SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-28308
COLLAGENEX PHARMACEUTICALS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1758016
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
41 University Drive, Newtown, Pennsylvania 18940
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (215) 579-7388
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
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None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(Title of Class)
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(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes: X No:
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
State the aggregate market value of the voting common stock held by
non-affiliates of the registrant: $184,146,741 at February 15, 2000 based on the
last sales price on that date.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of February 15, 2000:
Class Number of Shares
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Common Stock, $0.01 par value 8,665,729
The following documents are incorporated by reference into the Annual
Report on Form 10-K: Portions of the registrant's definitive Proxy Statement for
its 2000 Annual Meeting of Stockholders are incorporated by reference into Part
III of this Report.
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TABLE OF CONTENTS
Item Page
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PART I 1. Business...................................... 1
2. Properties.................................... 16
3. Legal Proceedings............................. 16
4. Submission of Matters to a Vote of 16
Security Holders..............................
PART II 5. Market for the Company's Common Equity
and Related Stockholder Matters............ 17
6. Selected Consolidated Financial Data.......... 18
7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 19
7A. Quantitative and Qualitative Disclosures
About Market Risk.......................... 25
8. Financial Statements and Supplementary Data 25
9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................. 25
PART III 10. Directors and Executive Officers of the
Company....................................... 26
11. Executive Compensation........................ 26
12. Security Ownership of Certain Beneficial
Owners and Management...................... 26
13. Certain Relationships and Related
Transactions.................................. 26
PART IV 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.................... 27
SIGNATURES........................................................ 28
EXHIBIT INDEX..................................................... 30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE................................................ F-1
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PART I
ITEM 1. BUSINESS.
General
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CollaGenex Pharmaceuticals, Inc. and subsidiaries ("CollaGenex", or the
"Company") is a specialty pharmaceutical company focused on providing innovative
medical therapies to the dental market. The Company's first product,
Periostat(R), is a prescription pharmaceutical capsule that was approved by the
United States Food and Drug Administration (the "FDA") in September 1998 and is
the first and only pharmaceutical to treat adult periodontitis by inhibiting the
enzymes that destroy periodontal support tissues. Periostat is indicated as an
adjunct to scaling and root planing ("SRP"), the most prevalent therapy for
adult periodontitis, to promote attachment level gain and to reduce pocket depth
in patients with adult periodontitis. Adult periodontitis, a chronic disease
characterized by the progressive loss of attachment between the tooth root and
the surrounding periodontal structures, may result in tooth loss if untreated.
See " -- Periostat."
The Company believes that it is the only pharmaceutical company
specifically focused on the pharmaceutical needs of dentists. There are
approximately 120,000 dentists in the United States, who write about 55 million
prescriptions per year. Most of these prescriptions are for drugs that treat the
symptoms associated with dental diseases, such as pain, inflammation and
infection. Periostat is the first orally administered, systemically delivered
pharmaceutical developed and approved specifically to treat a dental disease.
Research has shown that the enzyme-suppression technology underlying
Periostat may also be applicable to other diseases involving destruction of the
body's connective tissues, including cancer metastasis, osteoporosis,
osteoarthritis, rheumatoid arthritis, diabetes and acute lung injury. Phase I
clinical trials for Metastat(R), the Company's lead compound for the treatment
of metastatic cancer, were initiated in January 1998 under the sponsorship of
the National Cancer Institute (the "NCI"). Two Phase I clinical trials were
completed in 1999, and two additional Phase I trials are ongoing. The Company
and the NCI are currently evaluating the preliminary results from the completed
trials and the further clinical development of this compound. Preclinical
studies on Nephrostat, the Company's compound for the treatment of diabetic
complications, were discontinued during 1999.
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 ("SUNY").
SUNY also conducts research and development on other potential applications of
the core technology pursuant to a contract with the Company.
Periostat is marketed to the professional dental community in the United
States through a professional pharmaceutical sales force comprised of
approximately 135 sales representatives and managers. Currently, the Company's
sales force is also marketing Vioxx(R), a prescription non-steroidal
anti-inflammatory drug developed by Merck & Co., Inc. ("Merck") for the
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treatment of acute dental pain, and Denavir(R), a prescription drug developed by
SmithKline Beecham Consumer Healthcare, L.P. ("SmithKline") for the treatment of
cold sores. The Company is actively seeking other products to market to the
professional dental community.
The Company was incorporated in Delaware in January 1992 under the name
CollaGenex, Inc. The Company's name was changed to CollaGenex Pharmaceuticals,
Inc. in April 1996. The Company's executive offices are located at 41 University
Drive, Newtown, Pennsylvania 18940, and its telephone number is (215) 579-7388.
"Periostat(R)" and "Metastat(R)" are United States trademarks of the
Company. All other trade names, trademarks or service marks appearing in this
Annual Report on Form 10-K are the property of their respective owners and are
not property of the Company.
Periostat
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Adult 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 approximately 67
million people, suffer from some form of periodontal disease. Approximately 13
million people seek professional treatment annually for periodontal disease,
resulting in over 15 million periodontal procedures and annual expenditures of
approximately $6 billion, primarily for procedures and surgeries performed by a
periodontist or a dental professional.
The most prevalent therapy for adult periodontitis is SRP, a mechanical
procedure that removes hardened bacteria called plaque from tooth and root
surfaces above and below the gum line. Periostat is the first orally
administered, systemically delivered pharmaceutical indicated as an adjunct to
SRP to promote attachment level gain and to reduce pocket depth in patients with
adult periodontitis.
Periostat, a 20 mg dose of doxycycline, is a unique sub-anti-microbial
dosage strength that suppresses the chronic and progressive tissue degradation
characteristic of periodontitis without exerting any anti-microbial effect.
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.
Periostat's mechanism of action is believed to be through the direct inhibition
of collagenase, an enzyme within a broad class of enzymes known as matrix
metalloproteinases ("MMPs") that is excessively produced as a result of
inflammation resulting from bacterial infection in the gums. Periostat is
intended to be taken orally by the patient between dental visits. In September
1998, the FDA granted the Company marketing approval for Periostat as an adjunct
to SRP to promote attachment level gain and reduce pocket depth in patients with
adult periodontitis. Periostat was made available for prescription in November
1998 and was fully launched commercially in January 1999.
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Vioxx
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Pursuant to a Co-Promotion Agreement executed with Merck in September
1999, the Company received the exclusive right to co-promote Vioxx to the dental
community. Vioxx is a prescription strength non-steroidal anti-inflammatory drug
("NSAID") that was approved by the FDA on May 20, 1999 for the treatment of
osteoarthritis, the management of acute pain in adults, including dental pain,
and the treatment of primary dysmenorrhea. Merck promotes Vioxx to the general
physician community. The agreement provides for certain payments by Merck to the
Company upon sales of Vioxx to the dental community.
Vioxx belongs to a new class of NSAIDs that are believed to work by
selectively inhibiting the cyclooxygenase-2 (COX-2) enzyme, which plays a role
in pain and inflammation. Vioxx spares a related enzyme (COX-1) that helps
maintain the normal stomach lining and platelet homeostasis. In general, most
NSAIDs block both enzymes. Such medications treat pain and inflammation, but may
damage the stomach lining, potentially leading to ulcers in some patients. In
clinical trials, Vioxx was shown to be as effective in relieving pain as the
most effective NSAID, with a much lower risk of the gastrointestinal side
effects and prolonged bleeding commonly associated with NSAID pain relievers.
Prescribed as a once-a-day dose, Vioxx offers patients a convenient alternative
to the multiple daily doses required for many other NSAIDs.
Vioxx was launched to the dental community on September 23, 1999.
Denavir
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Denavir is an FDA approved topical antiviral cream used for the treatment
of cold sores. It is the first and only prescription-strength medicine for
treating recurrent cold sores in healthy adults. The Company markets Denavir to
the dental community under a Co-Promotion Agreement with SmithKline. The
agreement provides for certain payments by SmithKline to the Company.
Sales and Marketing
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The Company markets and sells its products in the United States through a
direct sales force comprised of approximately 135 sales representatives and
managers. Internationally, the Company intends to market Periostat through
collaborations with foreign marketing partners following receipt of the
requisite foreign regulatory approvals and, in the United Kingdom, through
CollaGenex International Ltd. This strategy is intended to enable the Company to
gain rapid market acceptance for its products and establish a commercial
presence in the dental market.
United States
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In June of 1997, the Company hired a Vice President of Marketing and a
Vice President of Sales. In January 1999, under their direction, the Company
trained a sales force of approximately 125 sales representatives and managers
and began to promote Periostat to the
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dental community. Ten additional sales representatives were hired during the
first quarter of 2000. The sales organization is comprised of two regional
managers, eleven district managers and approximately 120 full-time equivalent
("FTE") sales representatives. Each FTE is responsible for covering a territory
that includes approximately 250 dentists and periodontists that are believed to
be high volume potential prescribers of Periostat based on the estimated number
of SRPs performed in their respective practices.
The Company believes that its sales effort is distinguished from other
dental sales forces by its focus on education and the clinical benefits of
pharmaceutical dentistry, a new approach to treating dental diseases.
Accordingly, the Company produces educational marketing materials, detail aids
and product samples that are used extensively by the representatives in their
presentations to dentists. Clinical reprints and video presentations are also
provided. The Company believes that peer-to-peer communications are vital to
increasing the acceptance of Periostat and arranges speaking engagements and
teleconferences where Periostat advocates share their experiences with other
dental professionals.
Sales training is an important component of the Company's marketing
efforts. New representatives receive four weeks of field training and two weeks
of intensive office training in periodontal disease, host response, pain
management, territory management and selling skills. Training continues at
district-level meetings throughout the year.
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 other high-quality therapeutic dental products.
International
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The Company is establishing relationships with key partners to market and
sell Periostat internationally, upon receipt of the requisite foreign regulatory
approvals. In 1996, the Company executed a manufacturing and distribution
agreement with Roche S.P.A. (formerly Boehringer Mannheim Italia) pursuant to
which Roche S.P.A. has the exclusive right to market Periostat in Italy, San
Marino and The Vatican City pending requisite regulatory approval. In 1997, the
Company announced that a Marketing Authorization for Approval was filed for
Periostat by Roche S.P.A. with the Italian Ministry of Health. The Marketing
Authorization for Approval is currently under review.
In July 1998, the Company executed a licensing agreement with Laboratoires
Pharmascience S.A. ("Laboratories Pharmascience") pursuant to which Laboratoires
Pharmascience will market and distribute Periostat following the requisite
regulatory approval on an exclusive basis in France, Morocco, Algeria, Tunisia
and other countries of French speaking Africa.
