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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 1-9898
ORGANOGENESIS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2871690
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 DAN ROAD, CANTON, MA 02021
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 575-0775
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ( X ) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( X )
As of March 3, 1997, the approximate aggregate market value of voting
stock held by non-affiliates of the registrant was $322,698,150, based on the
last reported sale price of the Company's Common Stock on the American Stock
Exchange as the close of business on March 3, 1997. There were 14,342,140
shares of Common Stock outstanding as of March 3, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K
DOCUMENT INTO WHICH INCORPORATED
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Portions of the Registrant's Definitive Proxy Statement III
for its 1997 Annual Meeting of Stockholders
With the exception of the portions of the Definitive Proxy Statement
for the registrant's 1997 Annual Meeting of Stockholders expressly incorporated
into this Report by reference, such document shall not be deemed filed as a part
of this Annual Report on Form 10-K.
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PART I
The following discussions and other parts of this report which
express "belief", "anticipation", "expectation", "plans", "future" or
"intention" as well as other statements which are not historical fact, are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in these
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under "Item 7-Liquidity and Capital
Resources" and "Item 8-Nature of Business" sections of this report and those
included in publicly available filings with the Securities and Exchange
Commission.
ITEM 1. BUSINESS
Organogenesis Inc. (the "Company" or "Organogenesis") designs,
develops and manufactures medical therapeutics using living human cells and/or
natural connective tissue components. The Company's products are designed to
promote the establishment and growth of new tissues to restore, maintain or
improve biological function. The Company was organized as a Delaware
corporation in 1985. Its principal executive offices are located at 150 Dan
Road, Canton, Massachusetts 02021 and its telephone number is (617) 575-0775.
CORE TECHNOLOGIES
Organogenesis was founded to develop and commercialize therapies
based on innovations in tissue engineering. Tissue engineering is a relatively
new discipline focused on developing products based on living cells and/or
specialized biomaterials to assist, repair, regenerate or replace diseased or
damaged organs. An understanding of the biology of cells and the structure and
function of the extracellular matrix, and the critical interactions between
the two, is needed to fully exploit the potential of tissue engineering.
Because of this, Organogenesis continually strives to broaden, develop and
utilize its expertise in cell and connective tissue sciences.
CELL SCIENCE The ability to tap the power of living cells is
important to realizing the potential of tissue engineering. Cells are the
building blocks of life. They make up the organs of the body, serving
physical, metabolic and other specialized functions. Organogenesis' emphasis
on the significance of cell science to tissue engineering has led not only to
Apligraf/TM/ (formerly called Graftskin/TM/), but also has provided valuable
experience for the future in such areas as:
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- Cell sourcing - Transplantation immunology
- Specialized culture systems and media - Cell delivery and therapy design
- Human cell bank production - Cryopreservation of complex tissues
- Cell safety screening and functional testing
</TABLE>
Organogenesis has established significant expertise in the areas of
cell biology, cryopreservation technology and immunology.
Cell Biology Organogenesis has significant expertise in the science
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of three-dimensional organotypic cell culture -- the ability to produce living
cultures of cells with the properties and functions typical of the organ from
which they were derived. For example, Apligraf/TM/ is a three-dimensional,
organotypic skin product. This and other models (cornea) have provided
important scientific findings on cell-to-cell interaction, cell and matrix
interaction and extracellular matrix production.
By employing its cell growth and organotypic culture technologies,
Organogenesis has gained important knowledge of cell regulatory mechanisms and
factors controlling cell growth and tissue formation which is anticipated to
be broadly applicable to many cell types. Organogenesis is applying this
expertise to the development of other cell-based products, including other
living tissue products and other products based on difficult-to-culture cells.
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Cryopreservation Technology Organogenesis has developed the ability
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to cryopreserve (freeze) Apligraf/TM/ while maintaining greater than 90% cell
viability. This technology is anticipated to facilitate not only the
international distribution of Apligraf/TM/, but also other cell therapies
developed by Organogenesis. The Company aggressively protects all aspects of
its proprietary cryopreservation technology through a comprehensive patenting
program and currently has four cryopreservation patents allowed or pending in
the U.S. alone.
Immunology Immunology plays a critical role in tissue engineering
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both in determining the body's reaction to a biomaterial and assisting in the
transfer of human cells between individuals (allogeneic cells). Organogenesis
has a strong in-house immunology department which supports both safety
evaluation of its products and new product development. Organogenesis also
interacts with outside experts: the Company has a collaboration with Boston
Children's Hospital to further advance understanding of graft acceptance.
The ability to transplant cells from one individual to another is
important to the development and commercialization of manufactured tissues.
For example, the cells used in Apligraf/TM/ are derived from infant foreskin
tissue that would normally be discarded. Using proprietary cell culture
technology, the cells from one postage stamp-sized piece of foreskin can yield
up to 200,000 units of Apligraf/TM/.
Immunological screening of Apligraf/TM/ recipients shows no evidence
of immune response to the cell types used. These findings represent an
important step for the clinical validation of the Apligraf/TM/ technology.
Such studies also provide critical evidence to support the general concept of
the immune compatibility of allogeneic cells and are anticipated to positively
impact the future of cell therapy, transplantation and other areas of tissue
engineering.
CONNECTIVE TISSUE SCIENCES Organogenesis has developed proprietary
technology relating to the extracellular matrix; in particular, the ability to
procure and utilize collagen in a manner which retains the physical and
biological properties important to its interactions with living cells.
Organogenesis' collagen has been shown to support cell growth and interaction
in two settings:
. When cells are added to Organogenesis' collagen during product
manufacturing, the collagen supports cell growth, differentiation and
interaction. This allows Organogenesis to develop products such as
living tissue equivalents and other types of cell therapies.
Apligraf/TM/ is an example of this use of Organogenesis' collagen.
. When used as an implant by itself, Organogenesis' collagen helps
foster and direct the ingrowth of the patient's cells and blood
vessels. Over time, the recipient's body gradually replaces the
implant's collagen with its own tissue to form a fully functional
analog of the missing tissue using the implant as a guide.
Organogenesis has product development programs related to both such uses of
its collagen technology.
PRODUCTS
Organogenesis' product development focus includes living tissue
replacements, organ assist treatments and guided tissue regeneration
scaffolds. The Company is also exploring additional opportunities relating to
cell and gene therapy applications and to its cryopreservation technology.
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The Company's most advanced product is Apligraf/TM/ for the treatment of
venous ulcers. This product is not currently available for sale, as discussed
under "Regulatory Status" on page 5. The product pipeline below provides a
representation of the anticipated relative timing for other programs in the
Organogenesis product pipeline. Relative timing is used as programs differ not
only in current stage of development, but also in anticipated length of future
stages (e.g. length of clinical trial phase can vary markedly depending on
application). Within each category, products are alphabetized.
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ORGANOGENESIS PIPELINE
Projected Timing to Regulatory Submission*
NEAR TERM
Apligraf/TM/ - Burns, first indication
Apligraf/TM/ - Clean surgical excision, first indication
MID-TERM
Apligraf/TM/ - Chronic inflammatory wounds
Apligraf/TM/ - Clean surgical excision, second indication
Apligraf/TM/ - Clean surgical excision, third indication
Apligraf/TM/ - Decubitus ulcers
Apligraf/TM/ - Diabetic ulcers
Urinary Incontinence Injectable
Vascular Support Product
LONGER TERM
Apligraf/TM/ - Burns, second indication
Cell and Gene Therapies
Liver Assist Device
Living Tissue Product - Oral surgery
Living Tissue Product - Respiratory tract repair
Small Diameter Graft - Coronary applications
Small Diameter Graft - Peripheral applications
*There can be no assurance that these regulatory submissions will occur.
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LIVING TISSUE PRODUCTS
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APLIGRAF/TM/
Apligraf/TM/ (formerly called Graftskin/TM/) is a manufactured Human Skin
Equivalent developed for the treatment of wounds, including chronic wounds,
skin surgery wounds and burns. As discussed under "Collaborative Agreements,"
Novartis AG has exclusive global Apligraf/TM/* marketing rights.
*Apligraf/TM/ is a trademark of Novartis
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Product Description
Like human skin, Apligraf/TM/ is:
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. Bi-layered: Apligraf/TM/ has both layers of human skin - the upper
epidermis and the lower dermis. Each plays an important role in the
function of skin.
. Living: The upper layer of Apligraf/TM/ is comprised of living human
epidermal cells (keratinocytes); the lower layer consists of living
human dermal cells (fibroblasts) in an organized dermal matrix. The
cells in Apligraf/TM/ can interact with the wound bed and directly
contribute to the wound healing process.
. Organized: Under the microscope, Apligraf/TM/ shares the appearance
of skin. Organogenesis' proprietary organotypic culturing technology
enables the cells to reproduce their natural three-dimensional
arrangement. For example, the keratinocytes in Apligraf/TM/ establish
an outer stratum corneum layer, the primary protective layer of skin.
. Natural: Apligraf/TM/ contains no synthetics and does not need to be
removed.
Apligraf/TM/ is multi-functional, like human skin. Its different
components- the stratum corneum, the keratinocytes, the fibroblasts and the
collagen matrix - can affect the wound healing process in different, but
related, ways. Most importantly, these components can interact synergistically
as they would in human skin. Apligraf/TM/ interacts with the wound bed in a
way that provides flexibility of response and maximizes the chance for
successful healing.
Regulatory Status
In 1995, the Company submitted to the United States Food and Drug
Administration ("FDA") and the FDA accepted for filing, the Apligraf/TM/
Premarket Approval Application ("PMA") for use in the treatment of venous
ulcers. The filing date for this PMA was October 4, 1995. The basis for this
submission was the Apligraf/TM/ venous ulcer pivotal trial. The FDA granted
expedited review status to this PMA. PMA applications with expedited review
status are still subject to all other controls and requirements applicable to
PMAs in the standard review process. The Company interacts with the FDA on
this PMA, and it is currently pending.
International registration of Apligraf/TM/ is being pursued by Novartis,
which has regulatory responsibility for the product outside the U.S.
There can be no assurance of marketing approval for Apligraf/TM/ or that
Apligraf/TM/ will be commercially successful.
