SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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
Incorporation or Organization) Identification No.)
41 University Drive, Newtown, PA 18940
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(Address of Principal Executive Offices) (Zip Code)
(215) 579-7388
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(Registrant's Telephone Number,
Including Area Code)
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 the number of shares outstanding of each of the Registrant's
classes of common stock as of October 15, 2000:
Class Number of Shares
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Common Stock, $.01 par value 8,773,676
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COLLAGENEX PHARMACEUTICALS, INC.
TABLE OF CONTENTS
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Page
PART I. FINANCIAL INFORMATION.......................................... 1
Item 1. Financial Statements....................................... 1
Condensed Consolidated Balance Sheets as of
December 31, 1999 and September 30, 2000
(unaudited)............................................ 2
Condensed Consolidated Statements of Operations
for the Three Months Ended September 30, 1999
and 2000 (unaudited).................................... 3
Condensed Consolidated Statements of Operations
for the Nine Months Ended September 30, 1999
and 2000 (unaudited).................................... 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1999
and 2000 (unaudited).................................... 5
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 8
Results of Operations...................................... 9
Liquidity and Capital Resources............................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 14
PART II. OTHER INFORMATION.............................................. 15
Item 5. Other Information.......................................... 15
Item 6. Exhibits and Reports on Form 8-K........................... 16
SIGNATURES.............................................................. 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
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<TABLE>
<CAPTION>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
December 31, 1999 and September 30, 2000
December 31, September 30,
Assets 1999 2000
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(unaudited)
(dollars in thousands, except per share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 7,981 $ 5,220
Short term investments.............................................. 6,386 2,972
Accounts receivable, net of allowance of $386 and $373 at December 31,
1999 and September 30, 2000, respectively......................... 2,150 2,581
Inventories......................................................... 695 748
Prepaid expenses and other current assets........................... 615 1,101
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Total current assets.......................................... 17,827 12,622
Equipment and leasehold improvements, net.............................. 709 706
Other assets........................................................... 27 27
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Total assets.................................................. $ 18,563 $ 13,355
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Liabilities and Stockholders' Equity
Current liabilities:
Current portion of note payable..................................... $ 65 $ 65
Accounts payable.................................................... 2,440 3,148
Accrued expenses.................................................... 2,335 2,215
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Total current liabilities..................................... 4,840 5,428
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Note payable, less current portion..................................... 116 65
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Commitments
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized;
200,000 shares of Series D cumulative convertible preferred
stock, $0.01 par value, issued and outstanding at
December 31, 1999 and September 30, 2000 (liquidation value
of $20,000 at September 30, 2000)................................. 2 2
Common stock, $0.01 par value, 25,000,000 shares authorized;
8,622,091 and 8,773,676 shares issued and outstanding at
December 31, 1999 and September 30, 2000, respectively............ 86 88
Common stock to be issued (39,188 shares at December 31, 1999 and 0
shares at September 30, 2000)..................................... 858 --
Additional paid in capital.......................................... 66,348 68,457
Deferred compensation............................................... (76) (34)
Accumulated deficit................................................. (53,611) (60,651)
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Stockholders' equity......................................... 13,607 7,862
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Total liabilities and stockholders' equity................... $ 18,563 $ 13,355
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</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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<CAPTION>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Three Months Ended September 30, 1999 and 2000
(unaudited)
Three Months Ended
September 30,
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1999 2000
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(dollars in thousands, except per share data)
<S> <C> <C>
Revenues:
Product sales....................................................... $ 4,219 $ 4,252
Contract revenues................................................... 126 992
License revenues.................................................... -- 220
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Total revenues................................................ 4,345 5,464
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Operating expenses:
Cost of product sales............................................... 860 816
Research and development............................................ 1,102 562
Selling, general and administrative................................. 5,921 6,080
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Total operating expenses...................................... 7,883 7,458
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Operating loss................................................ (3,538) (1,994)
Other income (expense):
Interest income........................................................ 255 152
Interest expense....................................................... (3) (4)
Other expense.......................................................... -- (1)
