<PAGE>
As filed with the Securities and Exchange Commission on February 28, 2000
Registration Statement No. 333-93881
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
AMENDMENT NO. 3
to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
-------------------
ORAPHARMA, INC.
(Exact name of Registrant as specified in its charter)
Delaware 2834 22-3473777
(State or other (Primary Standard Industrial (IRS Employer
jurisdiction of Classification Code No.) Identification Number)
incorporation or
organization)
732 Louis Drive
Warminster, PA 18974
215/956-2200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-------------------
MICHAEL D. KISHBAUCH
President and Chief Executive Officer
OraPharma, Inc.
732 Louis Drive
Warminster, PA 18974
215/956-2200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-------------------
Copies to:
David R. King, Esq. Luci Staller Altman, Esq.
Morgan, Lewis & Bockius LLP Matthew F. Herman, Esq.
1701 Market Street Rishi A. Varma, Esq.
Philadelphia, PA 19103 Brobeck, Phleger & Harrison LLP
215/963-5000 1633 Broadway, 47th Floor
New York, NY 10019
212/581-1600
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended or until this
Registration Statement shall become effective on such date as the Commission,
acting pursuant to such Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus front cover
pages and two underwriting sections: (a) one to be used in connection with an
offering in the United States and Canada and (b) one to be used in connection
with a concurrent offering outside of the United States and Canada. The U.S.
prospectus and the international prospectus are otherwise identical in all
respects. The international versions of the front cover page and the
underwriting section are included immediately before Part II of this
registration statement.
1
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The Information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 28, 2000
[LOGO OF ORAPHARMA, INC.]
4,000,000 Shares
Common Stock
OraPharma is offering 4,000,000 shares of its common stock. This is our
initial public offering. We have applied to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "OPHM." We anticipate
that the initial public offering price will be between $15.00 and $17.00 per
share.
--------------
Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page 5.
--------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price.......................................... $ $
Underwriting Discounts and Commissions......................... $ $
Proceeds to OraPharma.......................................... $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
OraPharma has granted the underwriters a 30-day option to purchase up to an
additional 600,000 shares of common stock to cover over-allotments. FleetBoston
Robertson Stephens Inc. expects to deliver the shares to purchasers on ,
2000.
--------------
Robertson Stephens
U.S. Bancorp Piper Jaffray
Gerard Klauer Mattison & Co., Inc.
The date of this Prospectus is , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY................................................................... 1
RISK FACTORS.............................................................. 5
FORWARD-LOOKING STATEMENTS................................................ 13
USE OF PROCEEDS........................................................... 14
DIVIDEND POLICY........................................................... 14
CAPITALIZATION............................................................ 15
DILUTION.................................................................. 16
SELECTED FINANCIAL DATA................................................... 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 18
BUSINESS.................................................................. 23
MANAGEMENT................................................................ 38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 49
PRINCIPAL STOCKHOLDERS.................................................... 52
DESCRIPTION OF CAPITAL STOCK.............................................. 55
SHARES ELIGIBLE FOR FUTURE SALE........................................... 59
UNDERWRITING.............................................................. 60
LEGAL MATTERS............................................................. 62
EXPERTS................................................................... 62
ADDITIONAL ORAPHARMA INFORMATION.......................................... 62
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
i
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this
prospectus. We have included this information in the summary because we believe
this information is highly important in making a decision to invest in our
common stock. You should read this summary together with the more detailed
information regarding our company and the common stock being sold in this
offering appearing elsewhere in this prospectus, including our financial
statements and related notes, for a more complete understanding of our business
and the offering.
OraPharma
Introduction
OraPharma is developing pharmaceutical products for the treatment of oral
diseases and disorders. We completed two Phase 3 clinical trials in October
1999 for our first product candidate, Minocycline Periodontal Therapeutic
System. We conducted these trials on 747 patients to establish drug safety and
efficacy in treating adult periodontitis, a chronic infection caused by plaque
buildup on teeth and the leading cause of adult tooth loss. Based on our
clinical trial results, we submitted a New Drug Application, or NDA, to the
Food and Drug Administration, or FDA, on February 17, 2000. We developed MPTS
to be used together with the current standard of care, scaling and root
planing, which is a mechanical procedure involving the removal of bacteria-
containing plaque. We are directing our other research and development programs
at further establishing a presence in oral care pharmaceuticals and expanding
the use of our core technology, which is our manufacturing process and method
for administering the drug.
Periodontitis has no known cure and is thought to be linked to other
serious systemic health problems such as cardiovascular disease, diabetes and
low infant birth weight. Published reports citing the American Dental
Association state that approximately 50 million Americans have periodontal
disease and only 7.5 million Americans are currently receiving treatment.
Industry sources indicate that more than $6.0 billion is spent annually on
products and services to treat this condition. Pharmaceuticals for the
treatment of periodontitis comprise a rapidly emerging segment of the overall
oral health care market. In addition, we believe a broader market opportunity
exists for the treatment of other oral health care diseases and disorders with
large, unmet medical needs. Examples include oral mucositis, a condition that
is a consequence of cancer therapy and involves the formation of painful ulcers
in the mouth and esophagus, and various oral conditions requiring regeneration
of bone and tissue.
Our first product candidate, MPTS, uses our core technology--a patented
system that both allows precise drug placement at the desired site and enables
drug-release over several days or weeks--and a specially designed dispenser to
place the antibiotic minocycline at the site of periodontal infection. We
licensed MPTS and our core technology from American Cyanamid, which is now a
part of American Home Products, or AHP. We have developed MPTS to enhance the
effect of the standard treatment for periodontitis, scaling and root planing.
We believe MPTS offers significant advantages over existing pharmaceutical
treatments, particularly speed and convenience of administration. In addition,
our approach to deliver the drug precisely at the infection site results in
high drug concentration for an extended time period, with, we believe, reduced
risk of drug resistance. Finally, the oral care professional administers MPTS
chair-side, ensuring patient compliance.
In the U.S., we intend to create a sales and marketing force of 50 to 75
persons and to begin hiring and training activities in late 2000. Assuming we
obtain FDA approval, we will target approximately 3,700 periodontists, and
approximately 25,000 general dentists whom we believe frequently perform
scaling and root planing procedures. In international markets, we intend to
enter into strategic relationships to market and sell MPTS rather than
establish our own sales force.
1
<PAGE>
We licensed patents and related methods in December 1998 for two
additional product programs that are currently in preclinical studies.
Preclinical studies are safety investigations that are conducted prior to drug
testing in humans. The first, initially developed at Brigham and Women's
Hospital, is for the treatment of oral mucositis. This is a condition that
occurs in more than 40% of patients receiving standard chemotherapy and
virtually all patients who receive head and neck radiation therapy, according
to an article published in January 1995, Principles and Practice of Oncology.
The second, initially developed at Children's Hospital of Boston, is for the
regeneration of bone and soft-tissue to aid in the support of dental implants
and dentures. We also formed collaborations with both organizations to support
ongoing development of these technologies. In addition, we have begun two
research programs with the University of North Carolina--Chapel Hill, that
focus on treating traumatic tooth injury and periodontitis. Both programs are
at an early development stage, where we are screening possible compounds for
potential use as a drug therapy.
We aim to become a leader in oral care pharmaceuticals, including agents
that target both dental and non-dental pathologies of the oral cavity. Our
business strategy is based on leveraging our scientific and medical staff's
expertise in drug development, drug delivery and management of clinical trials;
building our own sales and marketing team for the commercialization of MPTS and
other oral healthcare product candidates in the U.S.; and forming strategic
relationships to complete early stages of research and conduct manufacturing
and distribution activities.
Additional Information
We were formed in August 1996. Our principal executive offices are
located at 732 Louis Drive, Warminster, Pennsylvania 18974, and our telephone
number is 215-956-2200.
We have applied for a federally registered trademark for "OraPharma."
This prospectus also includes trademarks and tradenames of other parties.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by OraPharma...... 4,000,000 shares
Common stock to be outstanding after
this offering........................ 12,596,735 shares
Use of proceeds........................ For further development of, obtaining
FDA approval for, and
commercialization of MPTS; payments
under licensing, sponsored research
and consulting agreements; general
corporate and working capital
purposes; ongoing research and
development; and obtaining new product
candidates or technology.
Proposed Nasdaq National Market
symbol............................... OPHM
</TABLE>
The number of shares outstanding after this offering excludes, as of
December 31, 1999:
. 1,250,000 shares of common stock available for issuance under our 1999
equity compensation plan;
. 586,472 shares of common stock issuable upon exercise of outstanding
stock options under our 1996 stock option plan at a weighted average
exercise price of $0.35 per share;
. warrants to purchase 31,249 shares of series A preferred stock, which
will either be exercised prior to the completion of this offering or
become exercisable for 31,249 shares of common stock upon the
completion of this offering at an exercise price of $2.00 per share;
. warrants to purchase 27,500 shares of common stock at an exercise price
of $3.64 per share;
. warrants to purchase 110,617 shares of common stock at an exercise
price of $12.92 per share issued in connection with the sale of series
D preferred stock; and
. warrants to purchase 41,152 shares of common stock at an exercise price
of $4.86 per share.
--------------------
Generally, the information in this prospectus, unless otherwise noted:
. assumes that the over-allotment option is not exercised;
. reflects the automatic conversion, on a one-for-one basis, of all
outstanding shares of series A, B, C and D preferred stock into an
aggregate of 7,557,100 shares of common stock at the closing of this
offering; and
. reflects a one-for-two reverse stock split that was completed on
February 3, 2000.
3
<PAGE>
Summary Financial Data
The following table presents summary financial information for OraPharma.
The pro forma balance sheet data gives effect to the conversion of all of our
outstanding shares of preferred stock. The pro forma as adjusted balance sheet
data reflects the sale by OraPharma of 4,000,000 shares of common stock in the
offering at an assumed offering price of $16.00 per share. The summary
financial data for the period from inception (August 1, 1996) through December
31, 1996, the years ended December 31, 1997, 1998 and 1999, and the period from
inception through December 31, 1999 are derived from the audited financial
statements. You should read this data together with the financial statements
and related notes included in this prospectus.
<TABLE>
<CAPTION>
Period from Period from
Inception Inception
(August 1, (August 1,
1996) Year Ended 1996)
Through December 31, Through
December 31, -------------------------------------- December 31,
1996 1997 1998 1999 1999
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating expenses:
Research and
development.......... $ 26,294 $ 1,706,393 $ 7,589,000 $ 9,693,413 $ 19,015,100
General and
administrative....... 408,295 939,469 1,604,579 2,189,577 5,141,920
--------- ----------- ----------- ------------ ------------
Operating loss........ (434,589) (2,645,862) (9,193,579) (11,882,990) (24,157,020)
Net interest income
(expense)............. (641) 504,123 424,488 636,957 1,564,927
--------- ----------- ----------- ------------ ------------
Net loss................ (435,230) (2,141,739) (8,769,091) (11,246,033) (22,592,093)
Non-cash preferred stock
charge................ -- -- -- 1,729,651 1,729,651
--------- ----------- ----------- ------------ ------------
Net loss to common
stockholders.......... $(435,230) $(2,141,739) $(8,769,091) $(12,975,684) $(24,321,744)
========= =========== =========== ============ ============
Basic and diluted net
loss per share........ $ (5.05) $ (13.72) $ (16.74)
=========== =========== ============
Shares used in computing
net loss per share.... 424,054 639,339 775,116
=========== =========== ============
Pro forma basic and
diluted net loss per
share................. $ (1.67)
============
Shares used in computing
pro forma basic and
diluted net loss per
share................. 7,792,759
============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------ ------------ ------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........... $ 13,073,803 $ 13,073,803 $ 71,893,803
Total assets........................ 14,711,739 14,711,739 73,531,739
Long-term debt...................... 288,043 288,043 288,043
Redeemable convertible preferred
stock............................. 33,730,563 -- --
Deficit accumulated during the
development stage................. (22,592,093) (22,592,093) (22,592,093)
Total stockholders' equity
(deficit)......................... (21,373,033) 12,357,530 71,177,530
</TABLE>
4
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors, together with
all of the other information contained in this prospectus before purchasing our
common stock. If any of the following risks actually occur, our business,
financial condition and operating results could be seriously harmed, the
trading price of our common stock could decline and you may lose all or part of
your investment.
Risks Related to Our Business
If the clinical trials of our product candidates fail, we will not be able to
market our product candidates.
To receive the regulatory approvals necessary for the sale of our product
candidates, we must demonstrate through human clinical trials that each product
candidate is safe and effective. Positive results from preclinical studies and
early clinical trials do not ensure positive results in clinical trials
designed to permit application for regulatory approval. We may suffer
significant setbacks in clinical trials, even after earlier clinical trials
show promising results. Any of our product candidates may produce undesirable
side effects in humans that could cause us or regulatory authorities to
interrupt, delay or halt clinical trials of a product candidate. We, the FDA or
foreign regulatory authorities may suspend or terminate clinical trials at any
time if we or they believe the trial participants face unacceptable health
risks.
If we obtain FDA approval for MPTS, our revenue for the forseeable future will
be solely derived from, and operating results will be substantially dependent
on, our ability to market MPTS.
Other than MPTS, all of our product candidates are at an early stage of
product development. The successful commercialization of our other product
candidates will require significant further research, development, testing,
regulatory approvals and investment. We may never successfully commercialize
any of our product candidates.
If we are unable to achieve product development milestones under our license
agreement with AHP, AHP would have the right to license MPTS and the core
technology to competitors.
We license MPTS and our core technology on an exclusive basis for
applications in the oral cavity from AHP. AHP has the right to convert our
exclusive license to commercialize MPTS to a non-exclusive license if we fail
to commercialize MPTS by August 2003. AHP also has the right to convert our
exclusive license to other oral products to a non-exclusive license if we fail
to commercialize at least one other oral cavity or non-oral cavity product by
August 2007.
If our license agreement with AHP is terminated, we would be forced to cease
our efforts to commercialize MPTS and our other oral cavity products utilizing
our core technology.
AHP has the right to terminate the AHP license agreement if we materially
breach our payment or other obligations under this agreement.
Our losses will continue to increase as we expand our product development
efforts, and our operations may never be profitable.
As of December 31, 1999, we had a cumulative net loss of approximately
$22.6 million. Our losses have resulted principally from costs incurred in our
research and development programs, including clinical trials, and from our
general and administrative costs. We have not derived revenues from product
sales or royalty revenue, and we do not expect to achieve revenue from product
sales or royalties until we receive regulatory approval and begin
commercialization of our product candidates.
5
<PAGE>
If the manufacturers that we rely on for the production and packaging of MPTS
do not provide us with sufficient quantities at an acceptable price, our
commercialization of MPTS will be halted, delayed or less profitable.
We depend on third parties for the manufacture, testing, filling and
packaging of our product candidates. We are solely dependent on one company for
the manufacture and testing of MPTS. Additionally, we are solely dependent on
another company for filling and packaging the dispensers. We may not be able to
enter into agreements on acceptable terms for the commercial-scale
manufacturing or filling and packaging of MPTS. If we are unable to do so, we
would be required to satisfy various regulatory requirements before engaging
manufacturers or packagers. In addition, each manufacturer and manufacturing
facility of any component or aspect of MPTS must be inspected and meet
extensive FDA regulatory requirements, and these manufacturers may not meet
these requirements.
If the sole-source suppliers that we depend on for the raw materials and
components for MPTS fail to provide a sufficient quantities, we may not be able
to obtain an alternate supply on a timely or acceptable basis and this could
delay or halt our commercialization of MPTS .
We currently rely on sole-source suppliers to provide to the parties that
produce and package MPTS each of the four separate raw materials and components
for MPTS:
. the polymer component, which is an inactive ingredient used in the
drug formulation;
. minocycline, the active drug ingredient;
. the plastic dispenser; and
. the stainless steel dispenser handle.
We have not entered into any agreements that provide us assurance of
continued supply of these components. We have obtained only the limited supply
of these materials and components necessary to conduct clinical trials. We may
not be able to obtain a sufficient supply of these raw materials and components
from each supplier at competitive prices, if at all, necessary for the
commercialization of MPTS. We may not be able to find alternative suppliers in
a timely manner that would provide these materials and components at acceptable
prices or in adequate quantities. Before replacing any of these suppliers or
engaging second-source suppliers, we would need to satisfy various regulatory
requirements.
If we are unable to effectively develop adequate sales and marketing
capabilities, we may be unsuccessful in commercializing our product candidates.
We intend to market and sell our product candidates in the U.S. through a
direct sales and marketing force. In order to do this, we will have to develop
a sales and marketing force with technical expertise and establish a supporting
distribution capability. Developing a sales and marketing force is expensive
and time-consuming and could delay any product launch. While we currently
expect to create a direct sales and marketing force of 50 to 75 people, the
actual number of representatives needed by us to reach our target market may be
significantly more or less than our current expectations. In addition, because
we intend to hire and train our sales and marketing force before we have
received FDA approval of our NDA for MPTS, if we fail to obtain FDA approval on
a timely basis, we will incur significant expense sooner than necessary for the
commercialization of MPTS.
If we are unable to establish our sales and marketing capability, we will
need to enter into sales and marketing agreements with third parties to market
MPTS in the U.S. This would delay or decrease our sales of this product.
Outside the U.S., we plan to enter into sales and marketing arrangements
with third parties. If we are unable to establish successful sales and
marketing relationships, we will not be successful in marketing MPTS outside of
the U.S.
6
<PAGE>
Even if we obtain FDA approval to market MPTS, it might not be accepted by oral
health care providers or patients.
MPTS will not be a commercially successful product unless accepted by
oral health care providers as clinically useful, cost-effective and safe. In
addition, because MPTS is designed to enhance the existing standard of care for
periodontitis, it increases the initial cost of treatment. Consequently,
patients may not accept MPTS if it is too expensive. Patient acceptance of MPTS
may be dependent on the availability of adequate reimbursement from
governmental health administration authorities, private health insurers and
other organizations. Reimbursement for oral care by third-party payors is
traditionally significantly more limited than reimbursement for other fields of
medical care.
If we cannot compete effectively, our sales will suffer.
Competition in the pharmaceutical industries, and the market for oral
care pharmaceuticals in particular, is intense. FDA-approved products currently
exist that will compete with most of the product candidates we are developing.
These products include:
.Atridox, a product developed by Atrix Laboratories and marketed by
Block Drug;
.Perio Chip, a product developed by Perio Products and marketed by
Astra; and
.Periostat, a drug developed and marketed by CollaGenex.
Many competitors have substantially greater research and development
capabilities and financial, scientific, manufacturing, marketing and sales
resources than we possess. Our competitors may succeed in developing products
earlier and obtaining regulatory approvals from the FDA more rapidly than us.
Our competitors may also develop products that are superior to those we are
developing and render our product candidates or technologies obsolete or non-
competitive.
If our intellectual property rights are compromised, we may be unable to
compete effectively.
Our success depends on our ability and the ability of our third-party
licensors to:
. obtain and maintain patent protection for MPTS, our other product
candidates, and our core technology; and
. preserve our trade secrets.
Patents may not ultimately be issued from any pending or future patent
applications. In addition, any issued patents may not be sufficient to protect
our product candidates or technologies. Our issued patents may be held to be
invalid if challenged. Third parties may also develop similar technology which
circumvents our or our licensors' patents. If we or our third-party licensors
do not obtain and maintain appropriate patent protection, we may face increased
competition in the United States and in foreign countries.
Our third-party licensors are primarily responsible for prosecuting and
maintaining all patents and patent applications covering MPTS, our core
technology, and our other product candidates. If these third parties do not
diligently prosecute and maintain the patents and patent applications upon
which we rely, our ability to exclude others from competing with us may suffer.
Patent applications in the United States are maintained in secrecy until
a patent issues. As a result, others may have filed patent applications for
products or technology covered by any pending patent applications we are
relying upon. There may be third-party patents, patent applications and other
intellectual property
7
<PAGE>
relevant to our product candidates and technologies which are not known to us
and that block or compete with our product candidates or technologies.
Litigation may be necessary to enforce any patents issued to us or to determine
the scope and validity of the intellectual property rights of third parties.
The defense and prosecution of patent and other intellectual property claims is
both costly and time consuming, even if the eventual outcome is favorable to
us.
If we infringe the intellectual property rights of others, or if we allege
others infringe our intellectual property rights, we may face significant
expense and liability.
If our technologies, product candidates, methods or processes infringe
the intellectual property rights of other parties, we may have to:
. obtain licenses from the owners of such intellectual property rights;
. redesign our product candidates or processes to avoid infringement;
. stop using the subject matter claimed in the patents held by others;
. pay damages; or
. defend litigation or administrative proceedings which may be costly
whether we win or lose.
We are aware of an issued patent that relates to use of some antibiotics,
including minocycline, to treat periodontal and other diseases, and which has
been exclusively licensed to a competitor. It is possible that a claim could be
asserted that the use of our MPTS product infringes this issued patent. We do
not believe that we infringe any valid and enforceable claims of the patent,
and we have received an opinion of patent counsel that the relevant claims of
the patent should be invalidated if asserted in litigation. If this patent is
found to contain claims infringed by the use of our MPTS product and such
claims are ultimately found to be valid and enforceable, we may not be able to
obtain a license from the competitor at a reasonable cost, if at all, or
develop or obtain alternative technology. In addition, if a third-party makes a
claim for infringement, we may have to defend ourselves in court and this could
result in substantial cost and diversion of management's resources, and our
defense may not be successful.
Our success also depends upon the skills, knowledge and experience of our
scientific and technical personnel. The confidentiality agreements required of
our employees may not provide adequate protection for our trade secrets, know-
how or other proprietary information or prevent any unauthorized use or
disclosure or the lawful development by others. In addition, many of our
scientific and management personnel were previously employed by other
biotechnology and pharmaceutical companies, where they were conducting research
in areas similar to those that we now pursue. As a result, we could be subject
to allegations of trade-secret violations and other claims relating to the
intellectual property rights of these companies.
If we are not able to retain our key management or scienctific personnel, our
business will suffer.
The employment of any of our key personnel could cease at any time.
Competition for qualified employees among companies in the pharmaceutical
industry is intense. Our future success depends upon our ability to attract,
retain and motivate highly-skilled employees. In order to successfully
commercialize our product candidates, we may be required to substantially
expand our personnel, particularly in the areas of sales and marketing,
pharmaceutical development, clinical trials management and regulatory affairs.
If our product candidates injure people, and we have no or limited product
liability insurance, we may incur significant expense and liability.
Our business exposes us to potential product liability risks. These types
of risks are inherent in the testing, manufacturing, marketing and sale of
pharmaceutical products and candidates. We may not be able to avoid product
liability claims. Product liability insurance for the pharmaceutical industry
is expensive and may not be available in the future. If we are unable to obtain
or maintain sufficient insurance coverage on reasonable terms or to otherwise
protect against potential product liability claims, we may be unable to
commercialize our product candidates.
8
<PAGE>
If we need additional financing, and this financing is unavailable, our ability
to develop and commercialize products and our operations will be adversely
affected.
Our current and anticipated development projects require substantial
capital. We are likely to need substantial additional funds to conduct our
research activities, technical studies, clinical trials and other activities
relating to the successful commercialization of our product candidates.
However, our access to capital funding is uncertain. If adequate funds are
unavailable, we may be required to:
. delay, reduce the scope of, or eliminate one or more of our research
or development programs;
. license rights to technologies, product candidates or products on
terms that are less favorable to us than might otherwise be available;
or
. obtain funds through arrangements that may require us to relinquish
rights to product candidates or products that we would otherwise seek
to develop or commercialize ourselves.
If we raise additional funds by issuing equity securities, our existing
stockholders will own a smaller percentage of OraPharma, and new investors may
pay less on average for their securities than, and could have rights superior
to, existing stockholders.
9
<PAGE>
Risks Related to Governmental Approvals
If we do not obtain regulatory approval, we will not be able to market our
product candidates.
We have not received regulatory approval in the United States or any
foreign jurisdiction for the commercial sale of any of our product candidates.
We have completed Phase 3 trials for MPTS and are conducting preclinical
studies or research and development for our other product candidates. Other
than an NDA submitted for MPTS, we have not submitted an NDA for any of our
product candidates. If any of our product candidates are determined to be
medical devices, we would be required to submit a Premarket Approval
Application or Premarket Notification to the FDA or any equivalent application
to any other foreign regulatory authorities for any of our product candidates.
To date, none of our product candidates has been determined to be safe or
effective.
The process of obtaining FDA and other required regulatory approvals,
including foreign approvals, often takes many years and can vary substantially
based upon the type, complexity and novelty of the product candidates involved.
Furthermore, this approval process is extremely expensive and uncertain. We
have only limited experience in filing and pursuing applications necessary to
gain regulatory approvals. We cannot guarantee that any of our product
candidates, including MPTS, will be found to be safe and effective by the FDA
and approved for marketing.
If the FDA determines that our MPTS clinical trials or our NDA are inadequate
or incomplete, the commercialization of MPTS will be delayed and become more
expensive.
We have completed two Phase 3 clinical trials with MPTS for the treatment
of adult periodontitis in conjunction with scaling and root planing, and on
February 17, 2000 submitted an NDA to the FDA based on the results of these
trials and the earlier Phase 1 and 2 trials. Although we believe the two trials
conducted by us with MPTS yielded successful results, the FDA may, after
completing its own analysis, either determine that such trials should have been
conducted or analyzed differently, and thus reach a different conclusion from
that reached by us, or request that further trials or analysis be conducted. In
addition, the FDA may not accept the NDA we submitted for MPTS as being
complete. This would require us to amend and resubmit the NDA.
If our manufacturers do not obtain or maintain current Good Manufacturing
Practices, we may not be able to commercialize MPTS or any other product
candidate.
Following extensive review of an NDA, the FDA may grant marketing
approval, reject the application or require additional testing or information.
Sales of a new drug may commence following FDA approval of an NDA and
satisfactory completion of a pre-approval inspection of each manufacturing
facility, including a review of pertinent production records. Drug
manufacturing facilities are subject to a plant inspection before the FDA will
issue approval to market a new drug product, and all of the suppliers and
contract manufacturers that we intend to use must adhere to the current Good
Manufacturing Practice regulations, or cGMPs, prescribed by the FDA. Detailed
manufacturing information is also required to be submitted for review and
approval by the FDA as part of the NDA. Among other things, we must submit data
indicating that the drug product can be consistently manufactured by our
supplier at the same quality standard, that the drug product is stable over
time, that the level of chemical impurities in the drug product is below
specified levels, and that the delivery device developed by us for MPTS works
as intended in a consistent manner. Our manufacturers may not be able to obtain
or maintain cGMPs as prescribed by the FDA.
If we fail to comply with extensive regulations after any FDA approval of a
product or the FDA withdraws its approval, we may be forced to suspend the sale
of this product.
Continued compliance with all FDA requirements and the conditions in an
approved NDA, including those concerning product specifications, manufacturing
process, validation, labeling, promotional material, record-keeping and
reporting, is required for all approved drug products. Failure to comply with
these
10
<PAGE>
requirements could result in warning letters, product recall, criminal action
or other FDA-initiated actions, which could delay further marketing until the
products are brought into compliance. Product approvals may also be withdrawn
if problems concerning safety, efficacy or quality of the product occur
following approval. In addition, if there are any modifications to the drug,
including any changes in indication, manufacturing process, labeling, delivery
devices or manufacturing facility, an NDA supplement may be required to be
submitted to the FDA. The FDA may also require post-marketing testing and
surveillance to monitor the effects of approved products or place conditions on
any approvals that could restrict the commercial applications of such products.
Approval of any NDA will also require us and the FDA to agree upon a
package insert that will, among other things, identify possible side effects
and specify contraindications. These restrictions could limit our ability to
market MPTS or any other products.
If future clinical trials take longer to complete than we expect, we would
incur additional costs and delays in commercialization.
Although for planning purposes we forecast the commencement and
completion of clinical trials, the actual timing of these events can vary
dramatically due to factors such as delays, scheduling conflicts with
participating clinicians and clinical institutions and the rate of patient
accruals. We cannot assure you that clinical trials involving our product
candidates will commence or be completed as forecasted, or that they will be
conducted successfully.
In some circumstances we rely on strategic relationships with academic
institutions or clinical research organizations to conduct, supervise or
monitor some or all aspects of preclinical and clinical trials involving our
product candidates. We will have less control over the timing and other aspects
of these clinical trials than if we conducted them entirely on our own.
Risks Related to the Offering
If the market price of our common stock after this offering is lower than the
price you paid, you may not be able to sell your shares without incurring a
loss.
Prior to this offering, there has been no public market for our common
stock. If you purchase shares of our common stock in this offering, you will
not pay a price that was established in a competitive market. Rather, you will
pay a price that we negotiated with the representatives of the underwriters.
After this offering, an active trading market in our stock might not develop or
continue.
If our stock price is highly volatile, the value of your investment may
fluctuate significantly.
The market prices for securities of early-stage drug companies have been
particularly volatile. Some of the factors that may cause the market price of
our common stock to fluctuate include:
. results of preclinical studies and clinical trials conducted by us or
on our behalf, or by our competitors;
. announcements of technological innovations or new commercial products
by us, third parties with respect to strategic relationships
maintained with us or our competitors;
. regulatory developments in both the United States and foreign
countries;
. changes in reimbursement policies;
. developments or disputes concerning patents or other proprietary
rights;
. fluctuations in our operating results;
. changes in financial estimates or recommendations by security
analysts;
11
<PAGE>
. public concern as to the safety and efficacy of products developed by
us, our collaborators or our competitors;
. lack of adequate trading liquidity as a public company; or
. general market conditions.
In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against the company. We may become involved in this type of
litigation in the future. Litigation of this type is often extremely expensive
and diverts management's attention and resources.
You will incur immediate and substantial dilution of the stock value of your
shares.
The assumed offering price of our common stock is substantially higher
than the net tangible pro forma book value per share of our outstanding common
stock. As a result, investors purchasing common stock in this offering will
incur immediate and substantial dilution in the net tangible book value of
their common stock of $10.36 per share based on the assumed offering price of
$16.00 per share. In the past, we issued options and warrants to acquire
capital stock at prices significantly below the assumed offering price. There
will be further dilution to investors when any of these outstanding options and
warrants are exercised.
If a large number of shares of our common stock are sold after this offering,
or if there is the perception that such sales could occur, the market price of
our common stock may decline.
These factors could also make it more difficult for us to sell equity
securities in the future at a time and price that we deem appropriate to raise
funds through future offerings of common stock. For example, 7,933,023 of our
shares will be available for sale after the completion of the offering. The
remaining 663,712 shares will become available for sale in December 2000. All
of our current stockholders have agreed under written "lock-up" agreements not
to sell any shares for 180 days after the date of this prospectus.
Because our certificate of incorporation and Delaware law contain provisions
that could discourage a takeover, our common stock may trade at a discount.
Our certificate of incorporation provides for the division of our board
of directors into three classes and provides our board of directors the power
to issue up to five million shares of preferred stock without stockholder
approval. This preferred stock could have voting rights that could be superior
to that of our common stock, and our board of directors has the power to
determine these voting rights. Our certificate of incorporation also requires
supermajority approval of the removal of any member of our board of directors
and prevents our stockholders from acting by written consent. In addition,
Section 203 of the Delaware General Corporation Law contains provisions which
impose restrictions on stockholder action to acquire control of OraPharma. The
effect of these provisions of our certificate of incorporation and Delaware law
would likely discourage third parties from seeking to obtain control of
OraPharma.
Because our six largest stockholders will own approximately 58.4% of our
outstanding common stock, they could control our actions in a manner that
conflicts with our interests and the interests of our other stockholders.
Our controlling stockholders, if they chose to act together, may be able
to exert considerable influence over us, including in the election of directors
and the approval of actions submitted to our stockholders. In addition, without
the consent of these stockholders, we may be prevented from entering into
transactions that could be beneficial to us such as acquisition proposals from
third parties.
12
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements under the captions
"Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere. These forward-
looking statements include statements about the following:
. establishing a sales and marketing force, including related hiring and
training activities;
. our intentions regarding international collaborations;
. anticipated operating losses and capital expenditures;
. anticipated regulatory filing dates and clinical trial initiation
dates for our other product candidates;
. our intention of making milestone payments in cash under our licensing
agreements;
. our product development efforts;
. the status of our regulatory process for MPTS and other product
candidates; and
. our intention to rely on third parties for manufacturing.
When used in this prospectus, the words "believe," "anticipate,"
"estimate," "expect," "seek," "intend," "may" and similar expressions are
generally intended to identify "forward-looking statements." Our forward-
looking statements involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements, or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by these forward-looking
statements. These factors are discussed in more detail elsewhere in this
prospectus, including under the captions "Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Because of these uncertainties, you should not
place undue reliance on our forward-looking statements. We do not intend to
update any of these factors or to publicly announce the result of any revisions
to any of our forward-looking statements contained herein, whether as a result
of new information, future events or otherwise.
The safe harbor for forward-looking statements contained in the
Securities Litigation Reform Act of 1995 is not available for our forward-
looking statements contained in this prospectus. This safe harbor protects
companies from liability for its forward-looking statements if it complies with
the requirements of this Act. The Act does not provide this protection for
initial public offerings and will not apply to this offering.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to OraPharma from the sale of the 4,000,000 shares of
common stock from this offering are estimated to be approximately $58.8
million, or $67.7 million if the underwriters' over-allotment option is
exercised in full. This is based upon an assumed offering price of $16.00 per
share after deducting underwriting discounts and commissions and estimated
offering expenses.
We expect to use these proceeds for the following purposes:
. approximately $30.0 million for the further development of, obtaining
FDA approval for, and commercialization of MPTS, including sales,
marketing and manufacturing scale-up related expenses, and
expenditures for inventories and capital equipment;
. approximately $4.3 million of payments under current licensing,
sponsored research and consulting agreements through 2001;
. general corporate and working capital purposes;
. ongoing research and development activities, including preclinical
studies and potential clinical trials; and
. obtaining licenses for new product candidates or technology.
In addition, a portion of the net proceeds may be used to acquire other
companies. We are not currently engaged in any negotiations to acquire any
other company.
The amounts and timing of our actual expenditures for each purpose may
vary significantly depending upon numerous factors, including:
. the size, scope and progress of our product candidate development
efforts;
. regulatory approvals;
. competition;
. marketing and sales activities;
. the market acceptance of any products we introduce;
. future revenue growth; and
. the amount of cash, if any, we generate from operations.