Potential Markets
Potential uses identified to date include wounds that have been open for
an extended period of time (chronic wounds), wounds created by skin surgery
(clean surgical excision wounds) and wounds due to burns. As more physicians
become familiar with Apligraf/TM/, additional uses continue to emerge.
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CHRONIC WOUNDS
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Globally, over 12 million people suffer from chronic wounds, including
venous ulcers, diabetic ulcers and decubitus ulcers (pressure sores).
Apligraf/TM/ clinical trials are completed, underway or planned in each of the
major segments of this market.
VENOUS ULCERS: An estimated 900,000-1.5 million patients in the U.S., 4
million patients globally, suffer from venous ulcers. These are generally
considered to be the most difficult to heal of the chronic wounds, as they are
associated with the greatest compromise of the patient's own wound healing
ability. Many venous ulcer patients have had their wound for more than a year.
Even when healing is achieved with traditional therapies, the process can take
six months or longer.
The Apligraf/TM/ venous ulcer pivotal trial was a prospective,
randomized, controlled multi-center study. The primary endpoints were: (1)
frequency of 100% wound closure and (2) time to 100% wound closure. In this
trial, Apligraf/TM/ was shown to achieve 100% wound closure in more patients
and to achieve it faster than multilayer compression therapy, standard care
for venous ulcers. Apligraf/TM/ was found to be highly effective even in
difficult-to-heal ulcers, such as ulcers of extended duration. Apligraf/TM/
was found to have an excellent safety profile, with no sign of tissue
rejection. Apligraf/TM/ was also found to provide biologic wound closure, able
to contribute directly to the wound healing process. This is believed to be
why Apligraf/TM/ can heal wounds that have remained open for long periods of
time.
.
DIABETIC ULCERS: Nearly 2 million people globally suffer from diabetic
ulcers, which can frequently lead to amputation. To address this need, in
March 1996 Organogenesis initiated a prospective, randomized, controlled
multi-center diabetic ulcer pivotal trial. This trial is currently at patient
recruitment stage.
DECUBITUS ULCERS: The decubitus ulcer market is large - over 6 million
people globally suffer from these wounds - but it is difficult to penetrate as
many of these patients receive inadequate medical care. Organogenesis feels it
is important to provide effective treatments for these patients and
anticipates initiating an Apligraf/TM/ decubitus ulcer pivotal trial in 1997.
OTHER CHRONIC WOUNDS: Additional opportunities for Apligraf/TM/ in non-
healing wounds continue to be identified. For example, clinicians have
expressed an interest in studying Apligraf/TM/ in a variety of chronic
inflammatory wounds.
CLEAN SURGICAL EXCISION WOUNDS
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Approximately one million skin surgery procedures are performed annually
on a global basis. Some of these procedures are for the removal of skin
cancers, birthmarks and tattoos, while others are to harvest skin for use
elsewhere on the body, such as in the treatment of burns. A number of patients
undergoing such procedures could potentially benefit from Apligraf/TM/. In
addition to these existing medical purposes, other potential uses for
Apligraf/TM/ in surgically-created wounds continue to be identified, including
plastic surgery applications and use in the treatment of localized skin
abnormalities.
Over one hundred patients have received Apligraf/TM/ for clean surgical
excision wounds in its dermatological surgery and donor site clinical studies.
The benefits provided by Apligraf/TM/ treatment can include immediate wound
closure, resurfacing of the wound with epithelium, rapid healing and good
cosmetic results.
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BURN WOUNDS
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Globally, an estimated 300,000 people visit the hospital for the
treatment of burns each year. Approximately 10,000 of these people have burns
over a large percentage of their body. While a number of dressings
(synthetics, cadaver skin) can provide temporary protection, what is sought is
permanent skin coverage. Data from the Apligraf/TM/ burn clinical study
indicate that meshed Apligraf/TM/ over meshed autograft can function as a skin
replacement, that Apligraf/TM/ can improve the functional and cosmetic
properties of the damaged area and that it may also reduce the number of
autograft procedures required.
OTHER LIVING TISSUE PRODUCTS
Organogenesis is using its expertise to develop a line of living tissue
products for unmet medical needs - products for external applications, such
as wound repair and for other applications, such as surgical reconstruction,
respiratory tract repair and oral surgery (e.g. periodontal procedures). As
part of this program, the Company is supporting research at Brigham and
Women's Hospital on the biology of oral mucosa tissue.
NEW CELL TECHNOLOGIES
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In early 1996, Organogenesis formed a New Cell Technologies group focused
on applying the Company's experience with difficult-to-culture cells to the
development of cell and gene therapies for conditions which may be best
treated with living cells. This group leverages the Company's expertise in
procuring, culturing, optimizing and cryopreserving mammalian cells.
LIVER ASSIST DEVICE
Liver disease is a leading cause of disease-related death in the U.S.,
killing about 40,000 people each year. Approximately 360,000 people in the
U.S. have active liver disease, and millions more have medical conditions
which can progress to severe disease. Currently, liver transplantation is the
only treatment for end-stage liver disease, as only liver cells (hepatocytes)
can provide the necessary function. Unfortunately, many patients die awaiting
a transplant. One in four transplant recipients requires a second liver
transplant due to deteriorated health. In addition to organ availability
issues, liver transplantation is also expensive: costing about $300,000 per
procedure plus $10,000-$25,000 per year per transplant.
The initial goal of the Organogenesis liver assist device (LAD) program
is the development and commercialization of a device which would provide
temporary support until either a transplant becomes available or the patient's
own liver has recovered. However, such a LAD could eventually be used to keep
less seriously ill patients from deteriorating to end-stage disease.
The challenge in developing a LAD is to optimize hepatocyte function
within a medical device. Organogenesis brings to this program extensive
experience with mammalian cells. To augment its internal strengths,
Organogenesis has entered into a collaboration with the Massachusetts General
Hospital to secure complementary skills in liver physiology and device design.
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PANCREATIC ISLET CELLS
Organogenesis also has a research program directed at the culturing of
pancreatic islet cells for the treatment of diabetes. Use of islet cells for
the treatment of diabetes may offer advantages over traditional, fixed dosing
insulin delivery as islet cells can provide insulin in response to the levels
of glucose in the blood.
GUIDED TISSUE REGENERATION SCAFFOLDS
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The cell compatibility of Organogenesis' collagen products makes them
well-suited for applications requiring an implant which can serve not only the
immediate physical function, but also can foster and direct the ingrowth of
host cells. Organogenesis has several guided tissue regeneration scaffold
products in development.
CARDIOVASCULAR SURGERY PRODUCTS
Much of cardiovascular surgery is directed towards the repair or
replacement of damaged blood vessels. For example, each year, nearly 300,000
coronary artery bypass procedures are performed in the U.S. alone, requiring
an average of 3.5 bypass grafts per procedure. Despite the size of this
market, cardiovascular surgeons still rely on vein harvested from the patient
for their graft material as traditional technologies have been unable to
achieve comparable performance.
Use of patient vein has its drawbacks: it varies in quality and
availability; harvesting vein greatly extends the procedure's duration,
increasing its cost; and the resultant second wound site increases post-
surgical patient discomfort and complications. However, patient vein offers a
feature not obtainable with synthetics: the ability to provide the critical
strength while becoming populated with patient cells.
Organogenesis is developing a ready-to-use small diameter graft to
provide the performance of saphenous vein. Organogenesis has shown
encouraging findings in preclinical studies and its development is continuing.
A goal of the Organogenesis cardiovascular program is to develop products for
multiple cardiovascular surgery needs, including vascular support applications
(e.g. stent grafts and wraps), peripheral revascularization procedures and
coronary bypass grafting.
UROLOGY
About 25 million women worldwide suffer from urinary incontinence, of
which nearly fifteen percent have intrinsic sphincter deficiency. Current
treatment for this condition includes injecting material to support the
sphincter. One drawback to available products is that they tend to disperse,
limiting their support.
Organogenesis is applying its tissue engineering technology to the design
and development of an injectable product which can retain position -
supporting the sphincter - while becoming populated with the patient's own
cells. The injected product is to be gradually replaced by patient-produced
collagen, achieving permanence of benefit without permanence of product.
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COMPETITION
The Company is engaged in the rapidly evolving and competitive field of
tissue engineering. A number of pharmaceutical, biotechnology and medical
product companies in the United States and abroad are seeking to develop
competitive products for the treatment of skin wounds and organ equivalent
products. Competition from these companies and others is intense and is
expected to increase. Many of these companies have substantially greater
capital resources, research and development staffs and facilities and
experience in the marketing and distribution of products than the Company. In
addition, competitive companies are working on alternate approaches to many of
the diseases targeted by the Company.
The Company is currently aware of other companies which have or are
planning to commercialize products intended to serve as skin replacements, in
addition to several companies that concentrate on skin repair products. The
Company's principal competitors in the wound care products market include
Advanced Tissue Sciences, Bristol-Myers Squibb, Genzyme Tissue Repair, Integra
Life Sciences, Johnson & Johnson, Kendall, LifeCell and Smith & Nephew. The
Company believes that its competitive position will be based on its ability to
create and maintain scientifically advanced technology and proprietary
products and processes, attract and retain qualified scientific personnel,
obtain patent or other protection for its products and processes, obtain
required government approvals on a timely basis, manufacture its products on a
cost effective basis and successfully market its products.
RETENTION OF KEY PERSONNEL
Because of the specialized nature of the Company's business, the
Company's success will depend, in large part, on its continued ability to
attract and retain highly qualified scientific and business personnel and on
its ability to develop and maintain relationships with leading research
institutions. The competition for those relationships and for experienced
scientists and management personnel that exists among the numerous
biotechnology, pharmaceutical and healthcare companies, universities and
nonprofit research institutions is intense.
PATENTS AND PROPRIETARY TECHNOLOGY
Organogenesis has a proprietary portfolio of patent rights and
applications and exclusive licenses to patents and patent applications
relating to living tissue products, organ assist treatments, guided tissue
regeneration scaffolds and other aspects of tissue engineering. These patent
applications include patents relating to tissue sourcing, methods of
preparation, cell culture technologies, sterilization technologies,
manufacturing methods and living tissue cryopreservation. The Company intends
to continue to attempt to aggressively patent its technologies.
