<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
Commission File Number 0-18044
PROCYTE CORPORATION
(Exact name of the registrant as specified in its charter)
WASHINGTON 91-1307460
(State of incorporation) (I.R.S. Employer Identification No.)
BUILDING A, 8511 154TH AVENUE N.E., REDMOND, WA 98052
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (425) 869-1239
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) 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 { }
As of September 30, 1997, there were issued and outstanding 13,364,958 shares of
common stock, par value $.01 per share.
1
<PAGE>
PROCYTE CORPORATION
INDEX
<TABLE>
<CAPTION>
<S> <C>
PART I - FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 3
BALANCE SHEET-AS OF SEPT. 30, 1997 AND DEC. 31, 1996 (UNAUDITED). . . . . . . 3
STATEMENTS OF OPERATIONS-THREE AND NINE MONTHS ENDED SEPT. 30, 1997 & 1996
(UNAUDITED) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
STATEMENTS OF CASH FLOWS -NINE MONTHS ENDED SEPT. 30, 1997 AND 1996
(UNAUDITED) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) . . . . . . . . . . . . . . . . 6
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) . . . . . . . . . . . . . . . . . . 7
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . .16
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . .16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEET-AS OF SEPT. 30, 1997 AND DEC. 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Sept. 30,1997 Dec. 31, 1996
-----------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................ $4,298,805 $1,804,875
Securities available for sale.................... 9,867,714 19,041,961
Inventories...................................... 1,787,114 596,740
Other............................................ 526,273 318,580
-----------------------------------
TOTAL CURRENT ASSETS 16,479,906 21,762,156
PROPERTY AND EQUIPMENT, AT COST
Equipment........................................ 3,896,425 3,604,764
Leasehold improvements........................... 5,015,348 5,097,833
Improvements in progress......................... 465,439 1,463,940
Less accumulated depreciation and amortization... 3,461,976 (4,306,094)
-----------------------------------
PROPERTY AND EQUIPMENT, NET 5,915,235 5,860,443
PATENTS, AT COST 290,930 290,930
Less accumulated amortization.................... (121,269) (109,270)
-----------------------------------
PATENTS, NET 169,661 181,660
OTHER 384,399 159,399
-----------------------------------
TOTAL ASSETS $22,949,201 $27,963,658
-----------------------------------
-----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................. $170,299 $334,843
Accrued liabilities.............................. 1,014,668 779,890
-----------------------------------
TOTAL CURRENT LIABILITIES 1,184,967 1,114,733
DEFERRED LEASE PAYMENTS 10,029 10,148
STOCKHOLDERS' EQUITY
Preferred stock $01 par value:2,000,000 shares
authorized; no shares issued or outstanding....
Common stock $01 par value: 30,000,000 shares
authorized; shares issued and outstanding
13,364,958 - Sept 30, 1997 and 13,364,958 -
December 31, 1996..............................