As a result, we will retain broad discretion in the allocation of the net
proceeds of this offering. We have determined that it is a prudent business
practice to offer 4,000,000 shares in this offering even though the net
proceeds from this offering will be greater than the specified uses outlined in
this prospectus. We believe this will provide us with total stockholders'
equity and current assets that are appropriate for our current state of
development, and the risks that we face. Pending the uses described above, we
intend to invest the net proceeds of this offering in short-term, investment-
grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future as we currently
intend to retain any future earnings to fund the continued development and
growth of our business. In addition, our existing credit facility prohibits the
payment of dividends.
14
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
. on an actual basis derived from our audited financial statements;
. on a pro forma basis to give effect to the automatic conversion of all
outstanding shares of preferred stock into an aggregate of 7,557,100
shares of common stock upon the completion of the offering; and
. on a pro forma as adjusted basis to give effect to the sale of
4,000,000 shares of common stock offered in the offering at an assumed
offering price of $16.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
As of December 31, 1999
------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------ ------------ --------------
(in thousands, except share amounts)
<S> <C> <C> <C>
Long-term debt, less current
portion........................... $ 288 $ 288 $ 288
------------ ----------- ------------
Redeemable Convertible Preferred
Stock, $.001 par value:
Series A, 400,000 shares
authorized, issued and
outstanding actual, none issued
and outstanding pro forma and
pro forma as adjusted........... 800 -- --
Series B, 3,311,828 shares
authorized, issued and
outstanding actual, none issued
and outstanding pro forma and
pro forma as adjusted........... 12,023 -- --
Series C, 3,292,177 shares
authorized, issued and
outstanding actual, none issued
and outstanding pro forma and
pro forma as adjusted........... 15,949 -- --
Series D, 553,095 shares
authorized, issued and
outstanding actual, none issued
and outstanding pro forma and
pro forma as adjusted........... 4,959 -- --
------------ ----------- ------------
Total redeemable convertible
preferred stock.............. 33,731 -- --
------------ ----------- ------------
Stockholders' Equity (Deficit):
Preferred stock, $.001 par value,
5,000,000 shares authorized,
none issued and outstanding..... -- -- --
Common stock, $.001 par value,
50,000,000 shares authorized,
1,039,635 issued and
outstanding actual, 8,596,735
issued and outstanding pro
forma, 12,596,735 issued and
outstanding pro forma as
adjusted........................ 1 9 13
Additional paid-in capital........ 2,033 35,756 94,572
Deferred compensation............. (815) (815) (815)
Deficit accumulated during the
development stage............... (22,592) (22,592) (22,592)
------------ ----------- ------------
Total stockholders' equity
(deficit).................... (21,373) 12,358 71,178
------------ ----------- ------------
Total capitalization........... $ 12,646 $ 12,646 $ 71,466
============ =========== ============
</TABLE>
- --------
The number of shares of common stock to be outstanding after this
offering is based on the number of shares outstanding as of December 31, 1999
and does not include:
. 1,250,000 shares of common stock underlying stock options available
for future grants under our 1999 equity compensation plan, none of
which have been granted;
. 586,472 shares of common stock issuable upon the exercise of
outstanding options under our 1996 stock option plan at a weighted
average exercise price of $0.35 per share; and
. 210,518 shares of common stock issuable upon the exercise of
outstanding warrants at a weighted average exercise price of $8.51 per
share.
15
<PAGE>
DILUTION
As of December 31, 1999, our pro forma net tangible book value was
$12,163,447, or $1.41 per share. Pro forma net tangible book value per share is
determined by dividing pro forma net tangible book value (total tangible assets
less total liabilities) by the pro forma number of shares of common stock after
giving effect to the automatic conversion of all outstanding shares of
preferred stock into an aggregate of 7,557,100 shares of common stock, which
will occur upon the closing of the offering.
Without taking into effect any changes in pro forma net tangible book
value after December 31, 1999, and to give effect to the sale of the common
stock offered hereby at an assumed offering price of $16.00 per share and the
application of the net proceeds of the offering, the pro forma as adjusted net
tangible book value would have been $70,983,447, or $5.64 per share. This
represents an immediate increase in pro forma net tangible book value of $4.23
per share to existing stockholders and dilution in pro forma as adjusted net
tangible book value of $10.36 per share to new investors who purchase shares in
the offering. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed offering price per share................................ $16.00
Pro forma net tangible book value per share before the
offering.................................................... $1.41
Increase per share attributable to new investors.............. 4.23
-----
Pro forma as adjusted net tangible book value per share after
the offering.................................................. 5.64
------
Dilution in net tangible book value per share to new investors.. $10.36
======
</TABLE>
If the underwriters' over-allotment option were exercised in full, the
pro forma as adjusted net tangible book value per share after the offering
would be $6.06 per share, the increase in net tangible book value per share to
existing stockholders would be $4.65 per share and the dilution in net tangible
book value to new investors would be $9.94 per share.
The following table summarizes, on a pro forma as adjusted basis as of
December 31, 1999, the differences between the total consideration paid and the
average price per share paid by the existing stockholders and the new investors
with respect to the number of shares of common stock purchased from us based on
an assumed offering price of $16.00 per share:
<TABLE>
<CAPTION>
Shares Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 8,596,735 68.2% $33,858,749 34.6% $ 3.94
New investors.............. 4,000,000 31.8 64,000,000 65.4 $16.00
---------- ----- ----------- -----
Total.................... 12,596,735 100.0% $97,858,749 100.0%
========== ===== =========== =====
</TABLE>
These tables do not assume exercise of stock options and warrants
outstanding at December 31, 1999 and include 156,606 shares subject to
repurchase by us.
At December 31, 1999, there were 586,472 shares of common stock issuable
upon exercise of outstanding stock options at a weighted average exercise price
of $0.35 per share and 210,518 shares of common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $8.51 per share.
16
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data of OraPharma should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on page 18 and the financial statements and related
notes beginning on page F-3. The selected financial data for the period from
inception (August 1, 1996) through December 31, 1996, the years ended December
31, 1997, 1998 and 1999 and the period from inception through December 31, 1999
are derived from the audited financial statements.
<TABLE>
<CAPTION>
Period from Period from
Inception Inception
(August 1, (August 1,
1996) Year Ended 1996)
Through December 31, Through
December 31, -------------------------------------- December 31,
1996 1997 1998 1999 1999
------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating expenses:
Research and
development.......... $ 26,294 $ 1,706,393 $ 7,589,000 $ 9,693,413 $ 19,015,100
General and
administrative....... 408,295 939,469 1,604,579 2,189,577 5,141,920
--------- ----------- ----------- ------------ ------------
Operating loss........ (434,589) (2,645,862) (9,193,579) (11,882,990) (24,157,020)
Net interest income
(expense)............. (641) 504,123 424,488 636,957 1,564,927
--------- ----------- ----------- ------------ ------------
Net loss................ (435,230) (2,141,739) (8,769,091) (11,246,033) (22,592,093)
Non-cash preferred stock
charge................ -- -- -- 1,729,651 1,729,651
--------- ----------- ----------- ------------ ------------
Net loss to common
stockholders.......... $(435,230) $(2,141,739) $(8,769,091) $(12,975,684) $(24,321,744)
========= =========== =========== ============ ============
Basic and diluted net
loss per share........ $ (5.05) $ (13.72) $ (16.74)
=========== =========== ============
Shares used in computing
basic and diluted net
loss per share........ 424,054 639,339 775,116
=========== =========== ============
Pro forma basic and
diluted net loss per
share................. $ (1.67)
============
Shares used in computing
pro forma basic and
diluted net loss per
share................. 7,792,759
============
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1996 1997 1998 1999
--------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............. $ 37,704 $10,136,747 $ 19,236,084 $ 13,073,803
Total assets.............. 61,479 10,859,584 20,480,402 14,711,739
Long-term debt............ -- -- 480,978 288,043
Redeemable convertible
preferred stock......... -- 12,822,769 28,771,713 33,730,563
Deficit accumulated during
the development stage... (435,230) (2,576,969) (11,346,060) (22,592,093)
Total stockholders'
deficit................. (359,071) (2,446,806) (11,080,451) (21,373,033)
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Background
We have devoted substantially all of our resources since we began
operations in August 1996 to research and development of pharmaceutical product
candidates for oral healthcare. We are a development stage pharmaceutical
company and have not generated any revenues from product sales. We have not
been profitable and since our inception we have incurred a cumulative net loss
of approximately $22.6 million through December 31, 1999. These losses have
resulted principally from costs incurred in research and development
activities, including Phase 3 clinical trials for our lead product candidate
MPTS, and general and administrative expenses. We expect to incur additional
operating losses until such time as we generate sufficient revenue to offset
expenses. Research and development costs relating to product candidates will
continue to increase. Manufacturing, sales and marketing costs will increase as
we prepare for the commercialization of MPTS.
We completed Phase 3 clinical trials in October 1999 for MPTS, our first
product candidate. We submitted an NDA for MPTS to the FDA on February 17,
2000. Most of our revenue for the foreseeable future will depend on our ability
to receive regulatory approvals for, and successfully market, MPTS. Assuming we
obtain FDA approval, we intend to deploy a sales and marketing force of 50 to
75 persons in the U.S. and expect to begin hiring and training activities in
late 2000. In international markets, we intend to rely on strategic
relationships to market and sell MPTS rather than establish our own sales
force.
Equity Financings
We have financed our operations primarily from the net proceeds generated
from the issuance of convertible preferred stock. As of December 31, 1999, we
have received total net proceeds of approximately $33.7 million from the
following sales of preferred stock:
. 400,000 shares of series A preferred stock were sold in February 1997
raising total net proceeds of approximately $800,000;
. 3,311,828 shares of series B preferred stock were sold in March 1997
raising total net proceeds of approximately $12.0 million;
. 3,292,177 shares of series C preferred stock were sold in December
1998 raising total net proceeds of approximately $15.9 million; and
. 553,095 shares of series D preferred stock were sold in December 1999
raising total net proceeds of approximately $5.0 million.
Milestone Payments, Royalties and License Fees
We paid AHP $250,000 and issued them 110,000 shares of our common stock
at the time we entered into our license agreement. Our license agreement with
AHP requires us to make payments to AHP as two milestones are achieved, and to
pay AHP royalties on sales of MPTS and other products that are covered by the
AHP patents or developed using the AHP technology. The first milestone payment
of $500,000 will be paid to AHP if and when the FDA accepts submission of our
NDA for MPTS for the treatment of periodontitis. A second milestone payment of
$2.5 million is due to AHP if and when we receive FDA approval of MPTS for
periodontitis. Instead of paying this second milestone in cash, we may issue
AHP warrants to purchase our common stock. In addition, if our cash reserves
are below $5.0 million at the time the first payment is due, we may instead
make this payment by issuing AHP a combination of a promissory note and a
warrant to purchase our common stock. We intend to make both of these milestone
payments in cash.
18
<PAGE>
We are also required to pay royalties on sales of MPTS to Gary R.
Jernberg, DDS, a holder of three U.S. patents, and to Technical Development and
Investments, Est., relating to technology previously licensed by AHP to this
third party. Royalties payable to these third parties can be fully credited
against up to 50% of the royalties payable under our agreement with AHP. In
addition, we are required to pay Dr. Jernberg a milestone payment of $50,000 if
and when the FDA accepts submission of our NDA for MPTS. A second milestone
payment of $100,000 is due to Dr. Jernberg if and when we receive FDA approval
of MPTS for the treatment of periodontitis.
We paid Mucosal Therapeutics LLC $200,000 and issued Mucosal Therapeutics
a warrant to purchase 27,500 shares of our common stock in December 1998. In
December 1999, we completed our first milestone and paid Mucosal Therapeutics
$100,000 and issued them a warrant to purchase 41,152 shares of our common
stock. During 1999, we recorded the $100,000 payment and the $346,108 fair
value of the warrant, as research and development expense. We are required to
make payments totalling $2.0 million to Mucosal Therapeutics, in the form of
cash and warrants to purchase our common stock, as preclinical and clinical
milestones are achieved, and upon FDA approval of a pharmaceutical product for
the treatment of oral mucositis. The license agreement further obligates us to
pay Mucosal Therapeutics royalties on sales of pharmaceutical products covered
by or involving use of this technology.
We have also entered into a research and consulting agreement with
Biomodels LLC, an affiliate of Mucosal Therapeutics, to perform preclinical
studies on our behalf and to provide us with research and general consulting
services regarding our development of the oral mucositis technology. At
December 31, 1999, the remaining payments due to this third party are expected
to total $720,000 through 2002.
We issued 82,500 shares of common stock to Children's Medical Center
Corporation in December 1998. We are also required to make milestone payments
totalling $1.0 million to CMCC, payable in the form of cash or shares of our
common stock, upon submission of our first NDA relating to a bone regeneration
product candidate and upon approval of our first NDA. We are also obligated to
pay CMCC royalties on sales of products covered by the CMCC patents or which
are specified bone and soft-tissue regeneration products. We have also entered
into a sponsored research agreement with Children's Hospital, a non-profit
affiliate of CMCC, to conduct research in the area of bone and soft-tissue
regeneration and perform related preclinical studies. At December 31, 1999, the
remaining payments due under the sponsored-research agreement are expected to
total $695,000 through 2002.
Results of Operations
Years Ended December 31, 1999 and 1998.
Research and Development Expenses. Research and development expenses
increased to approximately $9.7 million for the year ended December 31, 1999
compared to approximately $7.6 million in the same period in 1998, an increase
of 27.7%. This increase of approximately $2.1 million was primarily due to
costs associated with Phase 3 clinical trials of MPTS, and to a lesser extent,
expansion of efforts to develop new product candidates.
General and Administrative Expenses. General and administrative expenses
increased to approximately $2.2 million for the year ended December 31, 1999
compared to approximately $1.6 million in the same period in 1998, an increase
of 36.5%. This increase of $585,000 is primarily due to higher personnel costs,
together with higher facility costs and reflects the cost of preliminary
marketing efforts for MPTS and the pursuit of corporate collaborations.
Net Interest Income (Expense). Interest income for the year ended
December 31, 1999 and 1998 was $689,000 and $463,000, respectively. The
increase of $226,000 is attributable to higher levels of cash and cash
equivalents available for investment in 1999 from the proceeds of the sale of
our series C and series D preferred stock. Interest expense for the same
periods was $52,000 and $38,000 and represents interest incurred on an
equipment financing facility.
Net Loss. The net loss was approximately $11.2 million for the year ended
December 31, 1999 compared to approximately $8.8 million in the same period in
1998, an increase of 28.2%. This increase of
19
<PAGE>
approximately $2.4 million reflects increases in research and development and
general and administrative expenses, offset by the increase in interest income.
Net loss to common stockholders
Included in the net loss to common stockholders is a non-cash preferred
stock charge of approximately $1.7 million. See Note 8 to Notes to Financial
Statements.
Years Ended December 31, 1998 and 1997.
Research and Development Expenses. Research and development expenses
increased to approximately $7.6 million for the year ended December 31, 1998
compared to approximately $1.7 million in the same period in 1997, an increase
of 344.7%. This increase of approximately $5.9 million was primarily due to the
cost of materials for and the initiation of Phase 3 clinical trials of MPTS. We
also initiated development efforts on other new product candidates in 1998.
General and Administrative Expenses. General and administrative expenses
increased to approximately $1.6 million for the year ended December 31, 1998
compared to $939,000 in the same period in 1997, an increase of 70.8%. This
increase of $665,000 is primarily due to higher personnel costs, together with
higher facility costs, management and technical recruiting expenses and
reflects the cost of preliminary marketing efforts for MPTS and the pursuit of
corporate collaborations.
Net Interest Income (Expense). Interest income was approximately the same
for the years ended December 31, 1998 and 1997 at $463,000 and $506,000,
respectively. Interest expense for the same periods was $38,000 and $1,000, and
in 1998 represents interest incurred on an equipment financing facility.
Net Loss. The net loss was approximately $8.8 million for the year ended
December 31, 1998 compared to approximately $2.1 million in the same period of
1997, an increase of 309.4%. The increase of approximately $6.7 million
reflects costs associated with the initiation of Phase 3 clinical trials of
MPTS together with higher personnel related costs.
Liquidity and Capital Resources
As of December 31, 1999, we had cash and cash equivalents of
approximately $13.1 million, a decrease of approximately $6.2 million from
December 31, 1998. On December 23, 1999, we issued 553,095 shares of series D
preferred stock, raising total net proceeds of approximately $5.0 million.
During the years ended December 31, 1999, 1998 and 1997, net cash used in
operating activities was approximately $10.9 million, $6.8 million and $1.9
million, respectively. This net use of cash was to fund our net losses for the
periods, adjusted for non-cash expenses and changes in operating assets and
liabilities.
Net cash used in investing activities for the years ended December 31,
1999, 1998 and 1997 was $237,000, $700,000 and $711,000, respectively,
primarily the result of the acquisition of laboratory equipment, leasehold
improvements and furniture and fixtures and office equipment. During the year
ended December 31, 1997, $250,000 was used for the acquisition of intangible
assets related to the licensing of the MPTS technology.
We anticipate that our capital expenditures will be approximately $2.5
million in 2000, although we have no firm commitments to spend this amount.
Approximately $1.8 million of this amount represents laboratory and production
equipment. The balance is represented by planned expenditures for computer
equipment and furniture.
Net cash proceeds from financing activities for the years ended December
31, 1999, 1998 and 1997 was approximately $5.0 million, $16.6 million and $12.7
million, respectively. The net cash proceeds from financing activities during
the years ended December 31, 1999, 1998 and 1997 were primarily from the
issuance of preferred stock.
In June 1999, we increased our credit facility with a bank from $750,000
to approximately $1.8 million. The facility may be used to finance purchases of
equipment, software and leasehold improvements through June 30, 2000. As of
December 31, 1999, there was $481,000 outstanding under this facility, and $1.0
20
<PAGE>
million available for future borrowings. Outstanding borrowings bear interest
at the bank's prime rate plus 1%. Future borrowings will bear interest at the
bank's prime rate plus 0.75%.
We lease our corporate and research and development facilities under an
operating lease expiring on September 30, 2003. We may extend this lease for
two additional five-year periods at rental rates equal to the then fair rental
value as determined by our landlord. We have also entered into operating lease
agreements for various office equipment. The terms of these lease agreements
range from 18 to 60 months. Current total minimum annual payments under these
leases are $189,538, $191,422, $187,233 and $143,018 in 2000, 2001, 2002 and
2003, respectively.
We expect that our operating expenses and capital expenditures will
increase in future periods as a result of the manufacturing scale-up and in
anticipation of the commercialization of MPTS. The initiation of commercial
manufacturing will require the purchase of production equipment and the hiring
of additional staff to coordinate raw material suppliers and manage contract
manufacturing services at multiple locations. Sales and marketing activities
will require the hiring and training of a sales and marketing staff of 50 to 75
persons in late 2000 and early 2001. Research and development expenditures,
including clinical trials, are expected to continue at high levels as we
continue to develop new product candidates. We also intend to hire additional
research and development, clinical testing and administrative staff. Our cash
requirements will depend on numerous factors, including the progress of our
research and development programs, the time required to file and process
regulatory approval applications, the development of commercial manufacturing
capability, the ability to obtain additional licensing arrangements, and the
demand for our product candidates, if and when approved by the FDA or other
regulatory authorities.
We believe that our current cash position, available borrowings under our
credit facility and the proceeds of this offering will be sufficient to fund
our operations and capital expenditures through at least the year 2001.
Income Taxes
As of December 31, 1999, we had approximately $20.5 million of net
operating loss carryforwards and $670,000 of research and development credit
carryforwards for federal income tax purposes. These carryforwards expire on
various dates beginning in 2011. These amounts reflect different treatment of
expenses for tax reporting than are used for financial reporting. As of
December 31, 1999, we had capitalized approximately $1.2 million of research
and development expenses for federal income tax purposes. U.S. tax law contains
provisions that may limit our ability to utilize net operating loss and tax
credit carryforwards in any year or if there has been an ownership change. Any
such future ownership change may limit the utilization of net operating loss
and tax credit carryforwards. Based on the valuation of the Company and
applicable Internal Revenue Code regulations, we believe the offering will not
have a material effect on our ability to use those carryforwards.
Year 2000 Compliance
We have identified year 2000 risks in the two major categories of
internal business operations software and software used by external suppliers.
A review of our non-information technology systems did not identify any
material risks.
With respect to our internal business operations software, most of our
computers and software programs have been recently acquired. We have relied on
the efforts of computer and software vendors to make their latest hardware and
software releases year 2000-compliant. As a result, we do not expect to incur
any compliance cost. We have contacted vendors to confirm the status of the
software that is used in our computers and have verified that each computer is
using the software version that the vendor represents is year 2000-compliant.
In addition, we have utilized consultants and year 2000 test software to
evaluate compliance.
21
<PAGE>
We believe that because we are in an early stage of development and will
have no revenue from product sales for the forseeable future, any short-term
disruption relating to year 2000 will have little impact on our operations. We
have asked our suppliers about their year 2000 programs and they have advised
us that they are year 2000-compliant. We have also built appropriate
contingencies into our manufacturing scale-up schedules in the event that
certain key suppliers are not year 2000-compliant. These contingencies provide
for equipment and material to be on hand or scheduled for delivery earlier than
would otherwise be required so that any delay caused by a short-term supplier
disruption can be managed. We do not anticipate incurring any significant costs
resulting from these contingencies.
22
<PAGE>
BUSINESS
Introduction
OraPharma is developing pharmaceutical products for the treatment of oral
diseases and disorders. We completed two Phase 3 clinical trials in October
1999 for our first product candidate, MPTS, which we designed to treat adult
periodontitis when used together with scaling and root planing. We submitted an
NDA to the FDA on February 17, 2000 for this indication. We are directing our
other research and development programs at further establishing a presence in
oral care pharmaceuticals and expanding the use of our core technology.
Oral Care Pharmaceuticals Market
We have targeted our oral care pharmaceutical development program to
include dental and other oral conditions. The Health Care Financing
Administration projects that dental services will become an industry of
approximately $60 billion in the year 2000, growing from $13 billion in 1980.
Other oral conditions, including soft-tissue and non-dental diseases, further
expand the market. Oral care pharmaceuticals comprise what we believe is a
rapidly emerging segment of this overall market.
There are a number of important factors driving the emergence of oral
care pharmaceuticals, including:
. Increased demand for oral health services. The number of oral exams in
the U.S. has nearly doubled from 131 million in 1979 to 256 million in
1997 according to the American Dental Association, or ADA. We believe
this increase in patient visits was driven by factors such as aging
demographics, heightened awareness about the benefits of good oral
hygiene, increased desire for new services, including cosmetic
services, and improved reimbursement. We believe that oral care
pharmaceuticals are likely to benefit from the rapid growth of the
overall oral health industry.
. Opportunities for locally-delivered oral care pharmaceuticals. Many
pharmaceutical compounds already exist to treat the rising number of
oral conditions that oral care professionals must address. However,
many of these drugs are in the form of pills, injections, creams or
ointments that are not optimal for delivery in the oral cavity. As
these compounds are reformulated, we believe the demand for oral care
pharmaceuticals will increase.
. Changing treatment approaches. Dentists and other oral care
professionals are treating an aging patient base with increasingly
complicated medical histories. This complexity is forcing oral care
professionals to move beyond late-stage mechanical interventions and
become better informed about physiological causes and medical
treatments for oral conditions. Further, this emphasis on
understanding disease processes is extending to oral conditions beyond
tooth decay and periodontal disease, such as oral cancer diagnosis,
treatment of pre-cancerous lesions, xerostomia (severe "dry mouth
conditions") and oral mucositis.
. Oral conditions complicating treatment of other diseases. Oral
diseases such as xerostomia and oral mucositis are serious
complications for cancer patients receiving chemotherapy and head and
neck radiation therapy. As more potent chemotherapeutic agents have
emerged, these conditions are increasingly limiting tolerable doses,
and, ultimately, a patient's response to treatment. We believe oral
care pharmaceuticals may be able to help treat or prevent some of
these conditions.
. Suspected links between oral health and systemic health. Many
researchers are actively studying relationships between oral health
and medical problems elsewhere in the human body. For example, recent
studies suggest that patients with periodontal disease are at higher
risk for cardiovascular disease and diabetes. These same studies
suggest that periodontitis may contribute to low infant birth weight.
In addition, the National Institutes of Health have made oral health
an area of focus for 2000.
23
<PAGE>
. Increased focus on time-efficient treatments. While the demand for
oral care services is increasing, the supply of professionals has not
kept pace. An important implication of this growing supply and demand
imbalance is the growing need to minimize patient time in offices,
which places a premium on more time-efficient chair-side treatments.
An increasing number of pharmaceuticals, such as MPTS, are being
developed to offer oral care professionals faster solutions for
treating patients.
Business Strategy
We believe that oral care medicine is a rapidly emerging field and
presents an opportunity for us to become a leader in the development and
marketing of pharmaceutical products for the treatment of oral diseases and
disorders. Key elements of our business strategy to achieve this objective
include:
Focusing initially on approval and commercialization of MPTS.
Developing a direct sales and marketing organization for select
markets. We intend to develop our own domestic sales and marketing group for
the commercialization of our future product candidates. We believe we can
effectively sell our initial product candidates within the United States by
targeting a concentrated group of oral care specialists. Outside of the United
States, and for product candidates targeted at markets with larger practitioner
populations, we intend to pursue strategic relationships to market and sell our
product candidates.
Identifying and capitalizing on promising product candidate
categories. We select pharmaceutical product categories that we believe can
improve treatment through enhanced therapeutic and economic benefits, and
improved convenience to patients, professionals and payors. As an outgrowth of
this approach, we focus primarily on product candidates and formulations that
are administered chair-side. The chair-side approach allows the professional to
retain control of the patient's treatment, thereby avoiding concerns about
compliance, in contrast to pharmacy-dispensed drugs.
Focusing on product candidates with known pharmaceutical and clinical
activity and low technical risk. We emphasize product candidates that treat
serious diseases or conditions of the oral cavity where the compound is well
characterized and the biological and pharmaceutical role of the drug substance
is well understood. For example, minocycline, the active ingredient in MPTS, is
an FDA-approved drug for the systemic treatment of acne. To reduce the high
cost and risks associated with conducting basic research on new chemical
entities, we evaluate readily available compounds that can be reformulated for
application in the oral cavity and generally have a known safety and efficacy
profile. We believe this approach will result in quicker drug development.
Leveraging our core technology. Our initial focus is to identify product
opportunities and product candidates directed at oral care that can leverage
our core technology. Our core technology is compatible with a wide variety of
drug types, from simple compounds to proteins. We believe that our core
technology has broad application both inside and outside the oral cavity.
Leveraging product development expertise. We believe that we can leverage
our significant formulation development and clinical trial management expertise
by in-licensing or acquiring new product candidates and technologies, which we
will develop to further establish a presence in oral care pharmaceuticals, and,
possibly, to expand into non-oral health applications, primarily for out-
licensing.
24
<PAGE>
Product Candidates Summary
The following chart contains information regarding our product
candidates.
<TABLE>
<CAPTION>
Product
Therapeutic Indication Candidate Development Status Licensors/Research Institutions
- ---------------------- --------- ------------------- -------------------------------
<S> <C> <C> <C>
Periodontitis/Pocket- MPTS Phase 3 clinical American Home Products
depth Reduction trials completed;
NDA submitted
Oral Mucositis OC-1012 Preclinical Brigham and Women's
Hospital/of Mucosal
Therapeutics
Bone Regeneration OC-1016 Preclinical Children's Hospital of
Boston
Traumatic Tooth Injury MPTS Label extension University of North
Preclinical Carolina--Chapel Hill
Periodontitis/Anti- -- Preclinical University of North
inflammatory Carolina--Chapel Hill
</TABLE>
MPTS for the Treatment of Periodontitis
Periodontitis and Market
Periodontitis, a condition caused by plaque build-up on teeth, is
characterized by the progressive, chronic infection and inflammation of the
gums and surrounding tissue. In its mildest form, the disease is termed
gingivitis, which is accompanied by swollen, bleeding gums. When gingivitis is
not controlled, the disease often progresses to periodontitis. This chronic
infection and inflammation causes destruction of a tooth's supporting
structures, primarily bone and periodontal ligament, and results in the
formation of spaces between the gums and teeth, or periodontal pockets.
An average case of periodontitis affects three to four teeth, according
to The Journal of Periodontology. Our estimates suggest that the average
periodontal patient has 12 periodontal pockets. These periodontal pockets
provide a site for the accumulation of disease-causing bacteria. With
increasing depth of the pocket, bacterial plaque becomes less accessible to
typical oral hygiene practices, such as brushing and flossing, and routine
dental procedures, such as checkups and cleanings. Beyond a depth of 4mm,
brushing and bacterial mouth rinses, which may be effective in treating
gingivitis, cannot reach the base of the pocket and the bacteria that cause the
disease. A pocket depth of 5mm to 7mm constitutes moderate periodontitis and a
pocket depth of greater than 7mm constitutes severe periodontitis. The
destructive process will continue at the base of the pocket in spite of the
continuing use of effective oral hygiene unless treated by an oral care
professional. If left untreated, periodontitis will continue to progress and
eventually lead to tooth and bone loss.
The following illustration depicts, on the left side, an infected gum
with a periodontal pocket, and, on the right side, a healthy gum.
[Illustration of tooth surrounded by an infected gum with an identified
periodontal pocket on the left side, and a healthy gum on the right side.]
25
<PAGE>
Periodontitis has no known cure and is the most common cause of adult
tooth loss. According to published reports citing the ADA, approximately 50
million Americans have periodontal disease and only 7.5 million Americans are
currently receiving treatment. Along with this widespread prevalence, the ADA
estimated that in 1990, oral care professionals completed approximately 14
million treatment procedures for periodontitis. According to industry sources,
the U.S. population spends more than $6.0 billion per year on products and
services to treat periodontitis.
Effective treatment is possible only through periodic professional
intervention. The most common treatment is a mechanical procedure, scaling and
root planing, used to remove accumulated plaque above and below the gumline,
and may require the oral care professional to anesthetize the gums. A patient's
typical course of treatment involves two scaling and root planing procedures
annually. For more serious cases, treatment may include various forms of gum
surgery. These procedures are painful, may increase gum recession and root
sensitivity and may compromise aesthetics. These treatments are seldom curative
because the bacteria typically returns and the infection recurs. In an attempt
to stabilize the disease progression, oral care professionals generally place
patients on maintenance programs that involve frequent follow-up for evaluation
and ongoing scaling and root planing.
Systemic antibiotics have occasionally been used in conjunction with
scaling and root planing to treat periodontitis. However, concerns over side
effects and drug resistance have prompted the search for alternatives. Several
therapeutics have been approved by the FDA for the treatment of periodontitis.
The following three therapeutics were introduced in the U.S. in 1998:
. Atridox, a biodegradable gel that delivers the antibiotic doxycycline
into periodontal pockets. Atridox is a product consisting of a powder
and a gel which must be refrigerated and then mixed immediately prior
to use. Mixing involves manually pumping the powder and gel 100 times
between two interconnected syringes. After mixing, the practitioner
draws the product into one syringe, removes the other syringe and
replaces it with an application tip. The product is then injected into
the periodontal pockets. The practitioner is then instructed to cover
those pockets filled with Atridox with either a periodontal dressing
or a dental adhesive. FDA-approved labeling also specifies that the
patient should not brush any treated areas for seven days.
. PerioChip, a sustained-release biodegradable collagen chip containing
chlorhexidine, an anti-microbial, which is released over seven to 10
days. A chip is inserted into each periodontal pocket by the
practitioner. FDA-approved labeling limits each treatment to eight
chips, and the product must be refrigerated before use. FDA labeling
also indicates that mild to moderate sensitivity is normal during the
first week after placement, and patients are advised to promptly
notify the practitioner if a chip dislodges.
. Periostat, a 20 mg systemic doxycycline capsule taken orally twice
daily for up to nine months. The dosage is not intended to be
sufficient for an antibiotic effect, but is intended to suppress
collagenase, an enzyme that causes tissue destruction. The product is
a prescription drug, not a chair-side treatment.
PerioChip and Periostat are similarly indicated for use in conjunction
with scaling and root planing, the standard of treatment adopted by oral care
professionals. Atridox is indicated as a stand-alone treatment for
periodontitis.
Core Technology and Treatment Approach
MPTS uses our core technology and consists of a drug product candidate
that is prepackaged in a specially designed dispenser tip. The drug substance
is specially formulated into microspheres, which we refer to as MPTS
microspheres. Microspheres are small particles consisting of the active drug
ingredient, minocycline, that is distributed in an inactive polymer. When MPTS
is administered, the polymer begins to slowly dissolve thereby releasing
minocycline at a sustained rate for at least 14 days. As the polymer dissolves,
it is bioresorbed, that is, it chemically breaks down into components that are
excreted from the body.
26
<PAGE>
The polymer, PGLA, or poly (glycolide-co-dl-lactide), has three functions: to
control the rate of drug release, to provide adhesion in the periodontal pocket
and to stabilize the active drug. Polymers of this type have a long history of
use in medical devices such as sutures and in other drug-delivery systems.
We chose minocycline as the active ingredient because:
. its antibiotic profile places it among the most effective agents
against the pathogens associated with periodontitis; and
. it promotes gum reattachment through alteration of tooth root surface
chemistry.
The following illustrates the preparation of MPTS for administration to
the patient:
Illustration of dispenser and product candidate in trays
Illustration of tip being loaded into handle
Illustration of tip on handle, in hand ready for administration
The MPTS microspheres are in a dry powder form, and are packaged in a
small disposable tip that attaches to the specially designed dispenser. To
administer MPTS, the oral care professional removes the disposable tip from its
package and simply connects the tip to the dispenser, and then dispenses the
microspheres directly into the periodontal pocket. Each tip contains a metered
dose for one periodontal pocket and can be administered in only a few seconds.
Exposure to moisture in the periodontal pocket causes the microspheres to
adhere to the pocket, and then begin to break down, thereby releasing the
active ingredient at a sustained rate. We designed the sustained release
profile to maintain drug levels sufficient to kill bacteria for at least 14
days. Because the microspheres totally disintegrate, a return visit will not be
required to remove MPTS. Further, our clinical trial experience suggests that
MPTS' adhesion characteristics ensure retention without the need for a
periodontal dressing or adhesive. We designed our MPTS treatment in part to
eliminate the restricted dosage, refrigeration, mixing, dental dressing and/or
nonchair-side limitations of the other recently introduced treatments.