The Company has fourteen issued patents in the U.S. alone. The Company
also aggressively attempts to achieve comparable patents in the major
international markets for its products, particularly in Europe and Japan.
Currently, the Company has seven pan-European patents issued, plus one which
has achieved intent-to-grant status and five issued patents in Japan.
Certain of the Company's technologies are licensed under an exclusive
patent license agreement with the Massachusetts Institute of Technology
("MIT"). The agreement with MIT (as amended, the "MIT Agreement") covers
certain U.S. patents and corresponding patents in European and Far East
countries. Pursuant to the MIT Agreement, the Company has been granted an
exclusive, worldwide license to make, use and sell the products covered by the
patents and to practice the procedures covered by the patents. The MIT
Agreement requires the Company to pay to MIT a royalty on the cumulative net
sales of licensed products ranging from 3% to 4.5% of annual Company sales.
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The Company's other U.S. issued patents relate to: the Company's test
system incorporating skin tissue equivalents and other organ equivalents; its
proprietary collagen extraction process; the invention and methods of making
of dense fibrillar collagen (DFC) constructs; the production of an organ
equivalent for the cornea and its method of production using tissue culturing
systems; a method of making collagen thread; a method of cold chemical
sterilization which maintains the cell-compatibility of the Company's
collagen; methods for manufacturing living skin equivalents, including
Apligraf/TM/; and a method of cryopreservation of cultured living tissue
equivalents. As part of the continuing interest in protecting its intellectual
property rights, the Company has also filed, and is prosecuting, over thirteen
other patent applications in the United States alone.
There can be no assurance that any patents will be issued as a result of
the Company's patent applications or that issued patents will provide the
Company with significant protection against competitors. Moreover, there can
be no assurance that any patents issued to or licensed by the Company will not
be infringed or that third parties will not independently develop either the
same or similar technology.
A portion of the Company's know-how and technology are trade secrets. To
protect its rights, the Company requires key employees and consultants to
maintain the confidentiality of the Company's proprietary information and the
Company intends to require any corporate sponsor with which the Company enters
into a collaborative research and development agreement to do so as well.
There can be no assurance, however, that these agreements will provide
meaningful protection for the Company's trade secrets, know-how or other
proprietary information in the event of any unauthorized use or disclosure.
GOVERNMENT REGULATION
The Company's present and proposed activities are subject to government
regulation in the United States and other countries. In order to clinically
test, produce and market medical devices for human use, the Company must
satisfy mandatory procedures and safety and efficacy requirements established
by the FDA and comparable state and foreign regulatory agencies. Typically,
such rules require that products be approved by the government agency as safe
and effective for their intended use prior to being marketed. The approval
process is expensive, time-consuming and subject to unanticipated delays, and
no assurance can be given that any agency will grant its approval.
Testing is necessary to determine safety and efficacy before a submission
may be filed with the FDA to obtain authorization to market regulated
products. In addition, the FDA imposes various requirements on manufacturers
and sellers of products under its jurisdiction, such as labeling, good
manufacturing practices, record keeping and reporting requirements. The FDA
also may require post-marketing testing and surveillance programs to monitor a
product's effects.
As the Company develops products to the point where FDA authorization
becomes required, there can be no assurance that the appropriate authorization
will be granted, that the process to obtain such authorization will not be
excessively expensive or lengthy or that the Company will have sufficient
funds to pursue such approvals. Moreover, the failure to receive requisite
authorization for the Company's products or processes, when and if developed,
or significant delays in obtaining such authorization, would prevent the
Company from commercializing its products as anticipated and may have a
materially adverse effect on the business of the Company.
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PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE
The Company's business exposes it to potential liability risks that are
inherent in the testing, manufacturing and marketing of medical products. The
use of the Company's product candidates in clinical trials may expose the
Company to product liability claims and possible adverse publicity. These
risks also exist with respect to the Company's product candidates, if any,
that receive regulatory approval for commercial sale. The Company currently
has limited product liability coverage for the clinical research use of its
product candidates. The Company does not have product liability insurance for
the commercial sale of its product candidates but intends to obtain such
coverage if and when its products are commercialized. However, there can be no
assurance that the Company will be able to obtain additional insurance
coverage at acceptable costs, if at all, or that a product liability claim
would not have a material adverse affect on the business or financial
condition of the Company.
MANUFACTURING LIMITATIONS
The Company has limited experience in the commercial manufacturing of
medical device products. The process of manufacturing the Company's products
is complex, requiring strict adherence to manufacturing protocols. The
Company is producing its lead product, Apligraf/TM/, on a pilot-scale in
adherence to these manufacturing protocols in quantities sufficient to meet
clinical testing needs. However, the Company will need to transition from
pilot-scale manufacturing to full-scale production of the Company's products
and there can be no assurance that the Company will be able to make this
transition successfully.
As the Company undertakes the manufacture of products on a commercial
basis, it will be required to maintain a manufacturing facility in compliance
with Good Manufacturing Practices. Manufacturing facilities and processes must
pass an inspection before the FDA will issue any product licenses necessary to
market medical therapeutics and are subject to continual review and periodic
inspection. There can be no assurance that the Company will be able to
manufacture any products successfully and in a cost effective manner. If the
Company is unable to manufacture its potential products independently or
obtain or retain third-party manufacturing on commercially acceptable terms,
the submission of products for final regulatory approval and initiation of
marketing would be delayed. This, in turn, may cause the Company to be unable
to commercialize its product candidates as planned, which may have a material
adverse effect on the Company.
SOURCES OF SUPPLY
The Company manufactures Apligraf/TM/ for use in clinical trials at its
Canton, Massachusetts facility and intends to manufacture Apligraf/TM/ for
commercial sale at that facility. Among the fundamental raw materials needed
to manufacture Apligraf/TM/ are keratinocytes and fibroblasts. These cells are
derived from donated infant foreskin; it is critical that the cells be
pathogen free. The Company does extensive testing of the cells for pathogens,
including for the HIV or "AIDS" virus. However, there can be no assurance that
additional cells of adequate purity can be created, or once created, that the
cells derived from it will in fact be pathogen free.
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Another major additional material required to produce the Company's
products is collagen, a protein ordinarily obtained from animal source tissue
by commercial suppliers. The Company has developed a proprietary method of
procuring its own collagen. This process yields collagen which the Company
believes is superior in quality and strength to collagen available from
commercial sources and which provides the Company with a continuous, high-
quality source of supply. The Company currently obtains its animal source
tissue from U.S. suppliers only, as required by the U.S. Department of
Agriculture ("USDA"); there is currently only one other USDA-approved country
from which these materials may be purchased. There can be no assurance that
the Company will be able to obtain adequate supplies of animal source tissue
to meet its future needs or that the Company will be able to obtain such
supplies on a cost effective basis.
The thermo-formed tray assembly that is used in the manufacturing process
of Apligraf/TM/ is available under a supply arrangement with only one FDA-
approved manufacturing source. Because the FDA approval process requires
manufacturers to specify their proposed materials of certain component parts
in their applications, FDA approval of a new material would be required if a
currently approved material became unavailable from a supplier. There can be
no assurance that the Company will be able to obtain adequate supplies of
thermo-formed tray assemblies to meet its future Apligraf/TM/ manufacturing
needs or that the Company will be able to obtain such assemblies on a cost
effective basis.
There can be no assurance that interruptions in supplies will not occur
in the future or that the Company will not have to obtain substitute vendors
for these materials. Any significant supply interruption would adversely
affect the Company's clinical trials or future large scale commercial
manufacturing of Apligraf/TM/. In addition, an uncorrected impurity or
suppliers variation in a raw material, either unknown to the Company or
incompatible with the Company's manufacturing process, could have a material
adverse effect on the Company's ability to manufacture its products.
COLLABORATIVE AGREEMENTS
In January 1996, the Company and Novartis AG ("Novartis"), formerly
Sandoz Ltd. entered into an agreement granting Novartis exclusive global
marketing rights to Apligraf/TM/. Under the agreement, Novartis is responsible
for Apligraf/TM/ sales and marketing costs worldwide, as well as all clinical
trials, registrations and patent costs outside the U.S. The Company will
supply Novartis' global requirements for Apligraf/TM/ and will receive both a
per unit manufacturing payment and royalty revenues on all product sales.
Novartis has agreed to provide the Company up to $37,500,000 in equity
investments, research support and milestone payments, of which $11,500,000 was
received in 1996. The remaining payments will be received based upon
achievement of specified events or dates.
In 1995, the Company and Biomet, Inc. ("Biomet") mutually agreed to
replace the prior research agreement with a supply arrangement under which
Biomet may, but is not obligated to, purchase collagen from the Company. The
Company recognized revenues under these agreements of approximately $19,000
and $336,000 for the years ended December 31, 1995 and 1994, respectively. No
significant revenues were recognized under this supply arrangement in 1996.
In 1994, the Company signed a license agreement with Toyobo Ltd. ("Toyobo"),
granting Toyobo a license to manufacture and market Testskin in Japan, in
exchange for royalty payments to the Company. The Company recognized royalty
revenues under this agreement of approximately $42,000 for the year ended
December 31, 1996. No significant revenues were recognized under this
agreement in 1995 and 1994.
12
<PAGE>
RESEARCH AND OTHER AGREEMENTS
The agreements summarized below generally provide for funding over a limited
period. Each agreement is reviewed at least annually and the amounts to be
funded for the next period are then determined. Either party may cancel the
agreement upon advance, written notice.
In September 1996, the Company entered into a research agreement with the
Children's Hospital of Boston related to graft acceptance.
In June 1996, the Company announced that it had formed a research
collaboration with the Massachusetts General Hospital (MGH) on the development
of a liver assist device.
In December 1995, the Company signed a research agreement with the Brigham
and Women's Hospital focused on the biology of oral mucosa tissue.
In March 1995, the Company's Subsidiary, ECM Pharma/TM/, signed a research
agreement, with an option to negotiate a license, with Harvard Medical School
to supplement research related to the discovery of extracellular matrix
related therapeutics.