Additional paid-in capital....................... 82,769,840 82,576,340
Deficit accumulated during the development
stage.......................................... (61,149,160) (55,870,339)
-----------------------------------
TOTAL STOCKHOLDERS' EQUITY 21,754,205 26,838,777
-----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,949,201 $27,963,658
-----------------------------------
-----------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
STATEMENTS OF OPERATIONS-THREE AND NINE MONTHS ENDED SEPT. 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
Jan 1, 1985
(predecessor
Three months ended Sept 30, Nine months ended Sept 30, inception) to
--------------------------------------------------------- Sept 30,
1997 1996 1997 1996 1997
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUES
Product revenues . . . . . . . . . . . . . . . . . . $41,391 $14,153 $123,962 $14,153 $154,525
Contract Manufacturing . . . . . . . . . . . . . . . 135,723 88,722 705,706 563,938 1,565,646
License Fees . . . . . . . . . . . . . . . . . . . . 0 0 0 900,000 1,500,000
R&D Collaborative Agreements . . . . . . . . . . . . 0 0 0 0 7,754,711
Interest income. . . . . . . . . . . . . . . . . . . 252,705 437,375 760,235 1,222,954 9,418,980
Other income . . . . . . . . . . . . . . . . . . . . 400,000 1,112,110
----------------------------------------------------------
TOTAL REVENUES 429,819 540,250 1,989,904 2,701,045 21,505,972
COSTS AND EXPENSES
Cost of product sales. . . . . . . . . . . . . . . . 17,362 6,532 48,583 6,532 62,493
Research & development . . . . . . . . . . . . . . . 1,025,296 1,701,652 3,677,586 4,908,639 53,556,855
Litigation settlement. . . . . . . . . . . . . . . . 0 0 0 0 5,750,000
General & administrative . . . . . . . . . . . . . . 1,036,660 1,130,885 3,542,554 3,554,731 23,288,571
-----------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 2,079,318 2,839,069 7,268,723 8,463,370 82,657,919
NET LOSS $(1,649,499) $(2,298,819) $(5,278,819) $(5,768,857) $(61,151,947)
NET LOSS PER COMMON SHARE. . . . . . . . . . . . . . . $(0.12) $(0.17) $(0.40) $(0.44) $(7.59)
Weighted average number of common shares used
in computing net loss per common share . . . . . . . 13,340,058 13,225,773 13,315,257 13,191,941 8,057,022
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
STATEMENTS OF CASH FLOWS -NINE MONTHS ENDED SEPT. 30, 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
January 1,1985
(predecessor
Nine months ended September 30, inception) to
------------------------------- September 30,
1997 1996 1997
-----------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . ($5,278,820) ($5,768,857) $(61,151,947)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . 485,172 477,245 5,041,935
Patent expense . . . . . . . . . . . . . . . . . . . 11,999 12,000 798,928
Amortization of discount on marketable securities. . 0 0 (15,625)
(Gain) loss on sale of securities available for sal 86 137,074 (137,502)
Stock grants and Restricted Stock grants . . . . . . 194,250 194,250 526,971
Compensation expense on stock options. . . . . . . . 0 28,630 597,638
Changes in assets and liabilities:
(Increase) decrease in inventories . . . . . . . . . (1,190,373) (557,828) (1,787,113)
(Increase) decrease in other current assets. . . . . (207,692) (46,284) (526,275)
(Increase) decrease in insurance receivable. . . . . 0 2,000,000 0
(Increase) decrease in escrowed cash . . . . . . . . 0 (2,500,000) 0
Increase in other assets . . . . . . . . . . . . . . 0 (1,132,044) (9,399)
Increase (decrease) in accounts payable. . . . . . . (164,544) (209,108) 85,180
Increase (decrease) in accrued liabilities . . . . . 234,776 (151,444) 959,758
Increase (decrease) in deferred lease payments . . . (119) (14,817) 10,029
Decrease in deferred use tax . . . . . . . . . . . . 0 0 (94,713)
-----------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (5,915,265) (7,531,183) (55,702,135)
-----------------------------------------------
FINANCING ACTIVITIES
Proceeds from issuance of stock - net. . . . . . . . 0 94,478 81,405,340
Proceeds from borrowings . . . . . . . . . . . . . . 500,000
-----------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 0 94,478 81,905,340
-----------------------------------------------
INVESTING ACTIVITIES
Purchase of property and equipment . . . . . . . . . (539,966) (400,679) (10,861,242)
Purchase of securities available-for-sale. . . . . . (44,160,774) (135,794,265) (423,841,203)
Proceeds from sale or maturity of securities
available for sale . . . . . . . . . . . . . . . . 53,334,935 141,986,636 414,126,616
Patents:
Expenditures . . . . . . . . . . . . . . . . . . . . 0 0 (1,018,117)
Reimbursements . . . . . . . . . . . . . . . . . . . 0 0 64,546
Other. . . . . . . . . . . . . . . . . . . . . . . . (225,000) 0 (375,000)
-----------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES 8,409,195 5,791,692 (21,904,400)