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Net loss...................................................... $ (3,286) $ (1,847)
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Preferred stock dividend............................................... 429 429
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Net loss allocable to common stockholders.............................. (3,715) (2,276)
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Basic and diluted net loss per share allocable to common stockholders
$ (0.43) $ (0.26)
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Shares used in computing basic and diluted net loss per share
allocable to common stockholders.................................... 8,591,992 8,740,955
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</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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<TABLE>
<CAPTION>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
For the Nine Months Ended September 30, 1999 and 2000
(unaudited)
Nine Months Ended
September 30,
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1999 2000
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(dollars in thousands, except per share data)
<S> <C> <C>
Revenues:
Product sales....................................................... $ 9,839 $ 15,485
Contract revenues................................................... 262 2,520
License revenues.................................................... 100 320
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Total revenues................................................ 10,201 18,325
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Operating expenses:
Cost of product sales............................................... 2,113 3,113
Research and development............................................ 3,331 2,373
Selling, general and administrative................................. 17,694 19,516
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Total operating expenses...................................... 23,138 25,002
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Operating loss................................................ (12,937) (6,677)
Other income (expense):
Interest income........................................................ 615 502
Interest expense....................................................... (192) (12)
Other expense.......................................................... (2) (3)
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Net loss...................................................... $ (12,516) $ (6,190)
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Preferred stock dividend............................................... 663 1,278
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Net loss allocable to common stockholders.............................. (13,179) (7,468)
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Basic and diluted net loss per share allocable to common stockholders
$ (1.53) $ (0.86)
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Shares used in computing basic and diluted net loss per share
allocable to common stockholders.................................... 8,590,224 8,690,208
============= ============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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<CAPTION>
COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1999 and 2000
(unaudited)
Nine Months Ended
September 30,
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1999 2000
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(dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................. $ (12,516) $ (6,190)
Adjustments to reconcile net loss to net cash used in operating
activities:
Noncash compensation expense...................................... 151 366
Depreciation and amortization expense............................. 137 170
Change in assets and liabilities:
Accounts receivable............................................. 1,686 (431)
Inventories..................................................... (354) (53)
Prepaid expenses and other current assets....................... 132 (486)
Accounts payable................................................ (291) 708
Accrued expenses................................................ (81) (120)
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Net cash used in operating activities.................. (11,136) (6,036)
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Cash flows from investing activities:
Capital expenditures.................................................. (467) (167)
Proceeds from the sale of short term investments...................... 7,464 5,638
Purchase of short term investments.................................... (500) (2,224)
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Net cash provided by investing activities.............. 6,497 3,247
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Cash flows from financing activities:
Proceeds from the issuance of convertible note payable................ 10,000 --
Repayment of convertible note payable................................. (10,000) --
Proceeds from the issuance of preferred stock......................... 18,456 --
Net proceeds from the issuance of common stock........................ 9 79
Proceeds from the issuance of note payable............................ 219 --
Payments on note payable.............................................. (21) (51)
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Net cash provided by financing activities.............. 18,663 28
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Net increase (decrease) in cash and cash equivalents..................... 14,024 (2,761)
Cash and cash equivalents at beginning of period......................... 3,286 7,981
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Cash and cash equivalents at end of period............................... $ 17,310 $ 5,220
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Supplemental schedule of non-cash financing activities:
Common stock dividend declared on preferred stock..................... $ 234 $ 849
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Supplemental disclosure of cash flow information:
Cash paid during the quarter for interest............................. $ 192 $ 12
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</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 1 -- BASIS OF PRESENTATION:
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with generally accepted
accounting principles. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These unaudited condensed consolidated financial statements should
be read in conjunction with the Company's 1999 audited consolidated financial
statements and footnotes.