During 1995, the Company agreed to fund certain work performed at the
Connective Tissue Research Laboratory at Hebrew University.
RESEARCH AND DEVELOPMENT
The Company plans to continue to focus its product development efforts on
developing high quality cell therapy, matrix scaffold and other types of
tissue engineered products in such areas as wound care, urology,
cardiovascular medicine and general surgery.
The Company's research and development staff consists of scientists and
laboratory assistants with technical backgrounds in cell biology, matrix
biology, cell culture, immunology, cryopreservation, molecular biology and
clinical medicine.
For 1996, 1995 and 1994, the Company's research and development expenses
were $10,863,000, $9,272,000 and $8,219,000, respectively.
13
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name, age and current position of each
officer of the Company who was an executive officer on December 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mr. Herbert M. Stein 68 Chairman, Chief Executive Officer and Director
Dr. David T. Rovee 57 President, Chief Operating Officer and Director
Ms. Donna L. Abelli 38 Vice President -- Finance and Administration,
Chief Financial Officer, Treasurer and Secretary
Dr. Robert J. Buehler 49 Vice President -- Operations
Mr. Joel T. Cademartori 54 Vice President -- Regulatory Affairs, Quality
Assurance and Quality Control
Dr. Paul D. Kemp 40 Vice President -- Connective Tissue Science
Dr. Nancy L. Parenteau 43 Senior Vice President -- Research and Development
and Chief Scientific Officer
Dr. Michael L. Sabolinski 41 Senior Vice President -- Corporate Development
and Medical Affairs
</TABLE>
Mr. Stein became Chairman of the Board of Directors in February 1991. He has
been a Director of the Company since October 1986 and the Chief Executive
Officer of the Company since January 1987. Mr. Stein was the Vice Chairman of
the Board of Directors of the Company from January 1987 to February 1991. Mr.
Stein is also a director of EKCO Group, Inc. and Apogee Technology, Inc.
Dr. Rovee became President and Chief Operating Officer in February 1994. He
became a Director of the Company in March 1994. Dr. Rovee joined the Company
in September 1991 as a consultant and was elected Vice President -- Research
and Development of the Company in November 1991. Prior to joining the Company,
Dr. Rovee had been with Johnson & Johnson for 25 years, most recently as Vice
President of Research and Development for Johnson & Johnson Patient Care, Inc.
Ms. Abelli was elected as Vice President -- Finance and Administration,
Chief Financial Officer, Treasurer and Secretary in March 1996. Prior to
joining the Company, Ms. Abelli had been with the accounting firm of Coopers &
Lybrand L.L.P. for 15 years, most recently as a partner since 1992.
Dr. Buehler was elected as Vice President -- Operations in November 1995.
Dr. Buehler was Director, Process Development from August 1994 to November
1995; Director, Quality Assurance from June 1993 to August 1994; Director,
Operations from June 1988 to June 1993.
Mr. Cademartori was elected as Vice President -- Regulatory Affairs, Quality
Assurance and Quality Control in August 1995. Mr. Cademartori joined the
Company in October 1994 as Director of Quality Assurance. Prior to joining the
Company, Mr. Cademartori was an independent consultant of medical products
and quality assurance for various companies from December 1990 to October
1994. Mr. Cademartori was in General Management for Johnson & Johnson Medical
Products from June 1972 to December 1990.
Dr. Kemp was elected as Vice President -- Connective Tissue Science in
February 1994. Dr. Kemp was Director, Matrix Engineering from 1990 to 1994;
Director, Collagen Production from 1990 to 1992; Group Leader, Matrix
Biochemistry from 1988 to 1990 and Staff Scientist, Matrix Biochemistry from
1987 to 1988.
14
<PAGE>
Dr. Parenteau was elected as Senior Vice President, Research and Development
and Chief Scientific Officer in August 1995. Dr. Parenteau was Vice President
-- Cell and Tissue Science from February 1994 to August 1995; Director, Cell
Biology Research from 1989 to 1994; Project Director, Living Skin Equivalent
and Co-Director of Research from 1987 to 1989 and Group Leader, Cell Biology
from 1986 to 1987.
Dr. Sabolinski was elected as Senior Vice President -- Corporate Development
and Medical Affairs in August 1995. Dr. Sabolinski was Vice President --
Medical and Regulatory Affairs of the Company from February 1994 to August
1995. Dr. Sabolinski joined the Company in April 1992 as Director of Clinical
and Regulatory Affairs. Prior to joining the Company, Dr. Sabolinski was Vice
President of Clinical Affairs at Advanced Tissue Sciences from November 1991
to March 1992. From 1989 to November 1991, Dr. Sabolinski was Director of
Cardiovascular Products at Sandoz Pharmaceuticals Corp.
EMPLOYEES
As of March 1, 1997, the Company had 124 full-time employees. The
Company has 67 employees devoted to research and development, 38 employees
devoted to production and support of Apligraf/TM/ and other products and 19
employees devoted to General and Administrative. The Company has established
a stock option plan providing equity incentives to all key employees, an
employee stock purchase plan and a 401(k) plan for all of its full-time
employees. The Company believes that, through equity participation,
attractive fringe benefit programs and the opportunity to contribute to the
development of new products using new technology, the Company will continue to
be able to attract highly-qualified personnel.
SCIENTIFIC ADVISORY BOARD
The Company has a Scientific Advisory Board ("SAB") composed of five
physicians, professors and scientists in various fields of medicine and
science. The SAB meets from time to time to advise and consult with
management and the Company's scientific staff. Each member of the SAB is
expected to devote only a portion of his time to the Company and may have
consulting or other advisory arrangements with other entities which may
conflict or compete with his obligations to the Company. Members of the SAB
have no formal duties, authority or management obligations.
ITEM 2. PROPERTIES
During 1996, the Company leased 45,000 square feet of space in Canton,
Massachusetts at an annual average base rent of $386,000, plus operating
expenses. During November 1996, the Company negotiated a new lease for 10,000
square feet of additional warehouse and office space located in Canton,
Massachusetts at an annual average base rent of approximately $56,000. The
new lease commenced in November 1996 and will expire in October 1999.
In December 1996, the Company negotiated an amendment to its current
lease, giving it access to an additional 13,900 square feet of space next to
its current headquarters, to be occupied subsequent to year-end. The Company
is also exploring the options available for a new facility for full-scale
commercial production of products in the future. The Company believes that
its current facilities and its ability to expand into the additional 13,900
square feet of space will adequately support its manufacturing needs and
research and development activities through the end of 1997 and beyond.
15
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange under
the symbol ORG. On March 3, 1997, there were 566 shareholders of record of the
Company's Common Stock. The table below lists the high and low quarterly range
of reported closing prices of the Company's Common Stock during the past two
years.
<TABLE>
<CAPTION>
1996 1995
-----------------------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $21 1/4 $13 7/8 $15 5/8 $ 9 1/4
Second Quarter 23 1/4 16 1/2 13 1/4 8 1/2
Third Quarter 19 3/4 14 1/4 19 5/8 11 1/8
Fourth Quarter 24 1/2 17 3/8 21 5/8 14
</TABLE>
No cash dividends have been paid to date on the Company's Common Stock. The
1995 amounts above have been adjusted to reflect a 25% stock dividend
distributed to stockholders of record on September 1, 1995.
In October 1996, the Company received $124,800 from the exercise of 12,800
warrants at a price of $9.75 (See "Stockholders Equity - Common Stock" under
the Notes to Consolidated Financial Statements). These warrants were
exercised pursuant to a registration statement which went effective on July
30, 1996.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 7,527 $ 627 $ 996 $ 1,593 $ 4,972
Net Loss (7,499) (12,737) (10,441) (9,936) (6,230)
Net Loss Per Share (0.53) (1.02) (0.91) (0.87) (0.55)
Working Capital 11,256 12,886 8,407 11,356 13,809
Capital Expenditures 3,311 319 463 95 6,139
Total Assets 22,436 19,304 15,127 23,955 34,507
Stockholders' Equity 18,478 17,798 13,949 22,814 32,599
Number of Employees 115 97 94 73 89
</TABLE>
17
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussions and other parts of this report which express
"belief", "anticipation", "expectation", "plans", "future" or "intention" as
well as other statements which are not historical fact, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995 and involve risks and uncertainties. The Company's actual results may
differ significantly from the results discussed in these forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed under "Liquidity and Capital Resources " and
"Nature of Business" sections of this report and those included in publicly
available filings with the Securities and Exchange Commission.
Results of Operations
1996 Compared to 1995
Total revenues for fiscal year 1996 were $7,527,000, compared to $627,000 in
1995. The increase was primarily due to research and development support
payments of $6,500,000 received and recognized from Sandoz Ltd. (now Novartis
AG). Interest income increased to $985,000 for fiscal year 1996, compared to
$608,000 in 1995. The increase was primarily due to more cash being available
from Novartis' equity investment and research and development support payments
totaling $11,500,000 that were received in 1996.
Research and development expenses increased to $10,863,000 for fiscal year
1996 from $9,272,000 in 1995. The increase was primarily due to personnel
additions and activities supporting the Company's lead product, Apligraf/TM/,
including: expanding Apligraf/TM/ operations; initiation of the diabetic ulcer
pivotal trial; and supporting the premarket approval application for the
treatment of venous ulcers, which is pending at the FDA. The increase was
also due to the Company's research collaborations with leading academic
institutions and/or their faculty, including Brigham and Women's Hospital,
Children's Hospital in Boston, Harvard Medical School and the Massachusetts
General Hospital, to further strengthen the product portfolio. The Company
expects to continue to expand Apligraf/TM/ operations and to advance the
Company's product pipeline during 1997.
General and administrative expenses increased slightly to $4,163,000 for
fiscal year 1996 from $4,092,000 in 1995, primarily due to increased personnel
and related costs; this increase was partially offset by cost reductions in
other general and administrative related expenses. The Company's net loss for
fiscal year 1996 was $7,499,000, or $.53 per share, as compared with a net
loss for fiscal year 1995 of $12,737,000, or $1.02 per share.
1995 Compared to 1994
Contract revenues during 1995 were $19,000, compared to $336,000 in 1994.
