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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, 1997
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: (781) 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. ( )
As of March 2, 1998, the approximate aggregate market value of voting stock
held by non-affiliates of the registrant was $518,340,503 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 2, 1998. There were 23,166,056 shares of
Common Stock outstanding as of March 2, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
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PART OF FORM 10-K
DOCUMENT INTO WHICH INCORPORATED
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Portions of the Registrant's Definitive Proxy Statement for its 1998 Annual Meeting
of Stockholders .................................................................... III
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With the exception of the portions of the Definitive Proxy Statement for
the registrant's 1998 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 public filings or statements made by the
Company from time to time which concern the Company's business outlook; future
financial performance; anticipated profitability, revenues, expenses or capital
expenditures; future funding under collaborative agreements; and statements
concerning expectations as to any future events, 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
1-"Business", Item 7-"Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 8-"Financial Statements and
Supplementary Data" sections of this report and those included in other publicly
available filings with the Securities and Exchange Commission.
ITEM 1. BUSINESS
Organogenesis Inc. (the "Company" or "Organogenesis") designs, develops and
manufactures medical therapeutics containing living cells and/or natural
connective tissue components. The Company was formed to advance and apply
tissue engineering to major medical needs. It was organized as a Delaware
corporation in 1985, with principal executive offices located at 150 Dan Road,
Canton, Massachusetts 02021 and the telephone number is 781-575-0775.
Tissue engineering - Tissue engineering is an emerging field focused on
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utilizing the body's own healing and regenerative processes to achieve medical
benefit. Tissue engineered products typically include living cells and/or
natural connective material such as collagen. Living cells can produce or remove
substances in response to their environment; connective tissue can provide
physical function while being converted to living tissue through ingrowth of
patient's cells and blood vessels.
Tissue engineering at Organogenesis - In establishing its product and
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research pipeline, Organogenesis considers both scientific and commercial
factors, including the magnitude of the potential market, whether tissue
engineering has the potential to provide significant benefit over traditional
approaches and ability to achieve the necessary economies of scale for cost-
effectiveness. The Company has established expertise with both mammalian (e.g.,
human) cells and natural connective tissue and selects its approach based on
medical application. The Organogenesis pipeline thus includes both cellular
products which include living cells, and acellular, connective tissue-based
products. The lead product in both Organogenesis' cellular and acellular line
has each been cleared for marketing in at least one country.
Cellular Products - Organogenesis has established expertise in procuring,
culturing and optimizing human cells to provide cell function in tissue-
engineered products. The Company's lead product, Apligraf(TM) *(Graftskin) is
the first manufactured organ comprised of living human cells to be approved for
marketing by a major regulatory agency (Canadian Health Protection Branch in
April 1997). Additionally, it was recommended for approval without conditions by
the General and Plastic Surgery Restorative Devices Panel to the United States
Food and Drug Administration ("FDA") on January 29, 1998. Examples of the
Company's cellular products/research programs include:
* Apligraf(TM) is a trademark of Novartis.
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Cellular Products/Research Programs Cell Type (s) Cell Purpose
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Apligraf(TM) Skin cells: To enable active contribution to
Epidermal cells (keratinocytes) the healing process (e.g., produce
Dermal cells (fibroblasts) growth factors and other
wound-healing substances in
response to signals received from
wound bed)
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Liver Assist Device Liver cells (hepatocytes) To provide liver-like blood
processing: production/removal of
substances
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Diabetes research program Pancreatic islet cells To produce insulin in response to
glucose levels in blood.
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To help maximize the opportunity of commercializing cellular products, the
Company has established expertise in the field of cryopreservation - the ability
to "freeze" complex living tissue, store it for extended periods at ultracold
temperatures and restore it to ambient temperature while avoiding cell death.
For example, the Company can cryopreserve Apligraf(TM), consistently maintaining
greater than 90% cell viability. The Company has four U.S. patents issued or
pending to protect its cryopreservation technology.
Acellular (NON-CELLULAR) Products - With its connective tissue expertise,
Organogenesis is also developing a line of collagen-based products. Collagen is
the primary structural protein of the body and serves a number of functions,
including fostering and guiding the ingrowth of cells and blood vessels from
surrounding tissue. The first in this line of products, GRAFTPATCH(TM), has been
cleared for marketing by the FDA through the 510(k) process. The acellular
products are being designed to provide the necessary physical function for
medical benefit while being converted to living tissue by the recipient's body.
Examples of these products include:
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Acellular Products Description
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GRAFTPATCH(TM) For soft tissue reinforcement (e.g., hernia repair)
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Fibrillar Tissue Filler Potential applications include female urinary incontinence and soft
tissue bulking and repair (e.g., treatment of skin depressions)
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Vascular Graft Potential applications include coronary bypass procedures, peripheral
revascularization procedures and vascular support
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Commercialization strategy - Organogenesis intends to commercialize its
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products either by itself or through partners with an established marketing
presence. For example, Novartis Pharma AG has global marketing rights to
Apligraf(TM) and is responsible for sales and marketing costs. Organogenesis
commenced commercial manufacturing operations at its 70,000 square foot
facilities in Canton, MA in August 1997 with the Canadian launch of Apligraf(TM)
by Novartis Pharmaceuticals Canada Inc.
PRODUCTS
Organogenesis' product development focus includes living tissue
replacements, cell-based organ assist devices and other tissue-engineered
products. The Company is also exploring additional opportunities relating to
cell and gene therapy applications and to its cryopreservation technology. The
table below shows products/research programs in the Organogenesis pipeline,
potential indications and current status.
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Product Potential Indication / Use Status*
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Apligraf(TM) Venous leg ulcers Premarket Approval Application ("PMA") at FDA; FDA
advisory panel recommended approval without
conditions 1/29/98;
International registrations in process;
Approved/marketed in Canada;
Data presented/published
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Burns Trial completed, data presented
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Skin surgery Trials completed in donor site and dermatological
surgery wounds; publications; additional studies
underway and planned
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Diabetic ulcers Trial underway
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Pressure sores Trial planned;
Agreement signed with Clinical Studies Ltd., a
subsidiary of PhyMatrix Corp., related to conduct of
trial
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GRAFTPATCH(TM) Soft tissue reinforcement FDA marketing clearance (510k) granted;
intend to market through a partner
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Fibrillar Tissue Filler Include female urinary In preclinical studies
incontinence &
soft tissue bulking and
repair
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Other Living Tissues Include surgical In development
reconstruction & repair,
oral surgery applications
(e.g., periodontal)
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Vascular graft Vascular support; peripheral In preclinical studies
revascularizations; coronary
artery bypass procedures
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Liver assist device Support for liver In research
compromised patients
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* There can be no assurance that these products will receive final regulatory
approval, or if approved, will be commercially successful when and if product
launch occurs.
CELLULAR PRODUCTS
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APLIGRAF(TM)
The Company's most advanced product is Apligraf(TM). This product is
currently marketed for the treatment of venous leg ulcers in Canada, with
registrations elsewhere underway, as discussed under "Regulatory Status".
Apligraf(TM) is tissue-engineered living human skin for the treatment of wounds,
including chronic wounds, skin surgery wounds and burn wounds. As discussed
under "Collaborative Agreements," Novartis Pharma AG has exclusive global
Apligraf marketing rights.
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Product Description
Like human skin, Apligraf(TM) features both an organized epidermis and
dermis, composed of living human epidermal (keratinocytes) and dermal
(fibroblasts) cells. The epidermal layer of Apligraf(TM) is fully differentiated
and includes a stratum corneum - the outer protective layer of skin. The product
is all natural and is not removed after application.
[Photo showing structure of Apligraf(TM) compared to Human Skin]
Under the microscope, as shown above, Apligraf(TM) shares the appearance of
skin.
Apligraf(TM) includes both the organization and components of human skin.
The various parts of skin are believed to contribute to the wound healing
process in different, but interrelated ways. The stratum corneum protects the
wound and the underlying cells and provides feedback to the epidermis. The
epidermal keratinocytes directly close wounds, secrete growth factors in
response to wound signals and promote dermal tissue formation. The dermal
fibroblasts also secrete growth factors and contribute to the formation of new
dermal tissue. The extracellular matrix provides support for the epidermis and
supports cellular ingrowth and new tissue formation.
Regulatory Status
The Apligraf(TM) Premarket Approval Application (PMA) for the treatment of
venous leg ulcers is currently pending at the FDA. On January 29, 1998, the
General and Plastic Surgery Devices advisory panel to the FDA reviewed
Apligraf(TM) for the treatment of venous leg ulcers and recommended its approval
without conditions. The Company is working with the FDA to achieve a final
decision on this PMA. There can be no assurance that the FDA will accept the
advisory panel's recommendation or that the FDA will render its decision in a
timely manner.
International registrations of Apligraf(TM) are being pursued by Novartis,
which has regulatory responsibility for the product outside the U.S. In April
1997, Apligraf(TM) was approved for marketing by the Canadian Health Protection
Branch and has subsequently been launched in Canada.
There can be no assurance of additional marketing approvals for
Apligraf(TM), nor that Apligraf(TM) will be commercially successful.
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Potential Markets
Potential Apligraf(TM) uses identified to date include: wounds that have
been open for an extended period of time (chronic wounds), wounds created by
skin surgery, and wounds due to burns. As more physicians become familiar with
Apligraf(TM), additional potential uses could emerge.
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POTENTIAL APLIGRAF(TM) MARKET BY INDICATION
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APPROXIMATE # OF
INDICATION PATIENTS/PROCEDURES IN THE U.S.
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CHRONIC WOUNDS:
Venous leg ulcers 1,000,000 patients
Diabetic ulcers 600,000 patients
Pressure sores 2,000,000 patients
SKIN SURGERY WOUNDS 600,000 procedures per year
SEVERE BURNS WOUNDS 10,000-15,000 procedures per year
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CHRONIC WOUNDS
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Over 3 million people in the U.S., 11 million globally, suffer from chronic
wounds, including venous leg ulcers, diabetic ulcers and pressure sores.
Apligraf(TM) clinical trials are completed, underway or planned in each of the
major segments of this market:
VENOUS LEG ULCERS: An estimated 1 million patients in the U.S. suffer from
venous leg ulcers. In the Apligraf(TM) pivotal trial, it was found that half of
venous leg ulcer patients have difficult-to-treat ulcers, such as ulcers open
for over a year. Venous leg ulcers 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. Even when healing is
achieved with traditional therapies, the process can take six months or longer.
The Apligraf(TM) venous leg ulcer pivotal trial was a prospective,
randomized, controlled multi-center study. The FDA advisory panel agreed that
Apligraf(TM) was shown to heal patients faster than compression therapy alone.
Apligraf(TM) was shown to be highly effective in ulcers which resist healing
with traditional treatments: in ulcers open for over a year, Apligraf(TM) was
shown to heal 47% of patients compared to 19% with compression therapy alone.
The advisory panel to the FDA agreed that there were no clinically significant
safety concerns with Apligraf(TM) therapy.
DIABETIC ULCERS: NEARLY 600,000 people in the U.S. suffer from diabetic
ulcers, which can lead to amputation. To address this need, in March 1996
Organogenesis initiated a prospective, randomized, controlled multi-center
diabetic ulcer pivotal trial. Patient enrollment for this trial is expected to
be completed by the second half of 1998.
PRESSURE SORES (DECUBITUS ULCERS): Over 2 million people in the U.S. suffer
from pressure sores. Organogenesis plans to conduct a pivotal trial in pressure
sores. In November 1997, the Company signed an agreement with Clinical Studies
Ltd., a subsidiary of PhyMatrix Corp., to assist in the conduct and supervision
of an Apligraf(TM) pivotal trial in pressure sores.
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SKIN SURGERY WOUNDS
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Approximately 600,000 skin surgery procedures are performed annually in the
U.S., including dermatological surgery for the removal of skin cancers and
birthmarks, and donor site surgery (harvesting 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.