In October 1998, the Company announced that a Marketing Authorization
Application had been filed with the United Kingdom Medicine Control Agency (the
"UKMCA") with respect to Periostat. Such application was filed under the
European Mutual Recognition System in order to expedite the approval process for
the sale of Periostat in other European countries. In
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February 2000, the UKMCA granted marketing approval for Periostat for the
adjunctive treatment of chronic adult periodontitis. The Company intends to
launch a limited test-marketing effort for Periostat in the United Kingdom
through its subsidiary, CollaGenex International, Ltd., during 2000. There can
be no assurance that the Company will achieve other foreign regulatory approvals
or will successfully market Periostat in the United Kingdom or other European
countries.
The Company executed a licensing agreement with Pharmascience Inc.
("Pharmascience") in June 1999 pursuant to which Pharmascience will market and
distribute Periostat in Canada pending requisite regulatory approval. In the
fourth quarter of 1999, Pharmascience submitted an application to the Canadian
Therapeutic Products Program of Health Canada for Canadian marketing approval of
Periostat.
Product Support
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Consistent with the Company's strategy to outsource certain specialty
functions, in September 1998, the Company entered into a Professional Services
Agreement with Science Oriented Solutions ("SOS") pursuant to which SOS was to
establish and operate a medical professional inquiry support center to field
product inquiries regarding Periostat from the professional community. This
agreement was terminated during the first quarter of 2000 when the Company
established an internal professional inquiry support center.
Manufacturing, Distribution and Suppliers
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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 initial term
of the supply agreement expired on January 25, 2000 and thereafter automatically
renewed and will continue to 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 supply agreement
effective immediately at the end of such 90-day period. The Company relies on
Hovione as its sole supplier of doxycycline.
The Company also relies on third-party contract manufacturers for the
commercial manufacturing of Periostat. In June, 1998, the Company finalized its
manufacturing arrangements with Applied Analytical Industries, Inc. ("AAI"), in
Wilmington, North Carolina for the manufacture of Periostat. The Company's
agreement with AAI terminates three years from the date of the initial product
launch and automatically extends for consecutive one-year periods unless 12
months prior written notice is provided before the expiration of the applicable
term. AAI is required to comply with Good Manufacturing Practices ("GMP")
requirements.
In November 1998, the Company executed a Distribution Services Agreement
with Cord Logistics, Inc. ("Cord"), pursuant to which Cord acts as the Company's
exclusive distribution
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agent for Periostat in the United States and Puerto Rico. Cord is a subsidiary
of Cardinal Health, Inc., a leading wholesale distributor of pharmaceutical and
related healthcare products. Under this agreement, Cord warehouses and ships
Periostat from its central distribution facility to wholesalers and large
national retail chains which in turn distribute Periostat to pharmacies
throughout the United States for prescription sale to patients. Cord also
provides various financial support services to the Company, including billing
and collections, contract pricing maintenance, cash application, chargeback
processing and related reporting services. Under this agreement, Cord provides
certain customer service functions and supply data for certain of the Company's
required governmental filings. The Distribution Services Agreement has an
initial term of three years and will renew automatically for successive one-year
periods unless notice of termination is provided by either party 90 days prior
to expiration.
In 1999, the Company entered into an agreement with Pharmaceutical
Manufacturing Research Services, Inc. ("PMRS") to develop a tablet formulation
of Periostat. The Company believes that tablets will be less expensive to
produce than the capsules currently being sold. The Company expects to file a
New Drug Application ("NDA") with the FDA for a tablet formulation of Periostat
during the first six months of 2000.
There can be no assurance that the Company will be able to enter into
additional, or maintain existing manufacturing, distribution or supply
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, or if the Company's distributors are unable
to ship or support the Company's products, the Company's business, financial
condition and results of operations would be materially adversely affected. See
"--Government Regulation."
Customers
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During 1999, net product sales to each of McKesson Drug Company and Bergen
Brunswig Drug Company accounted for 30% and 14%, respectively, of the Company's
aggregate net product sales.
Research and Development
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The Company's research and development activities are conducted by third
parties, primarily contract research organizations, academic and government
institutions. The main focus of these activities is the identification and
development of novel tetracycline-based compounds for application in a variety
of inflammatory and tissue-destructive disorders. Other than Periostat, the most
advanced program involves Metastat, the Company's lead compound for treating
metastatic cancer.
Technology
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The Company's core technology involves the pharmaceutical modulation of
the activity of 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.
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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 excessive loss of tissue collagen, a
process called collagenolysis. One such example is the progressive destruction
of the periodontal ligament and alveolar bone in adult periodontitis. 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 periodontitis. 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 periodontitis. Studies published in scientific journals support the
hypothesis that the mechanism of action for this activity is the result, in
part, of the direct binding of tetracyclines to certain metal binding sites
associated with the MMP structure.
Although commercially available antibiotic tetracyclines show effective
anti-collagenolytic potential, long-term administration of these compounds at
normal antibiotic doses can result in well-known complications of long-term
antibiotic therapy, such as gastrointestinal disturbance, overgrowth of yeast
and fungi, and the emergence of antibiotic-resistant bacteria. The Company's
Phase III clinical trials using Periostat demonstrated that the administration
of sub-antimicrobial 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 is currently conducting Phase IV clinical studies to
support future marketing activities of Periostat.
The Company's license from SUNY also covers a broad class of chemically
modified tetracyclines ("CMTs") 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 focus on the use of CMTs in drug
therapies for potential applications where more potent doses of tetracyclines
may enhance the efficacy of the treatment as well as on the Phase IV clinical
studies for Periostat.
Periostat
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The Company is planning and conducting various Phase IV clinical trials
that evaluate the use of Periostat for other therapeutic indications. Phase IV
studies being conducted at SUNY and the University of Michigan are evaluating
Periostat's ability to promote attachment level,
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decrease pocket depth and promote healing in patients undergoing periodontal
flap surgery. Another Phase IV study being conducted at the University of
Southern California was designed to study the use of Periostat to prevent root
resorption during orthodontic tooth movement. Other Phase IV clinical trials are
being planned to evaluate the ability of Periostat to arrest or reverse the
degradation of the attachment apparatus that is sometimes associated with dental
implants, the evaluation of Periostat as an adjunct to SRP in institutionalized
geriatric patients, and the evaluation of Periostat as an adjunct to SRP in
patients with Type I and Type II diabetes. To extend the possible therapeutic
use of Periostat beyond the oral cavity, the Company and its collaborators are
planning clinical trials to evaluate whether Periostat can reduce the signs and
symptoms of acne, decrease bone loss in postmenopausal women and prevent the
growth and rupture of aortic aneurysms.
Metastat
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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, including prostate, breast, lung,
colon and melanoma.
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. In animal models involving a variety of human cancer cell
types, including prostate, breast, lung, colon and melanoma, CMTs developed by
the Company exhibited an ability to inhibit metastasis.
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 the Company's lead compound for the prevention of cancer metastasis,
Metastat.
In June 1997, the Company announced that it had formally extended its
Collaboration Agreement with the NCI with respect to the development of
Metastat. On December 5, 1997, the Company announced that the NCI had filed an
investigational new drug application ("IND") for Metastat. In January 1998, the
Company initiated Phase I clinical trials with respect to Metastat. Such studies
were sponsored by the NCI pursuant to the Company's Collaboration Agreement with
the NCI. In February 1999, the Company released initial findings related to such
studies. Following oral administration, desired plasma concentrations of the
compound were achieved and no dose-limiting side effects other than manageable
phototoxicity were encountered. In February 1999, the Company also announced the
allowance of a U.S. patent which provides intellectual property protection for
the use of Metastat for the inhibition of cancer metastasis.
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Subsequently, the NCI advised the Company that it believed that the level of
photosensitivity, although manageable, could limit the commercial viability of
Metastat. However, the NCI also advised the Company that it remained interested
in the mechanism of action of this class of compounds and it intended to
complete the current clinical trials to establish "proof of principal" with
respect to a variety of surrogate markers. Two Phase I clinical trials were
completed in 1999 and two additional Phase I clinical trials are ongoing. The
Company and the NCI are currently evaluating the results of the completed trials
and the further clinical development of this compound.
Preclinical Research and Development Activities
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The Company has an active preclinical program in place to identify and
characterize CMT derivatives that exhibit enhanced biological activities
compared to Periostat and Metastat. In collaboration with the University of
Rochester, the Company has synthesized over thirty new CMTs. These are being
evaluated in a variety of in vitro and in vivo assay systems under a three-year
research agreement with SUNY.
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.
The Company's research and development expenditures were approximately
$4.2 million, $4.7 million and $5.0 million in 1997, 1998 and 1999,
respectively.
Patents, Trade Secrets and Licenses
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The Company's success will depend in part on patent and trade secret
protection for its technologies, products and processes, and on its ability to
operate without infringement of proprietary rights of other parties both in the
United States and in foreign countries. Because of the substantial length of
time and expense associated with bringing new products through development to
the marketplace, the pharmaceutical industry places considerable importance on
obtaining and maintaining patent and trade secret protection for new
technologies, products and processes.
The Company depends on the license from the Research Foundation of the
State of New York at Stony Brook for all of its core technology (the "SUNY
License"). The SUNY License grants the Company an exclusive worldwide license to
make and sell products employing tetracyclines that are designed or utilized to
alter a biological process. Twenty-four United States patents and eight United
States patent applications held by SUNY are licensed to the Company under the
SUNY License. One of the twenty-four patents and one of the eight patent
applications have been co-assigned to the University of Miami, Florida, and
another patent has been co-assigned to Washington University. The primary United
States patent claims methods of use of conventional tetracyclines to inhibit
pathologically excessive collagenolytic activity (the "Primary Patent"), while a
related United States patent claims methods of use of tetracyclines which have
no antibiotic activity (the "Secondary Patent"). The twenty-two other United
States patents relate to the compositions of certain CMTs with
anti-collagenolytic properties, methods
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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. One of the Secondary Patents has also issued 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 United States patents relating to methods of use of
tetracyclines to reduce bone loss. Sixty-one (61) patents have issued in foreign
countries. All of SUNY's United States and foreign patents expire between 2004
and 2018. The Company's rights under the SUNY License are subject to certain
statutory rights of the United States government resulting from federal support
of research activities at SUNY. The failure to obtain and maintain patent
protection may mean that the Company will face increased competition in the
United States and in foreign countries. The SUNY License is terminable by SUNY
on 90 days prior notice only upon the Company's failure to make timely payments,
reimbursements or reports, if the failure is not cured by the Company within 90
days. The termination of the SUNY License, or the failure to obtain and maintain
patent protection for the Company's technologies, would have a material adverse
effect on the Company's business, financial condition and results of operations.
One of the United States 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.