The contract revenue was realized by the Company under a research agreement
with Biomet, Inc. ("Biomet"), which was then replaced with a supply
arrangement under which the Company sells collagen to Biomet. Interest income
in 1995 was $608,000, compared to $660,000 in 1994.
18
<PAGE>
Research and development expenses increased to $9,272,000 in 1995 from
$8,219,000 in 1994. The increase was primarily due to the Company's regulatory
filing and expanding Apligraf/TM/ operations and related increases in
resources in clinical research, cryobiology, quality assurance and process
scale-up. The increase was also due in part to the Company establishing
research collaborations with leading academic institutions and/or their
faculty, including Harvard Medical School and Hebrew University, to further
strengthen its product portfolio. General and administrative expenses
increased to $4,092,000 in 1995 from $3,218,000 in 1994, primarily due to
higher legal, consulting and other professional services resulting mainly from
the 1995 public offering, the collaborative agreement with Novartis and
support for the activity in research and development. The Company's net loss
for 1995 was $12,737,000, or $1.02 per share, as compared with a net loss for
1994 of $10,441,000, or $.91 per share.
Liquidity and Capital Resources
From inception, the Company has financed its operations substantially
through private and public placements of equity securities, as well as receipt
of research support and contract revenues, interest income from investments
and, to a lesser extent, sale of products and receipt of royalties. Novartis
has agreed to provide the Company up to $37,500,000 in equity investments,
research support and milestone payments (See "Collaborative Agreements" under
the Notes to Consolidated Financial Statements), of which $11,500,000 was
received in 1996. The remaining payments will be received based upon
achievement of specified events or dates. In addition, Novartis and the
Company are engaged in good-faith discussions regarding Novartis providing
Organogenesis with a revolving line of credit to finance Organogensis'
Apligraf/TM/-related expenditures through draw-downs of funds, in the event
such draw-downs are necessary.
The sale of equity securities and the exercise of warrants and stock options
provided cash of approximately $8,117,000 and $16,586,000 in fiscal years 1996
and 1995, respectively.
At December 31, 1996, the Company had cash, cash equivalents and investments
in the aggregate amount of $14,440,000 and working capital of $11,256,000,
compared to $13,721,000 and $12,886,000, respectively, at December 31, 1995.
The primary use of cash during fiscal year 1996 related to financing the
Company's operating activities of $4,087,000 and investing in plant expansion.
Capital expenditures increased significantly to $3,311,000 during fiscal year
1996, from $319,000 in 1995, primarily due to the build-out of the current
facilities to support Apligraf/TM/ manufacturing and the acquisition of
laboratory equipment for expanded research and development programs. The
Company expects to continue to utilize funds at an increasing rate during 1997
related to the continued expansion of Apligraf/TM/ operations and to the
advancement of the Company's product pipeline.
Facility expansion activities are expected to continue during 1997 as well.
In the last quarter of 1996, the Company amended its existing facility lease
for expanded space and leased additional warehouse and office space to enable
more of its main facility to be dedicated to manufacturing related operations.
The Company is also exploring the options available for a new facility for
full-scale commercial production of products in the future, as well as a
European distribution and/or manufacturing plant.
19
<PAGE>
These activities will require substantial additional financial resources
before the Company can expect to realize a net profit from product sales.
Based upon its current plans, the Company believes that the future funds from
Novartis, together with existing working capital, will be sufficient to
finance its operations for at least the next 12 months. However, the Company's
funding requirements may change depending upon numerous factors, including
progress of the Company's research and development programs; time required to
obtain regulatory approvals; resources the Company devotes to self-funded
projects, proprietary manufacturing methods and advanced technologies; and
marketing approval of the Company's products and, if approved, whether the
products will be commercially successful. There can be no assurances that
additional funds will be available when required on terms acceptable to the
Company. If adequate funds are not available, there could be a material
adverse effect on the Company's financial condition and results of operations.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ORGANOGENESIS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 8:
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants 22
Consolidated Balance Sheets as of December 31, 1996 and 1995 23
Consolidated Statements of Operations for the years ended December 31, 1996, 1995
and 1994 24
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994 25
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 26
Notes to Consolidated Financial Statements 27
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Organogenesis Inc.:
We have audited the accompanying consolidated balance sheets of
Organogenesis Inc. and its wholly owned subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, cash flows,
and changes in stockholders' equity for each of the three years in the period
ended December 31, 1996. 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 consolidated financial position of Organogenesis
Inc. and its wholly owned subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 27, 1997
22
<PAGE>
ORGANOGENESIS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 399 $ 2,569
Investments 14,041 11,152
Other current assets 703 557
------- -------
15,143 14,278
Property and equipment, net 7,204 4,942
Other assets 89 84
------- -------
$22,436 $19,304
======= =======
LIABILITIES
Current liabilities:
Accounts payable $ 1,220 $ 605
Accrued expenses 2,667 787
------- -------
3,887 1,392
Deferred rent payable 71 114
Commitments (see Notes)
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00; authorized 1,000,000 shares:
Series A Convertible Preferred;
designated 250,000 shares;
all have been issued and converted - -
Series B Junior Participating;
designated 50,000 shares;
no shares issued and outstanding - -
Common stock, par value $.01; authorized 40,000,000 shares:
issued and outstanding 14,292,345 and 13,732,437
shares as of December 31, 1996 and 1995, respectively 143 137
Additional paid-in capital 85,514 77,341
Accumulated deficit (67,179) (59,680)
------- -------
Total stockholders' equity 18,478 17,798
-------- -------
$22,436 $19,304
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE>
ORGANOGENESIS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Revenues:
Research and development support from related party $ 6,500 $ - $ -
Contract revenues and royalties 42 19 336
Interest income 985 608 660
----------- ----------- -----------
Total revenues 7,527 627 996
----------- ----------- -----------
Costs and Expenses:
Research and development 10,863 9,272 8,219
General and administrative 4,163 4,092 3,218
----------- ----------- -----------
Total costs and expenses 15,026 13,364 11,437
----------- ----------- -----------
Net loss $ (7,499) $ (12,737) $ (10,441)
=========== =========== ===========
Net loss per common share $ (.53) $ (1.02) $ (.91)
=========== =========== ===========
Weighted average number of
common shares outstanding 14,086,691 12,521,488 11,487,669
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
ORGANOGENESIS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Cash used in operating activities:
Net loss $ (7,499) $(12,737) $(10,441)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation 1,049 1,011 954
Issuance of stock options 62 - -
Changes in assets and liabilities:
Other current assets (146) (16) 129
Other assets (5) (4) (2)
Accounts payable 615 204 (2)
Accrued expenses 1,880 196 70
Deferred revenue - (13) 11
Deferred rent payable (43) (43) (43)
Other liabilities - (15) -
-------- -------- --------
Cash used in operating activities (4,087) (11,417) (9,324)
Cash flows from investing activities:
Capital expenditures (3,311) (319) (463)
Purchases of investments (13,870) (12,500) (98)
Sales/maturities of investments 10,981 7,032 7,999
-------- -------- --------
Cash provided by (used in) investing activities (6,200) (5,787) 7,438
Cash flows from financing activities:
Proceeds from sale of common stock - net 5,000 14,774 -
Proceeds from exercise of warrants 2,316 - -
Proceeds from exercise of stock options 801 1,812 1,577
-------- -------- --------
Cash provided by financing activities 8,117 16,586 1,577
-------- -------- --------
Decrease in cash and cash equivalents (2,170) (618) (309)
Cash and cash equivalents, beginning of period 2,569 3,187 3,496
-------- -------- --------
Cash and cash equivalents, end of period $ 399 $ 2,569 $ 3,187
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
ORGANOGENESIS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31, 1996, 1995 and 1994
- - -------------------------------------------------------------------------------------------------------------
Series A Convertible Additional Total
Preferred Stock Common Stock Paid-in Accumulated Stockholders'
--------------- ------------
Shares Amount Shares Amount Capital Deficit Equity
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 250 $ 250 9,128 $ 91 $58,975 $(36,502) $ 22,814
- - -------------------------------------------------------------------------------------------------------------
Issuance of common
stock upon exercise
of stock options and
in connection with
employee stock
purchase plan 238 2 1,574 1,576
Net loss (10,441) (10,441)
- - -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 250 $ 250 9,366 $ 93 $60,549 $(46,943) $ 13,949
- - -------------------------------------------------------------------------------------------------------------
Issuance of common
stock upon exercise
of stock options and
in connection with
employee stock
purchase plan 249 2 1,810 1,812
Sale of common stock - net 1,150 12 14,762 14,774
One for four
common stock
dividend 2,654 27 (27) -
Conversion of
Preferred A to
common stock (250) (250) 313 3 247 - -
Net loss (12,737) (12,737)
- - -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 - - 13,732 $137 $77,341 (59,680) $ 17,798
- - -------------------------------------------------------------------------------------------------------------
Issuance of common
stock upon exercise
of stock options and
in connection with
employee stock
purchase plan 112 1 800 801
Issuance of common
stock upon exercise
of warrants 234 3 2,313 2,316
Sale of common stock 214 2 4,998 5,000
Issuance of stock options 62 62
Net loss (7,499) (7,499)
- - -------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 - - 14,292 $143 $85,514 (67,179) $ 18,478
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE>
ORGANOGENESIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of Business:
Organogenesis Inc. (the "Company") designs, develops and manufactures medical
therapeutics containing living cells and/or natural connective tissue
components. The Company's products are designed to promote the establishment
and growth of new tissues to restore, maintain or improve biological function.
The Company has a wholly owned subsidiary, ECM Pharma/TM/, Inc. ("ECM
Pharma/TM/"). ECM Pharma/TM/ was established to discover, develop and
commercialize human therapeutics based on the extracellular matrix. The Company
also has a wholly owned investment subsidiary, Dan Capital Corporation, which
holds a substantial portion of the Company's cash, cash equivalents and
investments.
