolidation of the Company with or into another
corporation or the sale of all or substantially all of the Company's assets in
which the successor corporation does not assume outstanding options or issue
equivalent options, the Board of Directors of the Company is required to provide
accelerated vesting of outstanding options. The 1996 Stock Plan terminates on
March 21, 2006.

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

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

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

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

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

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

In January and November 1992, the Company sold an aggregate of 3,133,000
shares of Series A Redeemable Preferred Stock at a price of $1.00 per share. In
September and November 1993, the Company sold an aggregate of 1,946,268 shares
of Series B Redeemable Preferred Stock at a price of $1.68 per share. In
September and November 1995, the Company sold an aggregate of 5,318,980 shares
of Series C Redeemable Preferred Stock at a price of $2.00 per share. All shares
of Series A, Series B and Series C Redeemable Preferred Stock outstanding as of
the consummation of the IPO automatically converted into shares of Common Stock
on a one-for-two basis as of such date. The purchasers of the Series A, Series B
and Series C Redeemable Preferred Stock included the following members of the
Compensation Committee and entities affiliated with such persons:

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

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

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

41
<PAGE> 43

CERTAIN TRANSACTIONS

In January and November 1992, the Company sold an aggregate of 3,133,000
shares of Series A Redeemable Preferred Stock at a price of $1.00 per share. In
September and November 1993, the Company sold an aggregate of 1,946,268 shares
of Series B Redeemable Preferred Stock at a price of $1.68 per share. In
September and November 1995, the Company sold an aggregate of 5,318,980 shares
of Series C Redeemable Preferred Stock at a price of $2.00 per share. All shares
of Series A, Series B and Series C Redeemable Preferred Stock outstanding as of
the consummation of the Company's IPO automatically converted into shares of
Common Stock on a one-for-two basis on such date. The purchasers of the Series
A, Series B and Series C Redeemable Preferred Stock included the following 5%
stockholders or former 5% stockholders, directors and entities affiliated with
directors:

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

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

42
<PAGE> 44

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 28, 1997, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, by: (i) each
person who is known to the Company to own beneficially more than 5% of the
outstanding shares of Common Stock; (ii) each of the Company's directors and
Named Executives; (iii) all directors and executive officers of the Company as a
group; and (iv) the selling stockholder.

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF OUTSTANDING NUMBER OF
SHARES OF SHARES(2) SHARES PERCENT IF
COMMON STOCK ------------------- SUBJECT TO OVER-ALLOTMENT
BENEFICIALLY BEFORE AFTER OVER- ALLOTMENT OPTION
NAME OWNED(1) OFFERING OFFERING OPTION EXERCISED(2)(3)
- -------------------------------------- ------------ -------- -------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Columbine Venture Fund II, L.P. 6155
N. Scottsdale Road, Suite 100
Scottsdale, Arizona 85250......... 969,328 12.8% 11.3% -- 11.3%
Marquette Venture Partners II, L.P.
and MVP II Affiliates Fund, L.P.
520 Lake Cook Road, Suite 450
Deerfield, Illinois 60015......... 916,313(4) 12.1 10.7 -- 10.7
Zesiger Capital Group LLC 320 Park
Avenue, 30th Floor New York, New
York 10022........................ 629,700 8.3 7.4 -- 7.4
Delphi Ventures III, L.P. and Delphi
Investments III, L.P. 3000 Sand
Hill Road Building 1, Suite 135
Menlo Park, California 94025...... 625,000(5) 8.3 7.3 -- 7.3
Fairfax Partners/The Venture Fund of
Washington, L.P. 1568 Spring Hill
Road, Suite 200 McLean, Virginia
22102............................. 446,517 5.9 5.2 -- 5.2
Advanced Technology Ventures III,
L.P. 10 Post Office Square Boston,
Massachusetts 02109............... 390,299 5.2 4.6 -- 4.6
Johnson & Johnson Development
Corporation....................... 317,829 4.2 3.7 150,000 2.0
Brian M. Gallagher, Ph.D............ 227,500(6) 3.0 2.6 -- 2.6
Robert A. Ashley.................... 53,225(7) * * -- *
Nancy C. Broadbent.................. 50,000(8) * * -- *
Helmer P.K. Agersborg, Ph.D......... 103,709(9) 1.4 1.2 -- 1.2
Peter R. Barnett, D.M.D............. 500 * * -- *
James E. Daverman................... 916,313(10) 12.1 10.7 -- 10.7
Robert J. Easton.................... 31,866(11) * * -- *
Stephen W. Ritterbush, Ph.D......... 446,517(12) 5.9 5.2 -- 5.2
Pieter J. Schiller.................. 390,299(13) 5.2 4.6 -- 4.6
Terence E. Winters, Ph.D............ 969,328(14) 12.8 11.3 -- 11.3
All directors and executive officers
as a group (10 persons)........... 3,189,257(15) 41.2 36.5 -- 36.5
</TABLE>

- ---------------
* Less than 1%.