We developed MPTS to be administered immediately following scaling and
root planing, with periodically repeated application of MPTS for as long as a
periodontal pocket of at least 5mm exists. MPTS enables drug placement directly
into the periodontal pocket. This local administration of MPTS permits delivery
of an antibiotic to affected tissues with minimal systemic exposure. This
administration also generates significantly higher local drug concentrations
than could be safely obtained with systemic administration. Finally, its
administration by oral care professionals eliminates the concern about patient
compliance, a common problem with pharmacy-dispensed and orally-administered
drugs.
In summary, we believe that MPTS' advantages include:
. high drug concentration at the infection site with reduced risk of
drug resistance;
27
<PAGE>
. simple preparation without the need for mixing;
. rapid and easy administration;
. precise dosage control;
. improved patient compliance, comfort or convenience;
. simplified storage that avoids the need for refrigeration;
. bioresorbability, eliminating the need for a follow-up visit to remove
the product; and
. elimination of the need for adhesives and dressings.
Clinical Trials
Phases 1 and 2
MPTS' clinical trial history includes two Phase 1 trials and four Phase 2
multi-center trials, involving a total of 293 patients. These trials were
conducted by American Cyanamid prior to its merger with AHP, and prior to the
subsequent licensing of the technology to OraPharma. The Phase 1 trials
suggested that the product candidate was well tolerated, with minocycline
concentration levels sufficient to kill bacteria maintained in treated sites
for at least 14 days, with no local or systemic adverse events. Phase 2 trials
were conducted at four U.S. university centers and a benefit in periodontal
pocket-depth reduction was demonstrated in the patient population with no
adverse events. We used these Phase 2 trials as a basis to design the Phase 3
trials.
Phase 3
In November 1997, the FDA accepted transfer of the AHP IND to OraPharma,
and in August 1998, we commenced our Phase 3 clinical program to study MPTS
used as an adjunct to scaling and root planing (S/RP) for the treatment of
adult periodontitis. We completed enrollment of 747 patients on schedule in
January 1999, and the last patient visit was in October 1999, at 18 university
centers in the U.S. The design comprised two well controlled safety and
efficacy trials that compared three arms: S/RP alone, S/RP plus MPTS, and S/RP
plus vehicle (non-drug polymer acting as placebo). In these trials, the results
evaluators were blinded as to which of the three arms the patient fell into in
order to preserve trial integrity. We conducted an additional open-label safety
study in 174 patients at four U.S. university centers and one private practice.
Finally, we added a two-center pharmacokinetic study of 18 patients to measure
MPTS in blood serum and saliva in order to observe the drug release profile,
and to assess the development of minocycline resistance. In November 1999, we
announced initial results from these trials:
. The primary endpoint was a reduction in mean pocket depth from
baseline, with the patient as the unit of analysis. Combined data from
the two pivotal studies of 747 patients showed significant pocket-
depth reduction in comparing MPTS plus S/RP to both S/RP alone and
S/RP plus vehicle. These results were statistically significant at the
99.9% level, or what is commonly referred to as p(less than or
=)0.001. This means that, applying standard statistical methods, the
chance that these results could have occurred by chance is less than
or equal to 1 in 1,000. Each study independently generated
statistically significant results.
. A key secondary endpoint was subgroup population analysis for reduced
mean pocket depth across all subgroups. These results were
statistically significant at the 99% level, or p(less than or =)0.01,
in the subgroups relating to smoking, age greater than 50 and prior
history of cardiovascular disease.
. An additional key secondary endpoint was responder analysis. This
analysis demonstrated that the S/RP plus MPTS group achieved a higher
percentage of pockets with greater than 2 mm reduction than did the
other groups.
. Additional analysis also revealed that pockets with increased severity
of disease (i.e., deeper pockets) respond to MPTS treatment with
increasing pocket depth reduction.
28
<PAGE>
. There appeared to be no safety issues related to the treatment of MPTS
among the 939 patients dosed in these studies. Thirteen patients
withdrew from the studies due to adverse events; however, we believe
that these events were not related to MPTS.
. Trace amounts of minocycline were detectable in serum during the first
18 hours, and in saliva during the first 14 days after administration,
providing evidence that MPTS is a slow-release formulation. We found
no changes in gastrointestinal microorganisms, providing no evidence
of antibiotic resistance.
We submitted an NDA for MPTS on February 17, 2000. The NDA consists of
five main sections:
. a summary of our trials from an efficacy standpoint;
. an overall safety summary;
. an annotated package insert;
. a complete final chemistry, manufacturing and controls description;
and
. a summary of our preclinical and toxicology studies.
Manufacturing and Materials Supply
We do not currently have any internal manufacturing capabilities. We
rely on two sole-source manufacturers for the production and packaging of MPTS
and on four sole-source suppliers for other required materials and components.
If we were to change any of our contract manufacturers or material suppliers,
we and they would need to satisfy regulatory requirements.
Contract Manufacturers
Applied Analytical Industries, Inc., or AAI, Wilmington, NC,
manufactures and performs the required testing of MPTS microspheres. We
designed and own the MPTS production equipment used by AAI. We are currently
negotiating, but have not finalized any long-term agreement with this
manufacturer.
Packaging Coordinators, Inc., or PCI, Philadelphia, PA, a Cardinal
Health Company, fills the dispensers with the microspheres manufactured by
AAI, and provides all packaging services. We developed and own the equipment
used by PCI to fill the microspheres. We are currently negotiating, but have
not finalized any long-term agreement with this manufacturer.
Raw Material Suppliers
The polymer used in MPTS is custom-made for us according to procedures
and specifications supplied by us. We believe that alternative supply sources
are available, and that we could stockpile sufficient polymer to cover demand
until an alternate supplier is found, if needed. We are currently negotiating,
but have not finalized any long-term agreement with this supplier.
We purchase the active ingredient, minocycline, from an FDA-inspected
supplier. We are aware of other sources of minocycline, and we believe we
could rapidly arrange for another supplier, if necessary.
An injection molder manufactures the dispensers used to administer MPTS.
We own the molds, and expect that production could be easily transferred to
another qualified molder, if required.
29
<PAGE>
The stainless steel dispenser handle to which the MPTS dispenser is
attached for administration of the product is also manufactured for us. We
supplied the handle design. We expect that fabrication of the dispenser handle
could easily be transferred to another manufacturer, if necessary.
Commercialization
In the U.S., assuming we obtain FDA approval, we intend to create a sales
and marketing force that will target 3,700 periodontists and approximately
25,000 general dentists whom we believe to be "perio-aware", that is, those who
perform the most scaling and root planing procedures. We believe a sales and
marketing force of 50 to 75 persons will provide adequate reach and frequency,
and we expect to begin hiring and training activities in late 2000.
In international markets, we intend to market and sell MPTS through
arrangments with other parties, rather than establish our own sales force. We
are currently holding preliminary discussions with a number of companies.
Additional Product Candidates
We are developing multiple compounds to further establish a presence in
the oral care pharmaceutical market. Some programs are based on our core
technology, while additional programs are based on other technology licensed to
us. In connection with these product candidates, we have formed relationships
to capitalize on our core technology and exploit our expertise in formulation
and development. We believe these relationships will contribute to the
development and commercialization of our product candidates.
OC-1012 for the Prophylaxis and Treatment of Oral Mucositis
We are developing an agent for the prevention and treatment of oral
mucositis. Oral mucositis is a serious complication for patients receiving
chemotherapy and head and neck radiation therapy for cancer. In healthy
patients, the mucosal lining forms an important barrier, preventing entry of
potentially lethal organisms into the body. Normally, cells of the mucous
membranes lining the mouth and gastrointestinal tract undergo rapid renewal.
Both chemotherapy and head and neck radiation therapy for cancer interfere with
this renewal process, and can result in painful ulcers in the mouth and
esophagus. In extreme cases of oral mucositis, these ulcers can be an entry
point for disease organisms. In many cases, the mucositis advances to a point
where patients can no longer eat and must be hospitalized to be fed. In the
most severe cases, cancer treatment may be either stopped, delayed, or
treatment intensity reduced until the condition stabilizes. This may compromise
the patient's response to cancer treatment.
The American Cancer Society expects that approximately 1.2 million cases
of cancer will be diagnosed in the U.S. in 1999. A January 1995 Principles and
Practice of Oncology update states that more than 40% of patients receiving
standard chemotherapy, and virtually all patients who receive head and neck
radiation therapy, develop oral mucositis.
Our oral mucositis program is based on intellectual property developed
initially by Brigham and Women's Hospital of Boston, and licensed by us. We
have identified several compounds that are effective in reducing the severity
of mucositis in preclinical studies. We are currently applying our drug
delivery expertise to develop a formulation optimized for delivery of these
compounds. Our goal is to file an IND for an oral mucositis treatment product
candidate and begin clinical trials during 2001.
OC-1016 for Bone Regeneration
Our bone regeneration program is based on technology licensed from
Children's Hospital of Boston, and is currently in preclinical studies. The
technology is based on the protein osteopontin, which promotes the attachment
of bone forming cells. We are directing our program at two oral health
applications--dental
30
<PAGE>
implants and bone augmentation. Our technology may also have application
outside the oral cavity in orthopedics, which we believe presents potential
out-licensing opportunities.
We are currently developing two formulations as product candidates. One
formulation is a solution for coating dental implants to be applied prior to
installation. Dental implants are used to replace teeth that are lost due to
injury, or tooth decay, or as a consequence of periodontitis. An implant
procedure involves an initial step of installing a post into the jawbone, and a
second step of attaching an artificial tooth to the post. After the implant
post is installed, a patient must typically wait for three to four months for
the post to integrate securely into the bone before it is loaded with a new
tooth. This waiting period is uncomfortable and aesthetically displeasing, as
patients do not have use of the missing teeth. To the practitioner, it poses a
risk of stressing the implant before it properly integrates into the bone.
According to the National Institute of Dental Research, this premature
stressing is the leading cause of implant failure. Our program is directed at
developing an implant coating that would accelerate and strengthen integration
of the implant into the bone, thus reducing loading time and reducing early
implant failures. The ADA estimated in 1990 that approximately 640,000 implant
procedures were performed in the U.S.
We are also developing a semi-solid material that can be placed at a site
where bone growth is desired. Bone augmentation applications in the oral cavity
involve bone repair where the addition of bone will aid in supporting implants
and/or dentures, or reconstruction after tooth loss. To date, bone augmentation
procedures have lacked predictability in restoring sufficient quantity and
quality of bone. Our program is directed at providing a semi-solid material
that can be shaped precisely in the form of desired bone, thereby overcoming
the unpredictability of current bone growth approaches. We are designing the
material to be resorbed as new bone is deposited, which further simplifies the
procedure.
We are conducting work on the bone regeneration program through a
sponsored-research agreement with Children's Hospital of Boston, in
collaboration with our internal scientific staff. We expect product candidates
from this program to be regulated by the FDA as devices, rather than as drug
product candidates. Our goal is to file an initial IDE for at least one of
these formulations and begin clinical trials in 2001.
Our primary interests in non-oral health care applications include
orthopedic implants and spinal fusion. Other potential orthopedic applications
include wrist fractures, poor-healing fractures, and osteonecrosis, or
conditions of bone degeneration. Our current plan is to seek partners to
develop and commercialize the orthopedic and other non-oral health
applications.
MPTS for the Treatment of Traumatic Tooth Injury
We are engaged in a research and development effort jointly with the
University of North Carolina--Chapel Hill that targets traumatic tooth injury
as a potential line extension for MPTS. Our program is directed at improving
the viability of teeth that have been loosened or dislodged due to traumatic
injury. Recent studies suggest that topical application of antibiotics to the
tooth prior to reinstallation may improve the chance of recovery. We plan to
conduct preclinical studies in 2000 to understand MPTS' effect for this
indication.
Research and Development for the Treatment of Periodontitis
As part of a cooperative research agreement with the University of North
Carolina--Chapel Hill, we have begun work on a second treatment approach for
periodontitis as a follow-up to MPTS. This effort is aimed at identifying new
compounds to be administered via our drug-delivery system. Studies reveal that
much of the tissue destruction associated with periodontal disease is
ultimately caused by the body's response to inflammation, and we are testing
various compounds to affect this response. We believe that modifying the body's
response may augment our current antimicrobial approach.
31
<PAGE>
Technology, Licenses and Patents
MPTS and Our Core Technology
In February 1997, we licensed our first product candidate, MPTS, and our
core technology from American Cyanamid, now part of AHP. MPTS and this
technology are covered by seven issued U.S. patents that are owned by American
Cyanamid, now part of AHP. These patents claim the process for producing
microspheres, MPTS and other compositions produced by this process, the device
used for administering microspheres, the machine for filling this
administration device, and methods for treating dental conditions by the
administration of MPTS and other compositions produced using our microsphere
process. The AHP patents expire between 2008 and 2010, with the exception of
one patent covering the delivery-system technology that expires in 2014.
Corresponding patents are in effect or pending in other countries including
Australia, Canada, France, Germany, Italy, Japan, and Sweden where we believe
the market potential for MPTS is significant.
Under our agreement with AHP, we have an exclusive, worldwide license
under both the AHP patents and all related AHP technology to commercialize MPTS
and other products for use in the oral cavity. We also have a non-exclusive,
worldwide license under the AHP patents and technology to commercialize
products for use outside of the oral cavity. Additionally, we have the right to
sublicense this technology. Our agreement with AHP expires upon expiration of
the last to expire of the AHP patents, at which time our license rights become
fully paid-up and non-cancelable.
Our agreement with AHP required us to make an initial payment to AHP and
to grant AHP an equity position in OraPharma. The agreement further obligates
us to make payments to AHP if and when two milestones are achieved (FDA
acceptance of our NDA submission and FDA approval of our product candidates)
and to pay AHP royalties on sales of MPTS and other products that are covered
by the AHP patents or developed using the AHP technology.
In order to reacquire some of the rights to our core technology
previously licensed out by AHP, we were required to enter into a license
agreement with Technical Developments and Investments, Est., or TDI, a
corporation formed under the laws of Liechtenstein. Under this agreement, TDI
granted us an exclusive, worldwide sublicense to use the AHP technology in the
oral cavity. This agreement obligates us to pay royalties to TDI on sales of
products using the AHP technology in the oral cavity. Royalties payable to TDI
can be fully credited against up to 50% of the royalties payable under our
agreement with AHP.
In addition to our agreement with AHP, we have licensed three U.S.
patents from a periodontist and inventor, Gary R. Jernberg, DDS. One of these
patents expires in 2004 and covers local delivery of chemotherapeutics to treat
periodontitis by insertion of bioresorbable time-release microspheres into
periodontal pockets. The other two expire in 2010 and cover additional
embodiments of the method for local delivery using periodontal barriers. There
are no corresponding foreign patents. Our agreement with Dr. Jernberg requires
us to make royalty payments to him. In addition, this agreement obligates us to
make milestone payments to Dr. Jernberg (generally, upon FDA acceptance of our
NDA submission covering the licensed patents and upon FDA approval) and to
engage him as an ongoing consultant and to pay him royalties on sales of
licensed products. Royalties payable to Dr. Jernberg can be fully credited
against up to 50% of the royalties payable under our agreement with AHP.
Oral Mucositis Program
In December 1998, we entered into an agreement with Mucosal Therapeutics
LLC to license our oral mucositis technology. Mucosal Therapeutics is a
research entity established to commercially exploit this technology, which was
originally developed at Brigham and Women's Hospital in Boston. The technology
is the subject of two U.S. patent applications that have been assigned to
Mucosal Therapeutics. These patent
32
<PAGE>
applications claim methods for treating or preventing mucositis by
administering various combinations of inhibitors both alone and in combination
with antibiotics and other compounds. One of these patent applications was
filed in 1998 and the other in 1999. A patent application corresponding to both
U.S. patent applications has been filed under the Patent Cooperation Treaty or
PCT. This PCT application designates foreign countries where we believe the
market potential for a product to treat oral mucositis is significant.
Our license agreement with Mucosal Therapeutics affords us an exclusive,
worldwide license under the Mucosal technology to manufacture and sell
pharmaceutical products. The term of the license agreement is for the longer of
20 years or until expiration of the last to expire of any patents covering this
technology. Shortly after signing the license agreement, we paid Mucosal
Therapeutics an initial license fee and issued it warrants to purchase our
common stock. We are required to make payments to Mucosal Therapeutics, in the
form of cash and warrants to purchase our common stock, as preclinical and
clinical milestones are achieved and upon FDA approval of a pharmaceutical
product for the treatment of oral mucositis. The license agreement further
obligates us to pay Mucosal Therapeutics royalties on sales of pharmaceutical
products covered by or involving use of this technology. Additionally, we have
the right to sublicense this technology.
We have also entered into a research and consulting agreement with an
affiliate of Mucosal Therapeutics, Biomodels LLC to perform preclinical studies
on our behalf and to provide us with research and general consulting services
with respect to our development of the Mucosal technology. Our agreement with
Biomodels expires at the end of 2002.
Regeneration Program
In December 1998, we entered into an agreement to license our bone and
soft-tissue regeneration technology from Children's Medical Center Corporation,
or CMCC. This license covers two technologies, one relating to a non-
immunogenic bulking agent and the other to peptides derived from osteopontin
and related uses in bone regeneration. Two issued U.S. patents and one pending
U.S. patent application claim methods for using non-immunogenic cartilage and
bone suspension as bulking agents and expire in 2014 and 2016, respectively. A
corresponding application is pending in the European Patent Offices. Five
additional patent applications claim novel compositions and methods of use for
osteopontin peptides, methods and compositions for programming an organic
matrix for remodeling into a target tissue, and osteopontin peptide-coated
surfaces and methods of use. All of the patent applications were filed in 1997
and 1998. Corresponding PCT applications have been filed. The PCT applications
designate foreign countries where we believe the market potential for bone and
soft-tissue regeneration products is significant.
Our license agreement with CMCC provides us with worldwide license rights
under the CMCC patents and know-how to commercialize bone and soft-tissue
regeneration products for use in the oral cavity. Our license rights are
exclusive with respect to the CMCC patents and non-exclusive with respect to
the CMCC know-how. For products that are osseoinductive devices for bone
augmentation and regeneration, our license rights extend beyond the oral cavity
to all orthopedic uses in humans and therapeutic uses in animals. The term of
our license agreement with CMCC ends upon expiration of the last of the CMCC
patents to expire. Additionally, we have the right to sublicense this
technology.
Shortly after signing the license agreement, we made a payment to CMCC in
the form of shares of our common stock. We are required to make milestone
payments to CMCC upon submission of our first NDA and upon approval of our
first NDA. The license agreement further obligates us to pay CMCC royalties on
sales of products covered by the CMCC patents or which are specified bone and
soft-tissue regeneration products.
We have also entered into a sponsored-research agreement with Children's
Hospital, a non-profit affiliate of CMCC, to conduct research in the area of
bone and soft-tissue regeneration and perform related preclinical studies. The
sponsored-research agreement expires on October 1, 2002.
33
<PAGE>
Manufacturing
Our ability to conduct clinical trials on a timely basis, to obtain
regulatory approvals and to commercialize any of our product candidates will
depend in part on our ability to manufacture our product candidates either
directly or through third parties, at a competitive cost and in accordance with
applicable FDA and other regulatory requirements, including cGMPs.
We do not currently operate manufacturing facilities for clinical or
commercial production of our proposed product candidates. We have no experience
in manufacturing, and currently lack the resources and capability to
manufacture any of our proposed product candidates on a clinical or commercial
scale. Accordingly, we are, and intend to continue to be, dependent on third
parties for clinical- and commercial-scale manufacturing and distribution of
MPTS and our other product candidates. We are negotiating with various third-
party manufacturers and suppliers for production of MPTS to support product
candidate approval and commercialization.
Marketing and Sales
We currently have limited internal marketing, and no sales or
distribution capabilities. To promote our first product candidate, MPTS, in the
U.S., we intend to hire, train and, assuming we obtain FDA approval, deploy a
sales and marketing force of 50 to 75 professionals. This sales force would be
available to market our present and future product candidates to oral health
care professionals. In international markets, we intend to seek strategic
relationships to market and sell MPTS rather than establishing our own sales
force. We will also need to establish distribution capabilities to successfully
commercialize any of our product candidates. We may also promote our product
candidates through marketing relationships with one or more companies that have
established distribution systems and direct sales forces.
Government Regulation
The FDA and comparable regulatory agencies in state and local
jurisdictions and in foreign countries impose substantial requirements on the
clinical development, manufacture and marketing of pharmaceutical product
candidates. These agencies and other federal, state and local entities regulate
research and development activities and the testing, manufacture, quality
control, safety, effectiveness, labeling, storage, record-keeping, approval and
promotion of our product candidates. All of our product candidates will require
regulatory approval before commercialization. In particular, therapeutic
product candidates for human use are subject to rigorous preclinical and
clinical testing and other requirements of the Federal Food, Drug, and Cosmetic
Act, or FDC Act, implemented by the FDA, as well as similar statutory and
regulatory requirements of foreign countries. Obtaining these marketing
approvals and subsequently complying with ongoing statutory and regulatory
requirements is costly and time-consuming. Any failure by us or our
collaborators, licensors or licensees to obtain, or any delay in obtaining,
regulatory approvals or in complying with other requirements could adversely
affect the commercialization of product candidates and our ability to receive
product or royalty revenues.
The steps required before a new drug product candidate may be distributed
commercially in the U.S. generally include:
. conducting appropriate preclinical laboratory evaluations of the
product candidate's chemistry, formulation and stability, and
preclinical studies to assess the potential safety and efficacy of the
product candidate;
. submitting the results of these evaluations and tests to the FDA,
along with manufacturing information and analytical data, in an IND;
. making the IND effective after the resolution of any safety or
regulatory concerns of the FDA;
34
<PAGE>
. obtaining approval of Institutional Review Boards, or IRBs, to
introduce the drug into humans in clinical studies;
. conducting adequate and well-controlled human clinical trials that
establish the safety and efficacy of the product candidate for the
intended use, typically in the following three sequential, or slightly
overlapping stages:
Phase 1: The product candidate is initially introduced into healthy
human subjects or patients and tested for safety, dose tolerance,
absorption, metabolism, distribution and excretion;
Phase 2: The product candidate is studied in patients to identify
possible adverse effects and safety risks, to determine dosage
tolerance and the optimal dosage, and to collect some efficacy data;
and
Phase 3: The product candidate is studied in an expanded patient
population at multiple clinical study sites, to confirm efficacy and
safety at the optimized dose, by measuring a primary endpoint
established at the outset of the study;
. submitting the results of preliminary research, preclinical studies,
and clinical trials as well as chemistry, manufacturing and control
information on the product candidate to the FDA in an NDA; and
. obtaining FDA approval of the NDA prior to any commercial sale or
shipment of the product candidate.
This process can take a number of years and require substantial financial
resources. The results of preclinical studies and initial clinical trials are
not necessarily predictive of the results from large-scale clinical trials, and
clinical trials may be subject to additional costs, delays or modifications due
to a number of factors, including the difficulty in obtaining enough patients,
clinical investigators, product candidate supply, or financial support. The FDA
may also require testing and surveillance programs to monitor the effect of
approved product candidates that have been commercialized, and the agency has
the power to prevent or limit further marketing of a product candidate based on
the results of these post-marketing programs. Upon approval, a product
candidate may be marketed only in those dosage forms and for those indications
approved in the NDA. However, pursuant to recent Federal Court decisions, drug
marketers are in some limited circumstances permitted to distribute materials
concerning indications outside of the FDA labeling for product candidates.
In addition to obtaining FDA approval for each indication to be treated
with each product candidate, each domestic product candidate manufacturing
establishment must register with the FDA, list its product candidates with the
FDA, comply with cGMPs and permit and pass manufacturing plant inspections by
the FDA. Moreover, the submission of applications for approval may require
additional time to complete manufacturing stability studies. Foreign companies
that manufacture product candidates for distribution in the United States also
must list their product candidates with the FDA and comply with cGMPs. They are
also subject to periodic inspection by the FDA or by local authorities under
agreement with the FDA.
Any product candidates that we manufacture or distribute pursuant to FDA
approvals are subject to extensive continuing regulation by the FDA, including
record-keeping requirements and reporting of adverse experiences with the
product candidate. In addition to continued compliance with standard regulatory
requirements, the FDA may also require post-marketing testing and surveillance
to monitor the safety and efficacy of the marketed product candidate. Adverse
experiences with the product candidate must be reported to the FDA. Product
candidate approvals may be withdrawn if compliance with regulatory requirements
is not maintained or if problems concerning safety or efficacy of the product
candidate are discovered following approval.
The FDC Act also mandates that product candidates be manufactured
consistent with cGMPs. In complying with the FDA's regulations on cGMPs,
manufacturers must continue to spend time, money and effort in production,
recordkeeping, quality control, and auditing to ensure that the marketed
product candidate meets
35
<PAGE>
applicable specifications and other requirements. The FDA periodically inspects
manufacturing facilities to ensure compliance with cGMPs. Failure to comply
subjects the manufacturer to possible FDA action, such as Warning Letters,
suspension of manufacturing, seizure of the product, voluntary recall of a
product or injunctive action, as well as possible civil penalties. We currently
rely on, and intend to continue to rely on, third parties to manufacture our
compounds and product candidates. These third parties will be required to
comply with cGMPs.
Even after FDA approval has been obtained, further studies, including
post-marketing studies, may be required. Results of post-marketing studies may
limit or expand the further marketing of the products. If we propose any
modifications to a product, including changes in indication, manufacturing
process, manufacturing facility or labeling, a supplement to our NDA may be
required to be submitted to the FDA.
Products manufactured in the United States for distribution abroad will
be subject to FDA regulations regarding export, as well as to the requirements
of the country to which they are shipped. These latter requirements are likely
to cover the conduct of clinical trials, the submission of marketing
applications, and all aspects of manufacturing and marketing. Such requirements
can vary significantly from country to country. As part of our strategic
relationships, our collaborators may be responsible for the foreign regulatory
approval process of our product candidates, although we may be legally liable
for noncompliance.
Some of our product candidates may be regulated as medical devices by the
FDA. Under the FDC Act, medical devices are instruments, machines, implants,
in-vitro reagents, or any contrivance that is intended to affect the structure
or function of the body of man or animals, which does not achieve its primary
intended purposes through chemical action within or on the body of man or
animals and which is not dependent upon being metabolized for the achievement
of its primary intended purposes. The FDA's regulation of certain types of
medical devices is similar in many respects to its regulation of drugs,
including requirements for pre-approval testing, manufacture, quality control,
safety, effectiveness, labeling and promotion.
We are also subject to various federal, state and local laws, rules,
regulations and policies relating to safe working conditions, laboratory and
manufacturing practices, the experimental use of animals and the use and
disposal of hazardous or potentially hazardous substances used in connection
with our research work. Although we believe that our safety procedures for
handling and disposing of such materials comply with current federal, state and
local laws, rules, regulations and policies, the risk of accidental injury or
contamination from these materials cannot be entirely eliminated.
The extent of government regulation which might result from future
legislation or administrative action cannot be accurately predicted. In this
regard, although the Food and Drug Administration Modernization Act of 1997
modified and created requirements and standards under the FDC Act with the
intent of facilitating product candidate development and marketing, the FDA is
still in the process of developing regulations implementing the Food and Drug
Administration Modernization Act of 1997. Consequently, the actual effect of
these developments on our business is uncertain and unpredictable.
Competition
The pharmaceutical industry, and the oral care pharmaceuticals business
in particular, are intensely competitive and are characterized by rapid
technological progress. Some pharmaceutical and oral care pharmaceutical
companies and academic and research organizations currently engage in, have
engaged in or may engage in efforts related to the discovery and development of
new oral care pharmaceuticals, some of which may be competitive. Significant
levels of research also occur in universities and other nonprofit research
institutions. These entities have become increasingly active in seeking patent
protection and licensing revenues for their research results. They also compete
with us in recruiting skilled scientific talent.
We are currently aware of three FDA-approved products introduced in the
U.S. during 1998 for the treatment of periodontitis. They are: Atridox, a
product developed by Atrix Laboratories and marketed by Block
36
<PAGE>
Drug; PerioChip, a product developed by Perio Products and marketed by Astra;
and Periostat, a drug developed and marketed by CollaGenex. Atridox and
PerioChip are chair-side therapies involving the insertion of drug products
into the periodontal pocket by the oral care professional. Periostat represents
a systemic approach toward treating periodontal disease through enzyme
inhibition.
We are also aware of three products introduced between 1994 and 1998 for
the treatment of periodontitis. Of the three, neither Dentomycin Gel, developed
and marketed by Lederle, nor Elyzol Dental Gel, developed and marketed by
Alpharma, is currently approved for use in the U.S. We believe the third
product, Actisite Fiber, developed by Alza and sold by Procter & Gamble, while
approved in the U.S., is no longer actively promoted.
We believe that if we obtain FDA approval for any of our product
candidates, our ability to compete successfully will be based upon many
factors, including:
. efficacy and safety of our products;
. methods of administering our products;
. degree of clinical benefits of our products relative to their costs;
. timing and scope of regulatory approval;
. product reliability and availability;
. marketing and sales capability;
. patent protection; and
. reimbursement coverage from insurance companies and others.
Our competitive position will also depend upon our ability to attract and
retain qualified personnel, to obtain patent protection or otherwise develop
proprietary products or processes, and to secure sufficient capital resources
for the often substantial period between technological conception and
commercial sales. Because our product candidates have not been approved by the
FDA and are still under development, our relative competitive position in the
future is difficult to predict.
Employees
As of December 31, 1999, we had 18 employees. Of these employees, 11 were
engaged in research, development, clinical testing, regulatory affairs and/or
manufacturing activities, and seven were engaged in marketing, finance and
administrative activities. None of our employees is covered by collective
bargaining agreements. We consider relations with our employees to be good.
Facilities
Our leased corporate facilities, located in Warminster, Pennsylvania,
currently occupy approximately 11,300 square feet. The lease expires in
September of 2003 and has two five-year renewal options. We believe that our
existing facility is adequate for our current needs and that suitable
additional or alternative space will be available in the future on commercially
reasonable terms.
Legal Proceedings
We are not currently a party to any material legal proceedings.
37
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table presents information about our executive officers and
directors. Our board of directors is divided into three classes serving
staggered three-year terms.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael D. Kishbauch.... 50 President, Chief Executive Officer and Director
Mark B. Carbeau......... 39 Vice President, Corporate Development
J. Ronald Lawter,
Ph.D.................. 57 Vice President, Chief Scientific and Technical Officer
Jan N. Lessem, M.D.,
Ph.D.................. 51 Vice President, Chief Medical Officer
James A. Ratigan........ 51 Vice President, Chief Financial Officer and Secretary
Joseph E. Zack.......... 48 Vice President, Sales and Marketing
James J. Mauzey (1)..... 51 Director
Christopher Moller,
Ph.D. (2)............. 46 Director
Eileen M. More (2)...... 53 Director
Harry T. Rein (1)....... 55 Director
Seth A. Rudnick, M.D.... 51 Director
David I. Scheer (1)..... 47 Director
Jesse I. Treu, Ph.D.
(2)................... 52 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Mr. Kishbauch has served as our President and Chief Executive Officer and
as a director of OraPharma since September 1996. He served as President and
Chief Operating Officer for two business units of Nelson Communications, Inc.,
an integrated healthcare services firm, from February 1995 to August 1996. He
also served as President, Chief Operating Officer and director of MedImmune,
Inc., a Maryland-based biotechnology company, from December 1992 to February
1995. From February 1982 to May 1992, Mr. Kishbauch served with the
Pharmaceuticals Division of Ciba-Geigy Corporation in various sales and
marketing positions, ending as Vice President Product Planning and Promotion.
Mr. Kishbauch worked through positions of increasing responsibility in brand
management with The Procter and Gamble Company from June 1976 to February 1982.
Mr. Kishbauch received a B.A. in biology from Wesleyan University and an M.B.A.
from the Wharton School of the University of Pennsylvania.
Mr. Carbeau has served as our Vice President, Corporate Development since
May 1999. From September 1996 to April 1999, he served as General Partner in
The Lucas Group, a Boston-based strategy consulting and mergers and
acquisitions advisory firm, and from January 1995 to September 1996 as a
Principal in North Atlantic Capital, a private equity firm. Prior to that, he
was a consultant and case manager for The Boston Consulting Group, a management
consulting firm, from September 1990 through December 1994. Mr. Carbeau held a
number of cross-functional positions with Eli Lilly and Company, a
pharmaceutical company, from September 1982 to July 1988. He holds a B.S. in
industrial engineering from the Pennsylvania State University and an M.B.A.
from the Wharton School of the University of Pennsylvania.
Dr. Lawter has served as our Vice President, Chief Scientific and
Technical Officer since he joined us in March 1997. From October 1983 to March
1997, he held scientific and management positions in pharmaceutical product
development at American Cyanamid and at American Home Products after its
38
<PAGE>
acquisition of American Cyanamid in 1994. While at American Cyanamid, he led
the team that developed the drug-delivery technology that is the basis for our
lead product, MPTS. From August 1979 through October 1983, he was a senior
research scientist in the Advanced Drug Delivery Group at Ciba-Geigy. From 1977
through 1979, he was a research manager in the Biomedical Division of Abcor,
Inc. and from 1972 through 1977, was a consultant with Arthur D. Little, Inc.
He received a B.S. in chemistry from the University of South Carolina and a
Ph.D. in physical chemistry from the Massachusetts Institute of Technology.
Dr. Lessem has served as our Vice President, Chief Medical Officer since
June 1998. From May 1995 to June 1998, he served as Medical Director and Vice
President of Drug Strategy at Takeda America, a pharmaceutical company. Prior
to that, he was involved in various clinical research and management roles at
several pharmaceutical companies, specifically: SmithKline Beecham from June
1991 to May 1995; Union Chemique Belgique Pharmaceutical in Brussels, Belgium,
from May 1990 to May 1991; Syntex Research from January 1986 to May 1990;
Bristol Myers from August 1983 to December 1985; and Merck Sharp & Dohme from
May 1982 to August 1983. Between 1974 and 1982, he was a Fellow, instructor and
Associate Professor in Cardiology and Geriatrics, at the University of Lund, in
Sweden. He is a Fellow of the American College of Cardiology, and a member of
the New York Academy of Sciences, as well as The Swedish Medical Association.
Dr. Lessem earned an M.D. from the University of Lund in Sweden in 1974, a
Ph.D. in clinical cardiology from the same university in 1982, and was Board
Certified in Cardiology in Sweden in 1982.