The accompanying unaudited condensed consolidated financial statements
include the results of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
In the opinion of the Company's management, the accompanying unaudited
condensed consolidated financial statements have been prepared on a basis
substantially consistent with the audited consolidated financial statements and
contain adjustments, all of which are of a normal recurring nature, necessary to
present fairly their financial position as of September 30, 2000, their results
of operations for the three and nine months ended September 30, 1999 and 2000,
and their cash flows for the nine months ended September 30, 1999 and 2000.
Interim results are not necessarily indicative of results anticipated for the
full fiscal year.
Certain amounts in the December 31, 1999 Consolidated Balance Sheet have
been reclassified to conform with the September 30, 2000 presentation.
NOTE 2 -- INVENTORIES:
Inventories at December 31, 1999 and September 30, 2000 consist of the
following:
1999 2000
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Raw materials $ 254 $ 83
Finished goods 441 665
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$ 695 $ 748
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 2000
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(CONTINUED)
NOTE 3 -- RECENT PRONOUNCEMENTS:
In December 1999, the staff of the Securities and Exchange Commission
issued a Staff Accounting Bulletin 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 SAB 101 and
the effect it will have in our financial statements and current revenue
recognition policy. SAB 101, as amended, must be adopted no later than the
fourth quarter of 2000 with any impact reported as a cumulative effect
adjustment calculated as of January 1, 2000. Certain license fees recognized as
revenue during the three and nine months ended September 30, 2000 may need to be
deferred once SAB 101 is adopted and amortized over a yet to be estimated
expected period of benefit.
NOTE 4 -- CONTRACT DISPUTE WITH AAI:
Applied Analytical Industries, Inc. ("AAI"), the Company's current
manufacturer of Periostat, notified the Company in October 2000 of AAI's belief
that it is commercially impracticable for AAI to continue to manufacture
Periostat at current pricing levels as a result of certain manufacturing
specifications for Periostat that were mandated by the FDA. AAI is seeking to
recover certain costs that AAI claims it has incurred since beginning commercial
manufacture of Periostat in late 1998. AAI is also seeking to effect a price
increase on future quantities of Periostat manufactured for the Company. At
present, the Company and AAI are actively working to reach a resolution to this
matter, including possibly submitting the dispute to binding arbitration. The
Company cannot be certain that an agreement will be reached with AAI on
commercially reasonable terms, if at all, or that supplies of Periostat will not
be disrupted in the future as a result of this dispute.
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COLLAGENEX PHARMACEUTICALS, INC.
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
CollaGenex Pharmaceuticals, Inc. and its 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
120 sales representatives and managers. This sales force also co-promotes
Vioxx(R), a prescription non-sterodial anti-inflammatory drug developed by Merck
& Co., Inc. ("Merck") and Denavir(R), a prescription cold sore medication
developed by SmithKline Beecham Consumer Healthcare, L.P. ("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 $60.7 million at September 30, 2000. The Company expects
to continue to incur losses in the foreseeable future from expenditures on
sales, marketing, manufacturing, drug development, and administrative
activities.
Statements contained or incorporated by reference in this Quarterly Report
on Form 10-Q that are not based on historical fact are "forward-looking
statements" within the meaning of 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-Q 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
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periodontists, dental practitioners, other health care providers, patients and
insurance companies. Other than Periostat, which has been approved by the FDA
for marketing in the United States and approved by the Medicines Control Agency
for marketing in the United Kingdom, 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.
During the nine months ended September 30, 2000, the Company achieved net
product sales of $15.5 million from sales of Periostat. In addition, during the
nine months ended September 30, 2000, the Company generated $2.5 million in
contract revenues from its co-promotion agreements and $320,000 in license
revenues.
Net sales of Periostat for the three months ended September 30, 2000 were
$4.3 million as compared to $5.7 million and $5.5 million for the three months
ended June 30, 2000 and March 31, 2000, respectively. Based on prescription data
provided by NDC/Source, end user demand was higher in the third quarter of 2000
than the first and second quarters of 2000. However, during the fourth quarter
of 1999 and the first and second quarters of 2000, wholesale buying modestly
exceeded estimated end user demand. The Company believes, however, that as the
rate of growth in end user demand slowed during 2000, wholesalers reduced their
weeks of sales in inventories and drew down existing inventories to meet
demands, rather than placing new orders.