In addition to the patents and patent applications licensed from SUNY
which represent the core technology, the Company owns additional technology for
which applications for United States patents have been filed and have been
issued. In this regard, the Company reports the existence of an issued patent
for a toothpaste/mouthwash formulation for the amelioration of dentin
hypersensitivity. Furthermore, the Company reports pending applications covering
new tetracycline derivatives having increased lipophilicity.
10
<PAGE>
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 or 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 United States 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 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
11
<PAGE>
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, lead to invalidation of the studies, requiring
such studies to be repeated.
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,
12
<PAGE>
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 an 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 an 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).
The FDA has requested that a post-approval, post-marketing animal study
related to long-term dosing and carcinogenicity of Periostat be conducted to
satisfy the regulatory requirement for a chronically administered drug. Such
studies are currently underway.
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
13
<PAGE>
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 an NDA, subsequent new indications or dosages for the same product
are reviewed by the FDA by the filing of an 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
50 mg 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."
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.
In September 1998, the FDA granted the Company marketing approval for
Periostat as an adjunct to SRP to promote attachment level gain and reduce
pocket depth in patients with adult
14
<PAGE>
periodontitis. The Company is subject to numerous continuing requirements with
regard to such approval. For example, quality control and manufacturing must
conform to complex and detailed GMP requirements. In addition, the FDA 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. Also, an
NDA holder is required to report certain adverse reactions to the FDA, and to
comply with certain requirements concerning advertising and promotion labeling
for their products. There can be no assurance that approval from the FDA to
market Periostat will not be withdrawn or that Periostat will never be recalled.
Withdrawal of FDA marketing approval or a recall of Periostat would have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition to the applicable FDA requirements, the Company is subject to
foreign regulatory authorities governing clinical trials and drug sales. Whether
or not FDA approval has been obtained, approval of a pharmaceutical product by
the comparable regulatory authorities of foreign countries must be obtained
prior to the commencement of marketing of the product in those countries. The
approval process varies from country to country and the time required may be
longer or shorter than that required for FDA approval.
Competition
- -----------
The pharmaceutical industry is subject to intense competition as well as
rapid and significant technological change. The Company believes that a
significant competitive factor is the relative speed with which the Company can
supply commercial quantities of the product to the market on an ongoing basis.
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.
The Company believes that Periostat is distinguished from other existing
and known periodontitis treatments in that it is the only treatment which is
directed to suppression of the enzymes that degrade periodontal support tissues.
The Company believes that all other therapies focus on temporarily removing the
bacteria associated with periodontitis. Periostat is a prescription
pharmaceutical capsule indicated as an adjunct to SRP to promote attachment
level gain and to reduce pocket depth in patients with adult periodontitis that
is taken by the patient between dental visits. The Company believes that the
following chart summarizes the available forms of periodontitis treatment, other
than SRP and resective surgery:
Product
Product Manufacturer Dental Delivery Patient Treatment
Name Marketer Procedure Route Administered Focus
- ------------ ------------------- --------- -------- ------------ ---------
Periostat(R) CollaGenex No Systemic Yes Tissue
Pharmaceuticals, Inc. degradation
Atridox(TM) Atrix Laboratories/ Yes Local No Bacteria
Block Drug
Actisite(R) Alza/Proctor & Yes Local No Bacteria
Gamble
Periochip(TM) PerioProducts, Ltd./ Yes Local No Bacteria
Astra U.S.
15
<PAGE>
Many of the companies participating in the periodontal area 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 outsourced its manufacturing, clinical
trials, NDA preparation and other activities. The Company intends to continue to
outsource many of the activities which it historically has outsourced. As of
December 31, 1999, the Company employed 142 persons. Each of its management
personnel has had extensive prior experience with pharmaceutical, biotechnology
or medical products companies. The Company has increased its sales and marketing
staff to include approximately 113 sales representatives and managers
nationwide, of which 15 are part-time. In addition, the Company plans to recruit
additional sales representatives in 2000; however, there can be no assurance
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. Currently, none of the Company's employees are covered by collective
bargaining agreements. In general, the Company's employees are covered by
confidentiality agreements. The Company considers relations with its employees
to be excellent.
ITEM 2. PROPERTIES.
The Company owns no real property. From January to May 1999, the Company
leased 3,500 square feet of office space at 301 South State Street, Newtown,
Pennsylvania under two leases. In May 1999, the Company moved its principal
executive offices to 41 University Drive, Newtown, Pennsylvania. The newly
leased premises consist of approximately 14,204 square feet and the term of the
lease is one hundred and twenty-two (122) months.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
16
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Prior to June 1996, there was no established market for the Company's
common stock. Since June 20, 1996, the common stock has traded on the Nasdaq
National Market ("NNM") under the symbol "CGPI."
The following table sets forth the high and low bid information for the
common stock for each of the quarters in the period beginning January 1, 1998
through December 31, 1999 as reported on NNM. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.
Quarter Ended High Low
------------------------ ------- -------
March 31, 1998.......... $ 13.13 $ 5.50
June 30, 1998........... $ 10.75 $ 7.25
September 30, 1998...... $ 14.50 $ 7.75
December 31, 1998....... $ 14.25 $ 8.25
March 31, 1999.......... $ 12.44 $ 8.00
June 30, 1999........... $ 11.25 $ 7.50
September 30, 1999...... $ 23.94 $ 9.13
December 31, 1999....... $ 24.56 $ 15.75
As of February 15, 2000, the approximate number of holders of record of
the common stock was 115 and the approximate number of beneficial holders of the
common stock was 3,400.
The Company has never declared or paid any cash dividends on its common
stock. Except as set forth below, the Company intends to retain earnings, if
any, to fund future growth and the operation of its business. On May 12, 1999,
the Company consummated a $20.0 million financing through the issuance of its
Series D Cumulative Convertible Preferred Stock. As a result of such financing,
the Company has cumulative cash and common stock dividend obligations to the
holders of the Series D Cumulative Convertible Preferred Stock. Such financing
arrangement also limits the Company's ability to generally declare dividends to
its common stockholders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
17
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data set forth below with respect to
the Company's statement of operations data for each of the years in the
three-year period ended December 31, 1999, and with respect to the consolidated
balance sheet data at December 31, 1998 and 1999 are derived from and are
qualified by reference to the audited consolidated financial statements and the
related notes thereto of the Company found at "Item 14. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K." The consolidated statement of
operations data for the years ended December 31, 1995 and 1996 and with respect
to the consolidated balance sheet data as of December 31, 1995, 1996 and 1997
are derived from consolidated audited financial statements not included in this
Annual Report on Form 10-K. The selected consolidated financial data set forth
below should be read in conjunction with and is qualified in its entirety by,
the Company's audited consolidated financial statements and related notes
thereto found at "Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" which are included elsewhere in this Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Consolidated Statement of (in thousands except for per share data)
Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales .............. $ -- $ -- $ -- $ 3,053 $ 15,211
License revenues ........... -- 400 325 400 100
Contract revenues .......... -- -- 9 8 770
-------- -------- -------- -------- --------
Total revenues .............. -- 400 334 3,461 16,081
-------- -------- -------- -------- --------
Operating expenses:
Cost of product sales ...... -- -- -- 745 3,139
Research and development ... 3,635 4,436 4,200 4,670 5,005
Selling, general and
administrative ............. 1,548 2,527 6,096 10,600 23,180
Operating loss .............. (5,183) (6,563) (9,962) (12,554) (15,243)
Interest Income ............. 59 645 1,338 988 851
Interest Expense ............ (144) -- -- -- (199)
Net loss .................... (5,269) (5,918) (8,624) (11,566) (14,591)
Net loss allocable to
common stockholders ........ $ (6,028) $ (6,638) $ (8,624) $(11,566) $(15,683)
Net loss per share allocable
to common stockholders(1):
Basic ...................... $ (19.91) $ (1.74) $ (1.04) $ (1.35) $ (1.82)
Diluted .................... (14.60) (1.72) (1.04) (1.35) (1.82)
Shares used in computing
net loss per share allocable
to common stockholders(1):
Basic ...................... 303 3,809 8,291 8,579 8,598
Diluted .................... 413 3,864 8,291 8,579 8,598
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Balance Sheet Data: (in thousands)
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and
short-term investments.. $ 5,806 $ 18,215 $ 22,771 $ 10,250 $ 14,367
Total assets ............. 5,840 18,437 23,165 14,740 18,563
Mandatorily redeemable
convertible preferred
stock .................. 18,908 -- -- -- --
Accumulated deficit ...... (11,820) (17,739) (26,362) (37,928) (53,611)
Total stockholders'
equity (deficit) ....... (13,581) 17,592 20,708 9,281 13,607
</TABLE>
(1) See Note 2 of Notes to Consolidated Financial Statements for information
concerning computation of net loss per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Overview
- --------
CollaGenex Pharmaceuticals, Inc. and subsidiaries (the "Company") is a
specialty pharmaceutical company focused on providing innovative medical
therapies to the dental market. The Company's first product, Periostat, is a
prescription pharmaceutical capsule that was approved by the United States Food
and Drug Administration (the "FDA") in September 1998 as an adjunct to scaling
and root planing, the most prevalent therapy for periodontitis, to promote
attachment level gain and to reduce pocket depth in patients with adult
periodontitis. The Company is marketing Periostat to the dental community
through its own professional dental pharmaceutical sales force of approximately
135 sales representatives and managers. This sales force also co-promotes
Vioxx(R), a prescription non-sterodial anti-inflammatory drug developed by Merck
and Denavir(R), a prescription cold sore medication developed by SmithKline
Beecham, and the Company is actively seeking other products to market to the
dental community.
The Company began operations in January 1992 and functioned primarily as a
research and development company until 1998. During this period, the Company
operated with a minimal number of employees, and substantially all
pharmaceutical development activities were contracted to independent contract
research and other organizations. Following FDA approval of Periostat in
September 1998, the Company significantly increased its number of employees,
primarily in the areas of sales and marketing. The Company continues to contract
its research and development activities as well as manufacturing and
distribution.
The Company has incurred losses each year since inception and had an
accumulated deficit of $53.6 million at December 31, 1999. The Company expects
to continue to incur losses in the foreseeable future from expenditures on drug
development, marketing, manufacturing and administrative activities.
Statements contained or incorporated by reference in this Annual Report on
Form 10-K that are not based on historical fact are "forward-looking statements"
within the meaning of
19
<PAGE>
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements may be identified by the use of forward-looking terminology such as
"may," "will," "expect," "estimate," "anticipate," "continue," or similar terms,
variations of such terms or the negative of those terms. This Form 10-K contains
forward-looking statements that involve risks and uncertainties. The Company's
business of selling, marketing and developing pharmaceutical products is subject
to a number of significant risks, including risks relating to the implementation
of the Company's sales and marketing plans for Periostat, risks inherent in
research and development activities, risks associated with conducting business
in a highly regulated environment and uncertainty relating to clinical trials of
products under development. The success of the Company depends to a large degree
upon the market acceptance of Periostat by periodontists, dental practitioners,
other health care providers, patients and insurance companies. Other than
Periostat, which has been FDA approved for marketing in the United States, there
can be no assurance that any of the Company's other product candidates will be
approved by any regulatory authority for marketing in any jurisdiction or, if
approved, that any such products or that Vioxx or Denavir will be successfully
commercialized by the Company. The Company's actual results may differ
materially from the results discussed in the forward-looking statements
contained herein.