Over one hundred patients have received Apligraf(TM) for skin surgery
wounds in its dermatological surgery and donor site clinical studies. Data from
the Apligraf(TM) dermatological surgery study indicate Apligraf(TM) can provide
immediate wound closure, resurfacing of the wound with epithelium, rapid healing
and good cosmetic results. Data from a study in donor site wounds were published
as a research letter in the medical journal, Lancet, in October 1997 and
indicated Apligraf(TM) performed comparably to patient skin and better than
another common treatment, polyurethane film, in both time to 100 percent healing
and reduction in pain.
BURN WOUNDS
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An estimated 100,000 people in the U.S. visit the hospital for the
treatment of burns each year. Approximately 10,000-15,000 of these people
receive skin grafts. While a number of dressings (e.g., synthetics, and cadaver
skin) are available to provide temporary protection, severely burned areas
ultimately receive skin grafts. Skin grafts, however, typically leave a "chicken
wire" appearance that can compromise the cosmetic and functional outcome. For
example, flexibility can be reduced when patient skin is autografted over
joints. To improve cosmetic and functional results, numerous surgeries may be
required. Data from the Apligraf(TM) burn clinical study, presented at the
scientific meeting, Bioengineering of Skin Substitute in September 1997, show
that Apligraf(TM) used in conjunction with autograft results in less scarring
and more normal pliability when compared with autograft alone.
OTHER CELLULAR PROGRAMS
With Apligraf(TM), Organogenesis has demonstrated its ability to tap the
power of living cells. Other cellular programs at the Company include
development of other living tissues and a liver assist device, as well as
research programs related to gene and cell therapies, such as the culturing of
islet cells for the teatment of diabetes.
Other Living Tissues
Organogenesis is using its expertise to develop living tissue products for
medical needs such as surgical reconstruction, respiratory tract repair and oral
surgery (e.g., periodontal procedures). As part of the strategy of developing
treatments for conditions affecting surface tissues, the Company collaborates
with researchers at the Brigham and Women's Hospital, Boston.
Organogenesis' programs in living tissues also provide potential
opportunities in gene therapy. For instance, the Company believes its living
tissues can potentially be used as gene delivery vehicles. The Company is
researching genetically modifying its tissues to compensate for patient genetic
irregularities that compromise normal function. Other modifications are being
researched to enhance desirable patient responses.
Liver Assist Device
Approximately 360,000 people in the U.S. have active liver disease.
Millions more have medical conditions which can progress to end-stage disease.
Currently, liver transplantation is the only treatment for end-stage liver
disease, as only hepatocytes (liver cells) can provide the necessary function.
Unfortunately, each year many patients die awaiting a transplant. Among those
fortunate enough to receive a liver, one in four requires a second transplant
due to deteriorated health.
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Organogenesis is developing, in collaboration with the Massachusetts
General Hospital, an extracorporeal liver assist device with living hepatocytes
to provide temporary liver function to patients until either a transplant
becomes available or the patient's own liver recovers. The initial goal of this
product is to serve as a bridge to transplant. It is believed such a device
could eventually be used to support patients with chronic liver disease and slow
progression to the point of needing a transplant, thus avoiding this highly
invasive, expensive and risky procedure.
ACELLULAR PRODUCTS
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Organogenesis' acellular line of products is based on its proprietary
connective tissue technology. This line of products is being designed to
encourage the integration and ingrowth of the patient's own cells and blood
vessels, to provide permanence of benefit without permanence of product.
GRAFTPATCH(TM)
GRAFTPATCH(TM)is an all-natural product comprised of layers of collagen
that have been chemically cleaned for purity and cross-linked for strength.
GRAFTPATCH(TM) was granted FDA 510(k) marketing clearance in the U.S. in August
1997 for use in general surgical procedures for the reinforcement of soft tissue
(e.g., hernia repair). Recent preclinical studies have indicated GRAFTPATCH(TM)
provides mechanical strength and avoids the formation of adhesions. This has
been attributed to GRAFTPATCH(TM)'s ability to integrate with patient tissue and
thus avoid "foreign body" responses. Thus, the product may offer advantages in
preventing post-operative adhesions. Organogenesis' strategy is to market
GRAFTPATCH(TM) through a partner. No assurance can be given that Organogenesis
will be able to identify and/or reach agreement with a partner.
FIBRILLAR TISSUE FILLER
Injecting material that will bulk or support a tissue can be advantageous
in certain medical situations. For example, an estimated 10 million women in the
U.S., 25 million worldwide; suffer from female urinary incontinence; it is
believed that 10-15% of this population could potentially benefit from an
injectable product. Other examples include soft tissue bulking and repair (e.g.,
treatment of skin depressions). Currently available products have been found to
disperse upon injection, limiting their ability to provide long term bulk and
support.
To address such needs, Organogenesis has developed Fibrillar Tissue Filler
(FTF), so-called because of its unique string or "fibril" configuration of the
collagen. This fibril design has been found in preclinical studies to enable FTF
to be injectable, yet also retain shape. These attributes mean it could
potentially offer advantages over available products. FTF may also offer
potential in drug and cell delivery.
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VASCULAR GRAFT
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 use saphenous vein harvested from the patient for
their graft material because it offers a feature not obtainable with synthetics:
the ability to provide the critical strength while becoming populated with
patient cells. Use of patient vein, however, has its drawbacks: it varies in
quality and availability; harvesting vein extends the procedure's duration,
increasing its cost; and the resultant second wound site increases post-surgical
patient discomfort and potential for complications.
Organogenesis is developing a ready-to-use small diameter graft to provide
the performance of patient saphenous vein. This product is currently in
preclinical studies.
RISK FACTORS
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 U.S. and elsewhere are seeking to develop competitive
products for the treatment of skin wounds and other medical needs targeted by
the Company. 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 medical
needs targeted by the Company.
Potential competitors include other tissue engineering firms,
xenotransplant (transplantation of organs between different species) firms and
companies that use traditional technologies. For example, in the field of wound
care, competition is expected to include other tissue engineering companies in
some indications, as well as the wound care divisions of certain major
pharmaceutical firms. 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 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 personnel and on its ability to develop and maintain
relationships with leading research institutions. The competition for those
relationships and for experienced 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 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.
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The Company has twenty patents issued or allowed 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 eight 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.
The Company's 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 the Company's
cryopreservation technology. As part of the continuing interest in protecting
its intellectual property rights, the Company has also filed, and is
prosecuting, eight other patent applications in the U.S. 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, consultants and
corporate partners to maintain the confidentiality of the Company's proprietary
information. The Company intends to require any new 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 U.S. 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. In the U.S., some of the Company's
products will require clearance under the FDA 510(k) premarket notification
procedure. This requires submitting data that demonstrates a product is
"substantially equivalent" to a device marketed prior to the enactment of the
Medical Device Amendments of 1976 or to a device legally marketed thereafter
pursuant to a 510(k). Other products will require marketing approval via the
PMA process. The PMA process is significantly more complex, time consuming and
costly than the 510(k) process as extensive data on safety and efficacy must be
submitted. Each of these approval processes is expensive, time consuming and
subject to unanticipated delays, and no assurance can be given that any agency
will grant its approval.
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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.
PRODUCT LIABILITY INSURANCE
The Company's business exposes it to potential liability risks that are
inherent in the testing, manufacturing, marketing and sale of medical products.
The use of the Company's product candidates, whether for clinical trials or
commercial sale by the Company or its collaborators, may expose the Company to
product liability claims or product recall and possible adverse publicity. The
Company currently has product liability coverage; however, there can be no
assurance that the amount of insurance coverage will be sufficient to fully
cover potential liability claims. In addition, there can be no assurance that
the Company will be able to obtain additional product liability coverage in the
future at an acceptable cost. If a product liability claim were to exceed the
Company's current insurance coverage, there could be a material adverse affect
on the Company's financial condition and results of operations.
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. In August 1997,
the Company began producing its lead product, Apligraf(TM), for commercial sale
to Canada in adherence with these manufacturing protocols. However, with
increasing demand for Apligraf(TM), the Company will need to transition from
small-scale 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 is required to maintain a manufacturing facility in compliance with
Good Manufacturing Practices. Manufacturing facilities and processes pass an
inspection before the FDA issues 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 were 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.
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<PAGE>
SOURCES OF SUPPLY
The Company manufactures Apligraf(TM) for commercial sale, as well as for
use in clinical trials, at its Canton, Massachusetts facility. Among the
fundamental raw materials needed to manufacture Apligraf(TM) are keratinocytes
and fibroblasts. These cells are derived from donated infant foreskin. 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 obtained, or once obtained, that the cells derived from
it will in fact be pathogen-free.
Another major material required to produce the Company's products is
collagen, a protein obtained from animal source tissue. The Company has
developed a proprietary method of procuring its own collagen which the Company
believes is superior in quality and strength to collagen available from
commercial sources. The Company currently obtains its animal source tissue from
U.S. suppliers only. 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
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 production 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 Pharma AG ("Novartis" or "related
party") 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 supplies
Novartis' global requirements for Apligraf(TM) and receives both a per unit
manufacturing payment and royalty revenues on product sales. Novartis has agreed
to provide the Company up to $40,000,000 in equity investments, research support
and milestone payments, an increase of $2,500,000 from prior year due to the
addition of a research and development support milestone. During fiscal years
1997 and 1996, the Company received $2,500,000 and $11,500,000, respectively,
from Novartis. The remaining payments will be received based upon achievement of
specified events.
In March 1998, the Comapny received $3,750,000 from Novartis in Milestone and
equity payments; refer to the caption "Stockholders' Equity" under Item No.8.
In 1995, the Company and Biomet, Inc. ("Biomet") entered into a supply
arrangement under which Biomet may, but is not obligated to, purchase collagen
from the Company.
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. Additionally, Toyobo may, but is
not obligated to, purchase collagen and other products from the Company.
12
<PAGE>
RESEARCH AND OTHER AGREEMENTS
The agreements summarized below generally are funded 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 November 1997, the Company entered into a clinical research agreement with
Clinical Studies Ltd. related to the conduct of a clinical trial for the
treatment of pressure sores.
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 formed a research collaboration with the
Massachusetts General Hospital (MGH) related to the development of a liver
assist device.
In December 1995, the Company signed a research agreement with the Brigham and
Women's Hospital related to the biology of surface tissues (e.g., oral mucosa,
skin appendages).
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, connective tissue and other types of
tissue engineered products for a variety of areas, including wound care,
urology, liver disease, cardiovascular medicine and general and reconstructive
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 1997, 1996 and 1995, the Company's research and development expenses
were $13,981,000, $10,863,000 and $9,272,000, respectively, which include
production costs and funding of the research and other agreements noted above.
EMPLOYEES
As of March 2, 1998, the Company had 142 full-time employees. 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.
13
<PAGE>
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
The Company leases approximately 70,000 square feet of space in
Canton, Massachusetts at an annual average base rent of approximately $561,000,
plus operating expenses. In March 1998, the Company signed an amendment to its
major lease, which extends the term through September 30, 2004. The amendment
also grants three options to extend the term of the lease for an additional five
years per option and provides for an expansion option for the remaining rentable
area in the building. The Company is exploring alternatives for a new facility
for full-scale commercial production of products in the future. The Company
believes that its current facilities will adequately support its manufacturing
needs and research and development activities through the end of 1998 and
beyond.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
<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 2, 1998, there were 638 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>
1997 1996
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $ 16 13/16 $ 11 7/16 $ 13 5/8 $ 8 7/8
Second Quarter 16 1/16 11 3/16 14 7/8 10 9/16
Third Quarter 24 1/8 13 5/8 12 5/8 9 1/8
Fourth Quarter 30 1/16 22 11/16 15 11/16 11 1/8
</TABLE>
The amounts above have been adjusted to reflect two 25% stock dividends
distributed to stockholders of record on May 2 and November 28, 1997. All
related data in the consolidated financial statements reflect both stock
dividends for all periods presented, except for the Statements of Changes in
Stockholders' Equity. No cash dividends have been paid to date on the
Company's Common Stock.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT SHARE DATA AND NUMBER OF
EMPLOYEES)
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 3,531 $ 7,527 $ 627 $ 996 $ 1,593
Net Loss (19,807) (7,499) (12,737) (10,441) (9,936)
Net Loss Per Share (0.87) (0.34) (0.65) (0.58) (0.56)
Working Capital 4,843 11,256 12,886 8,407 11,356
Capital Expenditures 1,069 3,311 319 463 95
Total Assets 13,780 22,436 19,304 15,127 23,955
Stockholders' Equity 11,523 18,478 17,798 13,949 22,814
Number of Employees 137 115 97 94 73
</TABLE>
15
<PAGE>
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
This Form 10-K and other public filings or statements made by the Company from
time to time which concern the Company's business outlook; future financial
performance; anticipated profitability, revenues, expenses or capital
expenditures; future funding under collaborative agreements; and statements
concerning expectations as to any future events, 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 Items
No. 1 "Business", No. 7 "Management's Discussion and Analysis" and No. 8
"Financial Statements and Supplementary Data" of this report and those included
in other publicly available filings with the Securities and Exchange Commission.