(1) Except as set forth in the footnotes to this table and subject to
applicable community property law, the persons named in the table have sole
voting and investment power with respect to all shares.

(2) Applicable percentage of ownership for each holder is based on 7,543,579
shares of Common Stock outstanding on February 28, 1997, and 8,543,579
shares of Common Stock outstanding upon completion of this offering, plus
any Common Stock equivalents and presently exercisa-

43
<PAGE> 45

ble stock options or warrants held by each such holder, and options or
warrants held by each such holder which will become exercisable within 60
days after February 28, 1997.

(3) Assumes that the Underwriter's over-allotment option is exercised in full.

(4) Includes 890,860 shares and 25,453 shares owned by Marquette Venture
Partners II, L.P. and MVP II Affiliates Fund, L.P., respectively.

(5) Includes 613,946 shares and 11,054 shares owned by Delphi Ventures III,
L.P. and Delphi Investments III, L.P., respectively.

(6) Of such shares, 125,000 are subject to certain rights of first refusal held
by the Company, of which 43,750 also are subject to repurchase by the
Company as of February 28, 1997. See "Business -- Executive
Compensation -- Summary of Compensation in 1996." Includes 102,500 shares
of Common Stock underlying options which are or may be exercisable as of
February 28, 1997 or 60 days after such date.

(7) Includes 34,375 shares of Common Stock underlying options which are or may
be exercisable as of February 28, 1997 or 60 days after such date.

(8) Includes 49,000 shares of Common Stock underlying options which are or may
be exercisable as of February 28, 1997 or 60 days after such date. Includes
1,000 shares held as custodian to minor child.

(9) Includes 15,000 shares of Common Stock underlying options which are
exercisable as of February 28, 1997 or 60 days after such date.

(10) James E. Daverman is co-founding general partner of Marquette Venture
Partners II, L.P. and MVP II Affiliates Fund, L.P. and, as such, has the
power to vote or direct the vote of and to dispose of or direct the
disposition of the shares owned by Marquette Venture Partners II, L.P. and
MVP II Affiliates Fund L.P. Mr. Daverman expressly disclaims beneficial
ownership of such shares, except as to his proportionate interest in
Marquette Venture Partners II, L.P. and MVP II Affiliates Fund, L.P.

(11) Includes 20,278 shares of Common Stock held by Longbow Partners of which
Robert J. Easton is a general partner. Mr. Easton expressly disclaims
beneficial ownership of such shares, except as to his proportionate
interest in Longbow Partners. Includes 2,500 shares of Common Stock
underlying options which are exercisable as of February 28, 1997 or 60 days
after such date.

(12) Stephen W. Ritterbush, Ph.D. is a general partner of Fairfax Partners/The
Venture Fund of Washington, L.P. and, as such, has the power to vote or
direct the vote of and to dispose of or direct the disposition of the
shares owned by Fairfax Partners/The Venture Fund of Washington, L.P. Dr.
Ritterbush expressly disclaims beneficial ownership of such shares, except
as to his proportionate interest in Fairfax Partners/The Venture Fund of
Washington, L.P.

(13) Pieter J. Schiller is a general partner of Advanced Technology Ventures
III, L.P. and, as such, has the power to vote or direct the vote of and to
dispose of or direct the disposition of the shares owned by Advanced
Technology Ventures III, L.P. Mr. Schiller expressly disclaims beneficial
ownership of such shares, except as to his proportionate interest in
Advanced Technology Ventures III, L.P.

(14) Terence E. Winters, Ph.D. is a general partner of Columbine Venture Fund
II, L.P. and, as such, has the power to vote or direct the vote of and to
dispose of or direct the disposition of the shares owned by Columbine
Venture Fund II, L.P. Dr. Winters expressly disclaims beneficial ownership
of such shares, except as to his proportionate interest in Columbine
Venture Fund II, L.P.

(15) See Notes 6 through 14.

44
<PAGE> 46

DESCRIPTION OF CAPITAL STOCK

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

COMMON STOCK

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

At February 28, 1997, there were 7,543,579 shares of Common Stock issued
and outstanding and held of record by 56 stockholders and options to purchase an
aggregate of 546,704 shares of Common Stock were outstanding.