Results of Operations
- ---------------------
From its founding through the quarter ended September 30, 1998, the
Company had no revenues from sales of its own products. During the fourth
quarter of 1998, the Company achieved net product sales of $3.1 million
following the commercial launch of Periostat in November 1998. Most of the 1998
sales represented initial wholesale and retail stocking. During the year ended
December 31, 1999, the Company achieved net product sales of $15.2 million from
sales of Periostat. In addition, in 1999 the Company generated $770,000 in
contract revenues from its co-promotion agreements and $100,000 in license fees
relating to the signing of a distribution agreement for Periostat in Canada.
The Company realized a net loss in 1999 resulting primarily from higher
sales offset by higher planned sales, marketing and administrative expenses.
Total operating expenses consist of the cost of product sales, research and
development expenses and selling, general and administrative expenses. Cost of
product sales consists primarily of direct manufacturing expenses and royalties.
Research and development expenses consist primarily of funds paid to contract
research organizations for the provision of services and materials for drug
development, ongoing manufacturing and formulation enhancements and clinical
trials. Selling, general and administrative expenses consist primarily of
personnel salaries and benefits, direct marketing costs, professional and
consulting fees, insurance and general office expenses.
Years Ended December 31, 1999 and December 31, 1998
- ---------------------------------------------------
Revenues. The Company realized $16.1 million in net revenues during 1999
compared to $3.5 million during 1998. Revenues in 1999 included $15.2 million in
net sales of Periostat and $870,000 in licensing and contract revenues. The 1999
licensing revenues of $100,000 were attributable to a licensing agreement with
Pharmascience, Inc. pursuant to which Pharmascience, Inc., will market Periostat
in Canada pending requisite regulatory approval. Revenues in 1998
20
<PAGE>
included a non-refundable $400,000 licensing fee from Laboratories Pharmascience
under a licensing agreement pursuant to which Laboratories Pharmascience will
market Periostat in France pending requisite regulatory approval.
Cost of product sales. Cost of product sales were $3.1 million or 20.6% of
net product sales in 1999 compared to $745,000, or 24.4% of net product sales in
1998. This improvement in gross margin resulted from the absence of launch trade
allowances in 1999, and lower royalty rates applicable to the higher sales
achieved in 1999 compared to 1998.
Research and development expenses. Research and development expenses
increased to $5.0 million in 1999 from $4.7 million in 1998. In 1999, research
and development expenses were primarily for Phase IV clinical studies to support
the future marketing activities of Periostat, ongoing manufacturing and
formulation development work for Periostat and research and development
activities funded by the Company at SUNY. Research and development expenses for
1998 consisted primarily of costs associated with the Company's amendment to its
NDA for Periostat, a Phase III clinical trial intended to support future
marketing activities for Periostat and certain pre-clinical studies for other
potential compounds under development.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $23.2 million in 1999 from $10.6 million in
1998. This increase was due primarily to higher selling and marketing expenses
for a full year of commercial activities for Periostat in 1999 and the hiring of
additional sales personnel as Periostat sales commenced in the fourth quarter of
1998.
Other income/expenses. Interest income decreased from $988,000 in 1998 to
$851,000 in 1999. This decrease was due to lower balances in cash and short-term
investments as a result of normal operating activities. Interest expense for the
year ended December 31, 1999 was $199,000. This expense was primarily due to the
interest on the $10.0 million short term note executed by the Company in March
1999 which was repaid in connection with the Company's Financing (as hereinafter
defined) in May 1999.
Preferred stock dividend. Preferred stock dividends increased to $1.1
million during the year ended December 31, 1999 as a result of the Company's
obligations in connection with the issuance of its Series D Stock (as
hereinafter defined) in May 1999.
Years Ended December 31, 1998 and December 31, 1997
- ---------------------------------------------------
Revenues. The Company realized $3.5 million in net revenues during 1998
compared to $334,000 during 1997. Revenues in 1998 included $3.1 million in net
sales of Periostat and $408,000 in licensing and contract revenues. The 1998
licensing revenues of $400,000 were attributable to a licensing agreement with
Laboratories Pharmascience pursuant to which Laboratories Pharmascience will,
following all requisite regulatory approvals, market Periostat in France and
certain other related territories. Revenues in 1997 included a non-refundable
$300,000 licensing fee from Boehringer Mannheim Italia (now called Roche S.P.A.)
related to the achievement of the first milestone under a licensing agreement
pursuant to which Roche
21
<PAGE>
S.P.A. will, following all requisite regulatory approvals, distribute and
manufacture Periostat in Italy.
Cost of product sales. Cost of product sales were $745,000 in 1998, while
there were no cost of product sales in 1997. Such increase resulted from the
Company's initial sales of Periostat in 1998.
Research and development expenses. Research and development expenses
increased from $4.2 million in 1997 to $4.7 million in 1998. This increase
resulted primarily from expenses relating to additional costs associated with
the Company's amendment to its NDA for Periostat submitted to the FDA in March
1998, a Phase 3b clinical trial intended to support future marketing activities
for Periostat, the initiation of certain pre-clinical studies for Nephrostat,
the Company's compound for the treatment of diabetic complications, which were
discontinued in 1999, and consulting and product registration fees associated
with the Marketing Authorization Application that the Company has filed with the
United Kingdom Medicine Control Agency with respect to potential Periostat sales
in the United Kingdom.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased from $6.1 million in 1997 to $10.6 million in
1998. This increase was due primarily to the Company's pre-launch marketing
activities related to Periostat in 1998, the hiring of additional sales
personnel in 1998 and sales and marketing efforts in 1998 related to certain
contractual marketing arrangements entered into during 1997.
Other income/expenses. Interest income decreased from $1.3 million in 1997
to $988,000 in 1998. This decrease was due to lower balances in cash and
short-term investments as a result of normal operating activities since the
Company's follow-on public offering of common stock in April 1997.
Liquidity and Capital Resources
- -------------------------------
Since its origin in January 1992, the Company has financed its operations
through private placements of preferred stock and common stock, an initial
public offering of 2,000,000 shares of common stock, which generated net
proceeds to the Company of approximately $18.0 million after underwriting fees
and related expenses, and a subsequent public offering of 1,000,000 shares of
common stock, which generated net proceeds to the Company of approximately $11.6
million after underwriting fees and related expenses. On May 12, 1999, the
Company consummated a $20.0 million financing (the "Financing") through the
issuance of its Series D Cumulative Convertible Preferred Stock (the "Series D
Stock"), which generated net proceeds to the Company of $18.5 million. The
issuance of the Series D Stock was approved by a majority of the Company's
stockholders at the Company's Annual Meeting of Stockholders on May 11, 1999. A
portion of the proceeds of such Financing were used to repay a $10.0 million
Senior Secured Convertible Note provided by one of the investors on March 19,
1999 in connection with the Financing. The remaining proceeds have been and will
be used for general working capital purposes.
22
<PAGE>
The Series D Stock is convertible at any time into shares of common stock
of the Company at an initial conversion price of $11.00 per common share. The
conversion price is not subject to reset except in the event that the Company
should fail to declare and pay dividends when due or the Company should issue
new equity securities or convertible securities at a price per share or having a
conversion price per share lower than the then applicable conversion price of
the Series D Stock. During the first three years following issuance, holders of
the Series D Stock will be entitled to receive dividends payable in shares of
fully registered common stock at a rate of 8.4% per annum. Thereafter, dividends
will be payable in cash at a rate of 8.0% per annum.
All or a portion of the shares of Series D Stock shall, at the option of
the Company (as determined by the Board of Directors), automatically be
converted into fully paid, registered and non-assessable shares of common stock,
if the following two conditions are met: (i) the last sale price, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices on the Nasdaq is at least 200% of the conversion price then in effect (as
of February 15, 2000, $11.00 per share) for forty consecutive trading days; and
(ii) a shelf registration is in effect for the shares of common stock to be
issued upon conversion of the Series D Stock. Without written approval of a
majority of the holders of record of the Series D Stock, the Company, among
other things, shall not: (i) declare or pay any dividend or distribution on any
shares of capital stock of the Company other than dividends on the Series D
Stock; (ii) make any loans, incur any indebtedness or guarantee any
indebtedness, advance capital contributions to, or investments in any person,
issue or sell any securities or warrants or other rights to acquire debt
securities of the Company, except that the Company may incur such indebtedness
in any amount not to exceed $10.0 million in the aggregate outstanding at any
time for working capital requirements in the ordinary course of business; or
(iii) make research and development expenditures in excess of $7.0 million in
any continuous twelve month period, unless the Company has reported positive net
income for four consecutive quarters immediately prior to such twelve month
period.
At December 31, 1999, the Company had cash, cash equivalents and
short-term investments of approximately $14.4 million, an increase of $4.1
million from the $10.3 million balance at December 31, 1998.
In accordance with investment guidelines approved by the Company's Board
of Directors, cash balances in excess of those required to fund operations have
been invested in short-term United States Treasury securities and commercial
paper with a credit rating no lower than A1/P1. The Company's working capital at
December 31, 1999 was $13.0 million, an increase of $4.0 million from December
31, 1998. This increase was primarily attributable to the net proceeds received
from the Financing, offset in part by cash used in operations during 1999.
In April 1999, the Company received $219,000 in proceeds from the issuance
of a note payable. The proceeds of such note were used to fund the purchase of
equipment, fixtures and furniture for the Company's newly leased corporate
offices in Newtown, Pennsylvania. The term of the note is three years at 9.54%
per annum, with monthly minimum payments of principal and interest. The note is
secured by a third party irrevocable standby letter of credit for an amount not
less than 90% of the financed property.
23
<PAGE>
The Company anticipates that its existing working capital, including the
proceeds from the Financing, will be sufficient to fund the Company's operations
through at least 2000. The Company's future capital requirements and the
adequacy of its available funds will depend on many factors, including the size
and scope of the Company's marketing effort and sales of Periostat, 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.
At December 31, 1999, the Company had approximately $51.0 million of
Federal and $39.0 million of state net operating loss carryforwards available to
offset future taxable income. The Federal and state net operating loss
carryforwards will begin expiring in 2007 and 2005, respectively, if not
utilized. The Company also has research and development tax credit carryforwards
of approximately $790,000 available to reduce Federal income taxes which begin
expiring in 2007.