Mr. Ratigan has served as our Vice President, Chief Financial Officer
since June 1997 and was named Secretary in December 1999. From February 1997 to
June 1997, Mr. Ratigan served as the Chief Financial Officer of TL Ventures,
one of the initial investors in OraPharma. From September 1996 to February
1997, Mr. Ratigan served as the Vice President--Finance of Robotic Vision
Systems, Inc., a publicly-held company widely engaged in machine vision and
electronic imaging. From October 1993 to August 1996, Mr. Ratigan served as the
Executive Vice President, Chief Operating Officer and Chief Financial Officer
and a director of Perceptron, Inc., a publicly-held company which provides
three dimensional machine vision technologies to the automotive, forestry
products and aerospace industries. From March 1983 to October 1992, Mr. Ratigan
was with the Adler Group, a venture capital fund, where he served in a number
of positions including venture manager, Chief Financial Officer, and Chief
Executive Officer of a machine vision company controlled by the Adler Group.
Earlier, Mr. Ratigan spent eight years with Arthur Andersen LLP, where, as a
manager, he focused on entrepreneurial clients. Mr. Ratigan received his B.S.
in finance and accounting from LaSalle University, Philadelphia, Pennsylvania
and is a CPA.
Mr. Zack has served as our Vice President, Sales and Marketing since
March 1998. From 1993 to 1998, Mr. Zack held senior management positions of
General Manager and Executive Director Marketing with Advanced Tissue Sciences,
a biotechnology company focused on tissue engineering. Prior to that, he was
Executive Director Marketing for Ciba-Geigy from 1987 to 1993, and Product
Director from 1982 to 1987, where he was responsible for a number of successful
product launches. From 1973 to 1982, he held positions in sales and new product
development with Ciba-Geigy. Mr. Zack obtained a B.A. in biology from Colgate
University, and an M.B.A. from St. John's University in New York.
Mr. Mauzey has been a director of OraPharma since July 1997. Since March
1999, Mr. Mauzey has been the Chief Executive Officer of Innovex, a division of
Quintiles Transnational. From March 1994 through February 1999, Mr. Mauzey was
Chairman and Chief Executive Officer of Alteon, Inc., a biotechnology company.
Prior to that, he spent 22 years in major roles with leading pharmaceutical
companies, including as President of the Bristol-Myers Squibb U.S.
Pharmaceutical Division from March 1989 through March 1994 and as the President
of the Squibb Corporation U.S. Pharmaceutical Group and Vice President of both
U.S. and international operations of Lederle.
Dr. Moller has been a director of OraPharma since March 1997. Since 1990,
he has served as Vice President of TL Ventures, a company which manages a
series of private equity funds. Since 1994, Dr. Moller has served as a Managing
Director of the following funds managed by TL Ventures, Radnor Venture
Partners, Technology Leaders, Technology Leaders II, TL Ventures III and TL
Ventures IV. He is principally responsible
39
<PAGE>
for the life science portfolio at TL Ventures, specializing in financing and
development of early-stage biotechnology, bioinformatics and e-health
companies. Dr. Moller also currently serves as a director on the boards of
Adolor Corporation, Assurance Medical, Esperion Therapeutics, Immunicon
Corporation, eMerge Interactive, Inc., ChromaVision Systems, Inc. and Genomics
Collaborative. Dr. Moller holds a Ph.D. in immunology from the University of
Pennsylvania.
Ms. More has been a director of OraPharma since September 1996. She has
been associated with Oak Investment Partners, a venture capital firm, since
1978 and has been a general partner or managing member since 1980. She
currently serves as a director of several private companies including Halox
Technologies, Psychiatric Solutions and Teloquent Communications Corp. Ms. More
was also a founding investor in Genzyme and has also been responsible for
early-stage investments in numerous companies including Alkermes, Alexion
Pharmaceuticals, Esperion Therapeutics, Inc., KeraVision, Pharmacopeia, Trophix
Pharmaceuticals, Compaq Computer, Network Equipment Technologies, Octel
Communications and Stratus Computer.
Mr. Rein has been a director of OraPharma since March 1997. He is the
principal founder of Canaan Partners and has served as Managing General Partner
since its inception in 1984, with extensive experience working with small and
mid-sized companies. Prior to that, he was President and Chief Executive
Officer of GE Venture Capital Corporation. Mr. Rein joined General Electric
Company in 1979 and directed several of GE's lighting businesses as General
Manager before joining the venture capital subsidiary. Prior to his GE career,
Mr. Rein worked in various capacities with Polaroid Corporation, Transaction
Systems, Inc. and Gulf Oil Corporation. In addition to serving on the boards of
several private companies, Mr. Rein is also on the board of Anadigics.
Dr. Rudnick has been a director of OraPharma since July 1997. He
currently is consulting for several venture capital firms, and serves on the
board of NaPro BioTherapeutics, Inc. He was Chairman and CEO of
Cytotherapeutics, Inc. from 1995 through 1998. Prior to that, Dr. Rudnick
served as Senior Vice President of the R.W. Johnson Pharmaceutical Research
Group of Ortho Pharmaceutical Corporation, Senior Vice President of Development
with Biogen Research Corporation and Director of Clinical Research with
Schering-Plough. Dr. Rudnick has held various faculty appointments with Brown
University, the University of North Carolina and Yale University, and received
his M.D. from the University of Virginia, with fellowships at Yale in oncology
and epidemiology.
Mr. Scheer has been a director of OraPharma since September 1996. He has
been President of Scheer & Company, Inc., a firm with activities in venture
capital, corporate strategy, and transactional advisory services focused on the
life sciences industry, since 1981. In venture capital, Mr. Scheer has been
involved in the founding of our company, as well as ViroPharma, Inc., Esperion
Therapeutics, Inc. and Achillon Pharmaceuticals, Inc. and has been a member of
the board of directors of Nonlinear Dynamics, Inc. and a series of private and
public companies. He has led engagement teams from Scheer providing corporate
strategic advisory services to a broad range of companies including Agouron
Pharmaceuticals (now a division of Warner-Lambert), American Cyanamid (now a
division of AHP), B.F. Goodrich, Pharmacia AB, Pharmacia & Upjohn, Hoffman La-
Roche, Eli Lilly, and a range of smaller, publicly- and privately-held
companies. Mr. Scheer has also led or played a significant role in a series of
transactions involving corporate alliances, licensing arrangements,
divestments, acquisitions and mergers in the life sciences. He received his
B.A. from Harvard College and his M.S. from Yale University.
Dr. Treu has been a director of OraPharma since December 1998. He is a
managing member of Domain Associates, L.L.C., and has served in this or similar
capacities with this firm since 1986. He has served as a director of over 20
early-stage health companies, ten of which have so far become public companies.
He is currently a director of Focal, Inc., GelTex Pharmaceuticals, Trimeris
Inc. and Simione Central Holdings, Inc. Prior to the formation of Domain, Dr.
Treu had 12 years of health care experience at General Electric and Technicon
Corporation in a number of research, marketing management and corporate staff
positions. Dr. Treu
40
<PAGE>
received his B.S. from Rensselaer Polytechnic Institute, and from Princeton
University his M.A. and Ph.D. in physics.
Board of Directors
Our board of directors is divided into the following three classes, with
the members of the respective classes serving for staggered three-year terms:
. Class 1 directors, whose terms expire at the annual meeting of
stockholders to be held in 2001;
. Class 2 directors, whose terms expire at the annual meeting of
stockholders to be held in 2002; and
. Class 3 directors, whose terms expire at the annual meeting of
stockholders to be held in 2003.
Mr. Mauzey and Dr. Rudnick are our Class 1 directors, Dr. Moller, Mr.
Scheer and Dr. Treu are our Class 2 directors, and Mr. Kishbauch, Ms. More and
Mr. Rein are our Class 3 directors. At each annual meeting of stockholders
following this offering, our stockholders will elect the successors to
directors whose terms have expired to serve from the time of election and
qualification until the third annual meeting following election.
All directors were nominated and elected as directors by the holders of
our common and preferred stock in accordance with provisions of our current
stockholders agreement. These provisions of our stockholders agreement will
terminate upon the completion of this offering. Each of the individuals will
remain as a director until resignation or until the stockholders elect their
replacements in accordance with our certificate of incorporation.
Our executive officers are appointed by the board of directors and serve
until their successors have been duly elected and qualified. There are no
family relationships among any of our executive officers or directors.
Board Committees
Our board of directors has a compensation committee and an audit
committee. The compensation committee is responsible for the administration of
all salary and incentive compensation plans for our officers, including bonuses
and options granted under our option and equity compensation plans. The audit
committee is responsible for reviewing with management our financial controls
and accounting and reporting activities. In addition, the audit committee will
review the qualifications of our independent auditors, make recommendations to
the board of directors regarding the selection of independent auditors, review
the scope, fees and results of any audit and review any non-audit services and
related fees.
41
<PAGE>
Scientific Advisory Board
The Chairman of OraPharma's Scientific Advisory Board is Ray C. Williams,
DMD, who was first introduced to our technology and MPTS while Chairman of
Harvard's Periodontology Department, and who more recently has served as
Chairman of Periodontics at the University of North Carolina--Chapel Hill.
Through Dr. Williams, we have retained a Scientific Advisory Board
consisting of individuals with expertise in dental and periodontal medicine,
oral pathology and soft-tissue therapeutics. This group was assembled during
our first quarter of operations. Members of our Scientific Advisory Board
advise us concerning long-term scientific planning and research and
development, periodically evaluate our research programs, and periodically
review and evaluate our clinical development plans and clinical trials. Dr. Van
Dyke was a principal investigator for one of our Phase 2 trials and Drs.
Cochran and Van Dyke were principal investigators in our Phase 3 trials. The
current members of our Scientific Advisory Board are as follows:
<TABLE>
<CAPTION>
Member University Affiliation Professional Concentration
- --------------------- --------------------------------- -------------------------------
<S> <C> <C>
Dr. Ray Williams Professor/Chairman Educator and expert in host
(Chairman) Periodontology, UNC--Chapel pathways and periodontal
Hill; formerly Chairman, disease
Department of Periodontology,
Harvard University
Dr. Steven Professor, UNC--Chapel Hill; Inflammation research, link
Offenbacher formerly Chairman of between infant birth weight,
Periodontology, Emory cardiac conditions and
University periodontal disease
complications of cancer
therapy
Dr. George McDonald Professor, University of Gastroenterology, Soft-tissue
Washington, Fred Hutchinson disease, oral mucositis
Cancer Center
Dr. David Cochran Professor/Department Chairman, Growth factors, regeneration,
University of Texas San Antonio implantology
Dr. Niklaus Lang Professor/Department Chairman, Periodontology, implantology
University of Bern (Switzerland) research
Dr. Roy Page Professor, University of Microbiology, immunology
Washington
Dr. James Sciubba Director of Dental and Oral Dental education, oral
Medicine, Johns Hopkins Medical pathology and medicine, soft-
Center tissue disease
Dr. Thomas Van Dyke Professor, Boston University Inflammatory process in
periodontal disease, clinical
trials
</TABLE>
Director and Scientific Advisory Board Compensation
We reimburse each member of our board of directors and our scientific
advisory board for out-of-pocket expenses incurred in connection with attending
board meetings. We also pay each member of our board of directors and
scientific advisory board who is not an investor a fee of $1,500 for each board
meeting attended, and have granted stock options to each member of our
scientific advisory board.
42
<PAGE>
Executive Compensation
The following table presents information concerning the compensation we
paid for the years ended December 31, 1999 and 1998 to our chief executive
officer and to each of our other five most highly compensated executive
officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------- ---------------------
Restricted Securities
Stock Underlying All Other
Name and Principal Position Year Salary Bonus Awards Options Compensation (1)
- --------------------------- ---- ---------- --------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Kishbauch.... 1999 $ 233,650 $ 67,095 (5) 16,823 $ 6,974
President, Chief 1998 212,458 63,900 (5) -- 13,960
Executive Officer and
Director
James A. Ratigan........ 1999 151,125 30,000 -- 3,750 307
Vice President, Chief 1998 122,875 36,000 -- -- 514
Financial Officer and
Secretary
James R. Lawter,
Ph.D. ................ 1999 133,087 33,270 (6) 10,000 154
Vice President, Chief 1998 126,469 25,350 (6) -- 5,535
Scientific and
Technical Officer
Jan N. Lessem, M.D.,
Ph.D.(2).............. 1999 195,542 58,663 -- 9,022 20,307
Vice President, Chief
Medical Officer 1998 102,917 22,167 -- 52,500 300
Joseph E. Zack(3)....... 1999 166,000 33,200 -- 3,000 25,307
Vice President, Sales
and Marketing 1998 117,222 24,000 -- 62,500 38,691
Mark B. Carbeau(4) ..... 1999 116,846 23,333 -- 100,000 179
Vice President,
Corporate Development 1998 -- -- -- -- --
</TABLE>
- --------
(1) Includes in 1999 $6,667, $20,000 and $25,000 forgiveness of loans to Mr.
Kishbauch, Dr. Lessem and Mr. Zack, respectively, and term life insurance
premiums in the amounts of $307, $307, $154, $307, $307 and $179 paid by us
for Mr. Kishbauch, Mr. Ratigan, Dr. Lawter, Dr. Lessem, Mr. Zack and Mr.
Carbeau, respectively, during 1999. Includes $13,583 partial forgiveness of
a loan to Mr. Kishbauch, $4,974 of relocation expense reimbursement to Dr.
Lawter, $38,475 of relocation expenses reimbursed to Mr. Zack, and term
life insurance premiums in the amounts of $377, $514, $561, $300 and $216
paid by us for Mr. Kishbauch, Mr. Ratigan, Dr. Lawter, Dr. Lessem and Mr.
Zack, respectively, during 1998.
(2) Dr. Lessem's employment began on June 1, 1998, and the table above reflects
only compensation paid since this date.
(3) Mr. Zack's employment began on March 23, 1998, and the table above reflects
only compensation paid since this date.
(4) Mr. Carbeau's employment began on May 1, 1999, and the table above reflects
only compensation paid since this date.
(5) No restricted stock grants were made to Mr. Kishbauch during 1999 or 1998.
As of December 31, 1999, Mr. Kishbauch held 336,462 shares of restricted
common stock, subject to a restricted stock purchase agreement, dated March
6, 1997. These restricted shares were deemed to have a value of $5,383,056
as of the last day of the year, based on the assumed offering price of
$16.00 per share less the $.001 price per share paid for those shares. As
of December 31, 1999, 218,700 of these shares had vested and the remaining
35% of the restricted shares will vest at the rate of 5% per calendar
quarter over Mr. Kishbauch's period of continued service with us.
(6) No restricted stock grants were made to Dr. Lawter during 1999 or 1998. As
of December 31, 1999, Dr. Lawter held 89,375 shares of restricted common
stock, subject to a restricted stock purchase agreement, dated March 19,
1997. These restricted shares were deemed to have a value of $1,429,911 as
of the last day of the year, based on the assumed offering price of $16.00
per share less the $.001 per share paid for those shares. As of December
31, 1999, 67,031 of these shares had vested and the remaining 25% of the
restricted shares will vest at the rate of 5% per calendar quarter over Dr.
Lawter's period of continued service with us.
43
<PAGE>
Stock Option Grants
The following table contains information concerning stock options to
purchase common stock that we granted in 1999 to each of the officers named in
the summary compensation table. We generally grant stock options at 100% of the
fair market value of the common stock as determined by our board of directors
on the date of grant. In reaching the determination of fair market value at the
time of each grant, the board of directors considers a range of factors,
including our current financial position, results of operations and cash flows,
the status of development activities for our product candidates, our assessment
of competitive position in our market and prospects for the future, current
industry market conditions, including valuations for comparable companies and
the illiquidity of an investment in the common stock. We granted stock options
to employees to purchase a total of 172,270 shares of common stock in 1999.
Option Grants in 1999
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------
Potential Realizable
Value at Assumed
Percent of Annual Rates
Number of Total of Stock Price
Securities Options Appreciation
Underlying Granted to Exercise for Option Term
Options Employees Price Per Expiration --------------------
Name Granted in 1999 Share Date 5% 10%
- ---- ---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Kishbauch.... 16,823 9.8% $.60 1-1-09 $ 6,348 $ 16,087
James A. Ratigan........ 3,750 2.2 .60 1-1-09 1,415 3,586
James R. Lawter, Ph.D... 10,000 5.8 .60 1-1-09 3,773 9,562
Jan N. Lessem, M.D.,
Ph.D. ................ 9,022 5.2 .60 1-1-09 3,404 8,627
Joseph E. Zack.......... 3,000 1.7 .60 1-1-09 1,132 2,869
Mark B. Carbeau......... 100,000 58.0 .60 5-1-09 37,734 95,625
</TABLE>
The following table contains information concerning stock options to
purchase common stock held as of December 31, 1999 by each of the officers
named in the summary compensation table that have stock options.
1999 Year-End Option Values
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised In-
Underlying Unexercised the-Money Options at Year
Options at Year End End(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael D. Kishbauch...... -- 16,823 -- $ 259,074
James A. Ratigan.......... 37,500 41,250 $586,500 644,250
James R. Lawter, Ph. D.... -- 10,000 -- 154,000
Jan N. Lessem, M.D.,
Ph.D. .................. 15,750 45,772 246,330 713,709
Joseph E. Zack............ 21,875 43,625 324,125 681,575
Mark B. Carbeau........... -- 100,000 -- 1,540,000
</TABLE>
- --------
(1) There was no public trading market for the common stock as of December 31,
1999. Accordingly, these values have been calculated on the basis of the
assumed offering price of $16.00 per share minus the applicable per share
exercise price.
Employment Agreements
None of our executive officers has entered into employment agreements
with us. Our policy is to provide salary, benefits continuation and continued
vesting for six months if we terminate an executive officer without cause. In
addition, all existing stock options and shares of restricted common stock held
by an executive officer will vest upon any termination without cause following
a change of control of our company.
44
<PAGE>
Equity Compensation Plans
1996 Stock Option Plan
We maintain the 1996 Stock Option Plan, which has been approved by our
board of directors and our stockholders. The 1996 plan provides for grants of
incentive stock options and nonqualified stock options to our directors,
officers, employees, consultants and advisors; however, only employees,
officers, and directors who are our employees may receive grants of incentive
stock options. The 1996 plan authorizes up to 634,412 shares of common stock
for issuance under the terms of the plan. As of December 31, 1999, 586,472
options were outstanding under the 1996 plan. We will not make any additional
grants under the 1996 plan.
1999 Equity Compensation Plan
We also maintain the 1999 Equity Compensation Plan which has been
approved by our board of directors and stockholders. The 1999 plan provides for
grants of incentive stock options, nonqualified stock options, stock awards and
performance units to our employees, advisors, consultants and non-employee
directors.
General. The 1999 plan authorizes up to 1,250,000 shares of our common
stock for issuance under the terms of the plan. No more than 500,000 shares in
the aggregate may be granted to any individual in any calendar year. If options
granted under the plan expire or are terminated for any reason without being
exercised, or if stock awards or performance units are forfeited, the shares of
common stock underlying the grants will again be available for purposes of the
plan. No options have been granted under the 1999 plan.
Administration of the Plan. The compensation committee of the board of
directors administers and interprets the plan. The compensation committee has
the sole authority to:
. determine the individuals to whom grants will be made under the plan;
. determine the type, size and terms of the grants to be made to each
individual;
. determine the time when the grants will be made and the duration of
any exercise or restriction period, including the criteria for
exercisability and acceleration of exercisability;
. amend the terms of any previously issued grant; and
. deal with any other matters arising under the plan.
Grants. Grants under the plan may consist of:
. options intended to qualify as incentive stock options within the
meaning of Section 422 of the Internal Revenue Code;
. nonqualified stock options that are not intended to so qualify;
. stock awards; and
. performance units.
Eligibility for Participation. Grants may be made to any employee of
OraPharma or any of our subsidiaries, including employees who are our officers
or members of our board of directors, and to any non-employee member of our
board of directors. Consultants and advisors who perform services for us or any
of our subsidiaries are also eligible to receive grants under the plan. No
options have been issued under the 1999 plan.
Options. Incentive stock options may be granted only to employees.
Nonqualified stock options may be granted to employees, non-employee directors,
consultants and advisors. The exercise price of common stock
45
<PAGE>
underlying an option will be determined by the compensation committee, and may
be equal to or greater than the fair market value of our common stock on the
date the option is granted.
Participants may pay the exercise price:
. in cash;
. with the approval of the compensation committee, by delivering shares
of common stock owned by the grantee and having a fair market value on
the date of exercise equal to the exercise price of the option;
. payment through a broker in accordance with procedures permitted by
Regulation T of the Federal Reserve Board; or
. by such other method as the compensation committee may approve.
Options become exercisable according to the terms and conditions
determined by the compensation committee and specified in the grant instrument.
The compensation committee may accelerate the exercisability of any or all
outstanding options at any time for any reason. The compensation committee will
determine the term of each option, up to a maximum ten-year term. The term of
an incentive stock option granted to an employee who owns more than 10% of our
stock may not exceed five years from the date of grant.
Stock Awards. The compensation committee may issue shares of common stock
to participants subject to restrictions or no restrictions, as the compensation
committee determines. Unless the compensation committee determines otherwise,
during the restriction period, grantees will have the right to vote shares of
stock awards and to receive dividends or other distributions paid on such
shares. If a grantee's employment or service terminates during the restriction
period or if any other conditions are not met, the stock awards will terminate
as to all shares on which restrictions are still applicable, and the shares
must be immediately returned to us, unless the compensation committee
determines otherwise.
Performance Units. The compensation committee may make grants of
performance units to employees, consultants and advisors. Performance units may
be payable partly in cash or shares of our common stock, provided that the cash
portion does not exceed 50% of the amount to be distributed at the end of a
specified performance period. Payment will be contingent on achieving
performance goals by the end of the performance period. The measure of a
performance unit shall equal the fair market value of a share of our common
stock. The compensation committee will determine the performance criteria, the
length of the performance period, the maximum payment value of an award, the
minimum performance goals required before payment will be made, and any other
conditions the compensation committee deems appropriate and consistent with the
plan and Section 162(m) of the Internal Revenue Code.
Deferrals. The compensation committee may permit or require that a
grantee defer the receipt of cash or the delivery of shares that would
otherwise be due to the grantee in connection with any option, the lapse or
waiver of restrictions applicable to stock awards, or the satisfaction of any
requirements or objectives with respect to performance units.
Transferability. Grants are generally not transferable by the
participant, except in the event of death. However, the compensation committee
may permit participants to transfer nonqualified stock options to family
members or related entities on such terms as the compensation committee deems
appropriate.
Amendment and Termination of the Plan. The board of directors may amend
or terminate the plan at any time. However, the board of directors may not make
any amendment without stockholder approval if such stockholder approval is
required by Section 162(m) or Section 422 of the Internal Revenue Code or is
required by an applicable stock exchange. The plan will terminate on the day
immediately preceding the tenth anniversary of its effective date, unless the
board of directors terminates the plan earlier or extends it with approval of
the stockholders.
46
<PAGE>
Adjustment Provisions. Upon a merger, spin-off, stock split or other
transaction identified in the plan, the compensation committee may
appropriately adjust:
. the maximum number of shares available for grants;
. the maximum number of shares that any participant may be granted in
any year;
. the number of shares covered by outstanding grants;
. the kind of shares issued under the plan; and
. the price per share or the applicable market value of such grants.
Change of Control. Upon a change of control where we are not the
surviving entity or where we survive only as a subsidiary of another entity,
unless the compensation committee determines otherwise, all outstanding grants
will be assumed by or replaced with comparable options or other grants by the
surviving corporation. In addition, upon a change of control, the compensation
committee may:
. accelerate the vesting and exercisability of outstanding stock options
and stock awards;
. determine that grantees holding performance units will receive a
payment in settlement of these performance units;
. require that grantees surrender their outstanding options in exchange
for payment by us, in cash or common stock, as determined by the
compensation committee, in an amount equal to the amount by which the
fair market value of the shares of common stock subject to the
grantee's unexercised options exceeding the exercise price of those
options;
. after giving grantees an opportunity to exercise their outstanding
options terminate any or all unexercised options.
A "change of control" is defined to occur if:
. any person becomes a beneficial owner, directly or indirectly, of
stock representing more than 50% of the voting power of the then-
outstanding shares of our stock;
. the stockholders or the directors, as appropriate, approve:
. any merger or consolidation with another corporation where our
stockholders, immediately before such transaction, will not
beneficially own, immediately after the transaction, shares
entitling such stockholders to more than 50% of all votes to which
all stockholders of the surviving corporation would be entitled in
the election of directors;
. a sale or other disposition of all or substantially all our assets;
or
. a liquidation or dissolution.
. any person commences a tender offer or exchange offer for 30% or more
of the voting power of our then outstanding shares; or
. after any election of our directors, our board of directors consists
of a majority of directors who have been members of our board for less
than two years, unless at least two-thirds of the directors who were
in office prior to the election or nomination of the new director vote
for the new director.
Section 162(m). Under Section 162(m) of the Internal Revenue Code, we may
be precluded from claiming a federal income tax deduction for total
remuneration in excess of $1,000,000 paid to our chief executive officer or to
any of our other four mostly highly compensated officers in any one year. Total
remuneration includes amounts received upon the exercise of stock options
granted under the plan and the value of shares or cash paid pursuant to other
grants. An exception exists, however, for "qualified performance-based
compensation." The 1999 plan is intended to allow grants to meet the
requirements of "qualified performance-based compensation."
47
<PAGE>
Stock options should generally meet the requirements of "qualified
performance-based compensation" if the exercise price is at least equal to the
fair market value of our common stock on the date of grant. The compensation
committee may grant performance units and stock awards that are intended to be
"qualified performance-based compensation" under Section 162(m) of the Internal
Revenue Code. In that event, the compensation committee will establish in
writing the objective performance goals that must be met and other conditions
of the grant at the beginning of the performance period. The performance goals
may relate to the employee's business unit or to our performance as a whole, or
any combination of the two. The compensation committee will use objectively
determinable performance goals based on one or more of the following criteria:
stock price, earnings per share, net earnings, operating earnings, return on
assets, stockholder return, return on equity, growth in assets, unit volume,
sales, market share, scientific goals, pre-clinical or clinical goals,
regulatory approvals, or strategic business criteria consisting of one or more
objectives based on meeting specified revenue goals, market penetration goals,
geographic business expansion goals, cost targets or goals relating to
acquisitions, or divestitures, or strategic partnerships. With respect to stock
awards or performance units granted as "qualified performance-based
compensation," not more than 1,000,000 shares of stock may be granted to an
employee under the performance units or stock awards for any performance
period. At the end of each performance period, the compensation committee will
certify that the performance goals have been met. The compensation committee
may provide for payment of grants in the event of the death or disability of a
participant, or change of control during a performance period.
Plan Benefits. Because the compensation committee will make grants from
time to time to persons selected by the committee, we cannot presently
determine the benefits and amounts that may be received in the future by
persons eligible to participate in the 1999 plan.
401(k) Plan
On July 1, 1998, we adopted a tax-qualified employee savings and
retirement plan, our 401(k) plan, for our eligible employees. At the discretion
of the board of directors, we may make matching contributions on behalf of all
participants who have elected to make deferrals to the 401(k) plan. To date, we
have not made any matching contributions to the 401(k) plan. Any contributions
to the 401(k) plan by us or by our participants are paid to a trustee. The
401(k) plan, and the accompanying trust, are intended to qualify under Section
401(k) of the Internal Revenue Code, as amended, so that contributions and
income earned, if any, are not taxable to employees until withdrawn. The
contributions made by us vest in increments according to a vesting schedule. At
the direction of each participant, the trustee invests the contributions made
to the 401(k) plan in any number of investment options.
48
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Previous Capital Stock Financings
Preferred Stock
We sold 400,000 shares of series A preferred stock in February 1997 and
3,311,828 shares of series B preferred stock in March 1997. In December 1998 we
sold 3,292,177 shares of series C preferred stock. In December 1999 we sold
553,095 shares of series D preferred stock. Substantially all of our shares of
preferred stock have been sold to venture capital funds, each consisting of one
or more related funds.
The detailed description of the ownership within each venture capital
fund is contained in the footnotes to the Principal Stockholder's table on page
52. Each outstanding share of our preferred stock will automatically convert
into one share of common stock upon the completion of this offering.
Series A Preferred Stock. We sold 400,000 shares of series A preferred
stock in February 1997 at a purchase price per share of $2.00 for a total of
$800,000. In these transactions, we sold 100,000 shares to each of Oak
Investment Partners, Canaan Partners, TL Ventures III, and Frazier Healthcare.
We also granted warrants to each of Oak Investment Partners and to Canaan
Partners that are exercisable for 15,625 and 15,624 shares of common stock at
an exercise price of $2.00 per share in connection with loans of $62,500 that
each such venture fund made to us. These warrants expire in December 2003.
Series B Preferred Stock. We sold 3,311,828 shares of series B preferred
stock in March 1997 at a purchase price per share of $3.64 for a total of
approximately $12 million. In these transactions, we sold 824,176 shares of
series B preferred stock to each of Oak Investment Partners and TL Ventures
III; 824,175 to Canaan Partners and 839,301 shares to Frazier Healthcare.
Series C Preferred Stock. We sold 3,292,177 shares of series C preferred
stock in December 1998 at a purchase price per share of $4.86 for a total of
approximately $15.9 million. In these transactions, we sold:
. 545,267 shares to Oak Investment Partners,
. 370,370 shares to Canaan Partners,
. 370,369 shares to TL Ventures III,
. 164,609 shares to Frazier Healthcare,
. 1,037,037 shares to Domain Partners IV, L.P.,
. 259,259 shares to Biotechnology Investments,
. 360,081 shares to HealthCap KB, and
. 185,185 shares to Sentron Medical, Inc.
Series D Preferred Stock. We sold 553,095 shares of series D preferred
stock in December 1999 at a purchase price per share of $9.04 for a total of
approximately $5 million. In these transactions, we sold:
. 132,743 shares to Oak Investment Partners,
. 103,003 shares to Canaan Partners,
. 55,309 shares to TL Ventures III,
. 22,124 shares to Frazier Healthcare,
. 17,699 shares to Domain Partners IV, L.P.,
. 4,425 shares to Biotechnology Investments,
. 151,421 shares to HealthCap KB, and
. 66,371 shares to Sentron Medical, Inc.
49
<PAGE>
We also issued warrants to these investors exercisable for the following
number of shares of our common stock at an exercise price of $12.92 per share.
These warrants expire in December 2006 and are not exercisable until December
2000. These warrants were issued as follows:
. 26,548 to Oak Investment Partners,
. 20,600 to Canaan Partners,
. 11,061 to TL Ventures III,
. 4,425 to Frazier & Company,
. 3,540 to Domain Partners IV, L.P.,
. 885 to Biotechnology Investments,
. 30,284 to HealthCap KB, and
. 13,274 to Sentron Medical, Inc.
Transactions with Directors
Scheer & Company, Inc., a company owned and controlled by David I.
Scheer, one of our directors, provides business consulting and advisory
services to us for which it receives $15,000 per quarter plus out-of-pocket
expenses. Scheer & Company, Inc. was paid $21,190 in 1997, $82,009 in 1998 and
$77,345 in 1999.
Seth Rudnick, M.D., one of our directors, provides product candidate
development consulting services to us. Including out-of-pocket expenses, Dr.
Rudnick was paid $27,095 in 1998 and $22,124 in 1999 for these services.
Transactions with Scientific Advisory Board Members
Dr. Raymond Williams is the Chairman of our scientific advisory board.
Dr. Williams provides product candidate development and industry-specific
consulting services to us. For providing these services, we pay Dr. Williams
$4,000 per month plus expenses. We paid Dr. Williams $38,467 in 1997, $49,759
in 1998 and $48,664 in 1999 for these services.
Dr. Stephen Offenbacher, a member of our scientific advisory board,
provides product candidate development services to us for which we pay him
$3,000 per month plus out-of-pocket expenses. We paid Dr. Offenbacher $27,000
in 1997, $36,711 in 1998 and $36,000 in 1999.
Dr. Thomas Van Dyke, a member of our scientific advisory board, provides
product candidate development consulting services to us. Dr. Van Dyke was a
principal investigator for one of our Phase 2 trials and our Phase 3 trials. We
paid Dr. Van Dyke $4,019 in 1998 and $4,622 in 1999, including out-of-pocket
expenses, for product development consulting services.
Dr. Williams and Dr. Offenbacher are reimbursed for expenses associated
with their attendance at our scientific advisory board meetings. They have
received $3,904 and $3,936, respectively, for this activity. All other
scientific advisory board members are paid $1,500 for each meeting attended,
and are reimbursed for expenses they incur to attend such meetings.
50
<PAGE>
We have granted stock options to each member of our scientific advisory
board that are exercisable for the following number of shares of common stock:
<TABLE>
<CAPTION>
Scientific Advisory
Board Member Shares
------------------- ------
<S> <C>
Dr. Ray C. Williams 61,767
Dr. Stephen Offenbacher 37,060
Dr. David Cochran 10,000
Dr. Niklaus Lang 6,875
Dr. Roy Page 6,875
Dr. James Sciubba 6,875
Dr. Thomas Van Dyke 6,875
Dr. George McDonald 6,875
</TABLE>
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides information regarding the beneficial
ownership of our common stock as of December 31, 1999, and as adjusted to
reflect the sale of the 4,000,000 shares of our common stock offered hereby,
by:
. each person or entity who beneficially owns more than 5% of our stock;
. each of our directors;
. our named executive officers; and
. all executive officers and directors as a group.
Unless otherwise indicated, the address of each executive officer named
in the table below is care of OraPharma, Inc., 732 Louis Drive, Warminster, PA
18974. The amounts and percentages of common stock beneficially owned are
reported on the basis of regulations of the Securities and Exchange Commission
governing the determination of beneficial ownership of securities. Under the
rules of the Commission, a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power," which includes the power
to vote or to direct the voting of such security, or "investment power," which
includes the power to dispose of or to direct the disposition of such security.
A person is also deemed to be a beneficial owner of any securities of which
that person has a right to acquire beneficial ownership within 60 days. Under
these rules, more than one person may be deemed a beneficial owner of the same
securities and a person may be deemed to be the beneficial owner of securities
as to which such person has no economic interest.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Number of Shares ------------------------------
Name of Beneficial Owner Beneficially Owned Before Offering After Offering
- ------------------------ ------------------ --------------- --------------
<S> <C> <C> <C>
5% Stockholders
- ---------------
Oak Investment Partners
(1)....................... 1,804,810 21.4% 14.5%
Canaan Partners (2)......... 1,413,172 16.7 11.4
TL Ventures III (3)......... 1,349,854 16.0 10.9
Frazier & Company (4)....... 1,120,534 13.3 9.0
Domain Partners IV, L.P.