PREFERRED STOCK

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

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

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

In September 1995, the Company and the holders of the Company's Series A,
Series B and Series C Redeemable Preferred Stock entered into a Registration
Rights Agreement (the "Rights Agreement") pursuant to which the Company has
granted certain registration rights to such stockholders. Pursuant to the Rights
Agreement, at any time beginning six months after the effective date of the
Company's initial public offering undertaken in June 1996, the holders of at
least a majority of the Common Stock issued upon the conversion of the Series A,
Series B and Series C Redeemable Preferred Stock (the "Registrable Securities")
have the right, subject to certain restrictions set forth in the Rights
Agreement, to require that the Company register the Registrable Securities
requested by such holders at the Company's expense (on no more than two
occasions) on either a Form S-1, Form S-2 or Form S-3 Registration Statement
under the Securities Act. The Company is not, however, required to register any
Registrable Securities unless such shares represent at least 10% of the
Company's outstanding shares of Common Stock, or, if less than 10%, if the
anticipated aggregate offering price exceeds $1,000,000.

45
<PAGE> 47

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

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

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

LIMITATION OF DIRECTOR LIABILITY

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

ANTI-TAKEOVER PROVISIONS

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

46
<PAGE> 48

economic effects upon employees, suppliers, customers, creditors, the community
in which the Company conducts its business, and the economy of the state, region
and nation; and (v) the affirmative vote of the holders of at least 75% of the
voting power of all outstanding shares of the capital stock of the Company shall
be required to amend the above provisions or the limitation on director
liability. The Delaware statute, the undesignated authorized Preferred Stock and
the foregoing provisions of the Certificate of Incorporation may discourage
certain types of transactions involving an actual or potential change in control
of the Company and could have the effect of delaying, deterring or preventing a
change in control of the Company. In addition, in the event of a merger or
consolidation of the Company with or into another corporation or the sale of all
or substantially all of the Company's assets in which the successor corporation
does not assume outstanding options or issue equivalent options, the Board of
Directors of the Company is required to provide accelerated vesting of
outstanding options.

TRANSFER AGENT AND REGISTRAR

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

47
<PAGE> 49

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have outstanding
8,543,579 shares of Common Stock. Of these shares, the 1,000,000 shares sold in
this offering, and the 2,000,000 shares offered and sold pursuant to the
Company's initial public offering of Common Stock consummated in June 1996 will
be freely transferable by persons other than "affiliates" of the Company without
restriction or further registration under the Securities Act. The remaining
5,543,579 shares of Common Stock outstanding are "restricted securities" (the
"Restricted Shares") within the meaning of Rule 144 under the Securities Act and
may not be sold in the absence of registration under the Securities Act unless
an exemption from registration is available, including an exemption afforded by
Rule 144.

Pursuant to "lock-up" agreements, all of the Company's executive officers
and directors, and certain stockholders, who collectively hold 4,941,594 of such
Restricted Shares, have agreed not to offer, sell, contract to sell, grant any
option to purchase or otherwise dispose of any such shares for a period of 90
days from the date of this Prospectus without the prior written consent of Alex.
Brown & Sons Incorporated. The Company also has agreed that it will not offer,
sell or otherwise dispose of Common Stock for a period of 90 days from the date
of this Prospectus, other than pursuant to existing stock option plans, and in
connection with potential corporate collaborations and acquisitions, without the
prior written consent of Alex. Brown & Sons Incorporated. Upon termination of
such lock-up agreements, all of the "locked-up" Restricted Shares will be
eligible for immediate sale, in the public market subject to certain volume,
manner of sale and other limitations under Rule 144. Alex. Brown & Sons
Incorporated may, at its sole discretion and at any time without notice, release
all or any portion of the shares subject to such lock-up agreements.

Rule 144, as currently in effect, provides that an affiliate of the Company
or a person (or persons whose sales are aggregated) who has beneficially owned
restricted securities for at least two years but less than three years is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of one percent of the then outstanding shares of Common
Stock (85,436 shares immediately after this offering) or the average weekly
trading volume in the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 also are subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about the Company. However, a person who is not an "affiliate" of
the Company at any time during the three months preceding a sale, and who has
beneficially owned restricted securities for at least three years, is entitled
to sell such shares under Rule 144 without regard to the limitations described
above.