Section 382 of the Internal Revenue Code of 1986 subjects the future
utilization of net operating losses and certain other tax attributes, such as
research and development credits, to an annual limitation in the event of an
ownership change, as defined. Due to the Company's prior and current year equity
transactions, a portion of the net operating losses and tax credits of the
Company are subject to an annual limitation of approximately $3.8 million. To
the extent that any single-year limitation is not utilized to the full amount of
the limitation, such unused amounts are carried over to subsequent years until
the earlier of its utilization or the expiration of the relevant carryforward
period. At December 31, 1999, assuming there are no future ownership changes,
approximately $12.0 million is immediately available to offset future taxable
income. In addition to the Section 382 limitation, the state net operating loss
carryforward is subject to a $2.0 million annual limitation.
Recently Issued Accounting Standards
- ------------------------------------
In December 1999, the staff of the Securities and Exchange Commission
issued a Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 summarizes certain of the staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements, including the recognition of non-refundable
fees received upon entering into arrangements. We are in the process of
evaluating this SAB and the effect it will have in our financial statements and
current revenue recognition policy.
Year 2000 Issues
- ----------------
The Company believes that material Year 2000 compliance problems would
have arisen on or immediately after January 1, 2000. As of the date hereof, the
Company is not aware of any Year 2000-related problems associated with its
internal systems or software or that of its vendors, suppliers, manufacturers,
distributors and marketing partners. It is possible, however, that further Year
2000-related problems will arise in the future.
24
<PAGE>
Other than time spent by the Company's own personnel, to date the Company
has not incurred any significant costs in identifying and remediating Year 2000
problems.
European Monetary Union
- -----------------------
On January 1, 1999, eleven of the fifteen member countries of the European
Union set fixed conversion rates between their existing legacy currencies and
the euro. At such time, these participating countries adopted the euro as their
common legal currency. The eleven participating countries will now issue
sovereign debt exclusively in euro and will redenominate outstanding sovereign
debt. The legacy currencies will continue to be used as legal tender through
January 1, 2002, at which point the legacy currencies will be canceled and euro
bills and coins will be used for cash transactions in the participating
countries.
The Company does not denominate its international licensing agreements in
foreign currencies. The Company currently does not believe that the euro
conversion will have a material impact on the Company's results of operations or
financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company believes that it is not subject to a material Market Risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required to be filed pursuant to this Item 8 are
appended to this Annual Report on Form 10-K. A list of the financial statements
filed herewith is found at "Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
The information relating to the Company's directors, nominees for election
as directors and executive officers under the headings "Election of Directors",
"Executive Officers" and "Compliance with Section 16(a) of the Exchange Act" in
the Company's definitive proxy statement for the 2000 Annual Meeting of
Stockholders is incorporated herein by reference to such proxy statement.
ITEM 11. EXECUTIVE COMPENSATION.
The discussion under the heading "Executive Compensation" in the Company's
definitive proxy statement for the 2000 Annual Meeting of Stockholders is
incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The discussion under the heading "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive proxy statement for the 2000
Annual Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The discussion under the heading "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for the 2000 Annual
Meeting of Stockholders is incorporated herein by reference to such proxy
statement.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements.
Reference is made to the Index to Consolidated Financial Statements
and Schedule on Page F-1.
(2) Financial Statement Schedule.
Reference is made to the Index to Consolidated Financial Statements
and Schedule on Page F-1.
(3) Exhibits.
Reference is made to the Index to Exhibits on Page 30.
(b) Reports on Form 8-K.
No Reports on Form 8-K have been filed during the quarter ended
December 31, 1999. The Company filed a Current Report on Form 8-K on
March 25, 1999 relating to its issuance of a $10.0 million Senior
Secured Convertible Note and its proposed issuance of $20.0 million
of Series D Cumulative Convertible Preferred Stock to certain
investors. The Company filed a Current Report on Form 8-K on May 26,
1999 relating to the consummation of a $20.0 million financing
through the issuance of its Series D Cumulative Convertible Preferred
Stock and prepayment of such $10.0 million Senior Secured Convertible
Note.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized this 29th day of March,
2000.
COLLAGENEX PHARMACEUTICALS, INC.
By:/s/ Brian M. Gallagher
--------------------------------------
Brian M. Gallagher, Ph. D., President
and Chief Executive Officer
28
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------------------------------- --------------------------- --------------
/s/ Brian M. Gallagher, Ph.D. President, Chief March 29, 2000
- --------------------------------- Executive Officer and
Brian M. Gallagher, Ph.D. Director (Principal
Executive Officer)
/s/ Nancy C. Broadbent Chief Financial Officer, March 29, 2000
- --------------------------------- Treasurer and Secretary
Nancy C. Broadbent (Principal Financial and
Accounting Officer)
/s/ Helmer P.K. Agersborg, Ph. D. Chairman of the Board and March 29, 2000
- --------------------------------- Director
Helmer P.K. Agersborg, Ph.D.
/s/ Peter R. Barnett, D.M.D. Director March 29, 2000
- ---------------------------------
Peter R. Barnett, D.M.D.
/s/ Robert C. Black Director March 29, 2000
- ---------------------------------
Robert C. Black
Director March , 2000
- ---------------------------------
James E. Daverman
/s/ Robert J. Easton Director March 29, 2000
- ---------------------------------
Robert J. Easton
/s/ Stephen A. Kaplan Director March 29, 2000
- ---------------------------------
Stephen A. Kaplan
/s/ Stephen W. Ritterbush, Ph.D. Director March 28, 2000
- ---------------------------------
Stephen W. Ritterbush, Ph.D.
/s/ Terence E. Winters, Ph.D. Director March 25, 2000
- ---------------------------------
Terence E. Winters, Ph.D.
29
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
3.1(a) Amended and Restated Certificate of Incorporation.
3.2(a) Amended and Restated Bylaws.
4.1(a) Registration Rights Agreement dated September 29, 1995 by and
among the Company and certain investors, as supplemented.
4.2(a)(b) Letter dated December 16, 1993 re: certain rights of the Company
with respect to certain securities of the Company owned 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.
4.4(d) Shareholder Protection Rights Agreement, dated as of September 15,
1997, between the Company and American Stock Transfer & Trust
Company which includes (i) the Form of Rights Certificate and (ii)
the Certificate of Designation of Series A Participating Preferred
Stock of the Company.
4.5(j) Amendment No. 1 to Shareholder Protection Rights Agreement, dated
as of March 16, 1999, between the Company and American Stock
Transfer & Trust Company.
4.6(l) Certificate of Designation. Preferences and Rights of Series D
Cumulative Convertible Preferred Stock of CollaGenex
Pharmaceuticals, Inc.
+10.1(a) Assignment of, Amendment to and Restatement of Agreement, with
all exhibits, as amended, and schedules, dated January 13, 1992
by and among the Company, Johnson & Johnson Consumer Products,
Inc. and Research Foundation of State University of New York.
+10.2(a) Supply Agreement dated January 23, 1995 between the Company and
Hovione International Limited.
+10.3(a) Manufacturing Agreement as of April 12, 1996 by and between the
Company and Applied Analytical Industries, Inc.
10.4(a) Form of Non-Disclosure Agreement executed by all Employees as
employed from time to time.
10.5(a)(b) Form of Non-Competition Agreement executed by each of Brian M.
Gallagher, Ph.D., Nancy C. Broadbent and Robert A. Ashley.
10.6(a) Form of Mutual Non-Disclosure Agreement executed by certain
consultants and research collaborators as retained from time to
time.
10.7(a)(b) Form of Indemnification Agreement executed by each of the
Company's directors and officers.
10.8(a) Forms of Consulting Agreement executed by each of Lorne M. Golub
and Thomas F. McNamara.
10.9(a) Form of Material Transfer Agreement between the Company and
Researchers.
30
<PAGE>
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.10(g) 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 is incorporated by
reference to the Company's Registration Statement on Form S-1
(File Number 333-24151) which became effective on April 2, 1997),
as amended effective January 1, 1998 (such Amendment is filed
herewith).
10.11(a) Master Consulting Agreement dated September 19, 1994 between the
Company and Quintiles, Inc.
10.12(a)(b) 1992 Stock Option Plan of the Company, as amended to date.
10.13(a)(b) 1996 Stock Plan of the Company.
10.14(a)(b) 1996 Non-Employee Director Stock Option Plan of the Company.
+10.15(c) License Agreement dated July 18, 1996 by and between the Company
and Boehringer Mannheim Italia.
10.16(e) Letter Agreement dated June 24, 1997 relating to CoreStates Bank
N.A. line of credit, together with Master Commercial Promissory
Note.
10.17(e) Consulting and Contract Service Agreement dated February 1, 1997
by and between the Company and Innovative Customer Solutions, Ltd.
10.18(g) Lease Agreement dated August 22, 1997 between the Company and
Stocking Works Associates which became effective on September 1,
1997.
10.19(h) Contract between Quintiles Scotland Ltd. and the Company, dated
April 28, 1998.
+10.20(i) License Agreement dated as of June 30, 1998 by and between the
Company and Laboratories Pharmascience S.A.
+10.21(i) Exhibit A to the Manufacturing Agreement as of April 12, 1996 by
and between the Company and Applied Analytical Industries, Inc.,
filed with the Company's Registration Statement on Form S-1 (File
Number 333-3582) which became effective on June 20, 1996.
+10.22(i) Co-Promotion Agreement dated October 13, 1998 between SmithKline
Beecham Consumer Healthcare, L.P. and the Company.
+10.23(i) Distribution Services Agreement dated August 15, 1998 between
Cord Logistics, Inc. and the Company.
10.24(j) Convertible Loan and Security Agreement dated as of March 19,
1999, between OCM Principal Opportunities Fund, L.P. and the
Company.
10.25(j) Convertible Note dated March 19, 1999, made by the Company in
favor of OCM Principal Opportunities Fund, L.P.
10.26(j) Stock Purchase Agreement dated March 19, 1999, between the
Company, OCM Principal Opportunities Fund, L.P. and other
Purchasers set forth therein.
10.27(k) Lease Agreement dated March 15, 1999 between the Company and
Newton Venture IV Associates, effective May 15, 1999.
31
<PAGE>
Exhibit No. Description of Exhibit
- ----------- ----------------------
10.27(l) Stockholders and Registration Rights Agreement, dated March 19,
1999, by and among CollaGenex Pharmaceuticals, Inc., OCM
Principal Opportunities Fund, L.P. and the Purchasers set forth
therein.
21(f) List of subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
27 Financial Data Schedule.
- -------
+ Confidential treatment has been requested and granted for a portion of
this Exhibit.