Overview
- --------
Organogenesis Inc. (the "Company") designs, develops and manufactures medical
therapeutics containing living cells and/or natural connective tissue
components. The Company was formed to advance and apply tissue engineering to
major medical needs.
The Premarket Approval Application ("PMA") for the Company's lead product,
Apligraf(TM) tissue-engineered living human skin, is pending at the U.S. Food
and Drug Administration ("FDA") for the treatment of venous leg ulcers. On
January 29, 1998, the General and Plastic Surgery Devices advisory panel to the
FDA recommended unconditional approval of this PMA. Novartis Pharma AG
("Novartis" or "related party") has global Apligraf(TM) marketing rights and is
pursuing international marketing authorizations for the product. In August 1997,
Apligraf(TM) was commercially launched in Canada by Novartis Pharmaceuticals
Canada, Inc., an affiliate of Novartis. A pivotal trial to assess the efficacy
and safety of Apligraf(TM) is underway for the treatment of diabetic ulcers and
one is planned for the treatment of pressure sores. Trials have been completed
in skin surgery wounds (dermatological surgery and donor site wounds) and data
published; additional studies are in the process of being implemented. A
clinical trial has also been completed in burn wounds, and the data from this
trial were presented at a scientific conference in September.
Commercial launch of Apligraf(TM) in Canada occurred during the middle of the
third quarter. Since the Canadian launch, Novartis has implemented an education
and training program to build physician awareness and experience as the first
steps in establishing a long-term business base. Additionally, premarketing
educational activities are underway in the U.S. and Europe. The Company expects
production costs to exceed product sales for the near term due to start-up
expenses and the high costs associated with low volume production. There can be
no assurance that the Company will realize sufficient production volume or
otherwise reduce its production costs to significantly improve gross margins.
The Company is dependent on Novartis for the successful marketing of
Apligraf(TM). There can be no assurance that Novartis will succeed with
registrations and marketing of Apligraf(TM) or that the Company will be able to
meet the production demand of worldwide product commercialization.
16
<PAGE>
In August, 1997, the Company's surgical repair product, GRAFTPATCH(TM), was
cleared for marketing in the U.S. under the FDA's Section 510(k) notification
process. Marketing clearance has been granted for use in general surgical
procedures for reinforcement of soft tissue (e.g., hernia repair). The Company
intends to market this product through a third-party. There is no assurance that
the Company will enter into an agreement with any third-party.
Results of Operations
- ---------------------
1997 Compared to 1996
Total revenues for fiscal year 1997 were $3,531,000, compared to $7,527,000 in
1996. These amounts included research and development support payments received
and recognized from Novartis of $2,500,000 and $6,500,000, respectively. Other
revenues of $529,000 in 1997 represent product sales to related party,
royalties, and other revenues. The increase over 1996 other revenues of $42,000
is due to supply of product to Novartis, including product to support the
Canadian launch, and increased sales of other products. Interest income
decreased to $502,000 for fiscal year 1997, compared to $985,000 in 1996. The
decrease was primarily due to the difference in funds available for investment.
Research and development expenses increased to $13,981,000 for fiscal year 1997
from $10,863,000 in 1996. The increase was primarily due to personnel additions
mainly in operations and clinical research, expansion of facilities resulting in
higher non-cash depreciation charges and increased occupancy costs, and other
activities supporting the Company's research and development programs, including
the Apligraf(TM) diabetic ulcer pivotal trial and the fibrillar tissue filler
and liver assist device research programs. The Company expects to continue to
expand Apligraf(TM) operations and to advance the Company's product pipeline
during 1998.
General and administrative expenses decreased to $3,802,000 for fiscal year 1997
from $4,163,000 in 1996, primarily due to a reduction in the use of outside
services and cost containment, including legal, corporate insurance and other
corporate costs. This decrease was partially offset by an increase in personnel
costs, mostly due to increased headcount. Additionally, in May 1997, the
Company incurred a one time, non-cash compensation charge of $5,555,000 relating
to the extension of the term of a stock option held by an officer of the
Company.
As a result of the net effect described above, the Company incurred a net loss
of $19,807,000, including the $5,555,000 non-cash charge described above, or
$.87 per share - basic and diluted, for fiscal year 1997, compared to a net loss
of $7,499,000, or $.34 per share - basic and diluted, for the comparable 1996
period. The Company expects to incur additional losses as its expenditures
continue to increase due to continued expansion of its operations and research
programs.
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 Novartis. 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 PMA for the treatment of venous leg 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,
17
<PAGE>
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.
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 $.34 per share - basic and diluted, as compared
with a net loss for fiscal year 1995 of $12,737,000, or $.65 per share - basic
and diluted.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1997, the Company had cash, cash equivalents and investments in
the aggregate amount of $6,145,000 and working capital of $4,843,000, compared
to $14,440,000 and $11,256,000, respectively, at December 31, 1996. Cash used
in operating activities during fiscal year 1997 was $14,473,000, primarily due
to financing the Company's operations and reducing accounts payable and accrued
expenses related to investment in plant expansion. Capital expenditures were
$1,069,000 and $3,311,000 during fiscal years 1997 and 1996, respectively,
primarily related to the build-out of the current facilities to support Apligraf
manufacturing and the acquisition of laboratory equipment for expanded research
and development programs. The Company expects to continue to utilize funds
during 1998 for the continued expansion of Apligraf(TM) operations and for the
advancement of the Company's product pipeline. The Company is also exploring
adding manufacturing capacity to support the production of the Company's current
and future products. However, no assurances can be given that additional funds
will be available when required on terms acceptable to the Company to support
planned production or expanded operations during 1998 and beyond as discussed in
the preceding forward-looking statements.
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. During fiscal year
1997, financing activities provided cash of approximately $7,247,000, primarily
from the exercise of all Common Stock Purchase Warrants issued during the July
1995 public offering and the exercise of stock options. Financing activities
provided cash of approximately $8,117,000 for fiscal year 1996, primarily from a
$5,000,000 equity investment received under the collaborative agreement with
Novartis and the exercise of warrants and stock options. Cash from financing
activities in fiscal year 1995 was approximately $16,586,000, the majority of
which related to a public offering of common stock.
The Company closed a $20 million Convertible Preferred Stock and warrant
financing in March, 1998 with two institutional investors. The Series C
Convertible Preferred Stock ("Series C Preferred Shares") pay no dividends and
are convertible into Common Stock on a scheduled basis over the next two years
based on market price at time of conversion (up to $36 per share). The Company
may call for conversion under certain conditions based on continued improvement
in the price of the Company's Common Stock. Conversions by the investors are
subject to certain limits; no limits exist for conversions on redemption or up
on a major transaction. Mandatory conversion is March 26, 2000, at which time
the Company has the option to redeem any outstanding Series C Preferred Shares
in cash or by issuing Common Stock. In addition, the investors received 160,000
three year warrants to purchase Common Stock at $39 per share. The warrants may
be exercised at any time prior to April 2001. The investors also have the right
to receive, under certain conditions based on the Common Stock market price
declining below certain levels, additional warrants to purchase an aggregate of
up to 160,000 shares of Common Stock.
18
<PAGE>
Novartis has agreed to provide the Company up to $40,000,000 in equity
investments, research support and milestone payments (See "Collaborative
Agreement" under the Notes to Consolidated Financial Statements), an increase of
$2,500,000 from prior year due to the addition of a research and development
support milestone. During fiscal years 1997 and 1996, the Company received
$2,500,000 and $11,500,000, respectively from Novartis. The remaining payments
will be received based upon achievement of specified events. In March 1998, the
Company received $3,750,000 from Novartis. Of this amount, $750,000 represents a
research and development support payment and $3,000,000 represents a milestone
equity investment.
At December 31, 1997, the Company had net operating loss and tax credit
carryforwards of approximately $87,000,000 and $3,600,000, respectively. These
amounts at December 31, 1996 were $72,000,000 and $3,100,000, respectively.
These losses and tax credits are available to reduce federal taxable income and
federal income taxes, respectively, if any, in future years. However, the
realizability of the Company's deferred tax assets is not assured as it depends
upon future taxable income. Accordingly, the Company has recorded a 100%
valuation allowance against these assets. The Company is required to recognize
all or a portion of net deferred tax assets, with corresponding increases to net
income, when the Company believes, given the weight of all available evidence,
that it is more likely than not that all or a portion of the benefits of net
operating loss carryforwards and other credits will be realized. However, there
can be no assurance that the Company will ever realize any future cash flows or
benefits from these losses and tax credits.
The Company's operations and research programs will require 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 preferred
stock and warrant financing completed subsequent to December 31, 1997 and future
funds from Novartis, including product revenue, together with existing working
capital, will be sufficient to finance its operations into 1999. However, this
is a forward-looking statement and no assurance can be given that there will be
no changes that would significantly decrease available cash before such time.
Factors that may change the Company's cash requirements include: time required
to obtain regulatory approvals of the Company's products in different countries,
if needed, and subsequent timing of product launches; commercial acceptance when
product launches occur; progress of the Company's research and development
programs; resources the Company devotes to self-funded projects, proprietary
manufacturing methods and advanced technologies; and resources the Company
devotes to outside research collaborations or projects. 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, the Company may
need to delay, scale back or eliminate certain of its research and development
programs or license to third parties certain products or technologies that the
Company would otherwise undertake itself, and there could be a material adverse
effect on the Company's financial condition and results of operations.
The Year 2000 Issue
- -------------------
The Year 2000 Issue refers to potential problems with computer systems or any
equipment with computer chips or software that uses dates where the date has
been stored as just two digits (e. g., 97 for 1997). On January 1, 2000, any
clock or date recording mechanism incorporating date sensitive software which
uses two digits to represent the year may recognize a date using 00 as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices or engage in
similar business activities.
19
<PAGE>
The Company has recently initiated a review of its internal information and
other systems and equipment to determine the extent of any Year 2000 problems.
The Company is still gathering information, but based on such review to date,
the Company does not currently expect that any such problems will have a
material adverse effect on the Company's future operating results or financial
condition.
The Company is in the process of contacting its major suppliers and other third
parties in an effort to determine the extent to which the Company may be
vulnerable to third parties' failure to timely correct their own Year 2000
problems. To date, the Company is unaware of any situations of noncompliance
that would materially adversely affect its operations or financial condition.
There can be no assurance, however, that instances of noncompliance which could
have a material adverse effect on the Company's operations or financial
condition will be identified; that the systems of other companies with which the
Company transacts business will be corrected on a timely basis or that a failure
by such entities to correct a Year 2000 problem or a correction which is
incompatible with the Company's information systems would not have a material
adverse effect on the Company's operations or financial condition.