The Securities and Exchange Commission has adopted certain amendments to
Rule 144 that reduce by one year the holding period required for shares subject
to Rule 144 to become eligible for resale in the public market effective April
29, 1997. These amendments will substantially increase the number of shares of
Common Stock eligible for immediate resale following the expiration of the
lock-up agreements, with a potential adverse effect on the market price.

As of the date of this Prospectus, there were outstanding vested options to
purchase an aggregate of 105,850 shares of Common Stock. All optionholders who
are directors, officers or employees of the Company have entered into "lock-up"
agreements. Giving effect to vesting provisions limiting the exercisability of
all of the outstanding options and the "lock-up" period, an additional 138,141
shares of Common Stock will be eligible for immediate resale or issuable upon
exercise of vested options, subject to compliance with Rules 144 and 701 under
the Securities Act (relating to the sale of shares issuable under certain
compensatory stock plans).

The Common Stock has been traded on the Nasdaq National Market since June
20, 1996. Nevertheless, sales of a substantial amount of the Common Stock in the
public market, or the perception that such sales could occur, could adversely
affect the market price of shares of the Company's Common Stock and could impair
the Company's future ability to raise capital through an offering of its equity
securities. See "Risk Factors -- Shares Eligible for Future Sale and Potential
Adverse Effect on Market Price."

48
<PAGE> 50

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, Alex.
Brown & Sons Incorporated (the "Underwriter") has agreed to purchase from the
Company 1,000,000 shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus.

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

The Company has been advised by the Underwriter that the Underwriter
proposes to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus. After the public
offering, the offering price and other selling terms may be changed by the
Underwriter.

A certain stockholder, which is not an affiliate of the Company, has
granted to the Underwriter an option, exercisable not later than 30 days after
the date of this Prospectus, to purchase up to 150,000 additional shares of
Common Stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus. To the extent that
the Underwriter exercises such option, such selling stockholder will be
obligated, pursuant to the option, to sell such shares to the Underwriter. The
Underwriter may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriter will offer such additional shares on the same terms as those on
which the 1,000,000 shares are being offered.

The Company and, if the over-allotment option is exercised, the selling
stockholder have agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.

Stockholders of the Company, holding in the aggregate 4,941,594 shares of
Common Stock and options to purchase 541,704 shares of Common Stock, have agreed
not to offer, sell or otherwise dispose of any such Common Stock for a period of
90 days after the date of this Prospectus without the prior consent of Alex.
Brown & Sons Incorporated. See "Shares Eligible for Future Sale."

To facilitate the offering of the Common Stock, the Underwriter may engage
in transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Specifically, the Underwriter may over-allot shares of the
Common Stock in connection with this offering, thereby creating a short position
in the Underwriter's syndicate account. Additionally, to cover such over-
allotments or to stabilize the market price of the Common Stock, the Underwriter
may bid for, and purchase, shares of the Common Stock in the open market. Any of
these activities may maintain the market price of Common Stock at a level above
that which might otherwise prevail in the open market. The Underwriter is not
required to engage in these activities, and, if commenced, any such activities
may be discontinued at any time.

In connection with this offering, the Underwriter, who is a qualified
registered market maker on the Nasdaq Stock Market, may engage in passive market
making on Nasdaq in accordance with Rule 103 of Regulation M under the Exchange
Act during the two business day period before the commencement of the offers or
sales of the Common Stock. The passive market making transactions must comply
with applicable volume and price limits and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the highest
independent bid for such security; if all independent bids are lowered before
the passive market maker's bid, however, such bid must then be lowered when
certain purchase limits are exceeded. Passive market making may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.

49
<PAGE> 51

LEGAL MATTERS

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

EXPERTS

The consolidated financial statements of CollaGenex Pharmaceuticals, Inc.
and subsidiary as of December 31, 1995 and 1996 and 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 have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.

On January 19, 1996, the Company selected KPMG Peat Marwick LLP to act as
independent accountants for the Company and informed the prior auditors, the
Company's independent accountants since January 1994, of its decision. The
former auditors' report on the Company's financial statements for the period
from January 10, 1992 (inception) to December 31, 1993 is not included in this
Prospectus. In connection with its audit for the period from January 10, 1992
(inception) to December 31, 1993, there were no disagreements with the prior
auditors on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures. The prior auditors'
report on the Company's financial statements for the period from January 10,
1992 (inception) to December 31, 1993 contained no adverse opinion or disclaimer
of opinion and was not modified or qualified as to uncertainty, audit scope, or
accounting principles. The decision to change accountants was approved by the
Board of the Directors of the Company. The prior auditors have furnished the
Company with a letter addressed to the Securities and Exchange Commission (the
"Commission") stating their agreement with the above statements. Such letter
appears in Exhibit 16 to the Registration Statement.