(a) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File Number 333-3582) which became effective on June 20, 1996.
(b) A management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(c) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996 which was filed with the
Securities and Exchange Commission on October 29, 1996.
(d) Incorporated by reference to the Company's Current Report on Form 8-K,
dated September 16, 1997, which was filed with the Securities and
Exchange Commission on September 17, 1997.
(e) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, which was filed with the Securities
and Exchange Commission on August 1, 1997.
(f) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, which was filed with the Securities and
Exchange Commission on March 28, 1997.
(g) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, which was filed with the Securities and
Exchange Commission on March 30, 1998.
(h) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, which was filed with the Securities
and Exchange Commission on August 14, 1998.
(i) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998, which was filed with the
Securities and Exchange Commission on November 16, 1998.
(j) Incorporated by reference to the Company's Current Report on Form 8-K,
dated March 19, 1999 which was filed with the Securities and Exchange
Commission on March 25, 1999.
(k) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, which was filed with the Securities
and Exchange Commission on May 7, 1999.
(l) Incorporated by reference to the Company's Current Report on Form 8-K,
dated May 12, 1999, which was filed with the Securities and Exchange
Commission on May 26, 1999.
32
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Page
----
Independent Auditors' Report..................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999..... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998, and 1999.............................. F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1998 and 1999......................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999............................... F-6
Notes to Consolidated Financial Statements....................... F-7
Financial Statement Schedule
Valuation and Qualifying Accounts.............................. F-21
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
CollaGenex Pharmaceuticals, Inc.:
We have audited the consolidated financial statements of CollaGenex
Pharmaceuticals, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule 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 subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles. Also in our opinion the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
Princeton, New Jersey
February 7, 2000
F-2
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1999
(dollars in thousands, except per share data)
Assets 1998 1999
-------- --------
Current assets:
Cash and cash equivalents ......................... $ 3,286 $ 7,981
Short term investments ............................ 6,964 6,386
Accounts receivable, net of allowance of
$293 and $386 in 1998 and 1999, respectively ...... 3,045 2,150
Inventories ....................................... 342 695
Prepaid expenses and other current assets ......... 823 615
-------- --------
Total current assets ........................ 14,460 17,827
Equipment and leasehold improvements, net ............ 267 709
Other assets ......................................... 13 27
-------- --------
Total assets ................................ $ 14,740 $ 18,563
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of note payable ................... $ -- $ 65
Accounts payable .................................. 2,914 2,440
Accrued expenses .................................. 2,545 2,335
-------- --------
Total current liabilities ................... 5,459 4,840
-------- --------
Note payable, less current portion ................... -- 116
Stockholders' equity:
Preferred stock, $0.01 par value,
5,000,000 shares authorized, no shares
and 200,000 shares of Series D cumulative
convertible preferred stock issued and
outstanding in 1998 and 1999, respectively
(liquidation value $20,000) ..................... -- 2
Common stock, $0.01 par value; 25,000,000
shares authorized, 8,587,204 and 8,622,091
shares issued and outstanding in 1998 and
1999, respectively .............................. 86 86
Additional paid in capital ........................ 47,317 67,206
Deferred compensation ............................. (194) (76)
Accumulated deficit ............................... (37,928) (53,611)
-------- --------
Stockholders' equity ........................ 9,281 13,607
Commitments
-------- --------
Total liabilities and stockholders'
equity .................................... $ 14,740 $ 18,563
======== ========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
1997 1998 1999
----------- ----------- -----------
Revenues:
Product sales .................. $ -- $ 3,053 $ 15,211
License revenues ............... 325 400 100
Contract revenues .............. 9 8 770
----------- ----------- -----------
Total revenues ............. 334 3,461 16,081
----------- ----------- -----------
Operating expenses:
Cost of product sales .......... -- 745 3,139
Research and development ....... 4,200 4,670 5,005
Selling, general and
administrative ................. 6,096 10,600 23,180
----------- ----------- -----------
Total operating expenses ... 10,296 16,015 31,324
----------- ----------- -----------
Operating loss ............. (9,962) (12,554) (15,243)
Other income (expense):
Interest income ................ 1,338 988 851
Interest expense ............... -- -- (199)
----------- ----------- -----------
Net loss ................... (8,624) (11,566) (14,591)
=========== =========== ===========
Preferred stock dividend .......... -- -- 1,092
----------- ----------- -----------
Net loss allocable to common
stockholders ................... $ (8,624) $ (11,566) $ (15,683)
=========== =========== ===========
Basic and diluted net loss per
share allocable to common
stockholders .................... $ (1.04) $ (1.35) $ (1.82)
=========== =========== ===========
Shares used in computing basic
and diluted net loss per share
allocable to common
stockholders ................... 8,291,167 8,579,054 8,597,676
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1998 and 1999
(dollars in thousands)
Series D
cumulative convertible
preferred stock Common stock
--------------------- --------------------- Additional
Number of Par Number of Par paid-in
shares value shares value capital
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ......................... -- $ -- 7,535,533 $ 75 $ 35,551
Exercise of common stock options ............... -- -- 32,046 1 52
Issuance of common stock at $12.50 per share
in conjunction with follow-on offering, net
of issuance costs ............................ -- -- 1,000,000 10 11,552
Deferred compensation resulting from grant
of options ................................... -- -- -- -- 142
Amortization of deferred compensation .......... -- -- -- -- --
Net loss ....................................... -- -- -- -- --
--------- --------- --------- --------- -----------
Balance, December 31, 1997 ......................... -- -- 8,567,579 86 47,297
Exercise of common stock options ............... -- -- 19,625 -- 20
Amortization of deferred compensation .......... -- -- -- -- --
Net loss ....................................... -- -- -- -- --
--------- --------- --------- --------- -----------
Balance, December 31, 1998 ......................... -- -- 8,587,204 86 47,317
Exercise of common stock options ............... -- -- 13,575 -- 44
Issuance of Series D cumulative convertible
preferred stock, net of issuance costs ....... 200,000 2 -- -- 18,448
Common stock dividends on Series D
cumulative convertible preferred stock ......... -- -- 21,312 -- 1,092
Compensation expense resulting from options
to non-employees ............................. -- -- -- -- 305
Amortization of deferred compensation .......... -- -- -- -- --
Net loss ....................................... -- -- -- -- --
--------- --------- --------- --------- -----------
Balance, December 31, 1999 ......................... 200,000 $ 2 8,622,091 $ 86 $ 67,206
Total
Deferred Accumulated stockholders'
compensation deficit equity
--------- --------- ---------
<S> <C> <C> <C>
Balance, December 31, 1996 ......................... $ (296) $ (17,738) $ 17,592
Exercise of common stock options ............... -- -- 53
Issuance of common stock at $12.50 per share
in conjunction with follow-on offering, net
of issuance costs ............................ -- -- 11,562
Deferred compensation resulting from grant
of options ................................... (142) -- --
Amortization of deferred compensation .......... 125 -- 125
Net loss ....................................... -- (8,624) (8,624)
--------- --------- ---------
Balance, December 31, 1997 ......................... (313) (26,362) 20,708
Exercise of common stock options ............... -- -- 20
Amortization of deferred compensation .......... 119 -- 119
Net loss ....................................... -- (11,566) (11,566)
--------- --------- ---------
Balance, December 31, 1998 ......................... (194) (37,928) 9,281
Exercise of common stock options ............... -- -- 44
Issuance of Series D cumulative convertible
preferred stock, net of issuance costs ....... -- -- 18,450
Common stock dividends on Series D
cumulative convertible preferred stock ......... -- (1,092) --
Compensation expense resulting from options
to non-employees ............................. -- -- 305
Amortization of deferred compensation .......... 118 -- 118
Net loss ....................................... -- (14,591) (14,591)
--------- --------- ---------
Balance, December 31, 1999 ......................... $ (76) $ (53,611) $ 13,607
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1997, 1998 and 1999
(dollars in thousands)
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .......................................... $ (8,624) $(11,566) $(14,591)
Adjustments to reconcile net loss to net
cash used in operating activities:
Noncash compensation expense .................. 125 119 423
Depreciation and amortization expense ......... 31 66 151
Change in assets and liabilities:
Accounts receivable ......................... -- (3,045) 895
Inventories ................................. -- (342) (353)
Prepaid expenses and other assets ........... (125) (545) 194
Accounts payable ............................ 505 2,363 (474)
Accrued expenses ............................ 1,107 639 (210)
-------- -------- --------
Net cash used in operating activities ...... (6,981) (12,311) (13,965)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures .............................. (78) (230) (593)
Proceeds from the sale of short-term
investments ..................................... 25,402 6,880 7,464
Purchase of short-term investments ................ (23,427) (7,452) (6,886)
-------- -------- --------
Net cash provided by (used in) investing
activities ...................................... 1,897 (802) (15)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of note payable ............ -- -- 10,000
Repayment of note payable ......................... -- -- (10,000)
Net proceeds from the issuance of preferred
stock ........................................... -- -- 18,450
Net proceeds from issuance of common stock ........ 11,615 20 44
Proceeds from issuance of long-term debt .......... -- -- 219
Repayment of long-term debt ....................... -- -- (38)
-------- -------- --------
Net cash provided by financing
activities ............................... 11,615 20 18,675
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents ........................................ 6,531 (13,093) 4,695
Cash and cash equivalents at beginning of year ....... 9,848 16,379 3,286
-------- -------- --------
Cash and cash equivalents at end of year ............. $ 16,379 $ 3,286 $ 7,981
======== ======== ========
Supplemental schedule of noncash financing activities:
Deferred compensation ............................. $ 142 $ -- $ --
======== ======== ========
Common stock dividends on preferred stock ......... $ -- $ -- $ 1,092
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ............ $ -- $ -- $ 199
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
(1) BUSINESS
CollaGenex Pharmaceuticals, Inc. ("CollaGenex Pharmaceuticals" or the
"Company") was incorporated in Delaware on January 10, 1992. The Company
is a specialty pharmaceutical company focused on providing innovative
medical therapies to the dental market. The Company, through its own sales
and marketing force, is currently marketing Periostat(R) (doxycycline
hyclate), the Company's lead drug for the treatment of adult periodontal
disease which received approval from the U.S. Food & Drug Administration
(the "FDA") in September 1998. The Company is also co-marketing other
pharmaceutical products on a contract basis with two other companies. The
Company has other internally developed compounds in the research and
development stage.
The accompanying consolidated financial statements include the results of
operations of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
(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. 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, "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 their fair value, which
approximates cost, of the investments based on quoted market prices at
December 31, 1998 and 1999. The Company considers all of its short-term
investments to be available for sale.
Inventories
-----------
Inventories are stated at the lower cost or market. Cost is determined
using the first-in, first-out method.