To broaden and increase Periostat usage, the Company initiated a
direct-to-consumer advertising test program in October 2000 aimed at patients
and an Expanded Use Initiative in June 2000 aimed at dental professionals. The
Company has not yet determined the impact of such initiatives on net sales of
Periostat, if any.
The Company realized a net loss during the third quarter of 2000, resulting
primarily from higher revenue offset by higher planned sales, marketing and
administrative expenses incurred during such period. 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
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consist primarily of personnel salaries and benefits, direct marketing costs,
professional and consulting fees, insurance and general office expenses.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
REVENUES. The Company realized $5.5 million in net revenues during the
three months ended September 30, 2000 compared to $4.3 million during the three
months ended September 30, 1999. Revenues for the third quarter of 2000 included
$4.3 million in net sales of Periostat, $992,000 in contract revenues which were
derived from the Company's co-promotion of Vioxx for Merck and Denavir for
SmithKline Beecham and $220,000 in Periostat license revenues. Revenues for the
three months ended September 30, 1999 included $4.2 million in net sales of
Periostat and $126,000 in contract revenues. There were no co-promotion revenues
earned from Merck during the three months ended September 30, 1999.
COST OF PRODUCT SALES. Cost of product sales for Periostat were $816,000,
or 19.2% of net product sales, for the three months ended September 30, 2000,
compared to $860,000, or 20.4% of net product sales, for the three months ended
September 30, 1999. This decrease in cost of product sales for Periostat as a
percentage of net product sales for Periostat resulted primarily from per unit
price increases of Periostat in effect during the three months ended September
30, 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 49.0% to $562,000 in the third quarter of 2000 from $1.1 million in
the third quarter of 1999. This decrease resulted primarily from fewer expenses
related to Phase 3b clinical studies to support the future marketing activities
for Periostat, decreased manufacturing and formulation development work for
Periostat tablets and reduced research and development activities. Expenditures
made during the three months ended September 30, 2000 included, among other
expenditures, regulatory and consulting fees associated with the Company's New
Drug Application for Periostat tablets submitted to the FDA in the first quarter
of 2000 and ongoing Phase IV marketing studies of Periostat.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 2.6% to $6.1 million in the third quarter of
2000 from $5.9 million in the third quarter of 1999. This increase was due
primarily to the initiation of a direct-to-consumer advertising test campaign
which commenced during the quarter and higher personnel and training expenses
associated with additional sales representatives hired in 2000. The Company also
incurred advertising and promotional expenses for Vioxx and Denavir during the
third quarter of 2000 as a result of its co-promotional agreements with Merck
and SmithKline Beecham.
OTHER INCOME/EXPENSE. Interest income decreased to $152,000 in the third
quarter of 2000 from $255,000 in the third quarter of 1999. This decrease was
due to lower average balances in cash and short-term investments. Interest
expense was $4,000 in the third quarter of 2000 compared to $3,000 in the third
quarter of 1999. These expenses were primarily due to interest on the $219,000
note payable executed by the Company in April 1999.
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PREFERRED STOCK DIVIDENDS. Preferred stock dividends were $429,000 in the
third quarter of 2000 as a result of the Company's obligations in connection
with the issuance of its Series D Stock (as defined below) in May 1999.
Preferred stock dividends accrued in the third quarter of 1999 were also
$429,000.
NINE MONTHS ENDED SEPTEMBER 30,2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
REVENUES. The Company realized $18.3 million in net revenues during the
nine months ended September 30, 2000 compared to $10.2 million during the nine
months ended September 30, 1999. Revenues for the nine months ended September
30, 2000 included $15.5 million in net sales of Periostat, $2.5 million in
contract revenues which were derived from the Company's co-promotion of Vioxx
for Merck and Denavir for SmithKline Beecham and $320,000 in Periostat license
revenues. Revenues for the nine months ended September 30, 1999 included $9.8
million in net sales of Periostat, $262,000 in contract revenues and $100,000 in
Periostat license revenues. There were no co-promotion revenues earned from
Merck during the nine months ended September 30, 1999. During the first two
quarters of 2000, net revenues included $2.3 million in stocking orders from one
of the Company's major customers, which may have significantly increased that
customer's weeks of sales in inventory during the nine months ended September
30, 2000. During the nine month period ended September 30, 1999, this customer
placed orders totaling $940,000, which also may have increased its weeks of
sales in inventory during the nine months ended September 30, 1999.