50
<PAGE> 52

COLLAGENEX PHARMACEUTICALS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996.......................... F-3
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...... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period from January
10, 1992 (inception) to December 31, 1996........................................... F-5
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...... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE> 53

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> 54

COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996

<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
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> 55

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> 56

COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JANUARY 10, 1992
(INCEPTION) TO DECEMBER 31, 1996

<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ADDITIONAL ACCUMULATED TOTAL
-------------------- PAID-IN DURING THE STOCKHOLDERS'
NUMBER PAR CAPITAL DEFERRED DEVELOPMENT EQUITY
OF SHARES VALUE (DEFICIT) COMPENSATION STAGE (DEFICIT)
--------- ------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock in exchange for
technology license in January 1992 at
inception............................. 54,552 $ 546 $ 10,364 $ -- $ -- $ 10,910
Issuance of common stock in exchange for
consulting services................... 7,500 75 14,925 -- -- 15,000
Issuance of common stock in exchange for
technology license in November 1992... 24,396 244 4,635 -- -- 4,879
Accretion of undeclared dividends on
mandatorily redeemable convertible
preferred stock (note 5).............. -- -- (190,903) -- -- (190,903)
Net loss................................ -- -- -- -- (1,415,703) (1,415,703)
---------- ------ ----------- --------- ------------ -----------
Balance, December 31, 1992................ 86,448 865 (160,979) -- (1,415,703) (1,575,817)
Accretion of undeclared dividends on
mandatorily redeemable convertible
preferred stock (note 5).............. -- -- (351,072) -- -- (351,072)
Net loss................................ -- -- -- -- (2,482,757) (2,482,757)
---------- ------ ----------- --------- ------------ -----------
Balance, December 31, 1993................ 86,448 865 (512,051) -- (3,898,460) (4,409,646)
Exercise of common stock options ($0.20
per share) (note 7)................... 75,969 760 14,771 -- -- 15,531
Issuance of common shares to an
executive officer at $0.335 per share
in November 1994 (note 7)............. 125,000 1,250 40,625 -- -- 41,875
Accretion of undeclared dividends on
mandatorily redeemable convertible
preferred stock (note 5).............. -- -- (575,370) -- -- (575,370)
Net loss................................ -- -- -- -- (2,653,465) (2,653,465)
---------- ------ ----------- --------- ------------ -----------
Balance, December 31, 1994................ 287,417 2,875 (1,032,025) -- (6,551,925) (7,581,075)
Exercise of common stock options ($0.20
per share) (note 7)................... 25,242 252 5,471...... -- -- 5,723
Deferred compensation resulting from
grant of options (note 7)............. -- -- 43,250 (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) -- -- (759,801)
Net loss................................ -- -- -- -- (5,268,562) (5,268,562)
---------- ------ ----------- --------- ------------ -----------
Balance, December 31, 1995................ 312,659 3,127 (1,743,105) (20,183) (11,820,487) (13,580,648)
Exercise of common stock options
($0.20-$0.335 per share) (note 7)..... 23,750 238 5,544 -- -- 5,782
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 -- -- 18,026,905
Accretion of undeclared dividends on
mandatorily redeemable convertible
preferred stock (note 5).............. -- -- (719,562) -- -- (719,562)
Conversion of mandatorily redeemable
convertible preferred stock into
common stock in conjunction with the
Initial Public Offering............... 5,199,124 51,991 19,575,677 -- -- 19,627,668
Deferred compensation resulting from
grant of options (note 7)............. -- -- 426,000 (426,000) -- --
Amortization of deferred compensation... -- -- -- 150,358 -- 150,358
Net loss................................ -- -- -- -- (5,918,318) (5,918,318)
---------- ------ ----------- --------- ------------ -----------
Balance, December 31, 1996................ 7,535,533 $75,356 $35,551,459 $ (295,825) $(17,738,805) $ 17,592,185
========== ====== =========== ========= ============ ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 57