F-7
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
Equipment
---------
Equipment, consisting of computer and office equipment, exhibit equipment
and leasehold improvements is recorded at cost. Depreciation and
amortization is provided using the straight-line method over the estimated
useful lives of the assets or the related lease term, whichever is
shorter, generally three to ten years. Expenditures for repairs and
maintenance are expensed as incurred.
Segment Information
-------------------
The Company is managed and operated as one business. The entire business
is managed by a single management team that reports to the chief executive
officer. The Company does not operate separate lines of business or
separate business entities with respect to any of its products or product
candidates. Accordingly, the Company does not prepare discrete financial
information with respect to separate product areas or by location and does
not have separately reportable segments as defined by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
Financial Instruments
---------------------
The carrying amounts of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable and accrued expenses approximate
fair value because of the short maturity of these instruments. The
interest rates on the note payable approximate rates for similar types of
borrowing arrangements at December 31, 1999, therefore the fair value of
the note payable approximates the carrying value at December 31, 1999.
Recent Pronouncement
--------------------
On December 3, 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements". SAB 101 provides the SEC staff's views on the
recognition of revenue including non-refundable technology access fees
received by registrants in connection with research collaborations with
third parties. SAB 101 states that in certain circumstances the SEC staff
believes that up-front fees, even if non-refundable, should be deferred
and recognized systematically over the term of the research arrangement.
SAB 101 requires registrants to adopt the accounting guidance contained
therein by no later than the first fiscal quarter of the fiscal year
beginning after December 15, 1999. The Company is currently assessing the
requirements of SAB 101 and has not yet determined the impact of applying
the accounting guidance of SAB 101 on its financial position or results of
operations or current revenue recognition policy.
F-8
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
Product Sales
-------------
In September 1998, the Company received clearance from the FDA to market
Periostat. The Company has the exclusive right to market Periostat in the
United States. In November 1998, the Company began shipping Periostat to
wholesalers throughout the United States. The Company recognizes sales
revenue upon shipment. Sales are reported net of allowances for discounts,
rebates, chargebacks and product returns.
License Revenues
----------------
Revenue from license arrangements 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 arrangement
have been satisfactorily completed.
Contract Revenues
-----------------
Contract revenues are earned and recognized according to the provisions of
each collaborative agreement.
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.
Management 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.
F-9
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
Stock-Based Compensation
------------------------
As described in note 6, Statement of Financial Accounting Standards No.
123 ("SFAS 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 issued to employees is
measured as the excess, if any, of the market price of the Company's stock
at the date both the number of shares and price per share are known
(measurement date) over the exercise price. Such amounts are amortized
over the respective vesting periods of the option grants. Transactions
with non-employees, in which goods or services are the consideration
received for the issuance of equity instruments, are accounted for on a
fair value basis in accordance with SFAS 123 and related interpretations.
Concentration of Credit and Other Risks
---------------------------------------
The Company invests its excess cash in deposits with major U.S. financial
institutions, money market funds, U.S. Government obligations and
corporate debt securities. 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.
The Company currently contracts with a single source for the domestic
manufacturing of Periostat which is sold throughout the United States
exclusively to wholesale and retail distributors. During 1999, two
customers accounted for 30% and 14%, of net product sales, respectively.
During 1998, two customers accounted for 28% and 27%, of net product
sales, respectively.
The Company's business of selling, marketing and developing pharmaceutical
products is subject to a number of significant risks, including risks
relating to the implementation of the Company's sales and marketing plans,
risks inherent in research and development activities, risks associated
with conducting business in a highly regulated environment and
uncertainties related to clinical trials of products under development.
F-10
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
Net Loss Per Share
------------------
Basic earnings per share ("EPS") is calculated by dividing earnings (loss)
allocable to common stockholders by the weighted average shares of common
stock outstanding. Net loss allocable to common stockholders includes
dividends on the preferred stock. Diluted EPS would also include the
effect of dilution to earnings of convertible securities and stock
options. As of December 31, 1999, the effect of dilution to earnings of
convertible securities and stock options. As of December 31, 1999, the
Company has certain convertible preferred stock and stock options which
have not been used in the calculation of diluted net loss per share
allocable to common stockholders because to do so would be anti-dilutive.
As such, the numerator and denominator used in computing both basic and
diluted net loss per share allocable to common stockholders are equal.
(3) COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
Inventories
-----------
Inventories at December 31, 1998 and 1999 consists of the following:
1998 1999
----- -----
Raw materials........ $ 124 $ 254
Finished goods....... 218 441
----- -----
$ 342 $ 695
===== =====
Equipment and Leasehold Improvements
------------------------------------
Equipment and leasehold improvements at December 31, 1998 and 1999
consists of the following:
1998 1999
----- -----
Computer and office equipment........ $ 198 $ 672
Exhibit equipment.................... 185 259
Leasehold improvements............... -- 45
----- -----
383 976
Less accumulated depreciation........ (116) (267)
----- -----
$ 267 $ 709
===== =====
F-11
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
Accrued Expenses
----------------
Accrued expenses at December 31, 1998 and 1999 consists of the following:
1998 1999
------ ------
Contracted development and
manufacturing costs................ $ 984 $ 441
Sales and marketing costs............ 637 144
Payroll and related costs............ 421 1,237
Professional and consulting fees..... 268 221
Royalties............................ 163 215
Miscellaneous taxes.................. 29 32
Other................................ 43 45
------ ------
$2,545 $2,335
====== ======
(4) NOTE PAYABLE
In April 1999, the Company received $219 in proceeds from the issuance of
a note payable. The proceeds of such note were used to fund the purchase
of equipment, fixtures and furniture for the Company's newly leased
corporate office in Newtown, Pennsylvania. The term of the note is three
years with interest at 9.54% per annum, with monthly minimum payments of
principal and interest. The note is secured by a third party irrevocable
standby letter of credit for an amount not less than 90% of the financed
property.
(5) STOCKHOLDERS' EQUITY
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.
On April 8, 1997, the Company completed a follow-on offering of 1,000,000
shares of its common stock at a price of $12.50 per share. The net
proceeds for the offering after underwriting fees and all related expenses
was $11,562.
On May 12, 1999, the Company consummated a $20.0 million financing (the
"Financing") through the issuance of 200,000 shares of its Series D
Cumulative Convertible Preferred Stock (the "Preferred
F-12
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
Stock"), which generated net proceeds to the Company of approximately
$18.5 million. OCM Principal Opportunities Fund, L.P. ("OCM") led the
investor group, which also included certain current stockholders of the
Company.
The issuance of the Preferred Stock was approved by a majority of the
Company's stockholders at the Company's Annual Meeting of Stockholders on
May 11, 1999. A portion of the proceeds of the Financing were used for the
repayment of a $10.0 million Senior Secured Convertible Note with interest
at 12% per annum provided by OCM on March 19, 1999 in connection with the
financing. During the first three years following issuance, the Preferred
Stock pays dividends in common stock at a rate of 8.4% per annum.
Thereafter, the Preferred Stock pays dividends in cash at a rate of 8.0%
per annum. The Preferred Stock is convertible into common shares of the
Company at an initial conversion price of $11.00 per share, subject to
adjustment, at any time by the holder and under certain conditions by the
Company. The conversion price is subject to adjustment in the event the
Company fails to declare or pay dividends when due or should the Company
issue new equity securities or convertible securities at a price per share
or having a conversion price per share lower than the applicable
conversion price of the Preferred Stock. Dividends totaling $1,092 were
paid and/or declared in 1999.
The holders of the Preferred Stock are entitled to vote with the holders
of the Company's common stock on all matters to be voted on by the
Company's stockholders on an as converted to common stock basis, subject
to adjustment. The holders of the Preferred Stock are entitled to
liquidation preferences equal to the original purchase price plus
dividends accrued and unpaid plus other dividends in certain
circumstances. In connection with the issuance of the Preferred Stock, the
rights of the holders of the Company's common stock may be limited in
certain instances with respect to dividend rights, rights on liquidation,
winding up and dissolution of the Company, and the right to vote in
connection with certain matters submitted to the Company's stockholders.
Without written approval of a majority of the holders of record of the
Preferred Stock, the Company, among other things, shall not: (i) declare
or pay any dividend or distribution on any shares of capital stock of the
Company other than dividends on the Preferred Stock; (ii) make any loans,
incur any indebtedness or guarantee any indebtedness, advance capital
contributions to, or investments in any person, issue or sell any
securities or warrants or other rights to acquire debt securities of the
Company, except that the Company may incur such indebtedness in any amount
not to exceed $10.0 million in the aggregate outstanding at any time for
working capital requirements in the ordinary course of business; or (iii)
make research and development expenditures in excess of $7.0 million in
any continuous twelve month period, unless the Company has reported
positive net income for four consecutive quarters immediately prior to
such twelve month period.
The Company maintains a Shareholder Rights Plan (the "Rights Plan"). Under
the Rights Plan, each common stockholder receives one "Right" for each
share of common stock held. Each Right, once exercisable, entitles the
holder to purchase from the Company one one-hundredth of a share of the
Company's Series A Participating Preferred Stock at an exercise price of
$65. All Rights expire on September 26, 2007 unless earlier redeemed. At
December 31, 1999, the Rights were neither
a
F-13
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
exercisable nor traded separately from the Company's common stock, and
become exercisable only if person or a group of affiliated or associated
persons has acquired, or obtained the right to acquire, beneficial
ownership of 20% or more of the voting power of all outstanding shares of
the Company's common stock and in certain other limited circumstances.
Upon separation from the common stock, each Right will entitle the holder,
other than the acquiring person that has triggered such separation, to
effectively purchase certain shares of the Company's common stock equal in
market value to two times the then applicable exercise price of the Right.
If the Company is acquired in a merger or other business combination
transaction, or 50% or more of the Company's assets or earning power are
sold in one or more related transactions, the Rights will entitle holders,
upon exercise of the Rights, to receive shares of common stock of the
acquiring or surviving company with a market value equal to twice the
exercise price of each Right. In 1999, the Company amended its Rights Plan
to specifically exclude an initial issuance of the Preferred Stock.
(6) STOCK OPTION PLANS
The Company has three stock-based compensation plans (the "Plans") and has
adopted the disclosure-only provisions of SFAS 123. The Company continues
to apply 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 to employees at
exercise prices equal to the market value on the measurement date.
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 291,000 shares of the Company's common stock
at a price, for the incentive options, not less than the fair market value
on the measurement date. Such options are exercisable for a period of 10
years from the grant date and generally vest over a four year period. All
such 291,000 options available under the 1992 Plan were granted by March
31, 1996.