COST OF PRODUCT SALES. Cost of product sales for Periostat were $3.1
million, or 20.1% of net product sales, for the nine months ended September 30,
2000, compared to $2.1 million, or 21.5% of net product sales, for the nine
months ended September 30, 1999. This decrease in cost of product sales for
Periostat as a percentage of net product sales for Periostat resulted primarily
from the absence of trade allowances realized on product sales and per unit
price increases of Periostat in effect during the nine months ended September
30, 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased 28.7% to $2.4 million for the nine months ended September 30, 2000
from $3.3 million for the nine months ended September 30, 1999. This decrease
resulted primarily from fewer expenses related to Phase 3b clinical studies to
support the future marketing activities for Periostat, decreased manufacturing
and formulation development work for Periostat tablets and reduced research and
development activities. These decreases were partially offset by a $324,000
non-cash compensation charge incurred during the period related to accelerating
the vesting schedule on stock options granted to certain non-employees in 1999.
Expenditures made during the nine months ended September 30, 2000 included,
among other expenditures, regulatory and consulting fees associated with the
Company's New Drug Application for Periostat tablets submitted to the FDA during
the period and ongoing Phase IV marketing studies of Periostat.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 10.3% to $19.5 million for the nine months
ended September 30, 2000 from $17.7 million for the nine months ended September
30, 1999. This increase was due primarily to higher personnel, recruiting and
continued training expenses associated with additional sales representatives
hired in 2000. The Company also incurred advertising and promotional expenses
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for Vioxx and Denavir during the nine months ended September 30, 2000 as a
result of its co-promotional agreements with Merck and SmithKline Beecham.
OTHER INCOME/EXPENSE. Interest income decreased to $502,000 in the nine
months ended September 30, 2000 from $615,000 in the nine months ended September
30, 1999. This decrease was due to slightly lower average balances in cash and
short-term investments during 2000. Interest expense was $12,000 in the nine
months ended September 30, 2000. This expense was due to interest on the
outstanding balance on the $219,000 note payable executed by the Company in
April 1999. Interest expense was $192,000 for the nine months ended September
30, 1999 due primarily to interest on the $10.0 million short term convertible
note executed by the Company in March 1999 which was repaid in connection with
the Company's Financing (as defined below) in May 1999.
PREFERRED STOCK DIVIDENDS. Preferred stock dividends were $1.3 million in
the nine months ended September 30, 2000 and were $663,000 for the nine months
ended September 30, 1999 as a result of the Company's obligations in connection
with the issuance of its Series D Stock in May 1999.
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. 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 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 have been and will continue to 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
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prices on the Nasdaq is at least 200% of the conversion price then in effect (as
of September 30, 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 September 30, 2000, the Company had cash, cash equivalents and
short-term investments of approximately $8.2 million, a decrease of $6.2 million
from the $14.4 million balance at December 31, 1999, due primarily to the loss
from operations during the nine months ended September 30, 2000.
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
September 30, 2000 was $7.2 million, a decrease of $5.8 million from the $13.0
million balance at December 31, 1999. This decrease was primarily attributable
to the Company's cash used for normal operations during the nine months ended
September 30, 2000.
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 Company anticipates that its existing working capital will be
sufficient to fund the Company's operations through at least the year 2001. 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 efforts 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.
RECENT PRONOUNCEMENTS
In December 1999, the staff of the Securities and Exchange Commission
issued a Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101").