Accounting Pronouncements
- -------------------------
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that
changes in comprehensive income be shown in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. The Company does
not expect the adoption of SFAS 130 to materially effect its financial
statement presentation.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ORGANOGENESIS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 8:
<TABLE>
<S> <C>
Report of Independent Accountants..................................................................... 22
Consolidated Balance Sheets as of December 31, 1997 and 1996.......................................... 23
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995............ 24
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............ 25
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997,
1996 and 1995........................................................................................ 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, 1997 and
1996, 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, 1997. 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, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 26, 1998
22
<PAGE>
ORGANOGENESIS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 333 $ 399
Investments 5,812 14,041
Other current assets 927 703
-------- -------
7,072 15,143
Property and equipment, net 6,615 7,204
Other assets 93 89
-------- -------
$ 13,780 $22,436
======== =======
LIABILITIES
Current liabilities:
Accounts payable $ 643 $ 1,220
Accrued expenses 1,586 2,667
-------- -------
2,229 3,887
Deferred rent payable 28 71
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 23,160,320 and 22,331,789
shares as of December 31, 1997 and 1996, respectively 232 223
Additional paid-in capital 98,277 85,434
Accumulated deficit (86,986) (67,179)
-------- ---------
Total stockholders' equity 11,523 18,478
-------- ---------
$ 13,780 $ 22,436
======== =========
</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,
----------------------------------------
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
Revenues:
Research and development support from related party $ 2,500 $ 6,500 $ -
Product sales to related party, royalties and other income 529 42 19
Interest income 502 985 608
----------- ----------- -----------
Total revenues 3,531 7,527 627
----------- ----------- -----------
Costs and Expenses:
Research and development 13,981 10,863 9,272
General and administrative 3,802 4,163 4,092
Non-cash charge for stock option extension 5,555 - -
----------- ----------- -----------
Total costs and expenses 23,338 15,026 13,364
----------- ----------- -----------
Net loss $ (19,807) $ (7,499) $ (12,737)
=========== =========== ===========
Net loss per common share - basic and diluted $ (.87) $ (.34) $ (.65)
=========== =========== ===========
Weighted average number of
common shares outstanding - basic and diluted 22,688,388 22,010,455 19,564,825
=========== =========== ===========
</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,
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(19,807) $ (7,499) $(12,737)
Adjustments to reconcile net loss to
cash flows from operating activities:
Depreciation 1,658 1,049 1,011
Issuance of stock options 50 62 -
Non-cash charge for stock option extension 5,555 - -
Changes in assets and liabilities:
Other current assets (224) (146) (16)
Other assets (4) (5) (4)
Accounts payable (577) 615 204
Accrued expenses (1,081) 1,880 196
Deferred revenue - - (13)
Deferred rent payable (43) (43) (43)
Other liabilities - - (15)
-------- -------- --------
Cash used in operating activities (14,473) (4,087) (11,417)
Cash flows from investing activities:
Capital expenditures (1,069) (3,311) (319)
Purchases of investments (5,000) (13,870) (12,500)
Sales/maturities of investments 13,229 10,981 7,032
-------- -------- --------
Cash provided by (used in) investing activities 7,160 (6,200) (5,787)
Cash flows from financing activities:
Proceeds from sale of common stock - net - 5,000 14,774
Proceeds from exercise of warrants 4,571 2,316 -
Proceeds from exercise of stock options 2,676 801 1,812
-------- -------- --------
Cash provided by financing activities 7,247 8,117 16,586
-------- -------- --------
Decrease in cash and cash equivalents (66) (2,170) (618)
Cash and cash equivalents, beginning of period 399 2,569 3,187
-------- -------- --------
Cash and cash equivalents, end of period $ 333 $ 399 $ 2,569
======== ======== ========
</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, 1997, 1996 and 1995
--------------------------------------------------------------------------------
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, 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
- --------------------------------------------------------------------------------------------------------------
Issuance of common
stock upon exercise
of stock options and
in connection with
employee stock
purchase plan 297 3 2,673 2,676
Issuance of common
stock upon exercise
of warrants 357 4 4,567 4,571
Two, one-for-four
common stock dividends 8,214 82 (82) -
Issuance of stock options 50 50
Non-cash charge for stock
option extension 5,555 5,555
Net loss (19,807) (19,807)
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 - - 23,160 $232 $98,277 $(86,986) $ 11,523
- --------------------------------------------------------------------------------------------------------------
</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 was formed to advance and apply tissue engineering to
major medical needs.
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 United
States Food and Drug Administration ("FDA") regulations and similar foreign
regulatory bodies, continued availability of raw material for the Company's
products, availability of sufficient product liability insurance, ability to
transition from small-scale manufacturing to full-scale 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 time required to obtain regulatory approvals of the Company's products
in different countries, if needed, and subsequent timing of product launches;
commercial acceptance when product launches occur; progress of the Company's
research and development programs; resources the Company devotes to self-funded
projects, proprietary manufacturing methods and advanced technologies; and
resources the Company devotes to outside research collaborations or projects.
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 assurance that these or any additional funds will be available when required
on terms acceptable to the Company. Refer to "Stockholders' Equity" note for
equity financing subsequent to year end.
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.
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.
27
<PAGE>
Revenue Recognition
Research and development support revenue under the collaborative agreement with
Novartis is recognized as related expenses are incurred or contractual
obligations are met. Revenue from Apligraf sales is recognized upon shipment
or, in certain cases, after fulfillment of firm purchase orders in accordance
with the Manufacturing and Supply Agreement between the Company and Novartis.
Any related royalty revenue is recognized when net sales are reported to the
Company by Novartis, which generally occurs in the quarter after shipment of
product. Other product revenues are recognized upon shipment. Other royalty
revenue is recorded as earned. Deferred revenue arises from the difference
between cash received and revenue recognized in accordance with these policies.
Research and Development Costs
All research and development costs are expensed as incurred and currently
include cost of production.
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. However, the realizability of the
Company's deferred tax assets is not assured as it depends upon future taxable
income. Accordingly, the Company has recorded a 100% valuation allowance against
these assets. 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.
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which was
effective for financial statements issued for periods ending after December 15,
1997. SFAS 128 established standards for computing and presenting earnings per
share ("EPS"). This Statement simplifies the standards for computing earnings
per share previously found in Accounting Principles Board Opinion No. 15,
"Earnings Per Share", and makes them comparable to international EPS standards.
It replaces the presentation of primary EPS with a presentation of basic EPS.
This Statement requires restatement of all prior period EPS data presented. The
Company adopted SFAS 128 in December of 1997, which did not have a significant
effect on its financial statements for the current or prior periods. There was
no effect on the EPS disclosures as a result of the adoption of SFAS 128 due to
the antidilutive effect of the Company's then outstanding stock options,
warrants and convertible securities. For fiscal years 1996 and 1995, the net
loss per common share - basic and diluted, and weighted average number of common
shares outstanding were adjusted for 25% stock dividends distributed on May 2,
1997 and November 28, 1997.
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. All construction-in-progress was
put into service during 1997.
Stock-Based Compensation
During 1996, the Company adopted the disclosure provisions of Statement of
Financial Accounting Standards 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.
Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires that
changes in comprehensive income be shown in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. The Company does
not expect the adoption of SFAS 130 to materially effect its financial statement
presentation.
Investments:
- ------------
The Company determines the appropriate classifications of debt securities at the
time of purchase. 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, 1997, 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.
29
<PAGE>
The aggregate cost and fair market value of investments are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------- --------------------------
Amortized Market Amortized Market
Maturity Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than one year:
U.S. Government and Agency bonds $1,307 $1,310 $ 5,119 $ 5,122
Time deposits 304 304 500 500
Corporate notes 3,754 3,761 5,142 5,135
Discount notes - - 98 98
Certificates of deposit 197 197 989 989
Between one and two years:
U.S. Government and Agency bonds 250 251 1,010 1,012
Corporate notes - - 1,183 1,185
------ ------ ------- -------
Total Investments $5,812 $5,823 $14,041 $14,041
====== ====== ======= =======
</TABLE>
Other Current Assets:
- ---------------------
During 1996, the Company loaned two officers a total of $132,000. The loans
were granted interest-free and were 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. At December 31, 1997, no employee loans
were outstanding.
Included in other current assets is a net receivable due from Novartis of
approximately $170,000 and $127,000 as of December 31, 1997 and 1996,
respectively.
Property and Equipment:
- -----------------------
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
Estimated Useful December 31,
-----------------------------
Life (years) 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equipment 5-10 $ 9,110 $ 8,458
Furniture, fixtures and office 3-5 1,624 1,479
equipment
Leasehold improvements Lease term 3,746 1,572
Construction-in-progress - 1,902
------- -------
14,480 13,411
Less accumulated depreciation 7,865 6,207
------- -------
$ 6,615 $ 7,204
======= =======
</TABLE>
30
<PAGE>
Accrued Expenses:
- -----------------
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Compensation and employee benefits $ 880 $ 748
Professional services 226 263
Construction costs - 1,200
Other 480 456
------ ------
$1,586 $2,667
====== ======
</TABLE>
Lease Obligations:
- ------------------
The Company occupies its current premises under a lease which expires on
September 30, 2004, with three options to extend the term for an additional five
years each option. This lease also allows the Company to potentially expand the
rentable square footage during the lease term. The Company is responsible for
taxes, insurance and operating expenses under the terms of the lease. In
November 1996, the Company entered into an additional lease for warehouse and
office space which expires on October 31, 1999.
Future minimum lease payments are as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 561
1999 615
2000 761
2001 781
2002 801
Thereafter 1,447
------
$4,966
======
</TABLE>
Rent of approximately $491,000, $394,000 and $386,000 was charged to expense
during the years ended December 31, 1997, 1996 and 1995, respectively.
Income Taxes:
- -------------
At December 31, 1997, the Company had federal tax net operating loss
carryforwards of approximately $87,000,000, of which $4,534,000 relate to
disqualifying dispositions of qualified incentive stock options and exercise of
nonqualified stock options. The tax benefit of $1,813,600 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, 1997, the Company
had federal research and development tax credits of approximately $2,400,000,
which expire beginning in 2001. 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,
-----------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets and (liabilities):
Net operating loss carryforwards $ 34,975 $ 28,923
Research and development credits and other credits 3,373 2,242
Depreciation (529) (701)
Other 2,237 4
-------- --------
Net deferred tax asset before valuation allowance 40,056 30,468
Valuation allowance (40,056) (30,468)
-------- --------
Net deferred asset after valuation allowance $ 0 $ 0
======== ========
</TABLE>
These losses and tax credits are available to reduce federal taxable income
and federal income taxes, respectively, in future years, if any. However, the
realizability of the Company's deferred tax assets is not assured as it depends
upon future taxable income. Accordingly, the Company has recorded a 100%
valuation allowance against these assets. The Company is required to recognize
all or a portion of net deferred tax assets, with corresponding increases to net
income, when the Company believes, given the weight of all available evidence,
that it is more likely than not that all or a portion of the benefits of net
operating loss carryforwards and other credits will be realized. However, there
can be no assurance that the Company will ever realize any future cash flows or
benefits from these losses and tax credits.
Collaborative Agreements:
- -------------------------
In January 1996, the Company and Novartis Pharma AG ("Novartis" or "related
party") entered into an agreement granting Novartis exclusive global marketing
rights to Apligraf. Under the agreement, Novartis is responsible for Apligraf
sales and marketing costs worldwide, as well as all clinical trials,
registrations and patent costs outside the U.S. The Company supplies Novartis'
global requirements for Apligraf(TM) and receives both a per unit manufacturing
payment and royalty revenues on product sales. Novartis has agreed to provide
the Company up to $40,000,000 in equity investments, research support and
milestone payments, an increase of $2,500,000 from prior year due to the
addition of a research and development support milestone. During fiscal years
1997 and 1996, the Company received $2,500,000 and $11,500,000, respectively,
from Novartis. The remaining payments will be received based upon achievement of
specified events.
In March 1998, the Company received $3,750,000 from Novartis in milestone and
equity payments; refer to "Stockholders' Equity" note.
In 1995, the Company and Biomet, Inc. ("Biomet") entered into a supply
arrangement under which Biomet may, but is not obligated to, purchase collagen
from the Company. Revenues under this agreement are included in other income.
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. Additionally, Toyobo may, but is
not obligated to, purchase collagen and other products from the Company.
Revenues under this arrangement are included in royalties and other income.
32
<PAGE>
Research and Other Agreements:
- ------------------------------
The agreements summarized below generally are funded 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 November 1997, the Company entered into a clinical research agreement with
Clinical Studies Ltd. related to the conduct of a clinical trial for the
treatment of pressure sores.