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 (increased to 1,500,000 in 1999), shares of the
Company's common stock at a price, for the incentive options, not less
than the fair market value on the measurement date. 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. Such options are exercisable for a period of 10 years from the
grant date and generally vest over a two to five year period, and may be
accelerated for certain grants in certain circumstances.
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, 300,000 shares of common stock are reserved for issuance at an
exercise price equal to the fair market value on the date of grant. Such
options vest 20% per annum commencing one year from the grant date.
F-14
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
During 1996, 11,000 options were granted to employees at an exercise price
of $2.00 per share. During 1999, 192,500 options were granted to employees
at fair market value with an exercise price of $10.06 per share. These
grants were not issued under the terms of any of the above Plans.
Deferred compensation of $142 was recorded in 1997 and other amounts of
deferred compensation had been recorded in prior years for options granted
where the market value of the Company's stock on the measurement date
exceeded the exercise price of such options. Deferred compensation is
being amortized to compensation expense in the accompanying consolidated
statement of operations over the respective vesting periods of such grants
($125, $119 and $118 in 1997, 1998 and 1999, respectively).
In 1999, the Company granted options to certain non-employees to purchase
60,000 shares of common stock. Such options vest over a four year period
based upon future service requirements. In accordance with EITF Issue
96-18, the amount of compensation expense to be recorded in future periods
related to the 1999 grant is subject to change each reporting period based
upon changes in the market value of the Company's common stock, estimated
volatility and risk free interest rates until the non-employee completes
performance under the option agreement and the options vest. At December
31, 1999, 60,000 options subject to this treatment remain unvested. The
Company recorded total compensation expense of $305 in 1999, based on the
market value at the grant date and at December 31, 1999 as determined
using a Black-Scholes option pricing model.
At December 31, 1999, there were 654,100 shares available for grant under
the 1996 Plan and 115,000 under the Non-Employee Director Plan.
F-15
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
The following table summarizes stock option activity for 1997 through
1999:
Exercise price
Shares per share
---------- --------------
Balance, December 31, 1996........... 410,250 $ 0.20 - 10.00
Granted............................ 348,750 9.00 - 13.50
Exercised.......................... (32,046) 0.20 - 2.00
Cancelled.......................... (1,000) 0.335 - 1.20
----------
Balance, December 31, 1997........... 725,954 0.20 - 13.50
Granted............................ 315,000 6.25 - 13.25
Exercised.......................... (19,625) 0.355 - 2.00
Cancelled.......................... (3,000) 6.75
----------
Balance, December 31, 1998........... 1,018,329 0.20 - 13.50
Granted............................ 475,150 8.56 - 22.88
Exercised.......................... (13,575) 0.20 - 9.69
Cancelled.......................... (42,000) 6.75 - 17.75
----------
Balance, December 31, 1999........... 1,437,904 $ 0.20 - 22.88
========== ==============
As of December 31, 1999, the following options were outstanding and
exercisable by price range as follows:
Outstanding Exercisable
---------------------------------- ----------------------
Weighted Weighted Weighted
average average average
Range of remaining exercise exercise
exercise Number contractual price Number price
prices of shares life per share of shares per share
----------- ---------- ----------- --------- ---------- --------
$ 0.20- 2.00 218,704 5.7 years $ 1.02 203,954 $ 0.94
6.25-10.00 499,900 7.5 years 8.29 192,275 8.85
10.06-12.00 464,600 8.6 years 10.31 107,975 10.61
12.19-13.50 214,750 8.9 years 12.49 44,925 12.87
14.06-22.88 39,950 9.5 years 17.45 6,800 17.22
---------- ----------- --------- ---------- --------
1,437,904 7.9 year$ 8.72 555,929 $ 6.72
========== =========== ========= ========== ========
F-16
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
Had the Company elected to recognize compensation cost for options as
prescribed by SFAS 123, the Company's net loss allocable to common
stockholders and basic and diluted loss per share allocable to common
stockholders would have been reflected as set forth below:
1997 1998 1999
-------- --------- ---------
Net loss allocable to
common stockholders:
As reported ................. $ 8,624 $ 11,566 $ 15,683
Pro forma ................... 9,267 12,487 17,338
Basic and diluted net loss
per share allocable to
common stockholders:
As reported ................. $ 1.04 $ 1.35 $ 1.82
Pro forma ................... 1.12 1.46 2.02
Pro forma net loss allocable to common stockholders reflects only options
granted in 1995 through 1999. Consequently, the full impact of calculating
compensation cost for stock options under SFAS 123 is not reflected in the
pro forma net loss allocable to common stockholders 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 allocable to common stockholders figures above.
The weighted average fair values of stock options granted to employees
during 1997, 1998 and 1999 were $5.93, $4.64 and $11.24 per share,
respectively, on the date of grant. The weighted average fair values of
stock options granted to nonemployees during 1999 were $12.19 per share on
the date of grant. Such fair values were determined using the
Black-Scholes option pricing model and are based on the following
assumptions:
1997 1998 1999
------ ------ ------
Expected life in years..... 5 5 5
Risk-free interest rate.... 6.25% 6.25% 6.25%
Volatility................. 60% 60% 80%
Dividend yield............. 0% 0% 0%
(7) INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes in accordance with SFAS No. 109, "Accounting for Income
Taxes". Under the asset and liability method, deferred taxes
F-17
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
are determined based on the differences between the financial statement
and tax bases of assets and liabilities using currently enacted tax rates.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liability at December
31, 1998 and 1999 are presented below:
1998 1999
-------- --------
Deferred tax assets:
Capitalized start up costs ............... $ 677 $ 423
Net operating loss carryforwards ......... 14,145 19,543
Tax credit carryforward .................. 500 790
Accrued expenses ......................... 134 348
-------- --------
Total gross deferred tax assets ........ 15,456 21,104
Less valuation allowance ................. (15,450) (21,069)
-------- --------
Total deferred tax assets .............. 6 35
Deferred tax liability:
Depreciation ............................. (6) (35)
-------- --------
Net deferred taxes ..................... $ -- $ --
======== ========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which temporary differences are deductible
and carryforwards are available. Due to the uncertainty of the Company's
ability to realize the benefit of the deferred tax assets, the net
deferred tax assets are fully offset by a valuation allowance at December
31, 1998 and 1999.
The net change in the valuation allowance for the years ended December 31,
1998 and 1999 were increases of approximately $6,067 and $5,619,
respectively, related primarily to additional net operating losses
incurred by the Company.
At December 31, 1999, the Company had approximately $51,000 of Federal and
$39,000 of state net operating loss carryforwards available to offset
future taxable income. The Federal and state net operating loss
carryforwards will begin expiring in 2007 and 2005, respectively, if not
utilized. The
F-18
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
Company also has research and development tax credit carryforwards of
approximately $790 available to reduce Federal income taxes which begin
expiring in 2007.
Section 382 of the Internal Revenue Code of 1986 subjects the future
utilization of net operating losses and certain other tax attributes, such
as research and development credits, to an annual limitation in the event
of an ownership change, as defined. Due to the Company's prior and current
year equity transactions, a portion of the net operating losses and tax
credits of the Company are subject to an annual limitation of approximately
$3,800. To the extent that any single-year limitation is not utilized to
the full amount of the limitation, such unused amounts are carried over to
subsequent years until the earlier of its utilization or the expiration of
the relevant carryforward period. At December 31, 1999, assuming there are
no future ownership changes, approximately $12,000,000 is immediately
available to offset future taxable income. In addition to the Section 382
limitation, the state net operating loss carryforward is subject to a
$2,000 annual limitation.
(8) 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. The Company's option to acquire the license
was exercised in 1995 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 incurred royalty expense of $50, $200 and $711 in 1997, 1998 and
1999, respectively.
In addition, the Company is required to reimburse SUNY for certain patent
related costs, as well as to support certain additional research efforts.
F-19
<PAGE>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1998 and 1999
(dollars in thousands, except per share data)
(9) COMMITMENTS
The Company maintains various operating leases, primarily for office
space. As of December 31, 1999, future minimum rent payments under
noncancellable operation leases are as follows:
2000 $ 318
2001 318
2002 318
2003 318
2004 318
Thereafter 1,480
-------
Total $ 3,070
=======
Rent expense for the years ended December 31, 1997, 1998 and 1999 totaled
$70, $86 and $204, respectively.
The Company has entered into a three-year Co-Promotion Agreement under
which the Company is committed to spend up to $1 million annually for
promotional expenses, unless the agreement is earlier terminated per the
terms of the agreement.
(10) 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 1997, 1998 or 1999 in accordance with the
terms of the 401(k) Plan.
(11) CONTRACT RESEARCH AGREEMENT
In May 1998, the Company entered into a three year evaluation testing
agreement with SUNY pursuant to which SUNY will evaluate certain compounds
supplied by the Company under which the Company will pay SUNY up to
$1,570. Either party may terminate the agreement at any time. Costs
incurred during 1998 and 1999 were $333 and $541, respectively.
The Company has entered into several contract research agreements 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 as research services are performed. Costs
incurred under these agreements aggregated approximately $1,064, $1,837
and $396 for 1997, 1998 and 1999, respectively.
F-20
<PAGE>
SCHEDULE II
CollaGenex Pharmaceuticals, Inc. and Subsidiary
Financial Statement Schedule
Valuation and Qualifying Accounts
Years Ended December 31, 1998 and 1999
(in thousands)
Col A Col B Col C Col D Col E
- -------------- ---------- ------------------- ---------- --------------
Description Balance at Additions Deductions Balance at the
the End of Period
Beginning
of Period
- -------------- ---------- ------------------- ---------- --------------
Charged Other
to
Statement
of
Operations
- -------------- ---------- -------
Accounts
Receivable
Allowance:
1998 -- $293 -- -- $293
1999 $293 $554 -- $461 $386
F-21
<PAGE>
Exhibit 23.1
Consent of KPMG LLP
<PAGE>
ACCOUNTANTS' CONSENT
The Board of Directors
CollaGenex Pharmaceuticals, Inc.:
We consent to incorporation by reference in the registration statement No.
333-31229 on Form S-8 of CollaGenex Pharmaceuticals, Inc. and registration
statement No. 333-88697 on Form S-3 of CollaGenex Pharmaceuticals, Inc. of our
report dated February 7, 2000, relating to the consolidated balance sheets of
CollaGenex Pharmaceuticals, Inc. and subsidiaries as of December 31, 1998 and
1999, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999 and the related schedule, which report appears in the December
31, 1999, Annual Report on Form 10-K of CollaGenex Pharmaceuticals, Inc.
/s/ KPMG LLP
Princeton, New Jersey
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
audited consolidated financial statements at December 31, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
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<NAME> CollaGenex Pharmaceuticals, Inc.
<MULTIPLIER> 1,000
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<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
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<TOTAL-LIABILITY-AND-EQUITY> 18,563
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