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>
FOR THE PERIOD
FROM
YEARS ENDED DECEMBER 31, JANUARY 10, 1992
---------------------------------------- (INCEPTION) TO
1994 1995 1996 DECEMBER 31, 1996
----------- ----------- ------------ -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $(2,653,465) $(5,268,562) $ (5,918,318) $ (17,738,805)
Adjustments to reconcile net loss to net cash used in
operating activities:
Noncash research and development expense.............. -- -- -- 513,789
Compensation expense.................................. -- 23,067 150,358 173,425
Noncash consulting expense............................ -- -- -- 15,000
Accrued interest converted to preferred stock......... -- 121,187 -- 121,187
Depreciation and amortization expense................. 1,225 3,617 17,051 23,764
Change in assets and liabilities:
Increase in interest receivable..................... -- -- (65,534) (65,534)
Increase in prepaid expenses........................ -- (7,282) (81,161) (88,443)
Increase in other assets............................ (2,040) (7,328) (770) (11,159)
Increase (decrease) in accounts payable............. (64,396) (514,602) 27,762 45,434
Increase (decrease) in accrued expenses............. (85,171) 328,216 304,070 798,925
---------- ----------- ------------ ------------
Net cash used in operating activities................. (2,803,847) (5,321,687) (5,566,542) (16,212,417)
Cash flows from investing activities:
Organizational costs.................................... -- -- -- (5,000)
Capital expenditures.................................... (5,834) (11,758) (57,667) (75,259)
Proceeds from the sale of short-term investments........ -- -- 3,923,142 3,923,142
Purchase of short-term investments...................... -- -- (12,289,878) (12,289,878)
---------- ----------- ------------ ------------
Net cash used in investing activities................. (5,834) (11,758) (8,424,403) (8,446,995)
Cash flows from financing activities:
Proceeds from issuance of common stock.................. 57,406 5,723 18,032,687 18,095,816
Proceeds from issuance of preferred stock............... -- 7,613,273 -- 13,508,273
Proceeds from issuance of promissory notes.............. -- 3,028,500 -- 3,028,500
Repayment of promissory note............................ -- (125,000) -- (125,000)
---------- ----------- ------------ ------------
Net cash provided by financing activities............. 57,406..... 10,522,496 18,032,687 34,507,589
Net increase (decrease) in cash and cash equivalents...... (2,752,275) 5,189,051 4,041,742 9,848,177
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 $ 9,848,177
========== =========== ============ ============
Supplemental disclosure of cash flows information:
Cash paid for interest.................................. $ -- $ 22,921 $ -- $ 22,921
========== =========== ============ ============
Supplemental schedule of noncash financing activities:
Conversion of promissory notes to preferred stock....... $ -- $ 2,903,500 $ -- $ 2,903,500
Deferred compensation................................... -- 43,250 426,000 469,250
Accretion of undeclared dividends attributable to
mandatorily redeemable convertible preferred stock.... 575,370 759,801 719,562 2,596,708
Conversion of mandatorily redeemable convertible
preferred stock to common stock....................... -- -- 19,627,668 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> 58

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.

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.

F-7
<PAGE> 59

COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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

F-8
<PAGE> 60

COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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-9
<PAGE> 61

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.

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.

F-10
<PAGE> 62

COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

The 1992 Plan activity is summarized below:

<TABLE>
<CAPTION>
1992 PLAN
--------------------------
EXERCISE PRICE
SHARES PER SHARE
------- --------------
<S> <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

F-11
<PAGE> 63

COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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-12
<PAGE> 64

COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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-13
<PAGE> 65

COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 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.

F-14
<PAGE> 66

COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(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.

(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-15
<PAGE> 67

======================================================

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

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information.................. 2
Prospectus Summary...................... 3
Risk Factors............................ 6
Use of Proceeds......................... 15
Price Range of Common Stock............. 16
Dividend Policy......................... 16
Capitalization.......................... 17
Dilution................................ 17
Selected Consolidated Financial Data.... 18
Management's Discussion and Analysis of
Results of Operations and Financial
Condition............................. 19
Business................................ 21
Management.............................. 34
Certain Transactions.................... 42
Principal and Selling Stockholders...... 43
Description of Capital Stock............ 45
Shares Eligible for Future Sale......... 48
Underwriting............................ 49
Legal Matters........................... 50
Experts................................. 50
Index to Consolidated Financial
Statements............................ F-1
</TABLE>

------------------------
======================================================
======================================================

1,000,000 SHARES
LOGO
COMMON STOCK
-------------------
PROSPECTUS
-------------------
ALEX. BROWN & SONS
INCORPORATED
, 1997
======================================================
<PAGE> 68

PART II

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth an itemized estimate of fees and expenses
payable by the registrant in connection with the offering described in this
registration statement, other than underwriting discounts and commissions:

<TABLE>
<S> <C>
SEC registration fee................................................ $ 5,293.50
NASD filing fee..................................................... 2,247.00
Nasdaq/NNM additional listing fee................................... 17,500.00
Counsel fees and expenses........................................... 75,000.00
Accounting fees and expenses........................................ 35,000.00
Blue sky fees and expenses.......................................... 7,500.00
Printing expenses................................................... 20,000.00
Transfer agent and registrar fees................................... 3,500.00
Miscellaneous....................................................... 33,959.50
-----------
Total..................................................... $200,000.00
============
</TABLE>

All of the above expenses will be paid by the registrant.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Subsection (a) of Section 145 of the Delaware General Corporation Law
empowers a corporation to indemnify any person who was or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.

Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all of the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.

Section 145 further provides that to the extent a director or officer of a
corporation has been successful in the defense of any action, suit or proceeding
referred to in subsection (a) and (b) or in the defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith; that

II-1
<PAGE> 69

the indemnification provided by Section 145 shall not be deemed exclusive of any
other rights to which the indemnified party may be entitled; and that the scope
of indemnification extends to directors, officers, employees, or agents of a
constituent corporation absorbed in a consolidation or merger and persons
serving in that capacity at the request of the constituent corporation for
another. Section 145 also empowers the corporation to purchase and maintain
insurance on behalf of a director or officer of the corporation against any
liability asserted against him or incurred by him in any such capacity or
arising out of his status as such whether or not the corporation would have the
power to indemnify him against such liabilities under Section 145.

Article IX of the registrant's By-laws specifies that the registrant shall
indemnify its directors, officers, employees and agents because he or she was or
is a director, officer, employee or agent of the Corporation or was or is
serving at the request of the Corporation as a director, officer, employee or
agent of another entity to the full extent that such right of indemnity is
permitted by the laws of the State of Delaware. This provision of the By-laws is
deemed to be a contract between the registrant and each director and officer who
serves in such capacity at any time while such provision and the relevant
provisions of the Delaware General Corporation Law are in effect, and any repeal
or modification thereof shall not offset any action, suit or proceeding
theretofore or thereafter brought or threatened based in whole or in part upon
any such state of facts. The affirmative vote of the holders of at least 80% of
the voting power of all outstanding shares of the capital stock of the Company
is required to adopt, amend or repeal such provision of the By-laws.

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

Section 102(b)(7) of the Delaware General Corporation Law enables a
corporation in its certificate of incorporation to limit the personal liability
of members of its board of directors for violation of a director's fiduciary
duty of care. This Section does not, however, limit the liability of a director
for breaching his duty of loyalty, failing to act in good faith, engaging in
intentional misconduct or knowingly violating a law, or from any transaction in
which the director derived an improper personal benefit. This Section also will
have no effect on claims arising under the federal securities laws. The
registrant's Amended and Restated Certificate of Incorporation limits the
liability of its directors as authorized by Section 102(b)(7). The affirmative
vote of the holders of at least 75% of the voting power of all outstanding
shares of the capital stock of the Company is required to amend such provisions.

The registrant has obtained liability insurance for the benefit of its
directors and officers which provides coverage for losses of directors and
officers for liabilities arising out of claims against such persons acting as
directors or officers of the registrant (or any subsidiary thereof) due to any
breach of duty, neglect, error, misstatement, misleading statement, omission or
act done by such directors and officers, except as prohibited by law.

At present, there is no pending litigation or proceeding involving a
director or officer of the registrant as to which indemnification is being
sought nor is the registrant aware of any threatened litigation that may result
in claims for indemnification by any director or officer.

Reference is made to Section 8 of the Underwriting Agreement, the form of
which is filed as Exhibit One, in which the Underwriter has agreed to indemnify
the directors and officers of the registrant and certain other persons, against
certain civil liabilities, including certain liabilities under the Securities
Act of 1933, as amended (the "Act").

II-2
<PAGE> 70

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

The following information relates to all securities of the registrant sold
by the registrant within the past three years which were not registered under
the Act:

1. On September 26, 1994, October 1, 1994, November 23, 1994, February 28,
1995, April 24, 1995 and January 24, 1996, the registrant issued an
aggregate of 124,961 shares of Common Stock to employees and directors
of the registrant pursuant to the exercise of options granted under the
registrant's 1992 Stock Option Plan for an aggregate purchase price of
$27,036.

2. On November 23, 1994, the registrant issued to an executive officer of
the Company 125,000 shares of Common Stock for an aggregate purchase
price of $41,875.