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 formed a research collaboration with the
Massachusetts General Hospital (MGH) related to development of a liver assist
device.
In December 1995, the Company signed a research agreement with the Brigham and
Women's Hospital related to the biology of surface tissues (e.g., oral mucosa,
skin appendages).
In March 1995, the Company's subsidiary, ECM Pharma, 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,
1997, of which 250,000 and 50,000 shares are designated as Series A Convertible
Preferred Stock and Series B Junior Participating Preferred Stock, respectively.
The 250,000 shares of Series A Convertible Preferred Stock that were previously
issued were subsequently converted into 312,500 shares of Common Stock in
October 1995. There were no shares of Series A Convertible Preferred Stock or
Series B Junior Participating Preferred Stock issued and outstanding as of
December 31, 1997 and 1996, respectively.
Subsequent Preferred Stock and Warrant Offering
The Company closed a $20 million Convertible Preferred Stock and warrant
financing in March, 1998 with two institutional investors. The Series C
Convertible Preferred Stock ("Series C Preferred Shares") pay no dividends and
are convertible into Common Stock on a scheduled basis over the next two years
based on market price at time of conversion (up to $36 per share). The Company
may call for conversion under certain conditions based on continued improvement
in the price of the Company's Common Stock. Conversions by the investors are
subject to certain limits, no limits exist for conversions on redemption or up
on a major transaction. Mandatory conversion is March 26, 2000, at which time
the Company has the option to redeem any outstanding Series C Preferred Shares
in cash or by issuing Common Stock. In addition, the investors received 160,000
three year warrants to purchase Common Stock at $39 per share. The warrants may
be exercised at any time prior to April, 2001. The investors also have the right
to receive, under certain conditions based on the Common Stock market price
declining below certain levels, additional warrants to purchase an aggregate of
up to 160,000 shares of Common Stock.
33
<PAGE>
Common Stock
The Company has authorized 40,000,000 shares of Common Stock, of which there
were 23,160,320 and 22,331,789 shares of Common Stock issued and outstanding as
of December 31, 1997 and 1996, respectively.
In April 1997, the Board of Directors declared a 25% stock dividend for
stockholders of record on April 25, 1997. The stock dividend was payable on May
2, 1997 and resulted in the issuance of approximately 3,596,000 additional
shares of Common Stock. In November 1997, the Board of Directors declared a
second 25% stock dividend for stockholders of record on November 21, 1997. The
stock dividend was payable on November 28, 1997 and resulted in the issuance of
approximately 4,618,000 additional shares of Common Stock. All related data in
the consolidated financial statements reflect both stock dividends for all
periods presented, except for the Statements of Changes in Stockholders' Equity.
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 $14.96 per share, Novartis held approximately 1.4% of the
outstanding shares of the Company as of December 31, 1997.
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 Common Stock Purchase Warrant to purchase one share of
Common. On July 21, 1997, the Company gave notice of redemption with respect to
all of its outstanding Common Stock Purchase Warrants issued during the July
1995 public offering. All Common Stock Purchase Warrants were exercised during
1997, resulting in the Company receiving proceeds of approximately $4,571,000.
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 both stock dividends for all periods presented,
except for the Statements of Changes in Stockholders' Equity.
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.
34
<PAGE>
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.
Subsequent Common Stock Issuance
In March 1998, the Company received $3,750,000 from Novartis. Of this amount,
$750,000 represents a research and development support payment and $3,000,000
represents a milestone equity investment.
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. After adjusting for two 25% stock
dividends distributed during 1997, there is one sixty-fourth of a right for each
outstanding share of Common Stock. 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.
Stock-Based Compensation:
- -------------------------
At December 31, 1997, 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 - basic and diluted, for the years ended December
31, 1997, 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 1997, 1996 and 1995 (in thousands, except share data):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net loss $(19,807) $(18,686) $(7,499) $(8,696) $(12,737) $(13,443)
Net loss per share
- - basic and diluted $ (0.87) $ (0.82) $ (0.34) $ (0.40) $ (0.65) $ (0.69)
</TABLE>
35
<PAGE>
The effects on 1997, 1996 and 1995 pro forma net loss and net loss per share -
basic and diluted of expensing the estimated fair value of stock options may not
be representative of the effects on reporting pro forma results for future years
as the periods presented include only three, 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. The Black-
Scholes option pricing model was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
In addition, option pricing models require the input of highly subjective
assumptions, including expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different from those
of traded options and changes in the subjective input assumptions may materially
affect the fair value estimate, in the Company's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
The assumptions used to calculate the weighted average fair value of options
granted during 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected life for options issued to employees (years) 5.0 6.2 6.2
Expected life for options issued to Directors and Officers (years) 7.0 7.7 7.7
Risk-free interest rate 6.3% 6.2% 5.3%
Volatility 61.0% 61.0% 61.0%
Weighted average fair value per share of options granted during the $9.91 $6.52 $5.47
year
</TABLE>
In May, 1997, the Board of Directors voted to extend the term of an option for
an additional five years to purchase 585,938 shares of Common Stock at an
exercise price of $3.84 granted to an officer of the Company in 1987. The
extension of this option requires a new measurement date for valuing the option,
resulting in a non-cash compensation charge of $5,555,000 recorded in the second
quarter of 1997. The option is fully exercisable and the shares have been
reserved for issuance.
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 2,343,750 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. Vesting generally occurs ratably over
a five-year period beginning one year from the date of grant. 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.
The Company's 1986 Stock Option Plan (the "1986 Plan") provided for the
issuance of an aggregate of 3,906,250 shares of Common Stock for the granting of
incentive and non-qualified stock. The 1986 Plan
36
<PAGE>
PAGE>
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 390,625 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 195,313 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 585,938 shares of Common Stock at an exercise price of $3.84 per share.
The shares have been reserved for issuance and are fully vested and exercisable.
The following table presents the combined activity of all Stock Option Plans
for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
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 4,015,204 $ 7.49 3,222,563 $ 5.93 3,258,849 $5.25
Granted 833,436 15.58 1,088,008 10.75 684,003 7.65
Exercised (374,133) 7.00 (168,669) 4.49 (366,225) 4.27
Canceled (218,342) 9.37 (126,698) 7.03 (354,064) 5.80
--------- ------ --------- ------ --------- -----
Outstanding at end of period 4,256,165 9.26 4,015,204 7.49 3,222,563 5.93
========= ====== ========= ====== ========= =====
Exercisable at year end 2,183,705 $ 6.24 1,981,097 $ 5.64 1,655,166 $5.18
========= ====== ========= ====== ========= =====
Shares available for granting
Of options at end of period 987,906 1,715,898 383,064
========= ========= =========
</TABLE>
The following table presents weighted average price and life information about
significant option groups outstanding at December 31, 1997 for the Stock Option
Plans:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------- --------------------------------
Weighted Average Weighted Average Weighted
Remaining Exercise Average
Range of Number Contractual Price Number Exercise
Exercise Prices Outstanding Life (Years) Exercisable Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.072 - 4.608 1,389,722 4.8 $ 3.93 1,242,859 $ 3.89
4.672 - 7.232 671,004 5.9 6.21 424,866 6.01
7.552 - 11.36 1,211,349 7.2 9.71 476,684 9.07
11.44 - 18.55 901,364 9.1 14.19 39,296 12.62
</TABLE>
37
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
22.20 - 30.00 82,726 9.5 24.82 0 0
--------- --- ------ --------- ------
4,256,165 6.6 $ 8.51 2,183,705 $ 5.59
========= === ====== ========= ======
</TABLE>
The 1991 Employee Stock Purchase Plan:
- --------------------------------------
Under the 1991 Employee Stock Purchase Plan (the "Purchase Plan"), a total of
292,969 shares of Common Stock are reserved for issuance (up to 48,828 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 1997 and 1996, the Company issued a total of 3,777 and 3,577 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 1997 and 1996, the Company contributed
approximately $53,000 and $41,000, respectively, under this Savings Plan.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
38
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in the Company's Proxy
Statement for the Company's 1998 Annual Meeting of Stockholders (the "1998 Proxy
Statement") under the captions "ELECTION OF DIRECTORS" and "EXECUTIVE OFFICERS"
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 1998 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 1998
Proxy Statement under the captions, "Principal Stockholders" and "ELECTION OF
DIRECTORS - Compensation of Directors; Executive Compensation; and Compensation
Arrangement" in the Company's 1998 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 1998 Proxy Statement and is incorporated
herein by reference.
39
<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
40
<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 INC.
BY: /s/ HERBERT M. STEIN
----------------------
HERBERT M. STEIN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Date: March 30, 1998
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ HERBERT M. STEIN Chairman, Chief Executive March 30, 1998
- -----------------------------------------
Herbert M. Stein Officer and Director
(Principal executive officer)
/s/ DAVID T. ROVEE President, Chief Operating March 30, 1998
- -----------------------------------------
David T. Rovee Officer and Director
/s/ RICHARD S. CRESSE Director March 30, 1998
- -----------------------------------------
Richard S. Cresse
/s/ WILLIAM J. HOPKE Director March 30, 1998
- -----------------------------------------
William J. Hopke
/s/ KENNETH J. NOVACK Director March 30, 1998
- -----------------------------------------
Kenneth J. Novack
/s/ BJORN OLSEN Director March 30, 1998
- -----------------------------------------
Bjorn Olsen
/s/ MARGUERITE A. PIRET Director March 30, 1998
- -----------------------------------------
Marguerite A. Piret
/s/ ANTON E. SCHRAFL Director March 30, 1998
- -----------------------------------------
Anton E. Schrafl
/s/ DONNA L. ABELLI Vice President, Chief March 30, 1998
- -----------------------------------------
Donna L. Abelli Financial Officer,
Treasurer and Secretary
</TABLE>
41
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
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) Bylaws 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. **
(q) The Stock Purchase Agreement between the Company and Sandoz Pharma Ltd., dated as of
January 17, 1996. **
(r) Manufacturing and Supply Agreement between the Company and Novartis Pharma AG, dated
as of August 11, 1997**
</TABLE>
42
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ----------- ----------------------
<S> <C>
(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.
43
<PAGE>
EXHIBIT 10 (R)
GLOBAL
MANUFACTURING AND SUPPLY AGREEMENT
BETWEEN
ORGANOGENESIS INC.
and
NOVARTIS PHARMA AG.
THIS AGREEMENT is made as of this 11(th) day of August, 1997 by and between
Novartis Pharma AG., a corporation organized under the laws of Switzerland, of
Lichtstrasse 35, Basle, Switzerland (hereinafter "Novartis") and Organogenesis
Inc., a company organized under the laws of the State of Delaware, of 150 Dan
Road, Canton, MA 02021, USA (hereinafter "Organogenesis"). This Manufacturing
and Supply Agreement (MSA), which relates solely to the manufacture and supply,
for sales of Apligraf living skin equivalent in the configurations as defined in
the LSA and Annex A (the Territory Annex) of this MSA and meeting applicable
national regulatory requirements for manufacturing and control and as indicated
in the Quality Assurance Agreement ("Q.A. Agreement) attached to this Agreement
as Annex B, is entered into pursuant to the License and Supply Agreement dated
as of January 17, 1996 ("LSA") between Organogenesis and Novartis.
The scope of this MSA pertains only to non-cryopreserved Apligraf.
This agreement is intended to be global in its scope, however, it is understood
that regulatory, manufacturing and commercialization requirements may vary by
geographic region. In such instances, both parties intend to negotiate in good
faith to address such variations.
WITNESSETH:
WHEREAS, Novartis and Organogenesis have entered into the LSA relating to the
manufacture, use and sale of Apligraf skin and tissue equivalent as described
therein and hereinafter referred to as "Product"; and
WHEREAS, Novartis desires to contract with Organogenesis for the manufacture and
supply of finished Product which Novartis intends to sell in the Territory as
defined in the LSA; and
WHEREAS, Organogenesis possesses the requisite expertise, personnel and
facilities for the manufacture and supply of finished Product and is willing to
manufacture and supply such Product to Novartis;
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
and conditions herein contained, Novartis and Organogenesis agree as follows:
<PAGE>
ARTICLE 1. LSA PROVISIONS
- -------------------------
Except to the extent that they are specifically modified by this Manufacturing
and Supply Agreement, all provisions of the LSA remain in full force and effect.