(5)....................... 1,054,736 12.5 8.5
Healthcap KB (6)............ 511,502 6.0 4.1
<CAPTION>
Directors and Executive
Officers
- -----------------------
<S> <C> <C> <C>
Eileen M. More (1).......... 1,804,810 21.4% 14.5%
Harry T. Rein (2)........... 1,413,172 16.7 11.4
Christopher Moller (3)...... 1,349,854 16.0 10.9
Jesse I. Treu (5)........... 1,054,736 12.5 8.5
Michael D. Kishbauch (7).... 222,065 2.6 1.8
David I. Scheer (8)......... 167,750 2.0 1.4
J. Ronald Lawter (9)........ 69,031 * *
James A. Ratigan (10)....... 42,000 * *
Joseph E. Zack (11)......... 25,600 * *
Jan N. Lessem (12).......... 20,179 * *
James J. Mauzey (13)........ 12,500 * *
Seth A. Rudnick (13)........ 12,500 * *
Mark B. Carbeau (14)........ -- * *
All directors and executive
officers as a group (15).. 6,194,197 72.11% 49.2%
</TABLE>
- --------
* less than one percent
52
<PAGE>
(1) Includes 1,748,393 shares owned by Oak Investment Partners VI, Limited
Partnership and 40,792 shares owned by Oak VI Affiliates Fund Limited
Partnership. Also includes 15,625 shares of series A preferred stock
obtainable upon exercise of warrants. Ms. More is the managing member of
Oak Associates VI, LLC and Oak VI Affiliates, LLC, the general partners of
Oak Investment Partners VI, Limited Partnership and Oak VI Affiliates Fund,
Limited Partnership, respectively. Ms. More shares voting and investment
power with respect to these limited partnerships with the other general
partners of Oak Associates VI, LLC and Oak VI Affiliates, LLC. Ms. More
disclaims beneficial ownership of shares in which she does not have a
pecuniary interest. The address of both Oak Investment Partners VI, Limited
Partnership and Oak VI Affiliates Limited Partnership is One Gorham Island,
Westport, CT 06880.
(2) Includes 831,758 shares owned by Canaan S.B.I.C., L.P., 9,888 shares owned
by Canaan Capital Limited Partnership, 82,529 shares owned by Canaan
Capital Offshore Limited Partnership C.V. and 473,373 shares owned by
Canaan Equity L.P. Also includes 15,624 shares of series A preferred stock
obtainable upon exercise of warrants. Mr. Rein is Managing General Partner
of Canaan Partners, the fund manager for each of the Canaan entities. Mr.
Rein disclaims beneficial ownership of shares in which he does not have a
pecuniary interest. The address of all the Canaan Partners entities is 105
Rowayton Avenue, Rowayton, CT 06853.
(3) Includes 1,086,863 shares owned by TL Ventures III L.P., 227,504 shares
owned by TL Ventures III Offshore L.P. and 35,487 shares owned by TL
Ventures III Interfund L.P. TL Ventures III L.P., TL Ventures III Offshore
L.P., and TL Ventures III Interfund L.P. are referred to as TL Ventures
III. TL Ventures III L.P., TL Ventures III Offshore L.P., and TL Ventures
III Interfund L.P. are venture capital partnerships that are required by
their governing documents to make all investment, voting and disposition
actions in tandem. TL Ventures III Management L.P., a limited partnership,
is the sole general partner of TL Ventures III L.P. TL Ventures III
Offshore Partners L.P. is the sole general partner of TL Ventures III
Offshore L.P. TL Ventures III LLC is the sole general partner of TL
Ventures III Interfund L.P. The general partners have sole authority and
responsibility for all investment, voting and disposition decisions for TL
Ventures III. The general partners of TL Ventures III Management L.P., TL
Ventures III Offshore Partners L.P. and TL Ventures III LLC are Safeguard
Scientifics (Delaware), Inc., Robert E. Keith, Jr., Gary J. Anderson, Mark
J. DeNino, Robert A. Fabbio and Christopher Moller, a director of
OraPharma. Dr. Moller disclaims beneficial ownership of shares in which he
does not have a pecuniary interest. The address for each of the TL Ventures
investment funds is 700 Building, 435 Devon Park Drive, Wayne, PA 19087.
(4) Includes 1,110,909 shares owned by Frazier Healthcare II, L.P., 2,750
shares owned by Frazier & Company, Inc., 1,375 shares owned by Jon Gilbert,
2,750 shares owned by Nader Naini and 2,750 shares owned by Fred
Silverstein. Excludes 2,750 shares held by Charles Blanchard and Glenn
Stewart, former members of Frazier Management, L.L.C. The address for
Frazier Healthcare II L.P., Frazier & Company, Inc., Jon Gilbert, Nader
Naini, and Fred Silverstein is 2 Union Square, 601 Union Street, Suite
2110, Seattle, WA 98101. The general partner of Frazier Healthcare II, L.P.
is FHMII, LLC. Jon Gilbert, Nader Naini, and Fred Silverstein are members
of Frazier Management, L.L.C., the managing member of the member of FHMII,
LLC and each individually disclaims beneficial ownership of shares in which
he does not have a pecuniary interest.
(5) Includes 1,030,053 shares beneficially owned by Domain Partners IV, L.P.
and 24,683 shares beneficially owned by DP IV Associates, L.P. Dr Treu is a
managing member of One Palmer Square Associates IV, L.L.C., the general
partner of Domain Partners IV, L.P. and DP IV Associates, L.P. Dr. Treu
shares voting and investment power with respect to these shares and
disclaims beneficial ownership of such shares except to the extent of his
proportionate interest therein. Excludes 263,684 shares beneficially owned
by Biotechnology Investments Limited (BIL). Dr. Treu is a managing member
of Domain Associates, L.L.C. Pursuant to a contractual agreement, Domain
Associates, L.L.C. is the U.S. Venture Capital Advisor to BIL. Domain
Associates, L.L.C. has no voting or investment power with respect to BIL's
shares. Dr. Treu disclaims beneficial ownership of BIL's shares.
53
<PAGE>
(6) Includes 214,831 shares owned by HealthCap KB and 296,671 shares owned by
HealthCap Co Invest KB. The address for HealthCap KB and HealthCap Co
Invest KB is Sturegatan 34, S-11436 Stockholm, Sweden. HealthCap KB and
HealthCap Co Invest KB are Swedish limited partnerships.
(7) Includes 3,365 shares of common stock obtainable upon the exercise of
vested stock options. Excludes 117,762 shares of restricted common stock
and 13,458 shares of common stock obtainable upon the exercise of non-
vested stock options.
(8) Includes 167,750 shares owned by Scheer Investment Holdings I, L.L.C. Mr.
Scheer is President of Scheer & Company, Inc., the fund manager of Scheer
Investment Holdings I, L.L.C. Mr. Scheer disclaims beneficial ownership of
any shares in which he does not have a pecuniary interest.
(9) Includes 2,000 shares of common stock obtainable upon the exercise of
vested stock options. Excludes 22,344 shares of restricted common stock and
8,000 shares of common stock obtainable upon the exercise of non-vested
stock options.
(10) Includes 42,000 shares of common stock obtainable upon exercise of vested
stock options. Excludes 36,750 shares of common stock obtainable upon
exercise of non-vested stock options.
(11) Includes 25,600 shares of common stock obtainable upon the exercise of
vested stock options. Excludes 39,900 shares of common stock obtainable
upon exercise of non-vested stock options.
(12) Includes 20,379 shares of common stock obtainable upon exercise of vested
stock options. Excludes 41,143 shares of common stock obtainable upon
exercise of non-vested stock options.
(13) Includes 12,500 shares of common stock obtainable upon exercise of vested
stock options. Excludes 12,500 shares of common stock obtainable upon
exercise of non-vested stock options.
(14) Excludes 100,000 shares of common stock obtainable upon exercise of non-
vested stock options.
(15) Includes 31,249 shares of common stock obtainable upon exercise of
warrants and 118,144 shares of common stock obtainable upon exercise of
stock options.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our Authorized Capital Stock
. 50 million shares of common stock, par value $.001 per share
. five million shares of preferred stock, par value $.001 per share
. immediately after the sale of the shares of common stock in this
offering, we will have 12,596,735 shares of common stock outstanding and
no shares of preferred stock outstanding
Common Stock
Voting:
. one vote for each share held of record on all matters submitted to a
vote of stockholders
. no cumulative voting rights
. election of directors by plurality of votes cast
. all other matters by majority of votes cast
Dividends:
. subject to preferential dividend rights of outstanding shares of
preferred stock, if any, common stockholders are entitled to receive
ratably declared dividends
. the board of directors may only declare dividends out of legally
available funds
Additional Rights:
. subject to the preferential liquidation rights of outstanding shares of
preferred stock, if any, common stockholders are entitled to receive
ratably net assets, available after the payment of all debts and
liabilities, upon our liquidation, dissolution or winding up
. no preemptive rights
. no subscription rights
. no redemption rights
. no sinking fund rights
. no conversion rights
The rights and preferences of common stockholders are subject to the
right of any series of preferred stock we may issue in the future.
Preferred Stock
We may, by resolution of our board of directors, and without any further
vote or action by our stockholders, authorize and issue, subject to limitations
prescribed by law, up to an aggregate of five million shares of preferred
stock. The preferred stock may be issued in one or more classes or series of
shares of any class or series. With respect to any classes or series, the board
of directors may determine the designation and the number of shares,
preferences, limitations and special rights, including dividend rights,
conversion rights, voting rights, redemption rights and liquidation
preferences. Because of the rights that may be granted, the issuance of
preferred stock may delay, defer or prevent a change of control.
Prior to this offering, we had 400,000 shares of series A preferred
stock, 3,311,828 shares of series B preferred stock, 3,292,177 shares of series
C preferred stock and 553,095 shares of series D preferred stock issued and
outstanding. Upon the completion of this offering, all of our outstanding
shares of preferred stock will automatically convert into a total of 7,557,100
shares of common stock.
55
<PAGE>
Warrants
On completion of this offering we will have outstanding warrants to
purchase:
. 31,249 shares of common stock exercisable at a price of $2.00 per
share which expire in December 2003;
. 27,500 shares of common stock exercisable at a price of $3.64 per
share, which expire in January 2004;
. 110,617 shares of common stock exercisable at $12.92 per share which
expire in December 2006; and
. 41,152 shares of common stock exercisable at $4.86 per share which
expire in December 2004.
To exercise these warrants, the holder must enter into a restricted stock
purchase agreement. The agreement will grant the holder rights to register the
shares of common stock issuable upon exercise of the warrants. The exercise
price and the number of shares of common stock issuable on exercise of the
warrants may be adjusted following specific events including stock splits,
stock dividends, reorganizations, recapitalization, merger or sale of all or
substantially all our assets.
Registration Rights
Following completion of this offering, holders of 7,918,966 shares of
common stock, including holders of warrants to purchase 169,366 shares of
common stock, will have the right to have their shares registered under the
Securities Act of 1933. These rights are provided under the terms of agreements
between us and the holders of such securities. These agreements provide, in
specific instances, the holders of 7,698,966 shares of common stock, including
holders of warrants to purchase 141,866 shares of common stock, with the right
to file a registration statement on their behalf. In addition, pursuant to
these agreements, the holders of 7,918,966 shares of common stock, including
holders of warrants to purchase 169,366 shares of common stock, are entitled to
require us to include their registrable securities in future registration
statements we file under the Securities Act of 1933. Registration of shares of
common stock pursuant to the exercise of these registration rights would result
in such shares becoming freely tradable without restriction under the
Securities Act of 1933 immediately upon the effectiveness of such registration
and may adversely affect our stock price.
Stockholders' Meeting
Our next annual meeting of stockholders will be held in 2001.
Limitations on Liability
Our certificate of incorporation limits or eliminates the liability of
our directors to us or our stockholders for monetary damage to the fullest
extent permitted by the Delaware General Corporation Law. As permitted by the
Delaware General Corporation Law, our certificate of incorporation provides
that our directors shall not be personally liable to us or our stockholders for
monetary damages for a breach of fiduciary duty as a director, except for
liability:
. for any breach of such person's duty of loyalty;
. for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law; and
. for any transaction resulting in receipt by such person of an improper
personal benefit.
Our certificate of incorporation also contains provisions indemnifying
our directors and officers to the fullest extent permitted by the Delaware
General Corporation Law.
56
<PAGE>
We currently have directors' and officers' liability insurance to provide
our directors and officers with insurance coverage for losses arising from
claims based on breaches of duty, negligence, errors and other wrongful acts.
Anti-Takeover Effects of Provisions of Charter Documents and Delaware Law
Upon completion of this offering our certificate of incorporation will
provide for the division of our board of directors into three classes. Each
class must be as nearly equal in number as possible. Additionally, each class
must serve a three-year term. The terms of each class are staggered so that
each term ends in a different year over a three-year period. A director may
only be removed for cause and only by the vote of more than 50% of the shares
entitled to vote for the election of directors.
Our certificate of incorporation also provides that our board of
directors may establish the rights of, and cause us to issue, substantial
amounts of preferred stock without the need for stockholder approval. Further,
our board of directors may determine the terms, conditions, rights, privileges
and preferences of the preferred stock. Our board is required to exercise its
business judgment when making such determinations. Our board of directors' use
of the preferred stock may inhibit the ability of third parties to acquire
OraPharma. Additionally, our board may use the preferred stock to dilute the
common stock of entities seeking to obtain control of OraPharma. The rights of
the holders of common stock will be subject to, and may be adversely affected
by, any preferred stock that may be issued in the future. Our preferred stock
provides desirable flexibility in connection with possible acquisitions,
financings and other corporate transactions. However, it may have the effect of
discouraging, delaying or preventing a change in control of OraPharma. We have
no present plans to issue any shares of preferred stock.
The existence of the foregoing provisions in our certificate of
incorporation could make it more difficult for third parties to acquire or
attempt to acquire control of us or substantial amounts of our common stock.
After this offering is completed, Section 203 of the Delaware General
Corporation Law will apply to OraPharma. Section 203 of the Delaware General
Corporation Law generally prohibits certain "business combinations" between a
Delaware corporation and an "interested stockholder." An "interested
stockholder" is generally defined as a person who, together with any affiliates
or associates of such person, beneficially owns, or within three years did own,
directly or indirectly, 15% or more of the outstanding voting shares of a
Delaware corporation. The statute broadly defines business combinations to
include:
. mergers;
. consolidations;
. sales or other dispositions of assets having an aggregate value in
excess of 10% of the consolidated assets of the corporation or
aggregate market value of all outstanding stock of the corporation;
and
. certain transactions that would increase the "interested
stockholder's" proportionate share ownership in the corporation.
The statute prohibits any such business combination for a period of three
years commencing on the date the "interested stockholder" becomes an
"interested stockholder," unless:
. the business combination is approved by the corporation's board of
directors prior to the date the "interested stockholder" becomes an
"interested stockholder";
. the "interested stockholder" acquired at least 85% of the voting stock
of the corporation (other than stock held by directors who are also
officers or by certain employee stock plans) in the transaction in
which it becomes an "interested stockholder"; and
. the business combination is approved by a majority of the board of
directors and by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the "interested
stockholder."
57
<PAGE>
The Delaware General Corporation Law contains provisions enabling a
corporation to avoid Section 203's restrictions if stockholders holding a
majority of the corporation's voting stock approve an amendment to the
corporation's certificate of incorporation or by-laws to avoid the
restrictions. In addition, the restrictions contained in Section 203 are not
applicable to any of our existing stockholders. We have not and do not
currently intend to "elect out" of the application of Section 203 of the
Delaware General Corporation Law.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is StockTrans,
Inc., Ardmore, Pennsylvania.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market
following this offering could adversely affect the market price of our common
stock and adversely affect our ability to raise capital at a time and on terms
favorable to us.
Of the 12,596,735 shares to be outstanding after this offering (assuming
that the underwriters do not exercise their over-allotment option), the
4,000,000 shares of common stock offered hereby will be freely tradable without
restriction in the public market unless such shares are held by "affiliates,"
as that term is defined in Rule 144 under the Securities Act of 1933. The
remaining shares of common stock to be outstanding after this offering are
"restricted securities" under the Securities Act of 1933 and may be sold in the
public market under Rule 144, subject to the manner of sale and other
limitations of Rule 144.
In addition, as of December 31, 1999 there were options to purchase
586,472 shares of common stock, of which 194,402 options were fully
exercisable. An additional 1,250,000 shares were reserved for issuance under
our stock option plan, of which no options to purchase shares are being granted
on or prior to the completion of this offering. We intend to register the
shares of common stock issued, issuable or reserved for issuance under the plan
following the date of this prospectus.
Following completion of the offering, holders of 7,918,966 shares of
common stock, including holders of warrants to purchase 169,366 shares of
common stock, are entitled to registration rights with respect to such shares
for resale under the Securities Act. If such holders, by exercising their
registration rights, cause a large number of shares to be registered and sold
in the public market, this will likely cause an adverse effect on the market
price for our common stock. These registration rights may not be exercised
prior to the expiration of 180 days from the date of this prospectus. See
"Description of Capital Stock--Registration Rights."
Lock-Up Agreements
All of our stockholders, warrant holders and option holders, and all of
our officers and directors, have agreed under written "lock-up" agreements not
to sell any shares of common stock for 180 days after the date of this
prospectus without the prior written consent of FleetBoston Robertson Stephens
Inc.
59
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., U.S. Bancorp Piper Jaffray Inc., and
Gerard Klauer Mattison & Co., Inc., have severally agreed with us, subject to
the terms and conditions set forth in the underwriting agreement, to purchase
from us the number of shares of common stock set forth opposite their names
below. The underwriters are committed to purchase and pay for all shares if any
are purchased.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
FleetBoston Robertson Stephens Inc................................
U.S. Bancorp Piper Jaffray Inc....................................
Gerard Klauer Mattison & Co., Inc.................................
---------
Total........................................................... 4,000,000
=========
</TABLE>
The representatives have advised us that the underwriters propose to
offer the shares of common stock to the public at the initial public offering
price set forth on the cover page of this prospectus and to certain dealers at
that price less a concession of not in excess of $ per share, of which $
may be reallowed to other dealers. After this offering, the public offering
price, concession and reallowance to dealers may be reduced by the
representatives. This reduction shall not change the amount of proceeds to be
received by us as stated on the cover page of this prospectus. The common stock
is offered by the underwriters as stated herein, subject to receipt and
acceptance by them and subject to their right to reject any order in whole or
in part.
The underwriters have informed us that they do not intend to confirm
sales to any accounts over which they exercise discretionary authority. The
underwriters have advised us that they do not expect sales to discretionary
accounts to exceed 5% of the total number of shares offered.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 600,000 additional shares of common stock at the same price per
share as we will receive for the 4,000,000 shares that the underwriters have
agreed to purchase. If the underwriters exercise this option, each of the
underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage of such additional shares that the
number of shares of common stock to be purchased by it shown in the above table
bears to the 4,000,000 shares of common stock offered in this offering. If
purchased, such additional shares will be sold by the underwriter on the same
terms as those on which the 4,000,000 shares offered in this offering are being
sold. We will be obligated, pursuant to the option, to sell shares to the
underwriters to the extent the option is exercised. The underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the shares of common stock offered in this offering. If such option is
exercised in full, the total public offering price, underwriting discounts and
commissions and proceeds to us will be $ , $ and $ , respectively.
Indemnity. The underwriting agreement contains covenants of indemnity
among the underwriters and us against various civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each executive officer, director, and all of our
stockholders, agreed with the representatives for a period of 180 days after
the date of this prospectus, subject to certain exceptions, not to offer to
sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant
any rights with respect to any shares of common stock, any options or warrants
to purchase any shares of common stock, or any securities convertible into or
exchangeable for shares of common stock, owned as of the date of this
prospectus or thereafter acquired directly by such holders or with respect to
which they have or hereafter acquire the power of disposition, without the
prior written consent of FleetBoston Robertson Stephens Inc. FleetBoston
Robertson
60
<PAGE>
Stephens Inc. may, in its sole discretion and at any time or from time to time
without notice, release all or any portion of the securities subject to the
lock-up agreements. There are no agreements between the representatives and any
of our stockholders who have executed a lock-up agreement providing consent to
the sale of shares prior to the expiration of the lock-up period.
Future Sales. In addition, we have agreed that during the 180 days after
the date of this prospectus we will not, subject to certain exceptions, without
the prior written consent of FleetBoston Robertson Stephens Inc. (i) consent to
the disposition of any shares held by stockholders subject to lock-up
agreements prior to the expiration of the lock-up period or (ii) issue, sell,
contract to sell, or otherwise dispose of, any shares of common stock, any
options or warrants to purchase any shares of common stock or any securities
convertible into, exercisable for or exchangeable for shares of common stock
other than the sale of shares in this offering, the issuance of common stock
upon the exercise of outstanding options or warrants and the issuance of
options under our existing stock option and incentive plans, provided that
those options do not vest prior to the expiration of the lock-up period.
Listing. We have applied to have the common stock approved for quotation
on The Nasdaq National Market under the symbol "OPHM."
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price
for the common stock offered hereby will be determined through negotiations
between us and the representatives of the underwriters. Among the factors to be
considered in such negotiations are prevailing market conditions, certain of
our financial information, market valuations of other companies that we and the
representatives, believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.
Stabilization. The representatives of the underwriters have advised us
that, pursuant to Regulation M under the Securities Act, certain persons
participating in this offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, that may have the effect of stabilizing or maintaining the market price
of the common stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for or the purchase of shares of
common stock on behalf of the underwiters for the purpose of fixing or
maintaining the price of the common stock. A "syndicate covering transaction"
is the bid for or the purchase of the common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with this offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with this offering if the common
stock originally sold by such underwriter or syndicate member is purchased by
the representatives in a syndicate covering transaction and has therefore not
been effectively placed by such underwriter or syndicate member. The
representatives have advised us that such transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
Reserved Shares and Directed Share Program. At our request, the
underwriters have reserved up to 200,000 shares of the common stock to be
issued by us and offered for sale in this offering, at the initial offering
price, to Amarfour L.L.C. and others. Amarfour has not committed to purchase
these shares. At our request, the underwriters have reserved up to 200,000
shares of the common stock to be issued by us and offered for sale in this
offering, at the initial public offering price, to our directors, officers,
employees, business associates and related persons. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such individuals purchase such reserved shares. Any reserved shares
which are not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered in this offering.
61
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for OraPharma by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania.
Certain legal matters will be passed upon for the Underwriters by Brobeck,
Phleger & Harrison LLP, New York, New York.
The statements in this prospectus under the sections "Risk Factors--If we
or the parties from which we license our technology fail to secure or enforce
the patents and other intellectual property rights underlying MPTS, our core
technology or our other product candidates, we may be unable to compete
effectively"; "Risk Factors--We may face significant expense and liability if
our technologies, product candidates, methods or processes are found to
infringe on the intellectual property rights of others, or if we allege others
infringe our intellectual property rights"; and "Business--Technology, Licenses
and Patents" have been reviewed and approved by Arnall, Golden & Gregory, LLP,
Atlanta, Georgia, our patent counsel.
EXPERTS
The audited financial statements included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of that firm as
experts in giving said reports.
ADDITIONAL ORAPHARMA INFORMATION
We have filed with the SEC a registration statement on Form S-1 with
respect to the common stock offered hereby. This prospectus, which constitutes
a part of the registration statement, does not contain all of the information
set forth in the registration statement or the exhibits and schedules which are
part of the registration statement. For further information with respect to
OraPharma and our common stock, reference is made to the registration statement
and the exhibits and schedules thereto. You may read and copy any document we
file at the SEC's public reference rooms in Washington, D.C., New York, New
York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information about the public reference rooms. Our SEC filings are also
available to the public from the SEC's web site at http://www.sec.gov. Upon
completion of this offering, we will become subject to the information and
periodic reporting requirements of the Securities Exchange Act and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the SEC. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference rooms and the Web site of the SEC referred to above.
62
<PAGE>
ORAPHARMA, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Deficit................................................................ F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To OraPharma, Inc.:
We have audited the accompanying balance sheets of OraPharma, Inc. (a
Delaware corporation in the development stage) as of December 31, 1998 and
1999, and the related statements of operations, redeemable convertible
preferred stock and stockholders' deficit and cash flows for each of the three
years in the period ended December 31, 1999 and for the period from inception
(August 1, 1996) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of OraPharma, Inc. as
of December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 and for
the period from inception (August 1, 1996) to December 31, 1999 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
January 26, 2000 (except for the
recapitalization discussed in
Note 2, as to which the date
is February 3, 2000)
F-2
<PAGE>
ORAPHARMA, INC.
(a development-stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity (Note
December 31, 8)
-------------------------- December 31,
1998 1999 1999
------------ ------------ -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 19,236,084 $ 13,073,803
Prepaid expenses and other......... 46,441 263,944
Deferred offering costs............ -- 222,012
------------ ------------
Total current assets.............. 19,282,525 13,559,759
Fixed assets, net................... 971,413 957,897
Intangible assets, net.............. 226,464 194,083
------------ ------------
$ 20,480,402 $ 14,711,739
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current portion of long-term debt.. $ 192,935 $ 192,935
Accounts payable................... 821,931 452,763
Accrued expenses................... 1,293,296 1,420,468
------------ ------------
Total current liabilities......... 2,308,162 2,066,166
------------ ------------
Long-term debt...................... 480,978 288,043
------------ ------------
Redeemable convertible preferred
stock (liquidation preference of
$33,855,013 at December 31,
1999)............................. 28,771,713 33,730,563 $ --
------------ ------------ ------------
Commitments (Note 7)
Stockholders' equity (deficit):
Common stock, par value $.001 per
share, 50,000,000 shares
authorized, 957,038 and 1,039,635
issued and outstanding, actual,
8,596,735 issued and outstanding,
pro forma........................ 957 1,040 $ 8,597
Additional paid-in capital......... 485,915 2,033,413 35,756,419
Deferred compensation.............. (221,263) (815,393) (815,393)
Deficit accumulated during the
development stage................ (11,346,060) (22,592,093) (22,592,093)
------------ ------------ ------------
Total stockholders' equity
(deficit)....................... (11,080,451) (21,373,033) $ 12,357,530
------------ ------------ ============
$ 20,480,402 $ 14,711,739
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ORAPHARMA, INC.
(a development-stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Inception
(August 1,
Year Ended 1996)
December 31, Through
-------------------------------------- December 31,
1997 1998 1999 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Operating expenses:
Research and
development.......... $ 1,706,393 $ 7,589,000 $ 9,693,413 $ 19,015,100
General and
administrative....... 939,469 1,604,579 2,189,577 5,141,920
----------- ----------- ------------ ------------
Operating loss...... (2,645,862) (9,193,579) (11,882,990) (24,157,020)
Interest income.......... 505,529 462,506 689,453 1,657,740
Interest expense......... (1,406) (38,018) (52,496) (92,813)
----------- ----------- ------------ ------------
Net loss................. (2,141,739) (8,769,091) (11,246,033) (22,592,093)
Non-cash preferred stock
charge................. -- -- 1,729,651 1,729,651
----------- ----------- ------------ ------------
Net loss to common
stockholders........... $(2,141,739) $(8,769,091) $(12,975,684) $(24,321,744)
=========== =========== ============ ============
Basic and diluted net
loss per share......... $ (5.05) $ (13.72) $ (16.74)
=========== =========== ============
Shares used in computing
basic and diluted net
loss per share......... 424,054 639,339 775,116
=========== =========== ============
Pro forma basic and
diluted net loss per
share (unaudited)...... $ (1.67)
============
Shares used in computing
pro forma basic and
diluted net loss per
share (unaudited)...... 7,792,759
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ORAPHARMA, INC.
(a development-stage company)
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Stockholders' Deficit
---------------------------------------------------------------------
Redeemable Deficit
Convertible Accumulated
Preferred Stock Common Stock Additional During the
---------------------- ----------------- Paid-in Deferred Development
Shares Amount Shares Amount Capital Compensation Stage Total
--------- ----------- --------- ------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at Inception,
August 1, 1996......... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Deferred compensation
related to stock
options and grants.... -- -- -- -- 189,210 (189,210) -- --
Amortization of
deferred stock-based
compensation.......... -- -- -- -- -- 76,159 -- 76,159
Net loss............... -- -- -- -- -- -- (435,230) (435,230)
--------- ----------- --------- ------ ---------- --------- ------------ ------------
Balance, December 31,
1996................... -- -- -- -- 189,210 (113,051) (435,230) (359,071)
Sale of common stock
and restricted common
stock to founders..... 823,088 823 913 -- -- 1,736
Issuance of common
stock and warrant as
partial payment for
intangible assets..... -- -- 110,000 110 23,890 -- -- 24,000
Exercise of warrant to
purchase common
stock................. -- -- 20,000 20 1,980 -- -- 2,000
Sale of Series A
Preferred stock....... 400,000 800,000 -- -- -- -- -- --
Sale of Series B
Preferred stock, net
of expenses .......... 3,311,829 12,022,769 -- -- -- -- -- --
Amortization of
deferred stock-based
compensation.......... -- -- -- -- -- 26,268 -- 26,268
Net loss............... -- -- -- -- -- -- (2,141,739) (2,141,739)
--------- ----------- --------- ------ ---------- --------- ------------ ------------
Balance, December 31,
1997................... 3,711,829 12,822,769 953,088 953 215,993 (86,783) (2,576,969) (2,446,806)
Sale of Series C
Preferred stock, net
of expenses........... 3,292,180 15,948,944 -- -- -- -- -- --
Sale of restricted
common stock to a
founder and exercise
of employee stock
options............... -- -- 3,950 4 43 -- -- 47
Deferred compensation
related to stock
options............... -- -- -- -- 181,040 (181,040) -- --
Issuance of warrant to
purchase common stock
in connection with
acquisition of
technology............ -- -- -- -- 88,839 -- -- 88,839
Amortization of
deferred stock-based
compensation.......... -- -- -- -- -- 46,560 -- 46,560
Net loss............... -- -- -- -- -- -- (8,769,091) (8,769,091)
--------- ----------- --------- ------ ---------- --------- ------------ ------------
Balance, December 31,
1998................... 7,004,009 28,771,713 957,038 957 485,915 (221,263) (11,346,060) (11,080,451)
Sale of Series D
Preferred stock, net
of expenses........... 553,097 4,958,931 -- -- -- -- -- --
Issuance of common
stock in connection
with acquisition of
technology ........... -- -- 82,500 83 400,867 -- -- 400,950
Issuance of warrant to
purchase common stock
in connection with
acquisition of
technology............ -- -- -- -- 346,108 -- -- 346,108
Exercise of employee
stock options......... -- -- 100 -- 36 -- -- 36
Deferred compensation
related to stock
options .............. -- -- -- -- 800,519 (766,542) -- 33,977
Amortization of
deferred stock-based
compensation ......... -- -- -- -- -- 172,412 -- 172,412
Adjustment related to
stock split........... (6) (81) (3) -- (32) -- -- (32)
Net loss .............. -- -- -- -- -- -- (11,246,033) (11,246,033)
--------- ----------- --------- ------ ---------- --------- ------------ ------------
Balance, December 31,
1999................... 7,557,100 $33,730,563 1,039,635 $1,040 $2,033,413 $(815,393) $(22,592,093) $(21,373,033)
========= =========== ========= ====== ========== ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE>
ORAPHARMA, INC.
(a development-stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Inception
(August 1,
Year Ended 1996)
December 31, Through
-------------------------------------- December 31,
1997 1998 1999 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net loss................ $(2,141,739) $(8,769,091) $(11,246,033) $(22,592,093)
Adjustments to reconcile
net loss to net cash
used in operating
activities--
Depreciation and
amortization......... 61,251 188,956 282,842 533,987
Stock based
compensation
expense.............. 26,268 46,560 206,389 355,376
Common stock and
warrants issued in
connection with
acquisition of
technology........... -- 489,789 346,108 835,897
Changes in operating
assets and
liabilities--
Prepaid expenses and
other................ (25,813) (10,382) (217,503) (263,944)
Accounts payable....... 16,920 583,043 (369,168) 452,763
Accrued expenses....... 171,151 647,613 106,078 998,424
----------- ----------- ------------ ------------
Net cash used in
operating
activities........ (1,891,962) (6,823,512) (10,891,287) (19,679,590)
----------- ----------- ------------ ------------
Cash Flows Used in
Investing Activities:
Capital expenditures.... (460,500) (700,055) (236,945) (1,402,328)
Expenditures for
intangible assets..... (250,000) -- -- (259,639)
----------- ----------- ------------ ------------
Net cash used in
investing
activities........ (710,500) (700,055) (236,945) (1,661,967)
----------- ----------- ------------ ------------
Cash Flows Provided by
Financing Activities:
Proceeds from issuance
of notes payable...... 40,000 750,000 -- 915,000
Proceeds from the sale
of preferred stock,
net of expenses....... 12,822,769 15,948,944 4,958,850 33,730,563
Proceeds from the sale
of common stock and
exercise of stock
options and warrant... 3,736 47 36 3,819
Proceeds from PA
Opportunity Grant..... -- -- 200,000 200,000
Repayment of notes
payable............... (165,000) (76,087) (192,935) (434,022)
----------- ----------- ------------ ------------
Net cash provided by
financing
activities........ 12,701,505 16,622,904 4,965,951 34,415,360
----------- ----------- ------------ ------------
Net Increase (decrease)
in Cash and Cash
Equivalents............ 10,099,043 9,099,337 (6,162,281) 13,073,803
Cash and Cash
Equivalents, Beginning
of Period.............. 37,704 10,136,747 19,236,084 --
----------- ----------- ------------ ------------
Cash and Cash
Equivalents, End of
Period................. $10,136,747 $19,236,084 $ 13,073,803 $ 13,073,803
=========== =========== ============ ============
Supplemental Disclosure
of Cash Flow
Information:
Cash paid for interest.. $ 1,406 $ 37,631 $ 48,039 $ 87,076
=========== =========== ============ ============
Noncash financing
activities--
Issuance of common stock
and warrants for
acquisition of
intangible assets..... $ 24,000 $ -- $ -- $ 24,000
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
ORAPHARMA, INC.