3. On each of September 29, 1995 and November 13, 1995, the registrant
issued 3,068,980 and 2,250,000 shares of Series C Preferred Stock,
respectively, to "accredited investors" (as that term is defined in Rule
501 adopted under the Act) for an aggregate purchase price of $6,137,960
and $4,500,000, respectively.

4. The registrant from time to time has granted stock options to employees,
directors and consultants. The following table sets forth certain
information of such grants:

<TABLE>
<CAPTION>
NO. OF
SHARES RANGE OF EXERCISE PRICES
------------ ------------------------
<S> <C> <C>
1994........................................... 56,750 $ 0.20 - 0.335
1995........................................... 178,000 0.335 - 1.20
1996........................................... 200,500 2.00 - 10.00
</TABLE>

5. The registrant from time to time has issued stock to employees,
directors and consultants pursuant to the stock options. The following
table sets forth certain information regarding such issuances:

<TABLE>
<CAPTION>
NO. OF
SHARES RANGE OF EXERCISE PRICES
------------ ------------------------
<S> <C> <C>
1994........................................... 75,969 $ 0.20
1995........................................... 25,242 0.20
1996........................................... 23,750 0.20 - 0.335
</TABLE>

No underwriter was employed by the registrant in connection with the
issuance and sale of the securities described above. The registrant 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, and with respect to the securities described
in paragraph 3 above, Rule 506 adopted under the Act, no public offering having
been involved and securities having been acquired for investment and not with a
view to distribution. Appropriate legends were affixed to the stock certificates
issued in such transactions. All recipients had adequate access to information
about the registrant.

II-3
<PAGE> 71

ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS.

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ------------ -----------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement.
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) 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.
5 Opinion of Buchanan Ingersoll as to validity of the Common Stock.
+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) 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) 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.
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) 1992 Stock Option Plan of the Company, as amended to date.
10.13(a) 1996 Stock Plan of the Company.
10.14(a) 1996 Non-Employee Director Stock Option Plan of the Company.
+10.15(b) 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.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Buchanan Ingersoll (contained in the opinion filed as Exhibit 5 to
the Registration Statement).
24 Power of Attorney of certain officers and directors of the Company (contained
on the signature page of this Registration Statement).
27 Financial Data Schedule for the year ended December 31, 1996.
</TABLE>

II-4
<PAGE> 72

- ---------------
+ 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) 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.

Exhibit 23.1 is filed herewith. All other exhibits previously filed.

(b) Financial Statement Schedules

None.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes that:

(1) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the provisions described in Item 14, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

(2) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

(3) For the purpose of determining any liability under the Act each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-5
<PAGE> 73

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Township of
Newtown, State of Pennsylvania, on April 2, 1997.

COLLAGENEX PHARMACEUTICALS, INC.

By /s/ BRIAN M. GALLAGHER
------------------------------------
Brian M. Gallagher, Ph.D.,
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- --------------
<C> <S> <C>

/s/ BRIAN M. GALLAGHER, PH.D. President, Chief Executive April 2, 1997
- ------------------------------------------ Officer and Director (Principal
Brian M. Gallagher, Ph.D. Executive Officer)

/s/ NANCY C. BROADBENT Chief Financial Officer, April 2, 1997
- ------------------------------------------ Treasurer and Secretary
Nancy C. Broadbent (Principal Financial and
Accounting Officer)

* Chairman of the Board and April 2, 1997
- ------------------------------------------ Director
Helmer P.K. Agersborg, Ph.D.

* Director April 2, 1997
- ------------------------------------------
James E. Daverman
* Director April 2, 1997
- ------------------------------------------
Robert J. Easton

* Director April 2, 1997
- ------------------------------------------
Stephen W. Ritterbush, Ph.D.
</TABLE>

II-6
<PAGE> 74

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- --------------
<C> <S> <C>

* Director April 2, 1997
- ------------------------------------------
Pieter J. Schiller

* Director April 2, 1997
- ------------------------------------------
Terence E. Winters, Ph.D.

* Director April 2, 1997
- ------------------------------------------
Peter Barnett
</TABLE>

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

* By her signature set forth below the undersigned, pursuant to duly authorized
powers of attorney filed with the Securities and Exchange Commission, has
signed this Amendment to the Registration Statement on behalf of the persons
indicated.

By: /s/ NANCY C. BROADBENT

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

Nancy C. Broadbent (Attorney-in-fact)

II-7

<PAGE> 1

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
CollaGenex Pharmaceuticals, Inc.:

We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.

KPMG PEAT MARWICK LLP

Princeton, New Jersey

April 2, 1997