The Company is subject to risks common to entities in the biotechnology
industry, including, but not limited to, development by the Company's
competitors of new technologies or products that are more effective than the
Company's, risks of failure of clinical trials, dependence on and retention of
key personnel, protection of proprietary technology, compliance with U.S. Food
and Drug Administration ("FDA") regulations and similar foreign regulatory
bodies, continued availability of raw material for the Company's products,
availability of product liability insurance upon commercialization of the
Company's products, ability to transition from pilot-scale manufacturing to
full-scale commercial production of products, ability to recover the investment
in property and equipment, uncertainty as to the availability of additional
capital on acceptable terms, if at all, and the demand for the Company's
products, if and when approved.
The ultimate success of the Company is dependent upon its ability to raise
capital through equity placement, royalty and manufacturing payments, receipt of
contract revenue, sale of products, research and development funding under
licensing agreements and interest income on invested capital. However, the
Company's funding requirements may change depending upon numerous factors,
including progress of the Company's research and development programs; time
required to obtain regulatory approvals; resources the Company devotes to self-
funded projects, proprietary manufacturing methods and advanced technologies;
and marketing approval of the Company's products and, if approved, whether the
products will be commercially successful.
While management believes that future capital composed of equity investments,
milestone and research and development support payments, manufacturing payments
and royalty revenue will be sufficient to fund future operations, there can be
no assurances that these or any additional funds will be available when required
on terms acceptable to the Company.
Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All intercompany activity has been eliminated.
27
<PAGE>
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 amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
Research and development support revenue under the collaborative agreement
with Novartis is recognized as related expenses are incurred. Contract revenues
under research and development agreements are recognized as the related efforts
are performed. Deferred revenue arises from differences between cash received
and revenue recognized in accordance with these policies. Royalty revenue is
recorded as earned.
Research and Development Costs
All research and development costs are expensed as incurred.
Patents
As a result of the Company's research and development programs, the Company
has a proprietary portfolio of patent rights and patent applications for a
number of patents in the United States and abroad. Such patent rights are of
significant importance to the Company to protect its products and processes.
For financial reporting purposes, all costs in connection with patent rights and
patent applications have been expensed as incurred.
Income Taxes
Research and development and other tax credits are recognized for financial
reporting purposes when they are realized. Deferred taxes are determined based
on the difference between the financial reporting and the tax bases of assets
and liabilities using enacted income tax rates in effect in the years in which
the differences are expected to reverse. Tax credits will be recorded as a
reduction in income taxes when utilized.
Net Loss Per Common Share
Net loss per common share is based on the weighted average number of common
shares outstanding during each period. Common share equivalents have not been
included because the effect would be antidilutive.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and money market funds, which are
convertible into a known amount of cash and carry an insignificant risk of
change in value. These investments are highly liquid and have original
maturities of less than three months.
28
<PAGE>
Property and Equipment
Equipment, furniture and fixtures, office equipment and leasehold improvements
are stated at cost. Depreciation is provided using the straight-line method over
three to ten years. Leasehold improvements are being amortized using the
straight-line method over the term of the lease.
Maintenance and repairs are charged to expense as incurred and betterments are
capitalized. Upon retirement or sale, the cost of assets disposed of and their
related accumulated depreciation are removed from the accounts. Any resulting
gain or loss is credited or charged to operations.
Construction-in-Progress
At December 31, 1996, the Company had construction-in-progress of $1,902,000
due to the expansion of its current facilities. The Company plans to equip the
facility in phases as necessary to satisfy its production requirements.
Depreciation will commence once the facilities and equipment are put into
service.
Stock-Based Compensation
During 1996, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 allows the Company to continue to account
for its stock-based compensation arrangements under the provisions of Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees" ("APB 25")
and disclose in a footnote the pro forma effects to net loss and net loss per
share assuming the fair value accounting method of SFAS 123 was adopted.
Accordingly, no compensation cost has been recognized in income from stock-based
employee awards.
New Accounting Pronouncement
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121") was issued effective with fiscal years ending
December 31, 1996. This standard establishes accounting standards for the
impairment of long-lived assets, including property and equipment, certain
identifiable intangibles and goodwill related to those assets. SFAS 121 also
addresses the accounting for long-lived assets that are expected to be disposed.
SFAS 121 requires that long-lived assets and certain intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The adoption of SFAS 121 did not have an impact on the Company's
consolidated financial position or operating results.
Reclassifications
Certain reclassifications have been made to the fiscal years 1995 and 1994
financial statements to conform to the 1996 classifications. These
reclassifications have no impact on the Company's results of operations or
financial position.
29
<PAGE>
Investments:
The Company determines the appropriate classifications of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. The investments held are classified as available-for-sale and are carried
at cost plus accrued interest, which approximates fair market value and,
accordingly, there was no adjustment to stockholders' equity. The Company also
classifies its investments in accordance with their intended use. At December
31, 1996, the intended use of all investments is to fund working capital. The
Company invests its excess cash in securities that have an A or A1 rating or
better with a maximum maturity of two years.
The aggregate cost and fair market value of investments are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------- --------------------
Amortized Market Amortized Market
Maturity Cost Value Cost Value
-------- ---- ----- ---- -----
<S> <C> <C> <C> <C>
Less than one year:
U.S. Government and Agency bonds $ 5,119 $ 5,122 $ 2,573 $ 2,575
Time deposits 500 500 1,311 1,311
Corporate notes 5,142 5,135 5,582 5,582
Discount notes 98 98 697 697
Certificates of deposit 989 989 989 989
Between one and two years:
U.S. Government and Agency bonds 1,010 1,012 - -
Corporate notes 1,183 1,185 - -
------- ------- ------- -------
Total Investments $14,041 $14,041 $11,152 $11,154
======= ======= ======= =======
</TABLE>
Other Current Assets:
During 1996, the Company loaned two officers a total of $132,000. The loans
were granted interest-free and are due upon the earlier of the disposition of
underlying shares acquired from the exercise of stock options held by the
officers or termination of employment. Also included in other current assets is
a receivable of approximately $127,000 due from Novartis.
Property and Equipment:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
Estimated Useful December 31,
----------------
Life (years) 1996 1995
----------------- ------- -------
<S> <C> <C> <C>
Equipment 5-10 $ 8,458 $ 7,382
Furniture, fixtures and office equipment 3-5 1,479 1,265
Leasehold improvements lease term 1,572 1,453
Construction-in-progress 1,902 -
------- -------
13,411 10,100
Less accumulated depreciation 6,207 5,158
------- -------
$ 7,204 $ 4,942
======= =======
</TABLE>
30
<PAGE>
Accrued Expenses:
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1996 1995
------ -----
<S> <C> <C>
Compensation and employee benefits $ 748 $ 507
Professional services 263 170
Construction costs 1,200 -
Other 456 110
------ -----
$2,667 $ 787
====== =====
</TABLE>
Lease Obligations:
The Company occupies its current premises under a lease which expires on
October 1, 1999, with an option to extend the term for an additional five years.
The Company is responsible for taxes, insurance and operating expenses under the
terms of the lease. During December 1996, the Company negotiated an amendment
to its current lease, for an additional 13,900 square feet of space to be
occupied subsequent to year-end. During November 1996, the Company negotiated a
new lease for an additional 10,000 square feet of warehouse and office space
which expires on October 31, 1999.
Future minimum lease payments, including the additional space to be occupied
subsequent to year-end, are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 $ 492
1998 562
1999 426
------
$1,480
======
</TABLE>
Rent of approximately $394,000, $386,000 and $361,000 was charged to expense
during the years ended December 31, 1996, 1995 and 1994, respectively.
Income Taxes:
At December 31, 1996, the Company had Federal tax net operating loss
carryforwards of approximately $72,000,000, of which $3,101,000 relate to
disqualifying dispositions of qualified incentive stock options and exercise of
nonqualified stock options. The tax benefit of $1,240,000 related to the stock
options will be credited to equity when realized. The Federal net operating
loss carryforwards expire beginning in 2000. At December 31, 1996, the Company
had Federal research and development tax credits of approximately $2,242,000,
which expire beginning in 2005. Ownership changes may result in future
limitations on the utilization of net operating losses and research and
development tax credit carryforwards.
31
<PAGE>
The approximate tax effect of each type of temporary difference and
carryforward is reflected in the following table. The effective tax rate is
expected to be 40% combined federal and state (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets and (liabilities):
Net operating loss carryforwards $ 28,923 $ 25,520
Research and development credits 2,242 2,200
Depreciation (701) (720)
Other 4 -
-------- --------
Net deferred tax asset before valuation allowance 30,468 27,000
Valuation allowance (30,468) (27,000)
-------- --------
Net deferred asset after valuation allowance $ 0 $ 0
======== ========
</TABLE>
Due to the uncertainty surrounding the timing of realizing the benefits of its
favorable tax attributes in future tax returns, the Company has placed a 100%
valuation allowance against its otherwise recognizable net deferred tax assets.
Collaborative Agreements:
In January 1996, the Company and Novartis AG ("Novartis"), formerly Sandoz
Ltd., entered into an agreement granting Novartis exclusive global marketing
rights to Apligraf/TM/ Under the agreement, Novartis is responsible for
Apligraf/TM/ sales and marketing costs worldwide, as well as all clinical
trials, registrations and patent costs outside the U.S. The Company will supply
Novartis' global requirements for Apligraf/TM/ and will receive both a per unit
manufacturing payment and royalty revenues on all product sales. Novartis has
agreed to provide the Company up to $37,500,000 in equity investments, research
support and milestone payments, of which $11,500,000 was received in 1996. The
remaining payments will be received based upon achievement of specified events
or dates.
In 1995, the Company and Biomet, Inc. ("Biomet") mutually agreed to replace
the prior research agreement with a supply arrangement under which Biomet may,
but is not obligated to, purchase collagen from the Company. The Company
recognized revenues under these agreements of approximately $19,000 and $336,000
for the years ended December 31, 1995 and 1994, respectively. No significant
revenues were recognized under this supply arrangement in 1996.
In 1994, the Company signed a license agreement with Toyobo Ltd. ("Toyobo"),
granting Toyobo a license to manufacture and market Testskin in Japan in
exchange for royalty payments to the Company. The Company recognized royalty
revenues under this agreement of approximately $42,000 for the year ended
December 31, 1996. No significant revenues were recognized under this agreement
in 1995 and 1994.