(a development-stage company)
NOTES TO FINANCIAL STATEMENTS
1. Background:
OraPharma, Inc. (the "Company") was incorporated on August 1, 1996. In
February 1997, the Company acquired certain technologies and other assets
related to drug delivery technologies, together with certain exclusive patent
license rights to apply the acquired technologies to oral health care, as well
as certain nonexclusive patent license rights for other potential applications
of the acquired technologies.
Since February 1997, the Company has focused its efforts on research and
development activities related to the completion of its lead product candidate,
Minocycline Periodontal Therapeutic System (MPTS), which is based on the
acquired technologies. During 1998, the Company initiated Phase 3 clinical
trials in order to obtain the approval of the United States Food and Drug
Administration ("FDA") for this oral healthcare product. These trials were
completed in October, 1999. The Company plans to file a new drug application
("NDA") with the FDA during the first half of 2000.
During 1998, the Company acquired license rights to certain other
technologies which it intends to develop into future product candidates.
The Company has not generated any revenues from product sales and has
incurred substantial losses since its inception. The Company anticipates
incurring additional losses over at least the next several years and such
losses may increase as the Company expands its research and development
activities. Substantial financing will be needed by the Company to fund its
operations and to commercially develop its product candidates. There is no
assurance that such financing will be available when needed. Operations of the
Company are subject to certain additional risks and uncertainties including,
among others, dependence on MPTS and its exclusive licenses, uncertainty of
product development, supplier and manufacturing dependence, sales and marketing
inexperience, competition, reimbursement availability, dependence on other
exclusive licenses and relationships, uncertainties regarding patents and
proprietary rights, dependence on key personnel and other risks related to
governmental regulations and approvals.
2. Summary of Significant Accounting Policies:
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of expenses incurred during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents. Fair value
approximates carrying value because of the short maturity of the cash
equivalents.
Fixed Assets
Depreciation and amortization are provided using the straight-line method
of accounting over the estimated useful lives of the related assets or lease
term, whichever is shorter. The Company uses lives of three to five years.
F-7
<PAGE>
ORAPHARMA, INC.
(a development-stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Intangible Assets
Certain acquired technologies, together with acquired patent license
rights have been recorded at cost and are being amortized on a straight-line
basis over their estimated useful life of ten years.
Research and Development
Research and development costs are charged to expense as incurred.
Stock-Based Compensation
The Company accounts for stock-based compensation to employees using the
intrinsic value method in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has
recognized deferred stock compensation related to certain stock option grants
(see Note 9). The Company accounts for stock-based compensation to nonemployees
using the fair value method in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" and Emerging Issues Task Force (EITF) 96-18.
Net Loss Per Common Share
The Company has presented basic and diluted net loss per share pursuant
to SFAS No. 128, "Earnings per Share," and the Securities and Exchange
Commission Staff Accounting Bulletin No. 98. In accordance with SFAS 128, basic
and diluted net loss per share has been computed using the weighted-average
number of shares of common stock outstanding during the period, less shares
subject to repurchase. Pro forma basic and diluted net loss per common share,
as presented in the statements of operations, has been computed for the year
ended December 31, 1999 as described above, and also gives effect to the
conversion of the redeemable convertible preferred stock which will
automatically convert to common stock upon the closing of the Company's initial
public offering from the original date of issuance.
Impairment of Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of," if indicators of
impairment exist, the Company assesses the recoverability of the affected long-
lived assets by determining whether the carrying value of such assets can be
recovered through undiscounted future operating cash flows. If impairment is
indicated, the Company measures the amount of such impairment by comparing the
carrying value of the assets to the present value of the expected future cash
flows associated with the use of the asset. While the Company's current and
historical operating and cash flow losses are indicators of impairment, the
Company believes the future cash flows to be received from the long-lived
assets will exceed the assets' carrying value, and accordingly the Company has
not recognized any impairment losses through December 31, 1999.
F-8
<PAGE>
ORAPHARMA, INC.
(a development-stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table presents the calculation of basic, diluted and pro
forma basic and diluted net loss per share:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net loss to common stockholders... $(2,141,739) $(8,769,091) $(12,975,684)
=========== =========== ============
Basic and diluted:
Weighted-average shares of common
stock outstanding.............. 835,037 956,719 999,089
Less: weighted-average shares
subject to repurchase.......... (410,983) (317,380) (223,973)
----------- ----------- ------------
Weighted-average shares used in
computing basic and diluted net
loss per share................. 424,054 639,339 775,116
=========== =========== ============
Basic and diluted net loss per
share........................... $ (5.05) $ (13.72) $ (16.74)
=========== =========== ============
Pro forma:
Net loss to common stockholders.. $(12,975,684)
============
Shares used above................ 775,116
Pro forma adjustment to reflect
the weighted-average effect of
assumed conversion of
convertible preferred stock
(unaudited).................... 7,017,643
------------
Shares used in computing pro
forma basic and diluted net
loss per share (unaudited)..... 7,792,759
============
Pro forma basic and diluted net
loss per share (unaudited)..... $ (1.67)
============
</TABLE>
The Company has excluded all redeemable convertible preferred stock,
outstanding stock options and warrants, and shares subject to repurchase from
the calculation of basic and diluted loss per common share because all such
securities are antidilutive for all applicable periods presented. The pro forma
calculations exclude outstanding stock options and warrants as they are
antidilutive.
Recapitalization
In February 2000, the Company effected a 1-for-2 reverse stock split of
all outstanding Common and Preferred stock and increased the number of
authorized shares of common stock to 50,000,000. All references in the
accompanying financial statements to the number of shares and per share amounts
have been retroactively restated to reflect the reverse stock split.
3. Fixed Assets:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Laboratory and production equipment.................. $ 652,848 $ 811,995
Leasehold improvements............................... 293,776 293,776
Furniture and fixtures and office equipment.......... 218,759 296,557
--------- ---------
1,165,383 1,402,328
Less--Accumulated depreciation and amortization...... (193,970) (444,431)
--------- ---------
$ 971,413 $ 957,897
========= =========
</TABLE>
F-9
<PAGE>
ORAPHARMA, INC.
(a development-stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Acquisition of Intangible Assets:
In February 1997, the Company executed agreements with a pharmaceutical
company and a periodontist, whereby the Company acquired certain technologies
and other assets related to drug delivery technologies, together with certain
exclusive patent license rights to apply the acquired technologies to oral
health care, as well as certain nonexclusive patent license rights for other
potential applications for the required technologies.
During 1998, the Company initiated Phase 3 clinical trials on its first
oral healthcare product candidate which is based on the acquired technologies.
These trials were completed on October 15, 1999. The Company plans to file an
NDA with the FDA during the first half of 2000.
On the date of acquisition, the Company paid $250,000 in cash and issued
110,000 shares of common stock and a five-year warrant to purchase 20,000
shares of common stock for the acquired technologies and patent license rights.
These initial payments, valued at $274,000, have been recorded as an intangible
asset. Such intangible asset was recorded as the related technology has
alternative future uses since it represents the Company's core technology. The
shares of common stock had a fair value of $22,000 and the warrants had a fair
value of $2,000 based on using the Black-Scholes option pricing model. The
Company is obligated to make milestone payments which aggregate $3,150,000,
upon submission of an NDA to the FDA, and additional milestone payments upon
the FDA approving the NDA. Under certain circumstances, the Company may make
certain of these milestone payments by issuing shares of its common stock and
five-year warrants to purchase common stock. Should the Company issue any
warrants in connection with these milestone payments, the exercise price of
these warrants would be at the fair market value of the Company's common stock,
as defined, on the date of issuance.
The Company is also obligated to make royalty payments on future revenues
derived from products that are based on the acquired technology.
The Company has engaged one of the licensors as an advisor to the Company
and has agreed to pay $30,000 per year for such advisory services.
5. Accrued Expenses
<TABLE>
<CAPTION>
December 31,
---------------------
1998 1999
---------- ----------
<S> <C> <C>
Accrued compensation..................................... $ 208,273 $ 351,898
Accrued research and development......................... 986,255 537,625
Accrued offering costs................................... -- 150,000
Accrued other............................................ 98,768 180,945
Deferred revenue......................................... -- 200,000
---------- ----------
$1,293,296 $1,420,468
========== ==========
</TABLE>
During 1999, the Company received $200,000 under a Commonwealth of
Pennsylvania Opportunity Grant. Under the terms of the grant, amounts received
are subject to certain performance criteria. The Company has deferred the
$200,000, and will recognize this amount upon attaining the performance
criteria.
F-10
<PAGE>
ORAPHARMA, INC.
(a development-stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Long-Term Debt:
As of December 31, 1999, the Company had a $1,750,000 equipment credit
facility with a bank, of which $1,000,000 was available for future borrowings.
During 1998, the Company borrowed $750,000 under this facility to finance
various fixed assets. Borrowings under the facility are evidenced by notes
which bear interest at the bank's prime rate plus 1%, are payable in equal
monthly principal payments over 48 months and are secured by the assets
financed. The facility expires at June 30, 2000.
As of December 31, 1999, the remaining principal payments were as
follows:
<TABLE>
<S> <C>
2000............................................................ $ 192,935
2001............................................................ 192,935
2002............................................................ 95,108
---------
480,978
Less--Current portion........................................... (192,935)
---------
$ 288,043
=========
</TABLE>
This credit facility requires the Company to maintain minimum tangible
net worth and liquidity ratios. The Company is prohibited from paying
dividends, incurring indebtedness or disposing of assets. The agreement also
places certain restrictions on the Company's ability to make investments,
change its business, ownership or management, or enter into merger or
acquisition agreements.
7. Commitments:
Facility Lease
On October 1, 1998, the Company entered into a five-year operating lease
for the facility that it currently occupies. The following is a summary, as of
December 31, 1999, of the future minimum annual lease payments required under
this lease:
<TABLE>
<S> <C>
2000............................................................. $170,912
2001............................................................. 176,562
2002............................................................. 182,213
2003............................................................. 139,838
--------
Total minimum lease payments.................................... $669,525
========
</TABLE>
The Company has also entered into operating lease agreements for various
office equipment. The term of these lease agreements range from 18 to 60
months. Current minimum annual payments under these leases aggregate $18,626
per year.
Rental expense for all operating leases in 1997, 1998 and 1999 was
$24,089, $176,170 and $183,881, respectively.
License Agreements
In December 1998, the Company entered into agreements to acquire certain
rights to technologies from two entities. Under the terms of these agreements,
the Company received exclusive licenses and patent rights for certain product
applications based on these preclinical development-stage technologies. The
Company also entered into sponsored research and consulting agreements with
these entities to continue the development of these technologies on behalf of
the Company.
F-11
<PAGE>
ORAPHARMA, INC.
(a development-stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In connection with these agreements, during 1998 the Company incurred a
charge of $689,789, inclusive of $200,000 paid in cash and 82,500 shares of
the Company's common stock valued at $400,950 and a five-year warrant to
purchase 27,500 shares of common stock at an exercise price of $3.64 per share
valued at $88,839. The Company issued the common stock during 1999 and
accordingly, were not included in shares outstanding as of December 31, 1998.
The Company charged the $689,789 amount as research and development expense
given the preclinical development-stage nature of the technology.
During 1999, upon the completion of a milestone achievement, the Company
paid $100,000 in cash and issued a five-year warrant to purchase 41,152 shares
of common stock at an exercise price of $4.86 per share. The Company recorded
$346,108 of expense in connection with the issuance of this warrant. Together
with the $100,000 cash payment and the warrant value, the Company recorded a
$446,108 charged to research and development expense given the preclinical
development stage nature of the technology. The Company has, contingent on
achievement of milestones, future license payment obligations in the aggregate
amount of $3,000,000. These milestone payments are due upon NDA submission and
NDA approval.
During 1998 and 1999, the Company also incurred sponsored research and
consulting expenses in connection with these agreements of $625,600 and
$869,956, respectively. As of December 31, 1999, future sponsored research and
consulting payments are scheduled to be an aggregate of $1,414,444, payable as
follows:
<TABLE>
<S> <C>
2000............................................................. $ 712,778
2001............................................................. 457,778
2002............................................................. 243,888
</TABLE>
Under certain circumstances, either the Company or the other entities
may cancel these agreements.
As discussed in Note 4, the Company is obligated to make certain
milestone and future royalty payments in connection with the 1997 acquisition
of certain technology.
8. Preferred Stock:
Sales of Preferred Stock
As of December 31, 1999, the authorized and outstanding redeemable
convertible preferred stock series and their principal terms are as follows:
<TABLE>
<CAPTION>
Liquidation
Shares Shares Carrying Value
Series Authorized Outstanding Amount Per Share
------ ---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
A 400,000 400,000 $ 800,000 $2.00
B 3,311,828 3,311,828 12,022,754 3.64
C 3,292,177 3,292,177 15,948,904 4.86
D 553,095 553,095 4,958,905 9.04
--------- --------- -----------
7,557,100 7,557,100 $33,730,563
========= ========= ===========
</TABLE>
The Company sold 400,000 shares of Series "A" Convertible Preferred
stock ("Series A"), 3,311,828 shares of Series "B" Convertible Preferred stock
("Series B"), 3,292,177 shares of Series "C" Convertible Preferred stock
("Series C") and 553,095 shares of Series "D" Convertible Preferred stock
("Series D") in February 1997, March 1997, December 1998 and December 1999, at
$2.00, $3.64, $4.86 and $9.04 per share,
F-12
<PAGE>
ORAPHARMA, INC.
(a development-stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
respectively. All of these convertible preferred shares were sold to accredited
investors, and Series A, Series B, Series C and Series D shares have the same
preferences, other than the liquidation value where Series D shares have full
preference. In connection with the Series D sale, warrants to purchase common
stock were issued. (See Note 9).
The preferred shares are convertible into common stock on a share for
share basis and are entitled to vote together with the common stockholders as
one class. The preferred stockholders are entitled to receive 8% annual
cumulative dividends after January 2, 2002, and to participate equally with
respect to dividends or other distributions made on the common stock or any
other class or series of stock then ranking junior to or in parity with the
preferred shares. The preferred shares automatically convert into common stock
upon the closing of an initial public offering, as defined.
At the request of any holder of preferred shares, the Company is
obligated to redeem up to one third of such shares between January 1, 2002 and
December 31, 2002, up to one half of such shares between January 1, 2003 and
December 31, 2003 and all such shares thereafter. The redemption price shall be
$2.00 per share for Series A, $3.64 for Series B, $4.86 for Series C and $9.04
for Series D Convertible Preferred shares plus any unpaid cumulative or other
dividends thereon. The preferred stockholders are also entitled to certain
anti-dilution and registration rights.
Non-Cash Preferred Stock Charge
In accordance with EITF 98-5, the Company has recorded a deemed dividend
on the Series D which represents the excess of the fair market value of the
underlying common stock and warrants issued to the Series D holders over the
sale price of the securities. Such charge was recorded in 1999 since the Series
D were immediately convertible on the date of issuance on December 23, 1999.
Unaudited Pro Forma Stockholders' Equity
Upon completion of the proposed initial public offering of the Company's
common stock, all of the outstanding shares of Series A, B, C and D will
convert into common stock. The unaudited pro forma stockholders' equity at
December 31, 1999 reflects the assumed conversion of the Series A, B, C and D
into 7,557,100 shares of common stock.
9. Stockholders' Deficit:
1996 Stock Option Plan
The Company has adopted the 1996 Stock Option Plan (the "Plan"), which
provides for the granting of options to purchase a maximum of 634,412 shares of
the Company's common stock. Under the Plan, options may be granted to
directors, officers, employees, consultants and advisors to the Company.
Options under the Plan generally become exercisable as follows: 20% at
the first anniversary of the option grant date and 5% at each subsequent
quarterly anniversary date. All options expire ten years after the grant date.
The Company applies APB No. 25, "Accounting for Stock Issued to
Employees," and the related interpretations in accounting for its stock option
plans. The Company follows the disclosure requirement of SFAS No. 123,
"Accounting for Stock-Based Compensation." The weighted average fair value of
the options granted during 1997, 1998 and 1999 is estimated at $.12, $.12 and
$1.98 per share, respectively, on the date of grant using the Black-Scholes
option pricing model with the following assumptions: dividend yield of zero;
volatility of zero; weighted average risk-free interest rate of 6.47% in 1997,
5.81% in 1998 and 5.22% in 1999
F-13
<PAGE>
ORAPHARMA, INC.
(a development-stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
and an expected life of 6 years. Had compensation cost for the Company's common
stock option plan been determined based upon the fair value of the options at
the date of grant, as prescribed under SFAS No. 123, the Company's net loss for
the years ended December 31, 1997, 1998 and 1999 would have been as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net loss to common stockholders--
as reported.................... $(2,141,739) $(8,769,091) $(12,975,684)
=========== =========== ============
Net loss to common stockholders--
pro forma...................... $(2,145,157) $(8,774,181) $(12,985,654)
=========== =========== ============
Basic and diluted net loss per
share--as reported............. $ (5.05) $ (13.72) $ (16.74)
=========== =========== ============
Basic and diluted net loss per
share--
pro forma...................... $ (5.06) $ (13.72) $ (16.75)
=========== =========== ============
</TABLE>
Activity under the Plan is shown in the following table:
<TABLE>
<CAPTION>
Aggregate
Exercise Exercise
Shares Price Price
------- -------- ---------
<S> <C> <C> <C>
Outstanding, Date of Inception................ -- $ -- $ --
Granted...................................... 136,827 .02-.20 2,827
------- --------
Outstanding, December 31, 1996................ 136,827 .02-.20 2,827
Granted...................................... 147,500 .36 53,100
------- --------
Outstanding, December 31, 1997................ 284,327 .02-.36 55,927
Granted...................................... 130,875 .36 47,115
Exercised.................................... (200) .20 (40)
Forfeited.................................... (300) .20 (60)
------- --------
Outstanding, December 31, 1998................ 414,702 .02-.36 102,942
Granted...................................... 172,270 .60 103,362
Exercised.................................... (100) .36 (36)
Forfeited.................................... (400) .36 (144)
------- --------
Outstanding, December 31, 1999................ 586,472 $.02-.60 $206,124
======= ========
</TABLE>
The following table summarizes information about stock options at
December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Stock Options Exercisable Stock Options
------------------------- -------------------------
Weighted
Average
Remaining
Exercise Contractual Exercise
Prices Shares Life Shares Price
-------- ------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
$.02 136,327 6.9 years 81,796 $ .02
.36 277,875 7.9 years 112,606 .36
.60 172,270 9.2 years -- .60
</TABLE>
At December 31, 1999, options to purchase 587,472 shares had been
granted, of which 194,402 were exercisable. Options to purchase 47,640 shares
remaining available under the plan were cancelled in December 1999. The
weighted average remaining exercise period relating to the outstanding options
was approximately 8.1 years.
F-14
<PAGE>
ORAPHARMA, INC.
(a development-stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
During the years ended December 31, 1999 and 1998, in connection with the
grant of options to employees, the Company recorded deferred stock compensation
of $766,542 and $181,040, respectively, representing the difference between the
exercise price and the fair value of the Company's common stock on the date
such stock options were granted. Deferred compensation is included as a
component of stockholders' deficit and is being amortized to expense ratability
over the five-year vesting period of the options.
1999 Equity Compensation Plan
In December 1999, the Company's Board of Directors adopted the 1999
Equity Compensation Plan, subject to stockholder approval, which was obtained
in January 2000. 1,250,000 shares were reserved to be granted in the future
under this plan. As of December 31, 1999, no shares had been granted.
Warrants
In November 1996, the Company issued warrants to purchase 31,249 shares
of Series A Preferred stock at an exercise price of $2.00 per share in
connection with the issuance of convertible notes. On the date of issuance,
these warrants were deemed to have nominal fair value. None of these warrants,
which expire in December 2003, have been exercised.
In connection with the acquisition of certain technology, in December
1998, the Company issued a warrant to purchase 27,500 shares of common stock at
$3.64 per share and in December 1999, issued a warrant to purchase 41,152
shares of common stock at $4.86 per share. The fair value of these warrants,
using the Black-Scholes option pricing model, were $88,839 and $346,108,
respectively, and have been recorded as research and development expense. These
warrants expire in January 2004 and December 2004, respectively. (see Note 7).
In December 1999, the Company issued warrants to purchase 110,617 shares
of common stock at $12.92 per share. These warrants, which were issued to the
purchasers of the Company's Series D, expire in December 2006 and are not
exercisable until December 2000. The fair value of these warrants, using the
Black-Scholes option pricing model, of $756,114 has been recorded as a
component of the Preferred Stock charge (See Note 8).
Common Stock Subject to Repurchase
During 1997, the Company sold 467,087 shares of common stock to certain
members of management at $.002 per share. These shares are subject to
repurchase by the Company, at $.002 per share, in the event that their
employment is terminated. The number of shares repurchasable by the Company
decreases upon the individuals first anniversary of employment, and further
reduces upon subsequent quarterly anniversary dates. As of December 31, 1999,
156,606 shares of common stock are subject to repurchase by the Company.
10. Income Taxes:
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." The Company has net operating loss carryforwards
for tax reporting purposes that will begin to expire in 2011. Since realization
of the tax benefit associated with this carryforward is not assured, a
valuation allowance was recorded against this tax benefit as required by SFAS
No. 109. In addition, pursuant to income tax regulations, the annual
utilization of these losses may be limited. The Company believes that any such
limitation will not have a material impact on the utilization of these
carryforwards.
F-15
<PAGE>
As of December 31, 1999, the Company had federal net operating loss
carryforwards of $20,490,000. The Company also had federal research and
development tax credit carryforwards of $670,000.
The Tax Reform Act of 1986 contains provisions that limit the utilization
of net operating loss and tax credit carryforwards if there has been a
"ownership change." Any such future "ownership change," as described in Section
382 of the Internal Revenue Code, may limit the Company's utilization of its
net operating loss and tax credit carryforwards. Management believes the
proposed initial public offering will not have a material effect on the
Company's ability to utilize these carryforwards.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Based upon the Company's
loss history, a valuation allowance for deferred tax assets has been provided
as it is more likely than not that the deferred tax assets will not be
realized:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 3,144,000 $ 6,971,000
Capitalized research and development expenses.. 464,000 406,000
Research and development credit carryforwards.. 296,000 670,000
Capitalized patent rights...................... 148,000 140,000
----------- -----------
Total deferred tax assets..................... 4,052,000 8,187,000
Valuation allowance for deferred tax assets..... (4,052,000) (8,187,000)
----------- -----------
Net deferred tax assets....................... $ -- $ --
=========== ===========
</TABLE>
F-16
<PAGE>
Orapharma Logo
Until , 2000 (25 days after the date of this prospectus), all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This requirement is in
addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The Information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 28, 2000
[LOGO OF ORAPHARMA, INC.]
4,000,000 Shares
Common Stock
OraPharma is offering 4,000,000 shares of its common stock. This is our
initial public offering. We have applied to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "OPHM." We anticipate
that the initial public offering price will be between $15.00 and $17.00 per
share.
--------------
Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page 5.
--------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price.......................................... $ $
Underwriting Discounts and Commissions......................... $ $
Proceeds to OraPharma.......................................... $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
OraPharma has granted the underwriters a 30-day option to purchase up to an
additional 600,000 shares of common stock to cover over-allotments. FleetBoston
Robertson Stephens International Limited expects to deliver the shares to
purchasers on , 2000.
--------------
Robertson Stephens International
U.S. Bancorp Piper Jaffray
Gerard Klauer Mattison & Co., Inc.
The date of this Prospectus is , 2000
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens International Limited, U.S. Bancorp Piper
Jaffray Inc., and Gerard Klauer Mattison & Co., Inc., have severally agreed
with us, subject to the terms and conditions set forth in the underwriting
agreement, to purchase from us the number of shares of common stock set forth
opposite their names below. The underwriters are committed to purchase and pay
for all shares if any are purchased.
<TABLE>
<CAPTION>
Number
International Underwriter of Shares
------------------------- ---------
<S> <C>
FleetBoston Robertson Stephens International Limited...............
U.S. Bancorp Piper Jaffray Inc.....................................
Gerard Klauer Mattison & Co., Inc..................................
---------
Total............................................................ 4,000,000
=========
</TABLE>
The representatives have advised us that the underwriters propose to
offer the shares of common stock to the public at the initial public offering
price set forth on the cover page of this prospectus and to certain dealers at
that price less a concession of not in excess of $ per share, of which $
may be reallowed to other dealers. After this offering, the public offering
price, concession and reallowance to dealers may be reduced by the
representatives. This reduction shall not change the amount of proceeds to be
received by us as stated on the cover page of this prospectus. The common stock
is offered by the underwriters as stated herein, subject to receipt and
acceptance by them and subject to their right to reject any order in whole or
in part.
The underwriters have informed us that they do not intend to confirm
sales to any accounts over which they exercise discretionary authority. The
underwriters have advised us that they do not expect sales to discretionary
accounts to exceed 5% of the total number of shares offered.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 600,000 additional shares of common stock at the same price per
share as we will receive for the 4,000,000 shares that the underwriters have
agreed to purchase. If the underwriters exercise this option, each of the
underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage of such additional shares that the
number of shares of common stock to be purchased by it shown in the above table
bears to the 4,000,000 shares of common stock offered in this offering. If
purchased, such additional shares will be sold by the underwriter on the same
terms as those on which the 4,000,000 shares offered in this offering are being
sold. We will be obligated, pursuant to the option, to sell shares to the
underwriters to the extent the option is exercised. The underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the shares of common stock offered in this offering. If such option is
exercised in full, the total public offering price, underwriting discounts and
commissions and proceeds to us will be $ , $ and $ , respectively.
Indemnity. The underwriting agreement contains covenants of indemnity
among the underwriters and us against various civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each executive officer, director, and substantially
all of our stockholders, agreed with the representatives for a period of 180
days after the date of this prospectus, subject to certain exceptions, not to
offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or
grant any rights with respect to any shares of common stock, any options or
warrants to purchase any shares of common stock, or any securities convertible
into or exchangeable for shares of common stock, owned as of the date of this
prospectus or thereafter acquired directly by such holders or with respect to
which they have or hereafter
60
<PAGE>
acquire the power of disposition, without the prior written consent of
FleetBoston Robertson Stephens International Limited. FleetBoston Robertson
Stephens International Limited may, in its sole discretion and at any time or
from time to time without notice, release all or any portion of the securities
subject to the lock-up agreements. There are no agreements between the
representatives and any of our stockholders who have executed a lock-up
agreement providing consent to the sale of shares prior to the expiration of
the lock-up period.
Future Sales. In addition, we have agreed that during the 180 days after
the date of this prospectus we will not, subject to certain exceptions, without
the prior written consent of FleetBoston Robertson Stephens International
Limited (i) consent to the disposition of any shares held by stockholders
subject to lock-up agreements prior to the expiration of the lock-up period or
(ii) issue, sell, contract to sell, or otherwise dispose of, any shares of
common stock, any options or warrants to purchase any shares of common stock or
any securities convertible into, exercisable for or exchangeable for shares of
common stock other than the sale of shares in this offering, the issuance of
common stock upon the exercise of outstanding options or warrants and the
issuance of options under our existing stock option and incentive plans,
provided that those options do not vest prior to the expiration of the lock-up
period.
Listing. We have applied to have the common stock approved for quotation
on The Nasdaq National Market under the symbol "OPHM."
No Prior Public Market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price
for the common stock offered hereby will be determined through negotiations
between us and the representatives of the underwriters. Among the factors to be
considered in such negotiations are prevailing market conditions, certain of
our financial information, market valuations of other companies that we and the
representatives, believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.
Stabilization. The representatives of the underwriters have advised us
that, pursuant to Regulation M under the Securities Act, certain persons
participating in this offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, that may have the effect of stabilizing or maintaining the market price
of the common stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for or the purchase of shares of
common stock on behalf of the underwiters for the purpose of fixing or
maintaining the price of the common stock. A "syndicate covering transaction"
is the bid for or the purchase of the common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with this offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with this offering if the common
stock originally sold by such underwriter or syndicate member is purchased by
the representatives in a syndicate covering transaction and has therefore not
been effectively placed by such underwriter or syndicate member. The
representatives have advised us that such transactions may be effected on The
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
Reserved Shares and Directed Share Program. At our request, the
underwriters have reserved up to 200,000 shares of the common stock to be
issued by us and offered for sale in this offering, at the initial offering
price to Amarfour L.L.C. and others. Amarfour has not committed to purchase
these shares. At our request, the underwriters have reserved up to 200,000
shares of the common stock to be issued by us and offered for sale in this
offering, at the initial public offering price, to our directors, officers,
employees, business associates and related persons. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such individuals purchase such reserved shares. Any reserved shares
which are not so purchased will be offered by the underwriters to the general
public on the same basis as the other shares offered in this offering.
61
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses (other than underwriting discounts and commissions and the
underwriter's non-accountable expense allowance) payable in connection with
this offering of the rights and the sale of the Common Stock offered hereby are
as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $20,645
NASD filing fee................................................. 8,320
Nasdaq filing fee............................................... 100,000
Printing and engraving expenses................................. 150,000
Legal fees and expenses......................................... 250,000
Accounting fees and expenses.................................... 100,000
Blue Sky fees and expenses (including legal fees)............... 10,000
Transfer agent and rights agent and registrar fees and
expenses...................................................... 25,000
Miscellaneous................................................... 36,035
--------
Total......................................................... $700,000
========
</TABLE>
All expenses are estimated except for the SEC fee and the NASD fee.
Item 14. Indemnification of Directors and Officers
The Registrant's Certificate of Incorporation permits indemnification to
the fullest extent permitted by Delaware law. The Registrant's by-laws require
the Registrant to indemnify any person who was or is an authorized
representative of the Registrant, and who was or is a party or is threatened to
be made a party to any corporate proceeding, by reason of the fact that such
person was or is an authorized representative of the Registrant, against
expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with such third-party
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interests of the
Registrant and, with respect to any criminal third-party proceeding (including
any action or investigation which could or does lead to a criminal third-party
proceedings had no reasonable cause to believe such conduct was unlawful. The
Registrant shall also indemnify any person who was or is an authorized
representative of the Registrant and who was or is a party or is threatened to
be made a party to any corporate proceeding by reason of the fact that that
such person was or is an authorized representative of the Registrant, against
expenses actually and reasonably incurred by such person in connection with the
defense or settlement of such corporate action if such person acted in good
faith and in a manner reasonably believed to be in, or not opposed to, the best
interests of the Registrant, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Registrant unless and only to the extent that the
Delaware Court of Chancery or the court in which such corporate proceeding was
pending shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such authorized
representative is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper. Such
indemnification is mandatory under the Registrant's by-laws as to expenses
actually and reasonably incurred to the extent that an authorized
representative of the Registrant had been successful on the merits or otherwise
in defense of any third party or corporate proceeding or in defense of any
claim, issue or matter therein. The determination of whether an individual is
entitled to indemnification may be made by a majority of disinterested
directors, independent legal counsel in a written legal opinion or the
stockholders. Delaware law also permits indemnification in connection with a
proceeding brought by or in the right of the Registrant to procure a judgment
in its favor. Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers or persons controlling
II-1
<PAGE>
the Registrant pursuant to the foregoing provisions, the Registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in that Act and is
therefore unenforceable. The Registrant maintains a directors and officers
liability insurance policy.
The Underwriting Agreement provides that the underwriter is obligated,
under certain circumstances, to indemnify directors, officers, and controlling
persons of the Registrant against certain liabilities, including liabilities
under the Act.
Item 15. Recent Sales of Unregistered Securities
In the preceding three years, the Registrant has issued the following
securities that were not registered under the Act:
Since its inception, the Company has issued an aggregate of 1,039,635
shares of common stock, par value $0.001 per share. These shares include (i)
186,999 shares issued in February 1997 at a purchase price per share of $0.002
for a total of $374; (ii) 167,750 shares issued in March 1997 at a purchase
price of $0.002 for a total of $336; (iii) 110,000 shares issued in February
1997 at a purchase price per share of $0.20 for a total of $22,000; (iv) 20,000
shares issued in April 1997 at a purchase price per share of $.10 for a total
of $2,000; (v) 2,500 shares issued in October 1997 at a purchase price per
share of $0.02 for a total of $50; (vi) 2,500 shares issued in November 1997 at
a purchase price of $0.02 for a total of $50; (vii) 82,500 shares issued in
December 1998 at a purchase price per share of $2.42 for a total of $199,650;
(viii) 300 shares issued in connection with the exercise of stock options for a
total of $46 and (ix) 467,087 shares of restricted stock issued to certain
employees and other persons, consisting of 336,462 shares issued in March 1997
at a purchase price per share of $0.002 for a total of $673; 89,375 shares
issued in October 1997 at a purchase price per share of $0.002 for a total of
$179; 37,500 shares issued in October 1997 at a purchase price per share of
$0.002 for a total of $75; and 3,750 shares issued in February 1998 at a
purchase price per share of $0.002 for a total of $8.
Since its inception, the Company has also issued an aggregate of
7,557,100 shares of preferred stock: consisting of (i) 400,000 shares of series
A preferred stock issued in February 1997 at a purchase price of $2.00 for a
total of $800,000; (ii) 3,311,828 shares of series B preferred stock issued in
March 1997 at a purchase price per share of $3.64 for a total of approximately
$12 million; (iv) 3,292,177 shares of series C preferred stock issued in
December 1998 at a purchase price per share of $4.86 for a total of
approximately $15.9 million; and (v) 553,095 shares of series D preferred stock
issued on December 23, 1999 at a purchase price per share of $9.04 for a total
of approximately $5 million. All such issuances were made under the exemption
from registration provided under Section 4(2) of the Act.
Since its inception, the Company has issued warrants to purchase (i)
31,249 shares of series A preferred stock in February 1997, which will become
exercisable for 31,249 shares of common stock upon the completion of this
offering at an exercise price of $2.00 per share, which expire in December
2003; (ii) 27,500 shares of common stock on February 1, 1999 at an exercise
price of $3.64 per share, which expire in January 2004; (iii) 110,617 shares of
common stock on December 23, 1999, at an exercise price of $12.92 per share,
which expire in December 2006; and (iv) 41,152 shares of common stock on
December 28, 1999, at an exercise price of $4.86 per share, which expire in
December 2006. All such issuances were made under the exemption from
registration provided under Section 4(2) of this Act.
Pursuant to the Company's 1996 Stock Option Plan, since its inception the
Company has granted options to purchase a total of 587,472 shares of common
stock at a weighted average exercise price of $.35 per share, of which options
for 300 shares have been exercised and options for 700 shares have been
forfeited.