ARTICLE 2. DEFINITIONS
The following terms have meanings indicated or referred to below. Other
capitalized terms used herein and not defined herein have the meanings ascribed
thereto in the LSA.
2.1 "Force Majeure" means any strike, fire, earthquake, flood, governmental
acts or orders or restrictions, failure of suppliers, or any other reason
beyond the reasonable control and not caused by the negligence, intentional
conduct or misconduct of the non-performing party.
2.2 "Person" means any individual, corporation, partnership, company or other
entity.
2.3 "Affiliate", as defined in the LSA, means any corporation or other entity
which controls, is controlled by, or is in common control with a party to
this Agreement. A corporation or other entity shall be regarded as in
control of another corporation or entity if it owns or directly or
indirectly controls more than (40%) of the voting stock or other ownership
interest of the other corporation or entity, or if it possesses, directly
or indirectly, the power to direct or cause the direction of the management
and policies of the corporation or other entity.
2.4 "Product" means Apligraf (previously known as Graftskin in the LSA) living
skin equivalent in the configurations as specified in the LSA and Annex A
of this MSA and any other schedules attached to this agreement. The scope
of this Manufacturing and Supply Agreement pertains only to non-
cryopreserved Apligraf. ***
2.5 "Negligence" means the omission to do something which a reasonable person,
guided by those ordinary considerations which ordinarily regulate human
affairs, would do or the doing of something which a reasonable and prudent
person would not do.
2.6 "Maturation Period" means the period up to *** from the first commercial
sale of the Product in the first Primary Country.
_________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
2.7 ANNEX A is defined as the country-specific product classification and will
be updated regularly by Novartis after each new approval.
2.8 ANNEX B is the Quality Assurance Agreement and specifications.
2.9 ANNEX C is the financial section for the Product.
ARTICLE 3. SUPPLY OF PRODUCT
-----------------------------
3.1 Supply of Product Subject to the provisions of the LSA, Novartis agrees to
-----------------
purchase exclusively from Organogenesis, and Organogenesis agrees to
manufacture for, and sell exclusively to Novartis and/or its Affiliates
and/or Sublicensees during the term of the LSA Novartis' total requirements
for Product on the terms and conditions set forth herein. Novartis for
its' Affiliates and Sublicensees shall source requirements of Product from
Organogenesis in accordance with and pursuant to the LSA and this
agreement.
3.2 Origin of Product Product shall be manufactured by Organogenesis for
-----------------
purchase and resale by Novartis, its Affiliates and/or Sublicensees under
this Manufacturing and Supply Agreement. Organogenesis may subcontract any
part of the manufacturing process for Product to third parties provided the
Product and the facilities continue to meet the requirements as defined in
this manufacturing and supply agreement and provided that it has received
prior written approval from Novartis, which approval shall not be
unreasonably withheld. Organogenesis agrees not to use subcontractors who
have not met the material regulatory requirements of all countries where
the Product is being sold and distributed. Organogenesis will be obligated
to inform Novartis of any such changes and Novartis will be obligated to
seek regulatory approval for such changes in those nations in which it owns
the registration and such approval is required. Prior to subcontracting
any part of the manufacturing process for Product to Third Parties,
Organogenesis shall offer to subcontract such work to Novartis via
competitive bid. Organogenesis may, in its sole and exclusive discretion,
accept or reject Novartis' offer.
3.3 Manufacturing Facilities and Manufacturing Process
--------------------------------------------------
3.3.1. Regulatory Approval Organogenesis represents that its
-------------------
manufacturing and packaging facilities and process conform, and
will in the future conform, to current Good Manufacturing
Practices promulgated by the regulatory agencies that govern the
markets in which Product is manufactured, sold or distributed.
Novartis shall be promptly notified of any change in
Organogenesis facilities, manufacturing or testing procedures.
<PAGE>
3.3.2 Documentation Organogenesis and Novartis shall provide to each
-------------
other all documents and updates with regard to the supply of the
Product which are required by any regulatory agencies, and the
parties shall submit to all inquiries and inspections by such
regulatory agencies. The parties shall promptly notify each other
of all regulatory agency inspections concerning the Product and
in no case shall the written notification be more than two (2)
days after the inspection has been announced.
3.3.3 Facility use Organogenesis agrees that it shall not at any time
------------
manufacture other products in the manufacturing facility to be
used for the manufacture of Product if such manufacture would
jeopardize any regulatory acceptance of such facility for the
manufacture of Product and /or cause any delay in the timely
manufacture and delivery of ordered product.
3.3.4 Facility and equipment investment ***
---------------------------------
3.3.5 Cell Banks Organogenesis shall be responsible for the creation,
----------
maintenance, validation and security of the Master Cell Banks
(MCB) and the Working Cell Banks (WCB). Organogenesis shall be
responsible for the maintenance, and security of a separate off
site storage location as back-up for the MCB and WCB,
Organogenesis shall be responsible for the preparation of all
necessary documentation for the MCB and WCB, i.e., Standard
Operating Procedures, installation records and various checks and
balances therein.
________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
3.4 Production Plans and Purchase Orders
------------------------------------
3.4.1 Production Plans Immediately upon the execution of this
----------------
agreement, Novartis shall provide to Organogenesis written
production plans of its expected unit requirements for the
Product by geographic region, in order to permit Organogenesis to
project its facilities, equipment and material requirements. Such
production plans shall be provided in three (3) time specific
formats as follows: (a) Long Range Production Plan - Novartis
--------------------------
shall provide, each year beginning immediately upon the execution
of this agreement and thereafter annually on the first day July
of each subsequent calendar year, to Organogenesis a five (5)
year rolling production plan of its expected requirements for the
Product. The first two years of the Long Range Production Plan
shall be provided in monthly increments, the remaining three (3)
years shall be provided in annual increments. (b) Intermediate
------------
Range Production Plan - Novartis shall provide each month, on the
---------------------
last business day of the month or earlier, to Organogenesis a
twenty-four (24) month rolling production plan of its expected
requirements for the Product. *** The Intermediate Production
Plan shall be provided in monthly increments. (c) Short Range
-----------
Production Plan - Novartis shall provide each month, on the last
---------------
business day of the month in which the production plan is
provided, to Organogenesis a weekly production plan for the ***
of the most recent Intermediate Range Production Plan its
expected requirements for the Product. The Short Range Production
Plan shall be *** as referenced in section 3.4.2
3.4.2 Purchase Orders Novartis shall provide Organogenesis with firm
---------------
written "Purchase Orders" for Product for delivery in a defined
period not earlier than *** following receipt by Organogenesis of
such Purchase Orders. Purchase Orders shall be provided weekly
and be issued by Novartis to Organogenesis on the last business
day of the week. Novartis/Organogenesis will apply a *** to
increase flexibility and ability to match supply with demand. A
lot size will not be less than *** and not greater than ***.
Notwithstanding the Short Range Production Plan (Article 3.4.1)
and Purchase Orders, Novartis shall be permitted to revise
purchase order quantities at any time prior *** in the
manufacturing cycle ***. *** Because of the discrete nature of
the ***, Novartis may
________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
apply an upward adjustment to the original Purchase Order to the
maximum potential number of product units which can be
manufactured from the *** available. *** Upon notification in
writing of a change, Organogenesis shall make its best effort to
comply with the revisions to the Purchase Orders.
With respect to the then current Intermediate Range and Short
Range Production Plans, a Novartis Purchase Order which is
greater than the amount most recently planned for any month is
subject to acceptance by Organogenesis. At no time shall Novartis
place Purchase Orders for Product in quantities that exceed the
maximum manufacturing capacity of Organogenesis at that time, as
defined by the applicable Intermediate and Long Range Production
Plans that are mutually agreed upon and documented by the JOC
unless manufacturing capacity in excess of the applicable
Intermediate and Long Range Production Plans exists and such
orders are acceptable to Organogenesis. Organogenesis shall be
obligated to use its best efforts to meet shipment dates
requested by Novartis.
3.4.3 Labeling Novartis will supply approved printed packaging
--------
components to Organogenesis for the bag label, package insert,
and pH card respectively. Mechanical artwork will be provided to
Organogenesis for the shipper. Specifications for such labeling
will be as defined in the Quality Assurance Agreement (Annex B).
*** for each packaging component supplied by *** accordance with
the pricing schedule as referenced in Annex C. This pricing
schedule will be reviewed annually and negotiated in good faith
between the Parties. Organogenesis will retain the right to
assume procurement of the bag label, package insert, and pH card.
Novartis shall have the right to transfer the responsibility for
procurement of the bag label, package insert, and pH card to
Organogenesis.
If Novartis wishes to institute changes in labeling art work,
both parties will develop a mutually acceptable implementation
schedule. *** labeling and packaging components in accordance
with Novartis art work. Organogenesis shall not alter, change or
in any way modify Novartis supplied art work for any reason,
without written authorization from Novartis. *** beyond those
associated with labeling as required by regulatory agencies
governing the markets in which the Product is manufactured,
distributed or sold, *** .
3.4.4 Materials Responsibility and Obsolescence Organogenesis shall
------------------------
purchase all materials necessary for the manufacturing and
packaging of the Product. Such materials shall meet the
Specifications set forth in Annex B (the QA Agreement) attached
hereto and made a part hereof, which may be amended from time to
time by mutual agreement of the parties. In the case of
termination of this Agreement not caused by Organogenesis, ***
_________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
***such materials that have been purchased by Organogenesis
against the *** as outlined in the latest Intermediate Range
Forecast given to Organogenesis by Novartis with the exception of
*** for which *** of such material required to produce the *** as
outlined in the latest Intermediate Range Forecast. As a means to
continuous improvement, the purchase plan may be amended from
year to year by mutual agreement of the parties to achieve
optimal levels of service and inventory.
3.4.5 Waste Materials Organogenesis agrees that it will: (a) own all
---------------
waste materials generated by Organogenesis in connection with
receipt, manufacture, packaging, storage, and supply of Product,
including such waste of Product generated as a result of
Organogenesis' negligence; (b) be responsible for the removal,
packaging, storage, receipt, transportation, handling, and
disposal of any such waste in accordance with all national,
state, county and local laws and regulations; (c) be responsible
for the reconciliation and accountability of all waste of
Product, labeling and components. Excluded from this section
3.4.5 are recyclable shipping materials as dictated by national,
state, county or local governments. If necessary Novartis bears
the responsibility and cost of reclaiming shipping containers
from the end user.
3.5 Quality
-------
3.5.1 Q.A. Agreement The Quality Assurance Agreement (Annex B),
--------------
attached hereto sets forth Organogenesis' responsibility for the
specifications, testing, and release of Product and is made a
part hereof.
3.5.2 Specifications The Product shall meet the specifications
--------------
requirements as defined in Annex B, as amended from time to time
by mutual agreement and/or authority demand. Product shall be
manufactured according to the requirements of current Good
Manufacturing Practices ("cGMP") promulgated by the regulatory
agencies that govern the markets in which Product is
manufactured, sold or distributed. Product shall be manufactured
in a facility registered with, and approved by, all appropriate
government agencies that regulate the markets in which the
Product is manufactured, sold or distributed
3.5.3 Product Warranties Novartis agrees that it will deal directly
------------------
with its customers concerning warranty matters relating to
Product, and Organogenesis will not be required to participate in
such dealings. However, Organogenesis shall, in good faith,
whenever possible, render assistance as requested by Novartis
with regard to such dealings.
________________
***Confidential treatment requested as to certain portions, which portions
are omitted and filed separately with the Commission.