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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 SAB 101 and the effect it will have in our
financial statements and current revenue recognition policy. SAB 101, as
amended, must be adopted no later than the fourth quarter of 2000 with any
impact reported as a cumulative effect adjustment calculated as of January 1,
2000. Certain license fees recognized as revenue during the three and nine
months ended September 30, 2000 may need to be deferred once SAB 101 is adopted
and amortized over a yet to be estimated expected period of benefit.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company believes that it is not subject to a material impact to its
financial position or results of operations relating to market risk.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
DISTRIBUTION AGREEMENTS
On August 24, 2000 the Company announced that it had executed an agreement
for the marketing and distribution of Periostat in Israel with Taro
International Limited ("Taro"), a wholly-owned subsidiary of Taro Pharmaceutical
Industries Limited, an Israeli company. The agreement calls for Taro to pay
milestone fees associated with the regulatory approvals of Periostat.
On October 25, 2000 the Company announced that it has agreed to extend the
rights of ISDIN S.A., a joint venture between the Spanish companies Laboratorios
del Dr. Esteve S.A. and Antonio Puig S.A., to market and distribute Periostat in
Greece. The Company previously announced an exclusive marketing and distribution
agreement with ISDIN S.A. for the countries of Spain and Portugal.
APPOINTMENT OF DIRECTOR
On October 4, 2000, the Company announced that W. James O'Shea was
appointed to the Company's Board of Directors. Mr. O'Shea currently serves as
the president and chief operating officer of Sepracor Inc.
NEW PRODUCT MARKET
On October 5, 2000, the Company announced that Periostat will be available
for prescription in the United Kingdom, and will be marketed to the United
Kingdom periodontal community by CollaGenex International, Ltd., a wholly-owned
subsidiary of the Company.
GRANT AWARD
On October 18, 2000, the Company announced that it had received a Phase I
STTR grant from the National Heart, Lung and Blood Institute, a division of the
National Institute of Health. The grant will support the potential development
of one of the Company's group of compounds known as IMPACS(R) (Inhibitors of
Multiple Proteases And Cytokines) for the prevention and treatment of acute lung
injury.
CONTRACT DISPUTE WITH AAI
Applied Analytical Industries, Inc. ("AAI"), the Company's current
manufacturer of Periostat, notified the Company in October 2000 of AAI's belief
that it is commercially impracticable for AAI to continue to manufacture
Periostat at current pricing levels as a result of certain manufacturing
specifications for Periostat that were mandated by the FDA. AAI is seeking to
recover certain costs that AAI claims it has incurred since beginning commercial
manufacture of Periostat in late 1998. AAI is also seeking to effect a price
increase on future quantities of Periostat manufactured for the Company. At
present, the Company and AAI are
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actively working to reach a resolution to this matter, including possibly
submitting the dispute to binding arbitration. The Company cannot be certain
that an agreement will be reached with AAI on commercially reasonable terms, if
at all, or that supplies of Periostat will not be disrupted in the future as a
result of this dispute.
DISCUSSIONS WITH LABORATORIES PHARMASCIENCE
As previously disclosed by the Company, the Company and Laboratories
Pharmascience S.A. have been engaged in ongoing discussions to evaluate whether
the parties will continue their relationship under their previously negotiated
1998 License Agreement. After further discussions, the parties mutually decided
to discontinue their relationship. The Company is actively seeking a partner to
market and distribute Periostat in France, upon receipt of requisite regulatory
approval in such region.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27 - Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter to which this Form
10-Q relates.
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SIGNATURES
Pursuant to the requirements 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.
CollaGenex Pharmaceuticals, Inc.
Date: November 14, 2000 By: /s/ Brian M. Gallagher, Ph.D.
-------------------------------
Brian M. Gallagher, Ph.D.
Chairman, President and Chief
Executive Officer (Principal
Executive Officer)
Date: November 14, 2000 By: /s/ Nancy C. Broadbent
--------------------------------
Nancy C. Broadbent
Chief Financial Officer (Principal
Financial and Accounting Officer)