II-2
<PAGE>
For a more detailed description of the Company's 1996 Stock Option Plan, see
"Management--Equity Compensation Plans" in this registration statement. In
granting the options and selling the underlying securities upon exercise of the
options, the Company is relying upon exemptions from registration set forth in
Rule 701 and Section 4(2) of the Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.!
3.1 Fourth Amended and Restated Certificate of Incorporation of the
Company.*
3.2 Amended and Restated Bylaws of the Company.*
4.1 Second Amended and Restated Stockholders Agreement among Orapharma,
Inc. and the parties set forth therein, dated December 23, 1999.*
4.2 Warrant issued to Oak Investment Partners VI, Limited Partnership.*
4.3 Warrant issued to Oak V Affiliates Fund, Limited Partnership.*
4.4 Warrant issued to Canaan S.B.I.C., L.P.*
4.5 Warrant issued to Canaan Capital Limited Partnership.*
4.6 Warrant issued to Canaan Capital Offshore Limited Partnership.*
4.7 Series A Preferred and Series B Preferred Stock Purchase Agreement
among Orapharma and the parties named therein, date February 26,
1997.*
4.8 Series C Preferred Stock Purchase Agreement among Orapharma, Inc. and
the parties named therein, dated December 1, 1998.*
4.9 Series D Preferred Stock Purchase Agreement among Orapharma, Inc. and
the parties named therein, dated December 23, 1999.*
4.10 Restricted Stock Purchase Agreement between BioMorphics Group, Inc.
and OraPharma dated December 31, 1998.*
4.11 Restricted Stock Purchase Agreement between Children's Medical Center
Corporation and OraPharma dated December 31, 1998.*
4.12 Warrant issued to Mucosal Therapeutics.*
4.13 Restricted Stock Purchase Agreement between American Cyanamid Company
and OraPharma, dated February 26, 1997.*
4.14 Restricted Stock Purchase Agreement between Scheer Investment Holdings
I, L.L.C. and OraPharma dated February 24, 1997.*
4.15 Restricted Stock Purchase Agreement between Oak VI Affiliates Fund,
Limited Partnership and OraPharma, dated February 26, 1997.*
4.16 Restricted Stock Purchase Agreement between Oak Investment Partners
VI, Limited Partnership and OraPharma, dated February 26, 1997.*
4.17 Restricted Stock Purchase Agreement between Michael D. Kishbauch and
OraPharma, dated March 6, 1997.*
4.18 Restricted Stock Purchase Agreement between J. Ronald Lawter and
OraPharma, dated March 19, 1997.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
4.19 Warrant issued to Canaan Equity L.P.*
4.20 Warrant issued to Domain Partners IV, L.P.*
4.21 Warrant issued to DP IV Associates, L.P.*
4.22 Warrant issued to Old Court Limited*
4.23 Warrant issued to Frazier Healthcare II, L.P.*
4.24 Warrant issued to HealthCap KB.*
4.25 Warrant issued to HealthCap CoInvest KB.*
4.26 Warrant issued to Oak Investment Partners VI, Limited Partnership.*
4.27 Warrant issued to Oak VI Affiliates Fund, Limited Partnership.*
4.28 Warrant issued to Sentron Medical, Inc.*
4.29 Warrant issued to TL Ventures III L.P.*
4.30 Warrant issued to TL Ventures III Interfund L.P.*
4.31 Warrant issued to TL Ventures III Offshore L.P.*
4.32 Warrant issued to Mucosal Therapeutics LLC.*
4.33 First Amendment to Warrant issued to Oak Investment Partners VI, Limited Partnership.#
4.34 First Amendment to Warrant issued to Oak Affiliates Fund, Limited Partnership.#
4.35 First Amendment to Warrant issued to Canaan S.B.I.C., L.P.#
4.36 First Amendment to Warrant issued to Canaan Capital Limited Partnership.#
4.37 First Amendment to Warrant issued to Canaan Capital Offshore Limited Partnership C.V.#
5.1 Opinion of Morgan, Lewis & Bockius LLP.#
10.1 OraPharma, Inc. 1996 Stock Option Plan.*
10.2 OraPharma, Inc. 1999 Equity Compensation Plan.*
10.3 Office Space Lease for 730 Louis Drive, Warminster, Pennsylvania, between Equivest Management
Corporation and OraPharma, Inc. dated July 31, 1998.#
10.4 Loan and Security Agreement between Silicon Valley Bank and OraPharma dated October 10, 1997.!
10.5 Children's Hospital Sponsored Research Agreement, between Children's Hospital and OraPharma,
dated December 31, 1998.*@
10.6 License Agreement between Children's Medical Center Corporation and OraPharma, dated
December 31, 1998.*@
10.7 License Agreement between Mucosal Therapeutics LLC and OraPharma, dated December 14, 1998.*@
10.8 Research and Consulting Agreement between Biomodels LLC and OraPharma dated
December 14, 1998.*@
10.9 License Agreement between American Cyanamid Company and OraPharma, Inc. dated
February 26, 1997.*@
10.10 License Agreement between Gary R. Jernberg and OraPharma, dated December 19, 1996.*@
10.11 License Agreement between Technical Developments and Investments, Est. and OraPharma dated
February 13, 1997.*@
10.12 Amendment to the OraPharma, Inc. 1996 Stock Option Plan.*
23.1 Consent of Arthur Andersen LLP.!
23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 5.1).#
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
23.3 Consent of Arnall, Golden & Gregory, LLP.*
24.1 Power of Attorney.*
27.1 Financial Data Schedule.*
</TABLE>
- -------
*Previously filed.
!Filed herewith.
#To be filed by amendment.
@Confidential Treatment Requested.
(b) Financial Statement Schedules
All information for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission is either included in
the financial statements or is not required under the related instructions or
are inapplicable, and therefore have been omitted.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution no previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the
II-5
<PAGE>
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriter at the closing specified in the standby underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Act, the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430(a) and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the act shall be
deemed to be part of this registration statement as of the time it was declared
effective; and (3) that for the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth the
results of the subscription offer, the transactions by the underwriter during
the subscription period, the amount of unsubscribed securities to be purchased
by the underwriter, and the terms of any subsequent reoffering thereof. If any
public offering by the underwriter is to be made on terms differing from those
set forth on the cover page of the prospectus, a post-effective amendment will
be filed to set forth the terms of such offering.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has duly reasonable grounds to believe that it
meets all of the requirements for filing on Form S-1 and has duly caused this
Amendment No. 3 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Warminster, Pennsylvania, on
February 28, 2000.
OraPharma Inc.
/s/ Michael D. Kishbauch
By: _________________________________
Michael D. Kishbauch
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 3 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael D. Kishbauch President, Chief Executive February 28, 2000
______________________________________ Officer and Director
Michael D. Kishbauch (Principal Executive
Officer)
/s/ James A. Ratigan Vice President, Chief February 28, 2000
______________________________________ Financial Officer and
James A. Ratigan Secretary (Principal
Financial Officer)
/s/ Robert D. Haddow Controller (Principal February 28, 2000
______________________________________ Accounting Officer)
Robert D. Haddow
/s/ * Director February 28, 2000
______________________________________
James J. Mauzey
/s/ * Director February 28, 2000
______________________________________
Christopher Moller
/s/ * Director February 28, 2000
______________________________________
Eileen M. More
/s/ * Director February 28, 2000
______________________________________
Harry T. Rein
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director February 28, 2000
______________________________________
Seth A. Rudnick
* Director February 28, 2000
______________________________________
David I. Scheer
* Director February 28, 2000
______________________________________
Jesse I. Treu
</TABLE>
/s/ James A. Ratigan
*By: ____________________________
James A. Ratigan, Attorney-in-
fact
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.!
3.1 Fourth Amended and Restated Certificate of Incorporation of the
Company.*
3.2 Amended and Restated Bylaws of the Company.*
4.1 Second Amended and Restated Stockholders Agreement among Orapharma,
Inc. and the parties set forth therein, dated December 23, 1999.*
4.2 Warrant issued to Oak Investment Partners VI, Limited Partnership.*
4.3 Warrant issued to Oak V Affiliates Fund, Limited Partnership.*
4.4 Warrant issued to Canaan S.B.I.C., L.P.*
4.5 Warrant issued to Canaan Capital Limited Partnership.*
4.6 Warrant issued to Canaan Capital Offshore Limited Partnership.*
4.7 Series A Preferred and Series B Preferred Stock Purchase Agreement
among Orapharma and the parties named therein, date February 26,
1997.*
4.8 Series C Preferred Stock Purchase Agreement among Orapharma, Inc. and
the parties named therein, dated December 1, 1998.*
4.9 Series D Preferred Stock Purchase Agreement among Orapharma, Inc. and
the parties named therein, dated December 23, 1999.*
4.10 Restricted Stock Purchase Agreement between BioMorphics Group, Inc.
and OraPharma dated December 31, 1998.*
4.11 Restricted Stock Purchase Agreement between Children's Medical Center
Corporation and OraPharma dated December 31, 1998.*
4.12 Warrant issued to Mucosal Therapeutics.*
4.13 Restricted Stock Purchase Agreement between American Cyanamid Company
and OraPharma, dated February 26, 1997.*
4.14 Restricted Stock Purchase Agreement between Scheer Investment Holdings
I, L.L.C. and OraPharma dated February 24, 1997.*
4.15 Restricted Stock Purchase Agreement between Oak VI Affiliates Fund,
Limited Partnership and OraPharma, dated February 26, 1997.*
4.16 Restricted Stock Purchase Agreement between Oak Investment Partners
VI, Limited Partnership and OraPharma, dated February 26, 1997.*
4.17 Restricted Stock Purchase Agreement between Michael D. Kishbauch and
OraPharma, dated March 6, 1997.*
4.18 Restricted Stock Purchase Agreement between J. Ronald Lawter and
OraPharma, dated March 19, 1997.*
4.19 Warrant issued to Canaan Equity L.P.*
4.20 Warrant issued to Domain Partners IV, L.P.*
4.21 Warrant issued to DP IV Associates, L.P.*
4.22 Warrant issued to Old Court Limited*
</TABLE>
II-9
<PAGE>
<TABLE>
<S> <C>
4.23 Warrant issued to Frazier Healthcare II, L.P.*
4.24 Warrant issued to HealthCap KB.*
4.25 Warrant issued to HealthCap CoInvest KB.*
4.26 Warrant issued to Oak Investment Partners VI, Limited Partnership.*
4.27 Warrant issued to Oak VI Affiliates Fund, Limited Partnership.*
4.28 Warrant issued to Sentron Medical, Inc.*
4.29 Warrant issued to TL Ventures III L.P.*
4.30 Warrant issued to TL Ventures III Interfund L.P.*
4.31 Warrant issued to TL Ventures III Offshore L.P.*
4.32 Warrant issued to Mucosal Therapeutics LLC.*
4.33 First Amendment to Warrant issued to Oak Investment Partners VI, Limited Partnership.#
4.34 First Amendment to Warrant issued to Oak Affiliates Fund, Limited Partnership.#
4.35 First Amendment to Warrant issued to Canaan S.B.I.C., L.P.#
4.36 First Amendment to Warrant issued to Canaan Capital Limited Partnership.#
4.37 First Amendment to Warrant issued to Canaan Capital Offshore Limited Partnership C.V.#
5.1 Opinion of Morgan, Lewis & Bockius LLP.#
10.1 OraPharma, Inc. 1996 Stock Option Plan.*
10.2 OraPharma, Inc. 1999 Equity Compensation Plan.*
10.3 Office Space Lease for 730 Louis Drive, Warminster, Pennsylvania, between Equivest Management
Corporation and OraPharma, Inc. dated July 31, 1998.#
10.4 Loan and Security Agreement between Silicon Valley Bank and OraPharma dated October 10, 1997.#
10.5 Children's Hospital Sponsored Research Agreement, between Children's Hospital and OraPharma,
dated December 31, 1998.*@
10.6 License Agreement between Children's Medical Center Corporation and OraPharma, dated
December 31, 1998.*@
10.7 License Agreement between Mucosal Therapeutics LLC and OraPharma, dated December 14, 1998.*@
10.8 Research and Consulting Agreement between Biomodels LLC and OraPharma dated
December 14, 1998.*@
10.9 License Agreement between American Cyanamid Company and OraPharma, Inc. dated
February 26, 1997.*@
10.10 License Agreement between Gary R. Jernberg and OraPharma, dated December 19, 1996.*@
10.11 License Agreement between Technical Developments and Investments, Est. and OraPharma dated
February 13, 1997.*@
10.12 Amendment to the the OraPharma, Inc. 1996 Stock Option Plan.*
23.1 Consent of Arthur Andersen LLP.!
23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 5.1).#
23.3 Consent of Arnall, Golden & Gregory, LLP.*
24.1 Power of Attorney.*
27.1 Financial Data Schedule.*
</TABLE>
- --------
*Previously filed.
!Filed herewith.
#To be filed by amendment.
@Confidential Treatment Requested.
II-10
<PAGE>
EXHIBIT 1.1
Underwriting Agreement
March [__], 2000
FleetBoston Robertson Stephens Inc.
U.S. Bancorp Piper Jaffray Inc.
Gerard Klauer Mattison & Co., Inc.
As Representatives of the Several Underwriters
c/o FleetBoston Robertson Stephens Inc.
555 California Street, Suite 2600
San Francisco, California 94104
Ladies and Gentlemen:
INTRODUCTORY. OraPharma, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of 4,000,000 shares (the "Firm
- ----------
Shares") of its Common Stock, par value $0.001 per share (the "Common Shares").
In addition, the Company has granted to the Underwriters an option to purchase
up to an additional 600,000 Common Shares (the "Option Shares") as provided in
Section 2. The Firm Shares and, if and to the extent such option is exercised,
the Option Shares are collectively called the "Shares." FleetBoston Robertson
Stephens Inc. ("Robertson Stephens"), U.S. Bancorp Piper Jaffray Inc. and Gerard
Klauer Mattison & Co., Inc. have agreed to act as representatives of the several
Underwriters (in such capacity, the "Representatives") in connection with the
offering and sale of the Shares. As a part of the offering contemplated by this
Agreement, Robertson Stephens has agreed to reserve out of the Shares set forth
opposite its name on the Schedule A to this Agreement, up to 200,000 shares, for
sale to the Company's employees, officers, directors and other parties
associated with the Company (collectively, "Participants"), as set forth in the
Prospectus under the heading "Underwriting - Directed Share Program" (the
"Directed Share Program"). The Shares to be sold by Robertson Stephens pursuant
to the Directed Share Program (the "Directed Shares") will be sold by Robertson
Stephens pursuant to this Agreement at the public offering price set forth on
the cover page of the Prospectus (as defined). Any Directed Shares not orally
confirmed for purchase by any Participants as of 7:00 a.m. New York time on the
first day trading of the shares commences, will be offered to the public by
Robertson Stephens as set forth in the Prospectus.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-93881), which contains a form of prospectus, subject to completion, to be
used in connection with the public offering and sale of the Shares. Each such
prospectus, subject to completion, used in connection with such public offering
is called a "preliminary prospectus." Such registration statement, as amended,
including the financial statements, exhibits and schedules thereto, in the form
in which it was declared effective by the Commission under the Securities Act of
1933 and the rules and regulations promulgated thereunder (collectively, the
"Securities Act"),
<PAGE>
including any information deemed to be a part thereof at the time of
effectiveness pursuant to Rule 430A under the Securities Act, is called the
"Registration Statement." Any registration statement filed by the Company
pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b)
Registration Statement", and from and after the date and time of filing of the
Rule 462(b) Registration Statement the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. Such prospectus, in the form
first used by the Underwriters to confirm sales of the Shares, is called the
"Prospectus." All references in this Agreement to the Registration Statement,
the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus
or any amendments or supplements to any of the foregoing, shall include any copy
thereof filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR").
The Company hereby confirms its agreement with the Underwriters as
follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents, warrants and covenants to each
Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration Statement
and any Rule 462(b) Registration Statement have been declared effective by the
Commission under the Securities Act. The Company has complied to the
Commission's satisfaction with all requests of the Commission for additional or
supplemental information. No stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement is in effect
and no proceedings for such purpose have been instituted or are pending or, to
the best knowledge of the Company, are contemplated or threatened by the
Commission.
Each preliminary prospectus and the Prospectus when filed complied in
all material respects with the Securities Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Securities Act), was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sale of the Shares. Each
of the Registration Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and at all
subsequent times, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. Each preliminary
prospectus, as of its date, and the Prospectus, as amended or supplemented, as
of its date and at all subsequent times through the 30th day of the date hereof,
did not and will not contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately preceding
sentences do not apply to statements in or omissions from the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment thereto, or the Prospectus, or any amendments or supplements thereto,
made in reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives expressly
for use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to the Representatives three complete conformed copies of the
Registration Statement and of each
2
<PAGE>
consent and certificate of experts filed as a part thereof, and conformed copies
of the Registration Statement (without exhibits) and preliminary prospectuses
and the Prospectus, as amended or supplemented, in such quantities and at such
places as the Representatives have reasonably requested for each of the
Underwriters.
(c) Distribution of Offering Material By the Company. The Company has not
distributed and will not distribute, prior to the later of the Second Closing
Date (as defined below) and the completion of the Underwriters' distribution of
the Shares, any offering material in connection with the offering and sale of
the Shares other than a preliminary prospectus, the Prospectus or the
Registration Statement.
(d) The Underwriting Agreement. This Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(e) Authorization of the Shares. The Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and sale
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement, will be validly issued, fully paid and
nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are no
persons with registration or other similar rights to have any equity or debt
securities registered for sale under the Registration Statement or included in
the offering contemplated by this Agreement, except for such rights as have been
duly waived.
(g) No Material Adverse Change. Subsequent to the respective dates as of
which information is given in the Prospectus: (i) other than continuing losses
from operations in such amounts and resulting from such factors as is consistent
with past periods there has been no material adverse change, or any development
that could reasonably be expected to result in a material adverse change, in the
condition, financial or otherwise, or in the earnings, business, operations or
prospects, whether or not arising from transactions in the ordinary course of
business, of the Company (any such change or effect, where the context so
requires, is called a "Material Adverse Change" or a "Material Adverse Effect");
(ii) the Company has not incurred any material liability or obligation,
indirect, direct or contingent, not in the ordinary course of business, nor
entered into any material transaction or agreement not in the ordinary course of
business; and (iii) there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of capital stock or
repurchase or redemption by the Company of any class of capital stock.
(h) Independent Accountants. Arthur Andersen LLP, who have expressed their
opinion with respect to the financial statements (which term as used in this
Agreement includes the related notes thereto) and supporting schedules filed
with the Commission as a part of the Registration Statement and included in the
Prospectus, are independent public or certified public accountants as required
by the Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
(i) Preparation of the Financial Statements. The financial statements
filed with the Commission as a part of the Registration Statement and included
in the Prospectus present
3
<PAGE>
fairly the financial position of the Company as of and at the dates indicated
and the results of their operations and cash flows for the periods specified.
The supporting schedules included in the Registration Statement present fairly
the information required to be stated therein. Such financial statements and
supporting schedules have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved, except as may be expressly stated in the related notes thereto. No
other financial statements or supporting schedules are required to be included
in the Registration Statement. The financial data set forth in the Prospectus
under the captions "Summary--Summary Financial Data", "Selected Financial Data"
and "Capitalization" fairly present the information set forth therein on a basis
consistent with that of the audited financial statements contained in the
Registration Statement.
(j) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(k) Subsidiaries of the Company. The Company has no subsidiaries.
(l) Incorporation and Good Standing of the Company. The Company has been
duly organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware with full corporate power and authority to own
its properties and conduct its business as described in the Prospectus, and is
duly qualified to do business as a foreign corporation and is in good standing
under the laws of each jurisdiction which requires such qualification.
(m) Capitalization and Other Capital Stock Matters. The authorized, issued
and outstanding capital stock of the Company is as set forth in the Prospectus
under the caption "Capitalization" (other than for subsequent issuances, if any,
pursuant to employee benefit plans described in the Prospectus or upon exercise
of outstanding options or warrants described in the Prospectus). The Common
Shares (including the Shares) conform in all material respects to the
description thereof contained in the Prospectus. All of the issued and
outstanding Common Shares have been duly authorized and validly issued, are
fully paid and nonassessable and have been issued in compliance with federal and
state securities laws. None of the outstanding Common Shares were issued in
violation of any preemptive rights, rights of first refusal or other similar
rights to subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of first
refusal or other rights to purchase, or equity or debt securities convertible
into or exchangeable or exercisable for, any capital stock of the Company other
than those accurately described in the Prospectus. The description of the
Company's stock option, stock bonus and other stock plans or arrangements, and
the options or other rights granted thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(n) Stock Exchange Listing. The Shares have been approved for inclusion on
the Nasdaq National Market, subject only to official notice of issuance.
4
<PAGE>
(o) No Consents, Approvals or Authorizations Required. No consent,
approval, authorization, filing with or order of any court or governmental
agency or regulatory body is required in connection with the transactions
contemplated herein, except such as have been obtained or made under the
Securities Act and such as may be required (i) under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the Shares by
the Underwriters in the manner contemplated here and in the Prospectus, (ii) by
the National Association of Securities Dealers, Inc. and (iii) by the federal
and provincial laws of Canada.
(p) Non-Contravention of Existing Instruments Agreements. Neither the
issue and sale of the Shares nor the consummation of any other of the
transactions herein contemplated nor the fulfillment of the terms hereof will
conflict with, result in a breach or violation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company pursuant to, (i) the
charter or by-laws of the Company, (ii) the terms of any indenture, contract,
lease, mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which the Company is
a party or bound or to which its property is subject or (iii) any statute, law,
rule, regulation, judgment, order or decree applicable to the Company of any
court, regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or any of its properties.
(q) No Defaults or Violations. The Company is not in violation or default
of (i) any provision of its charter or by-laws, (ii) the terms of any indenture,
contract, lease, mortgage, deed of trust, note agreement, loan agreement or
other agreement, obligation, condition, covenant or instrument to which it is a
party or bound or to which its property is subject or (iii) any statute, law,
rule, regulation, judgment, order or decree of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its properties, as applicable, except
any such violation or default which would not, singly or in the aggregate,
result in a Material Adverse Change except as otherwise disclosed in the
Prospectus.
(r) No Actions, Suits or Proceedings. No action, suit or proceeding by or
before any court or governmental agency, authority or body or any arbitrator
involving the Company or its property is pending or, to the best knowledge of
the Company, threatened that (i) could reasonably be expected to have a Material
Adverse Effect on the performance of this Agreement or the consummation of any
of the transactions contemplated hereby or (ii) could reasonably be expected to
result in a Material Adverse Effect.
(s) All Necessary Permits, Etc. The Company possesses such valid and
current certificates, authorizations or permits issued by the appropriate state,
federal or foreign regulatory agencies or bodies necessary to conduct its
business, and the Company has not received any notice of proceedings relating to
the revocation or modification of, or non-compliance with, any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could result in a Material Adverse
Change.
(t) Title to Properties. The Company has good and marketable title to all
the properties and assets reflected as owned in the financial statements
referred to in Section 1(i) above (or elsewhere in the Prospectus), in each case
free and clear of any security interests, mortgages, liens, encumbrances,
equities, claims and other defects, other than liens granted to Silicon Valley
Bank (and other lenders party thereto) pursuant to our credit facility dated
October 10, 1997 referred to in the Registration Statement and except such as do
not materially and adversely affect the value of such property and do not
materially interfere with the use made or
5
<PAGE>
proposed to be made of such property by the Company. The real property,
improvements, equipment and personal property held under lease by the Company
are held under valid and enforceable leases, with such exceptions as are not
material and do not materially interfere with the use made or proposed to be
made of such real property, improvements, equipment or personal property by the
Company.
(u) Tax Law Compliance. The Company has filed all necessary federal, state
and foreign income and franchise tax returns and have paid all taxes required to
be paid by it and, if due and payable, any related or similar assessment, fine
or penalty levied against it. The Company has made adequate charges, accruals
and reserves in the applicable financial statements referred to in Section 1(i)
above in respect of all federal, state and foreign income and franchise taxes
for all periods as to which the tax liability of the Company has not been
finally determined. The Company is not aware of any tax deficiency that has been
or might be asserted or threatened against the Company that could result in a
Material Adverse Change.
(v) Intellectual Property Rights. The Company owns or possesses adequate
rights to use all patents, patent rights or licenses, inventions, collaborative
research agreements, trade secrets, know-how, trademarks, service marks, trade
names and copyrights which are necessary to conduct its businesses as described
in the Registration Statement and Prospectus; the expiration of any patents,
patent rights, trade secrets, trademarks, service marks, trade names or
copyrights would not result in a Material Adverse Change that is not otherwise
disclosed in the Prospectus; the Company has not received any notice of, nor is
the Company aware of any facts that would form a reasonable basis for any such
claim of, any infringement of or conflict with asserted rights of the Company by
others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights that is not
otherwise disclosed in the Prospectus; and the Company has not received any
notice of, nor is the Company aware of any facts that would form a reasonable
basis for any such claim of, any infringement of or conflict with asserted
rights of others with respect to any patent, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names or copyrights which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, might have a Material Adverse Change. There is no claim being made
against the Company regarding patents, patent rights or licenses, inventions,
collaborative research, trade secrets, know-how, trademarks, service marks,
trade names or copyrights. The Company does not in the conduct of their business
as now or proposed to be conducted as described in the Prospectus infringe or
conflict with any right or patent of any third party, or any discovery,
invention, product or process which is the subject of a patent application filed
by any third party, known to the Company, which such infringement or conflict is
reasonably likely to result in a Material Adverse Change.
(w) Y2K. There are no Y2K issues related to the Company that (i) are of a
character required to be described or referred to in the Registration Statement
or Prospectus by the Securities Act which have not been accurately described in
the Registration Statement or Prospectus or (ii) might reasonably be expected to
result in any Material Adverse Change or that might materially affect its
properties, assets or rights.
(x) No Transfer Taxes or Other Fees. There are no transfer taxes or other
similar fees or charges under federal law or the laws of any state, or any
political subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance and sale by the Company
of the Shares.
6
<PAGE>
(y) Company Not an "Investment Company". The Company has been advised of
the rules and requirements under the Investment Company Act of 1940, as amended
(the "Investment Company Act"). The Company is not, and after receipt of payment
for the Shares will not be, an "investment company" or an entity "controlled" by
an "investment company" within the meaning of the Investment Company Act and
will conduct its business in a manner so that it will not become subject to the
Investment Company Act.
(z) Insurance. The Company is insured by recognized, financially sound and
reputable institutions with policies in such amounts and with such deductibles
and covering such risks as are generally deemed adequate and customary for their
businesses including, but not limited to, policies covering real and personal
property owned or leased by the Company against theft, damage, destruction, acts
of vandalism and earthquakes, general liability, products liability and
Directors and Officers liability. The Company has no reason to believe that it
will not be able (i) to renew its existing insurance coverage as and when such
policies expire or (ii) to obtain comparable coverage from similar institutions
as may be necessary or appropriate to conduct its business as now conducted and
at a cost that would not result in a Material Adverse Change. The Company has
not been denied any insurance coverage which it has sought or for which it has
applied.
(aa) Labor Matters. To the best of Company's knowledge, no labor
disturbance by the employees of the Company exists or is imminent; and the
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, component manufacturers,
subassemblers, value added resellers, subcontractors, original equipment
manufacturers, authorized dealers or international distributors that might be
expected to result in a Material Adverse Change.
(bb) No Price Stabilization or Manipulation. The Company has not taken and
will not take, directly or indirectly, any action designed to or that might be
reasonably expected to cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the sale or resale of the Shares.
(cc) Lock-Up Agreements. Each officer and director of the Company and each
beneficial owner of one or more percent of the outstanding issued share capital
of the Company has agreed to sign an agreement substantially in the form
attached hereto as Exhibit A (the "Lock-up Agreements"). The Company has
---------
provided to counsel for the Underwriters a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to counsel for the Underwriters
true, accurate and complete copies of all of the Lock-up Agreements presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors or other stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of Robertson Stephens.
(dd) Related Party Transactions. There are no business relationships or
related-party transactions involving the Company or any other person required to
be described in the Prospectus which have not been described as required.
(ee) No Unlawful Contributions or Other Payments. Neither the Company nor,
to the best of the Company's knowledge, any employee or agent of the Company,
has made any contribution or other payment to any official of, or candidate for,
any federal, state or foreign office in violation of any law or of the character
required to be disclosed in the Prospectus.
7
<PAGE>
(ff) Environmental Laws. Except as otherwise disclosed in the Prospectus,
(i) the Company is in compliance with all rules, laws and regulations relating
to the use, treatment, storage and disposal of toxic substances and protection
of health or the environment ("Environmental Laws") which are applicable to its
business, except where the failure to comply would not result in a Material
Adverse Change, (ii) the Company has received no notice from any governmental
authority or third party of an asserted claim under Environmental Laws, which
claim is required to be disclosed in the Registration Statement and the
Prospectus, (iii) the Company is not currently aware that it will be required to
make future material capital expenditures to comply with Environmental Laws and
(iv) no property which is owned, leased or occupied by the Company has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. (S) 9601,
et eq.), or otherwise designated as a contaminated site under applicable state
- ------
or local law.
(gg) Periodic Review of Costs of Environmental Compliance. In the ordinary
course of its business, the Company conducts a periodic review of the effect of
Environmental Laws on the business, operations and properties of the Company, in
the course of which it identifies and evaluates associated costs and liabilities
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
permit, license or approval, any related constraints on operating activities and
any potential liabilities to third parties). On the basis of such review and the
amount of its established reserves, the Company has reasonably concluded that
such associated costs and liabilities would not, individually or in the
aggregate, result in a Material Adverse Change.
(hh) ERISA Compliance. The Company and any "employee benefit plan" (as
defined under the Employee Retirement Income Security Act of 1974, as amended,
and the regulations and published interpretations thereunder (collectively,
"ERISA")) established or maintained by the Company or its "ERISA Affiliates" (as
defined below) are in compliance in all material respects with ERISA. "ERISA
Affiliate" means, with respect to the Company, any member of any group of
organizations described in Sections 414(b),(c),(m) or (o) of the Internal
Revenue Code of 1986, as amended, and the regulations and published
interpretations thereunder (the "Code") of which the Company is a member. No
"reportable event" (as defined under ERISA) has occurred or is reasonably
expected to occur with respect to any "employee benefit plan" established or
maintained by the Company or any of its ERISA Affiliates. No "employee benefit
plan" established or maintained by the Company or any of its ERISA Affiliates,
if such "employee benefit plan" were terminated, would have any "amount of
unfounded benefit liabilities" (as defined under ERISA). Neither the Company nor
any of its ERISA Affiliates has incurred or reasonably expects to incur any
liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or
4980B of the Code. Each "employee benefit plan" established or maintained by the
Company or any of its ERISA Affiliates that is intended to be qualified under
Section 401(a) of the Code is so qualified and nothing has occurred, whether by
action or failure to act, which would cause the loss of such qualification.
(ii) FDA Matters. The Company has filed with the U.S. Food and Drug
Administration (the "FDA"), and all applicable state and local regulatory
bodies, for and received approval of all registrations, applications, licenses,
requests for exemptions, permits and other regulatory authorizations, necessary
to conduct the Company's business as it is described in the Registration
Statement and the Prospectus; the Company is in compliance with all such
registrations, applications, licenses, requests for exemptions, permits and
other regulatory authorizations, and all applicable FDA, state and local rules,
regulations, guidelines and
8
<PAGE>
policies, including, without limitation, applicable FDA, state and local rules,
regulations and policies relating to good manufacturing practice ("GMP") and
good laboratory practice ("GLP"); the Company has no reason to believe that any
party granting any such registration, application, license, request for
exemptions, permit or other regulatory authorization is considering limiting,
suspending or revoking the same and knows of no basis for any such limitation,
suspension or revocation.
(jj) Clinical Trials. The human clinical trials, animal studies and other
preclinical tests conducted by the Company or in which the Company has
participated that are described in the Registration Statement and Prospectus or
the results of which are referred to in the Registration Statement or
Prospectus, and such studies and tests conducted on behalf of the Company, were
and, if still pending, are, being conducted in accordance with experimental
protocols, procedures and controls generally used by qualified experts in the
preclinical or clinical study of new drugs or diagnostics as applied to
comparable products to those being developed by the Company; the descriptions of
the results of such studies, test and trials contained in the Registration
Statement and Prospectus are accurate and complete in all material respects, and
the Company has no knowledge of any other trials, studies or tests, the results
of which the Company believes reasonably call into question the clinical trial
results described or referred to in the Registration Statement and Prospectus;
and the Company has not received any notices or correspondence from the FDA or
any other governmental agency requiring the termination, suspension or
modification of any animal studies, preclinical tests or clinical trials
conducted by or on behalf of the Company or in which the Company has
participated that are described in the Registration Statement or Prospectus or
the results of which are referred to in the Registration Statement or
Prospectus.
(kk) Consents Required in Connection with the Directed Share Program. No
consent approval, authorization or order of, or qualification with, any
governmental body or agency, other than those obtained, is required in
connection with the offering of the Directed Shares in any jurisdiction where
the Directed Shares are being offered.
(ll) No Improper Influence in Connection with the Directed Share Program.
The Company has not offered, or caused Robertson Stephens to offer, Shares to
any person pursuant to the Directed Share Program with the specific intent to
unlawfully influence (i) a customer or supplier of the Company to alter the
customer's or supplier's level or type of business with the Company or (ii) a
trade journalist or publication to write or publish favorable information about
the Company or its products.
Any certificate signed by an officer of the Company and delivered to the
Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) The Firm Shares. The Company agrees to issue and sell to the several
Underwriters the Firm Shares upon the terms herein set forth. On the basis of
the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Company the respective number of
Firm Shares set forth opposite their names on Schedule A. The purchase price per
Firm Share to be paid by the several Underwriters to the Company shall be $[___]
per share.