<PAGE>
3.5.4 Nonconforming Goods In the event that any Product manufactured
-------------------
and delivered by Organogenesis hereunder fails to conform with the
requirements of Annex B, as amended from time to time by mutual
agreement, Novartis shall notify Organogenesis within *** days of
receipt of Product of such nonconformity. Provided that such Product
shall not have been improperly stored or handled after delivery by
Organogenesis to Novartis and/or its affiliates and/or its designated
carrier and upon confirmation of non-conformance, Organogenesis shall,
if requested by Novartis and as scheduled by Novartis, promptly
replace the defective Product free of all cost to Novartis, including
freight, transportation, handling, returns and disposal in accordance
with all regulations and laws. If Novartis does not require
replacement Product, for any reason, Organogenesis shall take full
responsibility in terms of cost for any such Nonconforming Product.
Such remedies shall be the sole remedies of Novartis with respect to
nonconforming goods. In cases of recalls in which both Organogenesis
and Novartis agree are due to supply by Organogenesis of non-
conforming goods, Organogenesis agrees to reimburse Novartis of for
documentable direct-out-of-pocket costs to recall the Product (the
"recall costs"). In cases of recalls in which there is no agreement
between the Parties or Novartis decides unilaterally to recall any
Product, both Parties will negotiate in good faith the allocation of
such recall costs. In no event shall Organogenesis be liable for
indirect, consequential or money damages with respect thereto, whether
in contract, tort or otherwise. The provisions of this Article 3.5.4
do not modify in any way the indemnification provisions applicable to
product liability claims found in Article 14.1 of the LSA.
ARTICLE 4. PRICE AND PAYMENT
-----------------------------
4.1 Product Price and Price Adjustments The base price to be paid to
-----------------------------------
Organogenesis by Novartis for Product purchased thereunder shall be in
accordance with the LSA, Article 12.4 and Article 12.5.
4.2 Financial Arrangements The conditions and responsibilities for specific
------------------------
cost arrangements (i.e. additional *** testing) are detailed in Annex C of
this MSA. The specifics foreseen in Annex C will be excluded from the
annual price adjustment as defined in Article 12.4 of the LSA and will be
updated when necessary after discussion between the parties.
4.3 Payment Novartis will be invoiced in U.S. Dollars and pay in U.S. Dollars.
-------
Novartis, shall render payment within thirty (30) days after receipt of
invoice which shall not be issued by Organogenesis earlier than the date of
shipment provided, however, there are no outstanding disputes or issues of
nonconformity related to such invoice or Product shipped thereunder. Any
amounts not paid to Organogenesis when due under this
______________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
Agreement shall accrue interest from the due date at *** equal to *** as
published ***.
ARTICLE 5. DISTRIBUTION
-----------------------
All Product will be supplied F.O.B. Organogenesis' facilities. For the
avoidance of doubt, this Article 5 pertains only to non-cryopreserved Apligraf.
All Product shall be shipped in compliance with instructions from Novartis and
shall be accompanied by appropriate documentation. Novartis will assume cost for
shipping product from Organogenesis' manufacturing facility and shall take
title to Product upon delivery by Organogenesis to Novartis' carrier.
Organogenesis shall deliver Product meeting finished Product specifications
properly packed in the proper specified containers, prepared for shipment in
accordance with Novartis' directions, accompanied by appropriate documentation,
and properly labeled to the loading dock. Novartis shall select the carriers
and be responsible for invoicing the customer. Novartis will provide
Organogenesis with a list of at least *** approved carriers *** that can be
utilized by Organogenesis in the event *** delayed or unable to ship the
Product.
ARTICLE 6. JOINT OPERATIONS COMMITTEE
--------------------------------------
6.1 Joint Operations Committee Novartis and Organogenesis hereby establish a
--------------------------
Joint Operations Committee ("JOC") to oversee global manufacturing
activities. The JOC shall be primarily responsible for decisions regarding
the manufacturing, packaging, quality, physical handling, distribution and
return of Product and for coordinating the efforts of the parties to ensure
that supply of Product to Novartis thereunder remains adequate and
uninterrupted. The JOC will analyze the Long Range Production Plans and
make appropriate proposals for initiating investment plans in a timely
manner. The JOC shall also have such additional responsibilities as are
designated in this Agreement.
6.2 Membership The JOC shall be comprised of *** representatives from each of
----------
Novartis and Organogenesis. Each party may replace its JOC representatives
at any time, after discussion with the other party, with subsequent written
notice to the other party. Organogenesis and Novartis shall each appoint
one of their JOC representatives to be responsible for coordinating
communications between Organogenesis and Novartis (the "Primary Contact
Person"). The JOC shall be co-chaired by the Primary Contact Persons of
both parties.
6.3 Decision Making Decisions of the JOC shall be made by vote through the
---------------
Primary Contact Persons. The Primary Contact Persons shall be responsible
for collecting the votes from their respective members and voting same. In
the event the parties are unable to agree on any issue, the dispute will be
referred to Organogenesis' ***
________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
(or designee of similar rank) and Novartis' *** (or designee of similar
rank) who shall promptly meet in person or by means of telephone or video
conference and endeavor to resolve the dispute in a timely manner. In the
event such individuals are unable to resolve the dispute, it shall be
settled by binding arbitration pursuant to Article 18.11 of the LSA, or as
otherwise agreed.
6.4 JOC Meetings The JOC shall meet at least *** at regular intervals, or more
------------
often as agreed by the parties, in person at such locations as the parties
agree, or by means of telephone or video conference. With the consent of
the parties, other representatives of Organogenesis or Novartis or its
Affiliates or Sublicensees may attend JOC meetings as nonvoting observers.
The party hosting a particular JOC meeting shall promptly prepare and
deliver to the members of the JOC, within ten (10) business days after the
date of each meeting, minutes of such meeting setting forth, among other
things, all decisions of the JOC. In case of telephone and video
conferences, this responsibility will alternate between parties.
ARTICLE 7 FAILURE BY ORGANOGENESIS TO SUPPLY
---------------------------------------------
The terms and conditions of this article will be defined in Annex D which is to
be negotiated in good faith by the Parties and which will be an integral part of
this Manufacturing and Supply Agreement.
ARTICLE 8. CERTAIN COVENANTS
-----------------------------
8.1 NOVARTIS COVENANTS Novartis agrees that it will:
------------------
a) Report at least *** business days of the ***, and shall report
reasonably promptly after a reasonable request by Organogenesis,
information regarding Product sales, returns and warranty problems.
b) Sell, advertise and promote Product only in compliance with applicable
law and the applicable product specifications. Novartis shall
communicate to Organogenesis information Novartis learns about the
effect of, the introduction of or any amendment or change of
interpretation of any law, statute, regulation, order or ordinance
applicable in any jurisdiction in which Novartis sells or markets
Product which may relate to the manufacturing, labeling or packaging
of Product.
________________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
8.2 ORGANOGENESIS COVENANTS Organogenesis agrees that it will:
-----------------------
Comply with the terms of any approval from the FDA or other applicable
national regulatory agency which are required in order to manufacture and
sell to Novartis Product. Organogenesis shall communicate to Novartis
information Organogenesis learns about the effect of, the introduction of
or any amendment or change of interpretation of any law, statute,
regulation, order bearing on any regulatory Approval for Product where it
has registration responsibility and Novartis shall advise Organogenesis of
such changes in all areas where it has registration responsibilities.
ARTICLE 9. TERM AND TERMINATION
--------------------------------
9.1 Agreement Term The term of this Manufacturing and Supply Agreement shall
--------------
commence on the date hereof and shall remain in effect throughout the term
of the LSA as specified in Article 16.1 thereof.
9.2 Extension of Term No later than six (6) months prior to the expiration of
-----------------
the LSA, Novartis shall notify Organogenesis whether it wishes to extend
this Manufacturing and Supply Agreement for Novartis' requirements for
Product for a further period, in which case a new Manufacturing and Supply
Agreement will be negotiated in good faith and entered into by both parties
hereto. If no such further Manufacturing and Supply Agreement is entered
into between parties, Novartis shall then have the right to manufacture
Product itself or have Product manufactured by a third party of its choice.
9.3 Termination This Manufacturing and Supply Agreement may only be terminated
-----------
in accordance with and pursuant to Article 16 of the LSA.
ARTICLE 10. SCHEDULE ANNEXES
- ----------------------------
All schedules Annexes to this Agreement will constitute an integral part of this
Agreement.
ARTICLE 11. PERFORMANCE BY AFFILIATES
- -------------------------------------
Any Party hereto may satisfy any of its obligations thereunder through any of
its Affiliates.
ARTICLE 12. ASSIGNMENT
- ----------------------
Neither party hereto may assign, cede, or transfer any of its rights or
obligations under this Agreement without the consent of the other party;
provided, however, without such consent, either party may assign this Agreement
in connection with the transfer or sale of all or substantially all of its
assets or business or its merger or consolidation with another company.
Notwithstanding the foregoing, Novartis may assign this Agreement in whole or in
part to its parent or corporate affiliate without the consent of Organogenesis.
ARTICLE 13. WAIVER
- ------------------
The waiver by either Party hereto of any right thereunder or the failure to
perform of a breach by the
<PAGE>
other Party shall not be deemed a waiver of any other right thereunder or of any
other breach or failure by said other Party whether of a similar nature or
otherwise.
ARTICLE 14. AGREEMENT INTERPRETATION
- -------------------------------------
This Manufacturing and Supply Agreement is subject to all of the terms and
conditions set forth in the LSA that are not inconsistent with the terms hereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the date and year first above mentioned.
ORGANOGENESIS INC. NOVARTIS PHARMA AG.
Name: Name:
/s/ Herbert M. Stein /s/Pierre Douaze /s/ Anne-Lise Eha
--------------------------- ---------------- -----------------
Title: Title:
Chairman & CEO Chairman Legal Counsel
- --------------------- ------------- -------------
Date: Date:
19 Sept., 1997 Nov. 14,1997 October 20, 1997
- --------------------- ------------ ----------------
<PAGE>
APLIGRAF MSA / ANNEX A DATE OF CURRENT REVISION SEPTEMBER 19, 1997
Country Specific Classification of the Product
<TABLE>
<CAPTION>
Country National Health Approved File Process Comments
Authority Specification
Classification
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Canada Device, Fresh NOC 4/97 *** ***
- ------------------------------------------------------------------------------------------------------------
</TABLE>
_____________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
NOVARTIS PHARMA AG
------------------
AND
ORGANOGENESIS, INC.
ANNEX B to the MANUFACTURING AND SUPPLY AGREEMENT
-------------------------------------------------
QUALITY ASSURANCE AGREEMENT
---------------------------
This Quality Assurance (QA) Agreement is between Novartis Pharma AG (NOVARTIS)
and Organogenesis, Inc. (ORGANOGENESIS).
1. Objective of the Agreement
--------------------------
This Agreement covers the manufacture and control procedures for the
product Apligraf/(R)/, made for NOVARTIS by ORGANOGENESIS. Its purpose is
to define the QA requirements between both parties and to provide a
mechanism for mutual changes agreed to by both parties' QA organizations.
2. Specifications for the Product
------------------------------
ORGANOGENESIS warrants that each lot of the Product manufactured by
ORGANOGENESIS shall meet all applicable quality specifications, including,
but not limited to, in-process production and environmental control
specifications and critical equipment operating parameters, which have been
established to assure the Product is suitable for its intended use during
the product life time. In addition, all regulatory specifications defined
in the applicable registration documents must be met. The control
procedures (analytical methods) referenced in the attached quality
specifications are an integral part of the determination of whether a lot
of Product meets the standards and specifications. The control procedures
are binding. (See Attachment 1)
<PAGE>
3. Starting Materials
------------------
3.1 Definition
----------
3.1.1 All starting materials shall be obtained from suppliers listed in
attachment 1.
3.1.2 NOVARTIS is responsible for providing all print and label
graphics to ORGANOGENESIS. NOVARTIS is responsible for
coordination of labeling. Final approval of United States
labeling is the joint responsibility of ORGANOGENESIS and
NOVARTIS. Final approval of all other labeling is the
responsibility of NOVARTIS.
3.2 Procurement/Delivery
--------------------
Requirements for vendor qualification for Apligraf/R/ are defined
in ***.
3.3 Testing and Release
-------------------
3.3.1 Starting materials shall be sampled and tested by ORGANOGENESIS
according to approved Quality Control Procedures (QCP's).