Research and Other Agreements:
The agreements summarized below generally provide for funding over a limited
period. Each agreement is reviewed at least annually and the amounts to be
funded for the next period are then determined. Either party may cancel the
agreement upon advance, written notice.
In September 1996, the Company entered into a research agreement with the
Children's Hospital of Boston related to graft acceptance.
32
<PAGE>
In June 1996, the Company announced that it had formed a research
collaboration with the Massachusetts General Hospital (MGH) on the development
of a liver assist device.
In December 1995, the Company signed a research agreement with the Brigham and
Women's Hospital focused on the biology of oral mucosa tissue.
In March 1995, the Company's subsidiary, ECM Pharma/TM/, signed a research
agreement, with an option to negotiate a license, with Harvard Medical School to
supplement research related to the discovery of extracellular matrix related
therapeutics.
During 1995, the Company agreed to fund certain work performed at the
Connective Tissue Research Laboratory at Hebrew University.
License Agreement:
Certain of the Company's technologies are licensed under an exclusive patent
license agreement with the Massachusetts Institute of Technology ("MIT"). The
agreement with MIT (as amended, the "MIT Agreement") covers certain U.S. patents
and corresponding patents in European and Far East countries. Pursuant to the
MIT Agreement, the Company has been granted an exclusive, worldwide license to
make, use and sell the products covered by the patents and to practice the
procedures covered by the patents. The MIT Agreement requires the Company to
pay to MIT a royalty on the cumulative net sales of licensed products ranging
from 3% to 4.5% of annual Company sales.
Stockholders' Equity:
Preferred Stock
The Company has authorized 1,000,000 shares of Preferred Stock at December 31,
1996, of which 250,000 and 50,000 shares have been designated as Series A
Convertible Preferred Stock and Series B Junior Participating Preferred Stock,
respectively. There were no shares of Series A Convertible Preferred Stock or
Series B Junior Participating Preferred Stock issued and outstanding as of
December 31, 1996 and 1995, respectively.
The 250,000 shares of Series A Convertible Preferred Stock were converted into
312,500 shares of Common Stock in October 1995.
Common Stock
In May 1996, the Company's stockholders approved an increase in the number of
authorized shares of Common Stock from 20,000,000 to 40,000,000. There were
14,292,345 and 13,732,437 shares of Common Stock issued and outstanding as of
December 31, 1996 and 1995, respectively.
In January 1996, the Company received proceeds from Novartis of $5,000,000
representing its first equity investment in the Company. As a result of this
initial investment at $23.37 per share, Novartis held approximately 1.5% of the
outstanding shares of the Company as of December 31, 1996.
33
<PAGE>
In July 1995, the Company completed a public offering of 230,000 units, at a
unit price of $66.25, resulting in the Company receiving net proceeds of
approximately $14,774,000. Each unit in the offering consisted of five shares
of Common Stock and one warrant to purchase one share of Common Stock at an
exercise price of $15.90 per share. The warrants are exercisable from October
14, 1996 through October 14, 2001 when the warrants expire. At December 31,
1996, there were 287,500 warrants outstanding. These warrants may be redeemed
by the Company for $.01 per warrant at any time after July 14, 1997 if the
Common Stock trades above $23.85 for thirty consecutive trading days.
In August 1995, the Board of Directors declared a 25% stock dividend for
stockholders of record on September 1, 1995. The stock dividend was payable on
September 8, 1995 and resulted in the issuance of approximately 2,654,000
additional shares of Common Stock. All related data in the consolidated
financial statements reflect the stock dividend for all periods presented.
In November 1991, the Company completed a public offering of 1,650,000 shares
of Common Stock. This offering resulted in the Company receiving net proceeds
of approximately $36,144,000. In connection with this offering, the underwriter
was issued a warrant to purchase 187,500 shares of Common Stock, exercisable at
any time during a four-year period. During 1996, these warrants were exercised
for 187,500 shares of Common Stock resulting in proceeds of approximately
$1,828,000.
In April 1991, the Company received net proceeds of approximately $924,000
from the sale of 125,000 shares of Common Stock and warrants to purchase Common
Stock exercisable at any time during a five-year period. The warrants allow for
the purchase of 31,250 shares of Common Stock at $9.60 per share and 15,625
shares at $12.00 per share. During 1996, these warrants were exercised for
46,875 shares of Common Stock, resulting in proceeds of $488,000.
Stockholder Rights Plan:
In August 1995, the Board of Directors adopted a Stockholder Rights Plan and
declared a dividend of one Right for each outstanding share of Common Stock to
stockholders of record on September 1, 1995. Each Right only becomes
exercisable and transferable apart from the Common Stock, at the earlier of (i)
10 days after a person or group acquires beneficial ownership of 15% or more of
the Company's outstanding Common Stock (the "Stock Acquisition Date") or (ii) 10
business days following an announcement of a tender or exchange offer of 30% or
more of the Company's outstanding stock.
Initially, each Right, upon becoming exercisable, would entitle the holder to
purchase one-thousandth of a share of Series B Junior Participating Preferred
Stock at an exercise price of $85, subject to adjustment. If a person or group
acquires beneficial ownership of 15% or more of the outstanding shares of Common
Stock, then each holder of a Right (other than Rights held by the acquiring
person or group) would have the right to receive that number of shares of Common
Stock which equals the exercise price of the Right divided by one-half of the
current market price of the Common Stock.
The Rights may be redeemed by the Company for $0.01 per Right at any time
until the tenth day following the stock acquisition date. The Rights will
expire on September 1, 2005.
34
<PAGE>
Stock-Based Compensation:
At December 31, 1996, the Company had four stock-based compensation plans (the
"Stock Option Plans"), as described below. Consistent with the optional
accounting method prescribed by SFAS 123, the following are the pro forma net
loss and net loss per share for the years ended December 31, 1996 and 1995,
respectively, had compensation cost for the Stock Option Plans been determined
based on the fair value at the grant date for grants made in 1996 and 1995 (in
thousands, except share data):
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
As Reported Pro Forma As Reported Pro Forma
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Net loss $(7,499) $(8,696) $(12,737) $(13,443)
Net loss per share $ (0.53) $ (0.62) $ (1.02) $ (1.07)
</TABLE>
The effects on 1996 and 1995 pro forma net loss and net loss per share of
expensing the estimated fair value of stock options are not necessarily
representative of the effects on reporting pro forma results for future years as
the periods presented include only two and one years, respectively, of fair
value expense for options granted under the Stock Option Plans and because the
method prescribed by SFAS 123 has not been applied to options granted prior to
January 1, 1995.
The weighted average fair value of options granted under the Stock Option
Plans was estimated using the Black-Scholes option pricing model with the
following assumptions:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Expected life for options issued to employees (years) 6.2 6.2
Expected life for options issued to Directors and Officers (years) 7.7 7.7
Risk-free interest rate 6.2% 5.3%
Volatility 61.0% 61.0%
Weighted average fair value per share of options granted during the year $10.19 $8.55
</TABLE>
The Stock Option Plans:
In May 1995, a stock option plan was approved by the Company's shareholders (
the "1995 Plan") providing for the issuance of up to 1,500,000 shares of Common
Stock options to enable the Company to attract and retain key employees and
consultants. Under the 1995 Plan, the Company may grant incentive and non-
qualified stock options to officers, employees, consultants and advisors to the
Company. The 1995 Plan, which took effect upon the expiration of the 1986 Stock
Option Plan in August 1996, is administered by the Board of Directors or its
delegated Committee, which selects the individuals to whom options are granted
and determines (i) the type of option to be granted, (ii) the number of shares
of Common Stock covered by the option, (iii) when the option becomes
exercisable, and (iv) the duration of the option which, in the case of incentive
stock options, may not exceed ten years. No one person may be issued options to
purchase more than 500,000 shares of Common Stock in any one calendar year.
Stock options granted under the 1995 Plan may not be granted at an exercise
price less than 100% of the fair market value of the Common Stock on the date of
grant (or 110% of fair market value in the case of incentive stock options
granted to employees holding 10% or more of the voting stock of the Company).
The aggregate fair market value (determined at the time of grant) of shares
issuable pursuant to incentive stock options which first become exercisable in
any calendar year by an employee of the Company may not exceed $100,000.
35
<PAGE>
The Company's 1986 Stock Option Plan (the "1986 Plan") provided for the
issuance of an aggregate of 2,500,000 shares of Common Stock for the granting of
incentive and non-qualified stock. The 1986 Plan was also administered by the
Board of Directors or its delegated Committee and had substantially the same
terms and conditions as described under the 1995 Plan. In August 1996, the 1986
Plan terminated and no further grants were made. All options outstanding on the
termination date remain in effect.
In 1994, a stock option plan for non-employee directors was approved by the
Company's shareholders (the "1994 Director Plan"). Under the 1994 Director
Plan, stock options to purchase up to 250,000 shares of the Company's Common
Stock may be granted to non-employee directors of the Company. The 1994
Director Plan provides that the option price per share be at fair market value
and vest ratably over a five-year period beginning one year from the date of
grant.
The 1991 Director Stock Option Plan (the "1991 Director Plan") provided for
the granting of options to purchase 125,000 shares of Common Stock by non-
employee directors and terminated upon the adoption of the 1994 Director Plan.
The options were granted at fair market value and were immediately exercisable,
subject to repurchase by the Company, at the option price, in the event the
optionee ceased to be a director of the Company. This repurchase right
terminates and the shares vest ratably over a five-year period beginning one
year from the date of grant. All options outstanding on the termination date
remain in effect.
In 1987, the Company granted to an Officer of the Company an option to
purchase 375,000 shares of Common Stock at an exercise price of $6.00 per share.
The shares have been reserved for issuance and are fully vested and exercisable.