9
<PAGE>
(b) The First Closing Date. Delivery of the Firm Shares to be purchased by
the Underwriters and payment therefor shall be made by the Company and the
Representatives at 6:00 a.m., San Francisco time, at the offices of Morgan,
Lewis & Bockius LLP, 1701 Market Street, Philadelphia, PA 19103, (or at such
other place as may be agreed upon among the Representatives and the Company),
(i) on the third (3rd) full business day following the first day that Shares are
traded, (ii) if this Agreement is executed and delivered after 1:30 P.M., San
Francisco time, the fourth (4th) full business day following the day that this
Agreement is executed and delivered or (iii) at such other time and date not
later that seven (7) full business days following the first day that Shares are
traded as the Representatives and the Company may determine (or at such time and
date to which payment and delivery shall have been postponed pursuant to Section
8 hereof), such time and date of payment and delivery being herein called the
"Closing Date;" provided, however, that if the Company has not made available to
the Representatives copies of the Prospectus within the time provided in Section
2(g) and 3(e) hereof, the Representatives may, in their sole discretion,
postpone the Closing Date until no later that two (2) full business days
following delivery of copies of the Prospectus to the Representatives.
(c) The Option Shares; the Second Closing Date. In addition, on the basis
of the representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Company hereby grants
an option to the several Underwriters to purchase, severally and not jointly, up
to an aggregate of 600,000 Option Shares from the Company at the purchase price
per share to be paid by the Underwriters for the Firm Shares. The option granted
hereunder is for use by the Underwriters solely in covering any over-allotments
in connection with the sale and distribution of the Firm Shares. The option
granted hereunder may be exercised at any time upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. The time and date of delivery of the
Option Shares, if subsequent to the First Closing Date, is called the "Second
Closing Date" and shall be determined by the Representatives and shall not be
earlier than three nor later than five full business days after delivery of such
notice of exercise. If any Option Shares are to be purchased, each Underwriter
agrees, severally and not jointly, to purchase the number of Option Shares
(subject to such adjustments to eliminate fractional shares as the
Representatives may determine) that bears the same proportion to the total
number of Option Shares to be purchased as the number of Firm Shares set forth
on Schedule A opposite the name of such Underwriter bears to the total number of
----------
Firm Shares. The Representatives may cancel the option at any time prior to its
expiration by giving written notice of such cancellation to the Company.
(d) Public Offering of the Shares. The Representatives hereby advise the
Company that the Underwriters intend to offer for sale to the public, as
described in the Prospectus, their respective portions of the Shares as soon
after this Agreement has been executed and the Registration Statement has been
declared effective as the Representatives, in their sole judgment, have
determined is advisable and practicable.
(e) Payment for the Shares. Payment for the Shares shall be made at the
First Closing Date (and, if applicable, at the Second Closing Date) by wire
transfer in immediately available-funds to the order of the Company.
It is understood that the Representatives have been authorized, for their
own account and the accounts of the several Underwriters, to accept delivery of
and receipt for, and make payment of the purchase price for, the Firm Shares and
any Option Shares the Underwriters have agreed to purchase. FleetBoston
Robertson Stephens Inc., individually and not as a
10
<PAGE>
Representative of the Underwriters, may (but shall not be obligated to) make
payment for any Shares to be purchased by any Underwriter whose funds shall not
have been received by the Representatives by the First Closing Date or the
Second Closing Date, as the case may be, for the account of such Underwriter,
but any such payment shall not relieve such Underwriter from any of its
obligations under this Agreement.
(f) Delivery of the Shares. The Company shall deliver, or cause to be
delivered, a credit representing the Firm Shares to an account or accounts at
The Depository Trust Company, as designated by the Representatives for the
accounts of the Representatives and the several Underwriters at the First
Closing Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The Company shall
also deliver, or cause to be delivered, a credit representing the Option Shares
the Underwriters have agreed to purchase at the First Closing Date (or the
Second Closing Date, as the case may be), to an account or accounts at The
Depository Trust Company as designated by the Representatives for the accounts
of the Representatives and the several Underwriters, against the irrevocable
release of a wire transfer of immediately available funds for the amount of the
purchase price therefor. Time shall be of the essence, and delivery at the time
and place specified in this Agreement is a further condition to the obligations
of the Underwriters.
(g) Delivery of Prospectus to the Underwriters. Not later than 12:00 noon
on the second business day following the date the Shares are released by the
Underwriters for sale to the public, the Company shall deliver or cause to be
delivered copies of the Prospectus in such quantities and at such places as the
Representatives shall request.
SECTION 3. COVENANTS OF THE COMPANY.
The Company further covenants and agrees with each Underwriter as
follows:
(a) Registration Statement Matters. The Company will (i) use its best
efforts to cause a registration statement on Form 8-A (the "Form 8-A
Registration Statement") as required by the Securities Exchange Act of 1934 (the
"Exchange Act") to become effective simultaneously with the Registration
Statement, (ii) use its best efforts to cause the Registration Statement to
become effective or, if the procedure in Rule 430A of the Securities Act is
followed, to prepare and timely file with the Commission under Rule 424(b) under
the Securities Act, a Prospectus in a form approved by the Representatives
containing information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Securities Act and (iii)
not file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representatives shall not previously have been advised
and furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Securities Act. If
the Company elects to rely on Rule 462(b) under the Securities Act, the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) under the Securities Act prior to the time
confirmations are sent or given, as specified by Rule 462(b)(2) under the
Securities Act, and shall pay the applicable fees in accordance with Rule 111
under the Securities Act.
(b) Securities Act Compliance. The Company will advise the Representatives
promptly (i) when the Registration Statement or any post-effective amendment
thereto shall have become effective, (ii) of receipt of any comments from the
Commission, (iii) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any additional
information and (iv) of the issuance by the Commission of any
11
<PAGE>
stop order suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the institution of any proceedings for that purpose. The
Company will use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) Blue Sky Compliance. The Company will cooperate with the
Representatives and counsel for the Underwriters in endeavoring to qualify the
Shares for sale under the securities laws of such jurisdictions (both national
and foreign) as the Representatives may reasonably have designated in writing
and will make such applications, file such documents, and furnish such
information as may be reasonably required for that purpose, provided the Company
shall not be required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from time to
time, prepare and file such statements, reports and other documents, as are or
may be required to continue such qualifications in effect for so long a period
as the Representatives may reasonably request for distribution of the Shares.
(d) Amendments and Supplements to the Prospectus and Other Securities Act
Matters. The Company will comply with the Securities Act and the Exchange Act,
and the rules and regulations of the Commission thereunder, so as to permit the
completion of the distribution of the Shares as contemplated in this Agreement
and the Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur as a
result of which, in the judgment of the Company or in the reasonable opinion of
the Representatives or counsel for the Underwriters, it becomes necessary to
amend or supplement the Prospectus in order to make the statements therein, in
the light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend or
supplement the Prospectus to comply with any law, the Company promptly will
prepare and file with the Commission, and furnish at its own expense to the
Underwriters and to dealers, an appropriate amendment to the Registration
Statement or supplement to the Prospectus so that the Prospectus as so amended
or supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with the law.
(e) Copies of any Amendments and Supplements to the Prospectus. The
Company agrees to furnish the Representatives, without charge, during the period
beginning on the date hereof and ending on the later of the First Closing Date
or such date, as in the opinion of counsel for the Underwriters, the Prospectus
is no longer required by law to be delivered in connection with sales by an
Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the
Prospectus and any amendments and supplements thereto as the Representatives may
request.
(f) Insurance. The Company shall (i) obtain Directors and Officers
liability insurance in the minimum amount of $10 million which shall apply to
the offering contemplated hereby and (ii) cause Robertson Stephens to be added
to such policy such that up to $500,000 of its expenses pursuant to Section 7(a)
shall be paid directly by such insurer.
(g) Notice of Subsequent Events. If at any time during the ninety (90) day
period after the Registration Statement becomes effective, any rumor,
publication or event relating to or affecting the Company shall occur as a
result of which, in your opinion, the market price of the Company Shares has
been or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above,
12
<PAGE>
forthwith prepare, consult with you concerning the substance of and disseminate
a press release or other public statement, reasonably satisfactory to you,
responding to or commenting on such rumor, publication or event.
(h) Use of Proceeds. The Company shall apply the net proceeds from the
sale of the Shares sold by it in the manner described under the caption "Use of
Proceeds" in the Prospectus.
(i) Transfer Agent. The Company shall engage and maintain, at its expense,
a registrar and transfer agent for the Company Shares.
(j) Earnings Statement. As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement (which need not be audited) covering the twelve-month period
ending March 31, 2001 that satisfies the provisions of Section 11(a) of the
Securities Act.
(k) Periodic Reporting Obligations. During the Prospectus Delivery Period
the Company shall file, on a timely basis, with the Commission and the Nasdaq
National Market all reports and documents required to be filed under the
Exchange Act.
(l) Agreement Not to Offer or Sell Additional Securities. The Company will
not offer, sell or contract to sell, or otherwise dispose of or enter into any
transaction which is designed to, or could be expected to, result in the
disposition (whether by actual disposition or effective economic disposition due
to cash settlement or otherwise by the Company or any affiliate of the Company
or any person in privity with the Company or any affiliate of the Company)
directly or indirectly, or announce the offering of, any other Common Shares or
any securities convertible into, or exchangeable for, Common Shares; provided,
however, that the Company may (i) issue and sell Common Shares pursuant to any
director or employee stock option plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the date of the Prospectus and
described in the Prospectus so long as none of those shares may be transferred
and the Company shall enter stop transfer instructions with its transfer agent
and registrar against the transfer of any such Common Shares and (ii) the
Company may issue Common Shares issuable upon the conversion of securities or
the exercise of warrants outstanding at the date of the Prospectus and described
in the Prospectus. These restrictions terminate after the close of trading of
the Common Shares on the 180th day after the date that the Registration
Statement was declared effective (the "Lock-Up Period").
(m) Future Reports to the Representatives. During the period of five years
hereafter the Company will furnish or make available to the Representatives (i)
as soon as practicable after the end of each fiscal year, copies of the Annual
Report of the Company containing the balance sheet of the Company as of the
close of such fiscal year and statements of income, stockholders' equity and
cash flows for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as practicable
after the filing thereof, copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report
filed by the Company with the Commission, the National Association of Securities
Dealers, Inc. or any securities exchange; and (iii) as soon as available, copies
of any report or communication of the Company mailed generally to holders of its
capital stock.
(n) Directed Share Program. The Company (i) will indemnify Robertson
Stephens for any losses incurred in connection with the Directed Share Program,
(ii) will comply with all
13
<PAGE>
applicable securities and other applicable laws, rules and regulations in each
jurisdiction in which the Directed Shares are offered in connection with the
Directed Share Program and (iii) will pay all reasonable fees and disbursements
of counsel incurred by the Underwriters in connection with the Directed Share
Program and any stamp duties, similar taxes or duties or other taxes, if any,
incurred by the Underwriters in connection with the Directed Share Program.
SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Shares as
provided herein on the First Closing Date and, with respect to the Option
Shares, the Second Closing Date, shall be subject to the accuracy of the
representations and warranties on the part of the Company set forth in Section 1
hereof as of the date hereof and as of the First Closing Date as though then
made and, with respect to the Option Shares, as of the Second Closing Date as
though then made, to the timely performance by the Company of its covenants and
other obligations hereunder, and to each of the following additional conditions:
(a) Compliance with Registration Requirements; No Stop Order; No Objection
from the National Association of Securities Dealers, Inc. The Registration
Statement shall have become effective prior to the execution of this Agreement,
or at such later date as shall be consented to in writing by you; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company or any Underwriter, threatened by the Commission, and any request of
the Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel; and the National Association of
Securities Dealers, Inc. shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(b) Corporate Proceedings. All corporate proceedings and other legal
matters in connection with this Agreement, the form of Registration Statement
and the Prospectus, and the registration, authorization, issue, sale and
delivery of the Shares, shall have been reasonably satisfactory to Underwriters'
Counsel, and such counsel shall have been furnished with such papers and
information as they may reasonably have requested to enable them to pass upon
the matters referred to in this Section.
(c) No Material Adverse Change. Subsequent to the execution and delivery
of this Agreement and prior to the First Closing Date, or the Second Closing
Date, as the case may be, other than continuing losses from operations in such
amounts and resulting from such factors as is consistent with past periods there
shall not have been any Material Adverse Change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
from that set forth in the Registration Statement or Prospectus, which, in your
sole judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus.
(d) Opinion of Counsel for the Company. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of Morgan, Lewis & Bockius LLP, counsel for the Company, substantially in the
form of Exhibit B attached hereto, dated the First Closing Date, or the Second
Closing Date, addressed to the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters.
Counsel rendering the opinion contained in Exhibit B may rely as to
---------
questions of law not involving the laws of the United States, the Commonwealth
of Pennsylvania and the General
14
<PAGE>
Corporation Law of the State of Delaware upon opinions of local counsel, and as
to questions of fact upon representations or certificates of officers of the
Company, and of government officials, in which case their opinion is to state
that they are so relying and that they have no knowledge of any material
misstatement or inaccuracy in any such opinion, representation or certificate.
Copies of any opinion, representation or certificate so relied upon shall be
delivered to you, as Representatives of the Underwriters, and to Underwriters'
Counsel.
(e) Opinion of Intellectual Property Counsel for the Company. You shall
have received on the First Closing Date, or the Second Closing Date, as the case
may be, an opinion of Arnall Golden & Gregory, LLP, intellectual property
counsel for the Company substantially in the form of Exhibit C attached hereto.
---------
(f) Opinion of FDA Counsel for the Company. You shall have received on the
First Closing Date, or the Second Closing Date, as the case may be, an opinion
of Morgan, Lewis & Bockius LLP, FDA counsel for the Company substantially in the
form of Exhibit D hereto.
---------
(g) Opinion of Counsel for the Underwriters. You shall have received on
the First Closing Date or the Second Closing Date, as the case may be, an
opinion of Brobeck, Phleger & Harrison LLP, substantially in the form of
Exhibit E hereto. The Company shall have furnished to such counsel such
- ---------
documents as they may have requested for the purpose of enabling them to pass
upon such matters.
(h) Accountants' Comfort Letter. You shall have received on the First
Closing Date and on the Second Closing Date, as the case may be, a letter from
Arthur Andersen LLP addressed to the Underwriters, dated the First Closing Date
or the Second Closing Date, as the case may be, confirming that they are
independent certified public accountants with respect to the Company within the
meaning of the Securities Act and the rules and regulations promulgated
thereunder and based upon the procedures described in such letter delivered to
you concurrently with the execution of this Agreement (herein called the
"Original Letter"), but carried out to a date not more than four (4) business
days prior to the First Closing Date or the Second Closing Date, as the case may
be, (i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the First Closing Date or the
Second Closing Date, as the case may be, and (ii) setting forth any revisions
and additions to the statements and conclusions set forth in the Original Letter
which are necessary to reflect any changes in the facts described in the
Original Letter since the date of such letter, or to reflect the availability of
more recent financial statements, data or information. The letter shall not
disclose any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company from that set forth in
the Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. The Original Letter from Arthur Andersen LLP shall be addressed
to or for the use of the Underwriters in form and substance satisfactory to the
Underwriters and shall (i) represent, to the extent true, that they are
independent certified public accountants with respect to the Company within the
meaning of the Securities Act and the rules and regulations promulgated
thereunder, (ii) set forth their opinion with respect to their examination of
the balance sheet of the Company as of December 31, 1999 and related statements
of operations, shareholders' equity, and cash flows for the twelve (12) months
ended December 31, 1999, and address other matters agreed upon by Arthur
Andersen LLP and you. In addition, you shall have received from Arthur Andersen
LLP a letter addressed to the Company and made available to you for the use of
the Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in
15
<PAGE>
establishing the scope of their examination of the Company's financial
statements as of December 31, 1999, did not disclose any weaknesses in internal
controls that they considered to be material weaknesses.
(i) Officers' Certificate. You shall have received on the First Closing
Date and the Second Closing Date, as the case may be, a certificate of the
Company, dated the First Closing Date or the Second Closing Date, as the case
may be, signed by the Chief Executive Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be satisfied that:
(i) The representations and warranties of the Company in this Agreement are
true and correct, as if made on and as of the First Closing Date or the
Second Closing Date, as the case may be, and the Company has complied with
all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the First Closing Date or the Second
Closing Date, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Securities Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
contained all material information required to be included therein by the
Securities Act and the applicable rules and regulations of the Commission
thereunder and in all material respects conformed to the requirements of
the Securities Act; the Registration Statement and the Prospectus, and any
amendments or supplements thereto, did not and does not include any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; and, since the effective date of the Registration Statement,
there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth; and
(iv) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been (a) any
material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company, other
than continuing losses from operations in such amounts and resulting from
factors as is consistent with past periods (b) any transaction that is
material to the Company, except transactions entered into in the ordinary
course of business, (c) any obligation, direct or contingent, that is
material to the Company, incurred by the Company, except obligations
incurred in the ordinary course of business, (d) any change in the capital
stock or outstanding indebtedness of the Company, (e) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company or (f) any loss or damage (whether or not insured) to the property
of the Company which has been sustained or will have been sustained which
has a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(j) Lock-up Agreement from Certain Stockholders of the Company. The Company
shall have obtained and delivered to you an agreement substantially in the
form of Exhibit A attached hereto from each officer and director of the
---------
Company, and each beneficial owner of one or more percent of the
outstanding issued share capital of the Company.
16
<PAGE>
(k) Stock Market Listing. The Shares shall have been approved for
inclusion on the Nasdaq National Market, subject only to official notice of
issuance.
(l) Compliance with Prospectus Delivery Requirements. The Company shall
have complied with the provisions of Sections 2(g) and 3(e) hereof with respect
to the furnishing of Prospectuses.
(m) Additional Documents. On or before each of the First Closing Date and
the Second Closing Date, as the case may be, the Representatives and counsel for
the Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Shares as contemplated herein, or in order to evidence
the accuracy of any of the representations and warranties, or the satisfaction
of any of the conditions or agreements, herein contained.
If any condition specified in this Section 4 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company at any time on or prior to the First
Closing Date and, with respect to the Option Shares, at any time prior to the
Second Closing Date, which termination shall be without liability on the part of
any party to any other party, except that Section 5 (Payment of Expenses),
Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification
and Contribution) and Section 10 (Representations and Indemnities to Survive
Delivery) shall at all times be effective and shall survive such termination.
SECTION 5. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of its obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent public or certified public accountants and other
advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all reasonable
costs and expenses incurred by Underwriters counsel in connection with the
Directed Share Program, (vii) all filing fees, reasonable attorneys' fees and
expenses incurred by the Company or the Underwriters in connection with
qualifying or registering (or obtaining exemptions from the qualification or
registration of) all or any part of the Shares for offer and sale under the
state securities or blue sky laws or the provincial securities laws of Canada or
any other country, and, if requested by the Representatives, preparing and
printing a "Blue Sky Survey", an "International Blue Sky Survey" or other
memorandum, and any supplements thereto, advising the Underwriters of such
qualifications, registrations and exemptions, (viii) the filing fees incident
to, and the reasonable fees and expenses of counsel for the Underwriters in
connection with, the National Association of Securities Dealers, Inc. review and
approval of the Underwriters' participation in the offering and distribution of
the Common Shares, (ix) the fees and expenses associated with including the
Common Shares on the Nasdaq National Market, (x) all costs and expenses incident
to the travel and accommodation of the Company's employees on the "roadshow,"
and (xi) all other fees, costs and expenses referred to in Item 13 of Part II of
the Registration Statement. Except as provided in this Section 5, Section 6, and
17
<PAGE>
Section 7 hereof, the Underwriters shall pay their own expenses, including the
fees and disbursements of their counsel.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is
terminated by the Representatives pursuant to Section 4 (other than pursuant to
Section 4(g)), Section 8, Section 9, or if the sale to the Underwriters of the
Shares on the First Closing Date is not consummated because of any refusal,
inability or failure on the part of the Company to perform any agreement herein
or to comply with any provision hereof, the Company agrees to reimburse the
Representatives and the other Underwriters (or such Underwriters as have
terminated this Agreement with respect to themselves), severally, upon demand
for all out-of-pocket expenses that shall have been reasonably incurred by the
Representatives and the Underwriters in connection with the proposed purchase
and the offering and sale of the Shares, including but not limited to the
reasonable fees and disbursements of counsel, printing expenses, travel and
accommodation expenses, postage, facsimile and telephone charges.
SECTION 7. INDEMNIFICATION AND CONTRIBUTION.
(a) Indemnification of the Underwriters. The Company agrees to indemnify
and hold harmless each Underwriter, its officers and employees, and each person,
if any, who controls any Underwriter within the meaning of the Securities Act
and the Exchange Act against any loss, claim, damage, liability or expense, as
incurred, to which such Underwriter or such controlling person may become
subject, under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of the Company, which consent shall not be unreasonably withheld),
insofar as such loss, claim, damage, liability or expense (or actions in respect
thereof as contemplated below) arises out of or is based (i) upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A under the Securities Act, or
the omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading; or
(ii) upon any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or (iii) in whole or
in part upon any inaccuracy in the representations and warranties of the Company
contained herein; or (iv) in whole or in part upon any failure of the Company to
perform its obligations hereunder or under law; or (v) any untrue statement or
alleged untrue statement of any material fact contained in any audio or visual
materials provided by the Company or based upon written information furnished by
or on behalf of the Company including, without limitation, slides, videos, films
or tape recordings, used in connection with the marketing of the Shares,
including without limitation, statements communicated to securities analysts
employed by the Underwriters; or (vi) any act or failure to act or any alleged
act or failure to act by any Underwriter in connection with, or relating in any
manner to, the Shares or the offering contemplated hereby, and which is included
as part of or referred to in any loss, claim, damage, liability or action
arising out of or based upon any matter covered by clause (i), (ii), (iii), (iv)
or (v) above, provided that the Company shall not be liable under this clause
(vi) to the extent that a court of competent jurisdiction shall have determined
by a final judgment that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be taken
by such Underwriter through its bad faith or willful misconduct; and to
reimburse each Underwriter and each such controlling person for any and all
expenses (including the fees and disbursements of counsel chosen by
18
<PAGE>
Robertson Stephens) as such expenses are reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending,
settling, compromising or paying any such loss, claim, damage, liability,
expense or action; provided, however, that the foregoing indemnity agreement
shall not apply to any loss, claim, damage, liability or expense to the extent,
but only to the extent, arising out of or based upon any untrue statement or
alleged untrue statement or omission or alleged omission made in reliance upon
and in conformity with written information furnished to the Company by the
Representatives expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto); and
provided, further, that with respect to any preliminary prospectus, the
foregoing indemnity agreement shall not inure to the benefit of any Underwriter
from whom the person asserting any loss, claim, damage, liability or expense
purchased Shares, or any person controlling such Underwriter, if copies of the
Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a
copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to have
been delivered, and if the Prospectus (as so amended or supplemented) would have
cured the defect giving rise to such loss, claim, damage, liability or expense.
The indemnity agreement set forth in this Section 7(a) shall be in addition to
any liabilities that the Company may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold harmless
the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of the Securities Act or the Exchange Act, against any loss, claim,
damage, liability or expense, as incurred, to which the Company, or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company by the
Representatives expressly for use therein; and to reimburse the Company, or any
such director, officer or controlling person for any legal and other expense
reasonably incurred by the Company, or any such director, officer or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. The indemnity
agreement set forth in this Section 7(b) shall be in addition to any liabilities
that each Underwriter may otherwise have.
(c) Information Provided by the Underwriters. The Company and each person,
if any, who controls the Company within the meaning of the Securities Act or the
Exchange Act, hereby acknowledges that the only information that the
Underwriters have furnished to the Company expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) are the statements set forth in the table in the first
paragraph and the information in the second, third and tenth paragraphs under
the
19
<PAGE>
caption "Underwriting" in the Prospectus; and the Underwriters confirm that such
statements are correct.
(d) Notifications and Other Indemnification Procedures. Promptly after
receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (Robertson Stephens in the case of Section 7(b) and Section
8), representing the indemnified parties who are parties to such action), (ii)
the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action, or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party, in each of which cases the fees and expenses of counsel
shall be at the expense of the indemnifying party.
(e) Settlements. The indemnifying party under this Section 7 shall not be
liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party against any loss, claim, damage,
liability or expense by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees
that it shall be liable for any settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 60 days
after receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior
20
<PAGE>
written consent of the indemnified party, effect any settlement, compromise or
consent to the entry of judgment in any pending or threatened action, suit or
proceeding in respect of which any indemnified party is or could have been a
party and indemnity was or could have been sought hereunder by such indemnified
party, unless such settlement, compromise or consent includes (i) an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such action, suit or proceeding and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act by or on behalf of any indemnified party.
(f) Contribution. If the indemnification provided for in this Section 7 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 7(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) then each
indemnifying party shall contribute to the aggregate amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect the
relative benefits received by such party on the one hand and the Underwriters on
the other from the offering of the Shares. If, however, the allocation provided
by the immediately preceding sentence is not permitted by applicable law then
each indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of such party on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities, (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or the Underwriters on the
other and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 7(f) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7(f). The amount paid
or payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 7(f) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (f), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this Section 7(f)
to contribute are several in proportion to their respective underwriting
obligations and not joint.
(g) Timing of Any Payments of Indemnification. Any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred, but in all cases, no later than forty-five
(45) days of invoice to the indemnifying party.
(h) Survival. The indemnity and contribution agreements contained in this
Section 7 and the representation and warranties set forth in this Agreement
shall remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter
21
<PAGE>
or any person controlling any Underwriter, the Company, its directors or
officers or any persons controlling the Company, (ii) acceptance of any Shares
and payment therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or officers, or
any person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this Section
7.
(i) Acknowledgements of Parties. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who were represented by
counsel during the negotiations regarding the provisions hereof including,
without limitation, the provisions of this Section 7, and are fully informed
regarding said provisions. They further acknowledge that the provisions of this
Section 7 fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement and Prospectus as required by
the Securities Act and the Exchange Act.
(j) Indemnification for Directed Share Program. The Company agrees to
indemnify and hold harmless Robertson Stephens and its affiliates and each
person, if any, who controls Robertson Stephens or its affiliates within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act ("Robertson Stephens Entities"), from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or investigating
any such action or claim) (i) caused by any untrue statement or alleged untrue
statement of a material fact contained in any material prepared by or with the
consent of the Company for distribution to Participants in connection with the
Directed Share Program, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; (ii) the failure of any Participant to pay
for and accept delivery of Directed Shares that the Participant has agreed to
purchase; or (iii) related to, arising out of, or in connection with the
Directed Share Program other than losses, claims, damages or liabilities (or
expenses relating thereto) that are finally judicially determined to have
resulted from the bad faith or gross negligence of Robertson Stephens Entities.
SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Shares that it
or they have agreed to purchase hereunder on such date, and the aggregate number
of Common Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase does not exceed 10% of the aggregate number of the
Shares to be purchased on such date, the other Underwriters shall be obligated,
severally, in the proportions that the number of Firm Common Shares set forth
opposite their respective names on Schedule A bears to the aggregate number of
----------
Firm Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Representatives with the consent of the non-defaulting Underwriters, to purchase
the Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase on such date. If, on the First Closing Date or the Second
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Shares and the aggregate number of Shares with respect to
which such default occurs exceeds 10% of the aggregate number of Shares to be
purchased on such date, and arrangements satisfactory to the Representatives and
the Company for the purchase of such Shares are not made within 48 hours after
such default, this Agreement shall terminate without liability of any party
(other than the defaulting underwriter) to any other party except that the
provisions of Section 5, and Section 7 shall at all times be effective and shall
survive such termination. In any such case either the Representatives or the
Company shall have the right to
22
<PAGE>
postpone the First Closing Date or the Second Closing Date, as the case may be,
but in no event for longer than seven days in order that the required changes,
if any, to the Registration Statement and the Prospectus or any other documents
or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
8. Any action taken under this Section 8 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 9. TERMINATION OF THIS AGREEMENT. This Agreement may be terminated
by the Representatives by notice given to the Company if (a) at any time after
the execution and delivery of this Agreement and prior to the First Closing Date
(i) trading or quotation in any of the Company's securities shall have been
suspended or limited by the Commission or by the Nasdaq Stock Market, or trading
in securities generally on either the Nasdaq Stock Market or the New York Stock
Exchange shall have been suspended or limited, or minimum or maximum prices
shall have been generally established on any of such stock exchanges by the
Commission or the National Association of Securities Dealers, Inc.; (ii) a
general banking moratorium shall have been declared by any of federal, New York,
Delaware or California authorities; (iii) there shall have occurred any outbreak
or escalation of national or international hostilities or any crisis or
calamity, or any change in the United States or international financial markets,
or any substantial change or development involving a prospective change in
United States' or international political, financial or economic conditions, as
in the judgment of the Representatives is material and adverse and makes it
impracticable or inadvisable to market the Common Shares in the manner and on
the terms described in the Prospectus or to enforce contracts for the sale of
securities; (iv) in the judgment of the Representatives there shall have
occurred any Material Adverse Change; or (v) the Company shall have sustained a
loss by strike, fire, flood, earthquake, accident or other calamity of such
character as in the judgment of the Representatives may interfere materially
with the conduct of the business and operations of the Company regardless of
whether or not such loss shall have been insured or (b) in the case of any of
the events specified in Section 9(a)(i)-(v), such event singly or together with
any other event, makes it, in your judgment, impracticable or inadvisable to
market the Shares in the manner and on the terms contemplated by the Prospectus.
Any termination pursuant to this Section 9 shall be without liability on the
part of (x) the Company to any Underwriter, except that the Company shall be
obligated to reimburse the expenses of the Representatives and the Underwriters
pursuant to Sections 5 and 6 hereof, (y) any Underwriter to the Company or any
person controlling the Company or (z) of any party hereto to any other party
except that the provisions of Section 7 shall at all times be effective and
shall survive such termination.
SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, its officers, and of the several Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter
or the Company or any of its or their partners, officers or directors or any
controlling person, as the case may be, and will survive delivery of and payment
for the Shares sold hereunder and any termination of this Agreement.
SECTION 11. NOTICES. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
23
<PAGE>
FLEETBOSTON ROBERTSON STEPHENS INC.
555 California Street
San Francisco, California 94104
Facsimile: (415) 676-2675
Attention: General Counsel
If to the Company:
ORAPHARMA, INC.
732 Louis Drive
Warminster, PA 18974
Facsimile: (215) 443-9531
Attention: President
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 8 hereof, and to the benefit of the employees, officers and directors
and controlling persons referred to in Section 7, and to their respective
successors, personal representatives, and no other person will have any right or
obligation hereunder. The term "successors" shall not include any purchaser of
the Shares as such from any of the Underwriters merely by reason of such
purchase.
SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 14. GOVERNING LAW PROVISIONS.
(a) Governing Law. This agreement shall be governed by and construed in
accordance with the internal laws of the state of New York applicable to
agreements made and to be performed in such state.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding arising
out of or based upon this Agreement or the transactions contemplated hereby
("Related Proceedings") may be instituted in the federal courts of the United
States of America located in the Borough of Manhattan in the City of New York or
the courts of the State of New York located in the Borough of Manhattan in the
City of New York (collectively, the "Specified Courts"), and each party
irrevocably submits to the exclusive jurisdiction (except for proceedings
instituted in regard to the enforcement of a judgment of any such court (a
"Related Judgment"), as to which such jurisdiction is non-exclusive) of such
courts in any such suit, action or proceeding. Service of any process, summons,
notice or document by mail to such party's address set forth above shall be
effective service of process for any suit, action or other proceeding brought in
any such court. The parties irrevocably and unconditionally waive any objection
to the laying of venue of any suit, action or other proceeding in the Specified
Courts and irrevocably and unconditionally waive and agree not to plead or claim
in any such court that any such suit, action or other proceeding brought in any
such court has been brought in an inconvenient forum. Each party
24
<PAGE>
not located in the United States irrevocably appoints CT Corporation System,
which currently maintains a San Francisco office at 49 Stevenson Street, San
Francisco, California 94105, United States of America, as its agent to receive
service of process or other legal summons for purposes of any such suit, action
or proceeding that may be instituted in any state or federal court in the City
and County of San Francisco.
(c) Waiver of Immunity. With respect to any Related Proceeding, each party
irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and execution to
which it might otherwise be entitled in the Specified Courts, and with respect
to any Related Judgment, each party waives any such immunity in the Specified
Courts or any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such Related
Proceeding or Related Judgment, including, without limitation, any immunity
pursuant to the United States Foreign Sovereign Immunities Act of 1976, as
amended.
SECTION 15. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Section headings herein are for the convenience of the parties only and
shall not affect the construction or interpretation of this Agreement.
[The remainder of this page has been intentionally left blank.]
25
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company the enclosed copies hereof,
whereupon this instrument, along with all counterparts hereof, shall become a
binding agreement in accordance with its terms.
Very truly yours,
ORAPHARMA, INC.
By:_____________________________
Michael D. Kishbauch
President and Chief Executive Officer
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Representatives as of the date first above written.
FLEETBOSTON ROBERTSON STEPHENS INC.
U.S. BANCORP PIPER JAFFRAY INC.
GERARD KLAUER MATTISON & CO., INC.
On their behalf and on behalf of each of the several underwriters named in
Schedule A hereto.
- ----------
BY: FLEETBOSTON ROBERTSON STEPHENS INC.
By: _______________________________________________
Mitch Whiteford
Managing Director
26
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION> NUMBER OF FIRM COMMON
UNDERWRITERS SHARES TO BE PURCHASED
______________________________________________________________________ _________________________
<S> <C>
FLEETBOSTON ROBERTSON STEPHENS INC.......................................... [___]
U.S. BANCORP PIPER JAFFRAY INC.............................................. [___]
GERARD KLAUER MATTISON & CO., INC........................................... [___]
[___]....................................................................... [___]
[___]....................................................................... [___]
Total.................................................................. [___]
</TABLE>
S-A
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this S-1
Registration Statement.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
February 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ORAPHARMA,
INC.'S DECEMBER 31, 1998 AND SEPTEMBER 30, 1999 FINANCIAL STATEMENT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 19,236,084 13,073,803
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 19,282,525 13,559,759
<PP&E> 1,165,383 1,402,328
<DEPRECIATION> 193,970 444,431
<TOTAL-ASSETS> 20,480,402 14,711,739
<CURRENT-LIABILITIES> 2,308,162 2,066,166
<BONDS> 480,978 288,043
28,771,713 33,730,563
0 0
<COMMON> 957 1,040
<OTHER-SE> (11,081,408) (21,374,073)
<TOTAL-LIABILITY-AND-EQUITY> 20,480,402 14,711,739
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 9,193,579 11,882,990
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 38,018 52,496
<INCOME-PRETAX> (8,769,091) (11,246,033)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (8,769,091) (11,246,033)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,769,091) (12,975,684)
<EPS-BASIC> (13.72) (16.74)
<EPS-DILUTED> (13.72) (16.74)
</TABLE>