3.3.2 ORGANOGENESIS is responsible for all testing, which shall be
carried out according to control procedures set forth in the
applicable quality specifications and registration documents (See
Attachment 1). If the results are satisfactory, the starting
materials may be released for processing.
3.3.3 NOVARTIS is responsible for all labeling text, labeling changes
and approvals which shall be carried out according to control
procedures set forth in the applicable quality specifications and
registration documents (See Attachment 1).
3.3.4 ORGANOGENESIS and NOVARTIS are jointly responsible for labeling
text accuracy of labeling components for US product. NOVARTIS is
responsible for labeling text accuracy for all non-US product.
- -------------------
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
3.4 Retained Samples and Records
----------------------------
ORGANOGENESIS' and NOVARTIS' record and retention procedures shall be
in compliance with current FDA and other applicable regulatory
agencies requirements.
3.5 Storage
-------
ORGANOGENESIS shall store each starting material under conditions such
that when it is used it complies in all quality characteristics with
the specifications.
NOVARTIS shall assure all labeling is stored and shipped under
conditions such that when it is received by ORGANOGENESIS it complies in
all quality characteristics with the specifications.
4. Manufacturing
-------------
ORGANOGENESIS is responsible for manufacture and packaging, which shall be
carried out in accordance with the *** approved by ORGANOGENESIS in
accordance with current Good Manufacturing Practices, as promulgated by the
U.S. FDA, and other applicable regulatory agencies requirements.
5. Product Testing
---------------
5.1 In-process testing shall be performed by ORGANOGENESIS as defined in
the applicable quality specifications and registration documents.
5.2 Each lot of a Product shall be tested by ORGANOGENESIS for conformance
with the requirements of the applicable specifications prior to
shipment. ORGANOGENESIS shall provide a Certificate of Conformance for
each lot of each Product delivered to NOVARTIS.
5.3 All testing shall be carried out by ORGANOGENESIS according to the
control procedures in the applicable quality specifications and
registration documents (See Attachment 1).
_____________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
5.4 ORGANOGENESIS shall investigate and document all laboratory testing
failures, specification failures resulting in batch rejections, in-
process production and environmental control specification failures,
and critical equipment operating parameter failures. These failures
must be fully investigated in a timely manner, to determine the
possible root cause, and necessary follow-up actions must be
conducted.
6. Batch Manufacturing Record/Device History Record
------------------------------------------------
6.1 ORGANOGENESIS shall complete a batch manufacturing record/device
history record for each lot of Product manufactured, retain it in
accordance with paragraph 3.4, and upon request shall provide a copy
of the record to NOVARTIS.
6.2 ORGANOGENESIS shall document, on the batch manufacturing record/device
history record, any investigation of deviations and any action taken
to assure that the Product meets applicable specifications.
6.3 Ancillary Lot Record Documentation
----------------------------------
ORGANOGENESIS shall retain records for each component used in the
manufacture of a lot of Product as well as supporting documentation
for the validation and operation of equipment, process validation, and
all test results and investigations impacting on the manufacturing and
testing operations, as per paragraph 3.4.
6.4 Retained Samples of the Product
-------------------------------
Storage of retained samples of each lot of Product required by
regulatory authorities is ORGANOGENESIS' responsibility.
7. Support of Expiration Date
--------------------------
ORGANOGENESIS shall maintain documentation in accordance with its current
SOPs supporting current expiration dating.
8. Storage and Packaging
---------------------
ORGANOGENESIS shall store, package, and label Product as described in the
Master Batch Records/Master Device Records.
<PAGE>
9. Change Control
--------------
ORGANOGENESIS will inform NOVARTIS prospectively of any planned changes to
suppliers, starting material specifications and control procedures,
packaging and labeling specifications and control procedures, master batch
record/master device record, in-process specifications and control
procedures, product specifications and control procedures, and expiration
dating. ORGANOGENESIS will document the proposed changes on a change order
form according to *** and forward a copy of this form to NOVARTIS for
review. NOVARTIS will determine the regulatory requirements for
implementation in the countries where NOVARTIS holds registration authority
and will respond in writing to ORGANOGENESIS in a timely manner.
10. Product Acceptance
------------------
Acceptance of each lot of a product for sale shall be the responsibility of
ORGANOGENESIS' Quality Assurance department, except for those countries
with a regulatory requirement for release in their country by a "Qualified
Person". For countries requiring the additional release by a "Qualified
Person", the procedure in Attachment 2 will apply.
11. Basis for Product Rejection
---------------------------
11.1 Release Standards and Regulatory Specifications: If or when a lot of
-----------------------------------------------
Product or starting material fails to meet the specifications, and/or
it does not comply with the requirements outlined in the applicable
regulatory documents, ORGANOGENESIS may dispose of the product. If
ORGANOGENESIS believes the product is acceptable, both parties, after
review of the ORGANOGENESIS investigation, will immediately discuss
the disposition of the batch. NOVARTIS will make the ultimate
release/rejection decision. Documentation for that decision will be
provided in writing within *** of the decision by NOVARTIS.
__________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
11.2 Manufacturing Procedures: A lot of Product shall be rejected by
------------------------
ORGANOGENESIS if it was not manufactured in compliance with applicable
cGMP's, not manufactured according to approved procedures and/or was not
manufactured utilizing approved plant and equipment.
12. ***
13. Information/Complaints
----------------------
A joint complaint handling system shall be used by both parties to manage
all product complaints. NOVARTIS is responsible for all direct
user/customer contact. If a contact concerns a product complaint or a
potential complaint, NOVARTIS shall obtain all information necessary to
determine if the event is reportable. ORGANOGENESIS will be notified
immediately of potentially reportable events. ORGANOGENESIS is responsible
for complaint investigation and corrective action. A complete official
complaint file must be maintained at the Apligraf(R) manufacturing site.
Complaint management procedures will comply with all applicable
regulations.
ORGANOGENESIS also shall inform NOVARTIS of any serious violations
uncovered as a result of an inspection of its facilities and procedures. In
addition, each party shall inform the other immediately about inspections
by authorities regarding the Product. NOVARTIS will inform ORGANOGENESIS of
significant off label uses of the product or substantial problems in the
distribution of the product which may effect product quality or have
regulatory implications.
___________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
14. Inspections
-----------
With reasonable frequency, after suitable advance notice and during normal
business hours, NOVARTIS may inspect, on a confidential basis,
ORGANOGENESIS facilities, batch records, validation records and testing
records to assure that the manufacturing and control processes were carried
out in accordance with current Good Manufacturing Practices and other
applicable regulatory requirements. ORGANOGENESIS agrees to seek permission
to allow NOVARTIS to co-inspect with ORGANOGENESIS any facility contracted
by ORGANOGENESIS for manufacture or testing of product. Similarly, with
reasonable frequency, after suitable advance notice and during normal
business hours, ORGANOGENESIS may inspect, on a confidential basis,
NOVARTIS' customer complaint handling, label control, and distribution
records, procedures and facilities.
15. ***
16. Authorization to Ship Product
-----------------------------
At the time an order is placed to ship product outside the United States
for any purpose, NOVARTIS warrants that all regulatory requirements
associated with the import of the product into that country have been met.
17. Regulatory Submissions to Health Authorities
--------------------------------------------
ORGANOGENESIS and NOVARTIS hereby agree to notify the other party of any
original submissions, amendments or supplements to applicable regulatory
documents filed with regulatory authorities which, if approved, would
require any changes in manufacturing or testing procedures for the product.
Both parties must approve regulatory documents prior to submission to any
regulatory authority.
________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
18. Persons to Whom Communications Should he Addressed
--------------------------------------------------
Persons who should be contacted in matters of Quality Assurance are listed
in Attachment 3.
19. Changes to the QA Agreement
---------------------------
Any changes in this Agreement must be specified in writing and accepted by
both parties.
20. Report of Adverse Events
------------------------
ORGANOGENESIS will be responsible for reporting events which are reportable
under the Medical Device Reporting (MDR) regulations or other applicable
regulations. NOVARTIS will cooperate with ORGANOGENESIS to assure timely
transfer of information concerning events which may be reportable.
<PAGE>
21. Defined Terms
-------------
Capitalized terms used but not defined within should have the meaning
assigned to them in the License and Supply Agreement among NOVARTIS and
ORGANOGENESIS, as of the date of this agreement.
NOVARTIS PHARMA AG ORGANOGENESIS, INC.
By: R.S. Heir By: Joel T. Cademartori
Head, Corporate Quality Assurance Vice President, Regulatory Affairs,
Quality Assurance and Control
Signature: /s/ R. S. Heir Signature: /s/ J.Cademartori
-------------------------- -------------------------
Date: 4-9-97 Date: 8/8/97
-------------------------------- -----------------------------------
<PAGE>
July 21, 1997
ATTACHMENT 1
to the Quality Assurance Agreement
between Novartis Pharma AG and Organogenesis, Inc.
***
_____________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission. Thirty-seven pages have been
omitted.
<PAGE>
July 21, 1997
NOVARTIS PHARMA AG
AND
ORGANOGENESIS, INC.
ATTACHMENT 2
------------
to the QUALITY ASSURANCE AGREEMENT
----------------------------------
The United States and Canada have no regulatory requirement for release in their
country by a "Qualified Person". No additional procedures apply.
<PAGE>
July 21, 1997
NOVARTIS PHARMA AG
AND
ORGANOGENESIS, INC.
ATTACHMENT 3
------------
to the QUALITY ASSURANCE AGREEMENT
----------------------------------
PERSONS WHO SHOULD BE CONTRACTED IN MATTERS OF QUALITY ASSURANCE:
*** ***
Novartis Pharmaceuticals Corp. Organogenesis, Inc.
59 Route 10 150 Dan Road
East Hanover, New Jersey 07936 Canton, MA 02021
________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
APLIGRAF MSA / ANNEX C
- ----------------------
FINANCIAL SECTION
-----------------
1. *** on Supply Price
-------------------
During the ***, the partners will ***.
A. *** will pay the *** for all units of product ordered but
not sold.
B. On an annual basis, an independent certified public
accountant will on a confidential basis verify OI internal costs
and report to Novartis if the average manufacturing costs for the
Product are less than *** of product. If so, ***.
After the *** the parties agree to review and discuss the available
variance information and its impact.
2. Reduction of Purchase Orders Prior to ***
-----------------------------------------
Reduction of purchase orders prior to *** will incur *** for the ***
as per article 3.4.2. The total cost per unit of product *** is ***.
*** is to be reviewed annually and will be validated by an independent
certified public accountant during a confidential review of
Organogenesis' internal costs.
3. ***
***
_________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
***
4. Labeling Components
***
_________________
***Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
ANNEX D
FAILURE BY ORGANOGENESIS TO SUPPLY
TO BE NEGOTIATED
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Dan Capital Corp. (Del.)
ECM Pharma, Inc. (Del.)
44
<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 Form S-8 (File Nos. 33-
12761, 33-41862, 33-48888, 33-48890, 33-86506, 33-86508, 33-48892 and 33-64319)
and on Form S-3 (File Nos, 33-33914, 33-40287, 33-43648, 33-60381, 33-63397 and
333-3995) in effect on the filing date of Organogenesis Inc.'s Annual Report on
the Form 10-K for the year end December 31, 1997, of our report dated March 25,
1998, on our audits of the consolidated financial statements of Organogenesis
Inc. and its wholly owned subsidiaries as of December 31, 1997 and 1996, and for
the years ended December 31, 1997, 1996, and 1995, which report is included or
incorporated by reference in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 26, 1998
45
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 333
<SECURITIES> 5,812
<RECEIVABLES> 0
<ALLOWANCES> 0
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<CURRENT-ASSETS> 7,072
<PP&E> 14,480
<DEPRECIATION> 7,865
<TOTAL-ASSETS> 13,780
<CURRENT-LIABILITIES> 2,229
<BONDS> 0
0
0
<COMMON> 232
<OTHER-SE> 11,291
<TOTAL-LIABILITY-AND-EQUITY> 13,780
<SALES> 0
<TOTAL-REVENUES> 3,531
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<OTHER-EXPENSES> 23,338
<LOSS-PROVISION> 0
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