The following table presents the combined activity of the Stock Option Plans
for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of period 1,687,440 $ 9.26 1,710,663 $ 8.20 1,722,550 $6.61
Granted 696,325 16.79 437,762 11.95 720,625 9.36
Exercised (107,948) 7.02 (234,384) 6.67 (295,600) 5.27
Canceled (81,087) 10.99 (226,601) 9.06 (436,912) 5.84
--------- ------ --------- ------ --------- -----
Outstanding at end of period 2,194,730 11.70 1,687,440 9.26 1,710,663 8.20
========= ====== ========= ====== ========= =====
Exercisable at year end 892,902 $ 8.81 684,306 $ 8.10 570,255 $7.38
========= ====== ========= ====== ========= =====
Shares Available for granting
of options at end of period 1,098,175 245,161 453,510
========= ========= =========
</TABLE>
36
<PAGE>
The following table presents weighted average price and life information about
significant option groups outstanding at December 31, 1996 for the Stock Option
Plans:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- --------------------------------------
Weighted Average Weighted Average Weighted Average
Range of Number Remaining Contractual Exercise Exercise
Exercise Prices Outstanding Life (Years) Price Number Exercisable Price
- - --------------- ----------- ------------ ----- ------------------ -----
<S> <C> <C> <C> <C> <C>
$3.20 - 4.80 63,739 4.5 $ 4.48 63,114 $ 4.48
5.10 - 7.70 557,238 6.4 6.34 366,959 6.18
7.80 - 11.80 544,385 7.3 9.95 247,496 9.49
11.90 - 17.00 836,293 8.2 15.22 204,683 13.54
17.10 - 22.75 193,075 9.4 19.24 10,650 18.84
--------- --- ------ ------- ------
2,194,730 7.5 11.70 892,902 8.81
========= === ====== ======= ======
</TABLE>
The 1991 Employee Stock Purchase Plan:
Under the 1991 Employee Stock Purchase Plan (the "Purchase Plan"), a total of
187,500 shares of Common Stock are reserved for issuance (up to 31,250 shares
may be issued in any one year). The Purchase Plan allows eligible employees the
option to purchase Common Stock during two six month periods of each year at 85%
of the lower of the fair market value of the shares at the time the option is
granted or is exercised. The term of this plan will end December 31, 1999.
During 1996 and 1995, the Company issued a total of 3,577 and 795 shares of
Common Stock, respectively, under this Purchase Plan.
Employee Savings Plan:
In 1992, the Company instituted an employee savings plan under Section 401(k)
of the Internal Revenue Code. All full-time employees with six months of
service are eligible to participate. During 1996 and 1995, the Company
contributed approximately $41,000 and $36,000, respectively, under this Savings
Plan.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
37
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the
caption "Executive Officers of the Company" in PART I hereof and the remainder
is contained in the Company's Proxy Statement for the Company's 1997 Annual
Meeting of Stockholders (the "1997 Proxy Statement") under the captions
"Executive Compensation - Section 16(a) Beneficial Ownership Reporting
Compliance" and "ELECTION OF DIRECTORS" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained under the caption
"ELECTION OF DIRECTORS -Executive Compensation" in the Company's 1997 Proxy
Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is contained in the Company's 1997
Proxy Statement under the captions, "Principal Stockholders" and "ELECTION OF
DIRECTORS - Compensation of Directors; Executive Compensation; and Compensation
Arrangement" in the Company's 1997 Proxy Statement, and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption
"Certain Transactions" in the Company's 1997 Proxy Statement and is incorporated
herein by reference.
38
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 3. Exhibits:
The exhibits filed as a part of this Annual Report on Form 10-K are
listed in the Exhibit Index immediately preceding the exhibits. The Registrant
has identified in the Exhibit Index each management contract and compensatory
plan filed as an exhibit to this Form 10-K in response to Item 14(c) of Form
10-K.
(b) Reports on Form 8-K:
None
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ORGANOGENESIS
BY: /s/ HERBERT M. STEIN
----------------------
HERBERT M. STEIN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ HERBERT M. STEIN Chairman, Chief Executive March 28, 1997
- - ---------------------------- Officer and Director
Herbert M. Stein (Principal executive
officer)
/s/ DAVID T. ROVEE President, Chief Operating March 28, 1997
- - ---------------------------- Officer and Director
David T. Rovee
/s/ RICHARD S. CRESSE Director March 28, 1997
- - ----------------------------
Richard S. Cresse
/s/ WILLIAM J. HOPKE Director March 28, 1997
- - ----------------------------
William J. Hopke
/s/ ANTON E. SCHRAFL Director March 28, 1997
- - ----------------------------
Anton E. Schrafl
/s/ BJORN OLSEN Director March 28, 1997
- - ----------------------------
Bjorn Olsen
/s/ MARGUERITE A. PIRET Director March 28, 1997
- - ----------------------------
Marguerite A. Piret
/s/ DONNA L. ABELLI Vice President, Chief March 28, 1997
- - ---------------------------- Financial Officer,
Donna L. Abelli Treasurer and Secretary
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
(3)(a) -- Restated Certificate of Incorporation of the Company.(1)
(b) -- Certificate of Amendment to the Restated Certificate of
Incorporation of the Company.(10)
(c) -- Certificate of Stock Designation, Number, Voting Powers,
Preferences and Rights of the Series of the Preferred Stock of
Organogenesis Inc. to be Designated Series A Convertible
Preferred Stock.(11)
(d) -- Certificate of Designation, filed with the Secretary of
State of the State of Delaware on August 29, 1995. (18)
(e) -- By-Laws of the Company, as amended.(2)
(f) -- Rights Agreement, dated as of September 1, 1995, between the Company
and American Stock Transfer & Trust Company. (18)
(g) -- Form of Unit Warrant Agreement.(19)
(h) -- Form of Investment Agreement.(19)
(4)(a) -- Form of Warrant Agreement with respect to Warrants included as
part of the Units of the Company's securities.(1)
(b) -- Notice of Redemption of the Company's Redeemable Common Stock
Purchase Warrants.(3)
(c) -- Form of Stock Registration Rights Agreement, dated February 23,
1990, between the Company and certain security holders.(4)
(10)(a) -- 1986 Stock Option Plan of the Company, as amended.*(14)
(b) -- 1991 Director Stock Option Plan of the Company.*(14)
(c) -- 1991 Employee Stock Purchase Plan of the Company.*(14)
(d) -- 1994 Director Stock Option Plan of the Company.*(17)
(e) -- License Agreement among the Company, Eugene Bell and Massachusetts
Institute of Technology dated December 16, 1985 ("MIT License
Agreement").(1)
(f) -- Amendment to MIT License Agreement, dated October 22, 1986.(1)
(g) -- Second Amendment to MIT License Agreement, dated as of March 31, 1988.(8)
(h) -- Research and Supply Agreement between the Company and Eli Lilly
and Company dated July 1, 1987.(6)
(i) -- Research and Supply Agreement between the Company and Eli Lilly
and Company dated July 1, 1991.(12)
(j) -- Subscription Agreement between the Company and a purchaser of the
Series A Convertible Preferred Stock and 10% Subordinated
Promissory Notes dated as of July 3, 1986, with a schedule of
additional purchasers.(1)
(k) -- Indenture of Lease between Canton Commerce Center Limited
Partnership and the Company, dated as of July 10, 1989.(9)
(l) -- Non-Statutory Stock Option Agreement between the Company and
Herbert M. Stein dated April 7, 1987.*(7)
(m) -- Letter Agreement between the Company and Dr. David T. Rovee dated
September 23, 1991.*(14)
(n) -- Agreement between Biomet, Inc. and Organogenesis Inc. dated July
27, 1993.(15)
(o) -- 1995 Stock Option Plan.*(20)
(p) -- The License and Supply Agreement between the Company and Sandoz
Pharma Ltd., dated as of January 17, 1996. **
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
(q) -- The Stock Purchase Agreement between the Company and Sandoz Pharma
Ltd., dated as of January 17, 1996. **
(21) -- Subsidiaries of the Company, filed herewith.
(23) -- Consent of Coopers & Lybrand L.L.P., filed herewith.
</TABLE>
(1) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-9832).
(2) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K, filed March 31, 1987.
(3) Incorporated herein by reference to the exhibits to the Company's
Current Report on Form 8-K, filed February 18, 1987.
(4) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-3 (File No. 33-33914).
(5) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-8 (File No. 33-12761).
(6) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q, filed August 14, 1987.
(7) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K, filed March 30, 1988.
(8) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K, filed March 31, 1989.
(9) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K, filed April 2, 1990.
(10) Incorporated herein by reference to Exhibit 3(a) to the Company's Form
10-K, filed April 1, 1991.
(11) Incorporated by reference to Exhibit 4 to the Company's Quarterly
Report on Form 10-Q, filed August 13, 1991.
(12) Incorporated herein by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q, filed November 5, 1991.
(13) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K, filed March 30, 1992.
(14) Incorporated herein by reference to the exhibits to the Company's
Annual Report Form 10-K, filed March 31, 1993.
(15) Incorporated herein by reference to the Company's Quarterly Report on
Form 10-Q, filed August 13, 1993.
(16) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K, filed March 31, 1994.
(17) Incorporated herein by reference to Appendix A of the Company's
Definitive Proxy Statement filed April 19, 1994.
(18) Incorporated herein by reference to the exhibits to the Company's
Current Report on Form 8-K, filed August 29, 1995
(19) Incorporated herein by reference to the exhibits to the Company's
Amended Registration Statement on Form S-3, filed July 5, 1995.
(20) Incorporated herein by reference to Appendix A of the Company's
Definitive Proxy Statement filed April 14, 1995.
* Management contract or compensatory plan identified pursuant to Item 14(a)3.
**Confidential Treatment requested.
42
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Dan Capital Corp. (Del.)
ECM Pharma/TM/, Inc. (Del.)
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Organogenesis Inc. and its wholly owned subsidiaries on all Forms S-8 and on all
Forms S-3, in effect on the filing date of Organogenesis Inc.'s Annual Report on
the Form 10-K for the year end December 31, 1996, of our report dated March 27,
1997, on our audits of the consolidated financial statements of Organogenesis
Inc. and its wholly owned subsidiaries as of December 31, 1996 and 1995, and for
the years ended December 31, 1996, 1995, and 1994, which report is included or
incorporated by reference in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 27, 1997
<TABLE> <S> <C>
<PAGE>
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<CIK> 0000779733
<NAME> ORGANOGENESIS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 399
<SECURITIES> 14,041
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<CURRENT-ASSETS> 15,143
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0
0
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<OTHER-SE> 18,335
<TOTAL-LIABILITY-AND-EQUITY> 22,436
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