-----------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,493,930 (1,645,013) 4,298,805
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,804,875 6,019,740
-----------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,298,805 $4,374,727 $1,642,316
-----------------------------------------------
-----------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES
Conversion of debt to common stock . . . . . . . . . $500,000
------------
------------
Issuance of stock for patents. . . . . . . . . . . . $27,790
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------- Paid-in Accumulated
Shares Par Value Capital Deficit Total
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, Dec. 31, 1996 13,277,558 $132,776 $82,576,340 ($55,870,339) $26,838,777
------------------------------------------------------------------
Hymedix Restricted Stock:
($2.59 per share) March 31 25,000 250 64,500 64,750
($2.59 per share) June 30 25,000 250 64,500 64,750
($2.59 per share) Sept 30 25,000 250 64,500 64,750
Net loss (5,278,820) (5,278,820)
------------------------------------------------------------------
Balance, Sept 30, 1997 13,327,558 $133,276 $82,705,340 ($61,149,159) $21,754,207
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
PROCYTE CORPORATION
(a development stage company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited Financial Statements of ProCyte Corporation
("ProCyte" or the "Company") for the three and nine-month periods ended
September 30, 1997 and 1996, have been prepared by the Company in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Pursuant to such rules and regulations, the Financial Statements do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. Accordingly, this financial
information should be read in conjunction with the complete Financial
Statements, including the notes thereto and the auditors' opinion, which are
included in the Company's Annual Report Form 10-K for the year ended December
31, 1996. In the opinion of management, all material adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Interim results are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997.
2. INVESTMENTS
At September 30, 1997, the Company's investments consisted entirely of U.S.
Treasury bills & notes and U.S. Agency securities and were classified as
"available for sale." The amortized cost and estimated market value for
investments maturing in one year or less was $4,298,805, and for those maturing
in one through five years was $9,867,714. There were no gross unrealized gains
or losses at September 30, 1997. Realized losses from sales of investments in
the three and nine-month periods ended September 30, 1997 were $(545) and $(86),
respectively.
3. EXISTING CORPORATE LICENSE AGREEMENTS
HYMEDIX INTERNATIONAL, INC.
In November 1995, ProCyte entered into a license agreement with Hymedix
International, Inc. ("Hymedix") in which the Company acquired the exclusive
worldwide rights, outside of Asia, to five FDA-cleared wound care products
developed by Hymedix, as well as exclusive rights to the use of the underlying
technology in the territory for future wound care products. Additionally, the
Company acquired, on a non-exclusive basis, the rights to a sixth FDA-cleared
wound care product in the same territory. The Company shares marketing rights
to the sixth product with B. Braun Medical, Inc. The Company also acquired
exclusive worldwide rights to the drug delivery application of Hymedix's
polymer-based technology for wound healing applications.
Under the terms of the agreement with Hymedix, the Company is obligated to
pay certain upfront, milestone and royalty payments. The Company's upfront
payment included 200,000 shares of the Company's common stock, releasable over a
two-year period in four equal assignments of 50,000 shares each, unless Hymedix
has materially breached the license agreement or the Company has terminated the
license agreement. The stock is subject to SEC Rule 144 restrictions and has
piggyback registration rights for a limited period of time. The Company may
terminate the agreement at any time upon sixty days' written notice. The
Company accrues the estimated expense of the milestone payment on an on-going
basis.
7
<PAGE>
4. INVENTORIES
Inventories consist of raw materials, work in process and finished
goods, and are accounted for at the lower of cost or market. As of September
30, 1997, finished goods inventory was valued at $516,575, and raw materials
and work-in-process inventory was valued at $1,270,539.
5. STOCKHOLDERS' EQUITY
Information relating to stock options granted, exercised, canceled and
currently exercisable is as follows:
<TABLE>
<CAPTION>
Shares subject Weighted average
to option exercise price
---------------------------------
---------------------------------
<S> <C> <C>
Balance, January 1, 1996 . . . . . . . . . . . . 1,524,957 $4.44
Granted. . . . . . . . . . . . . . . . . . . . 402,000 $2.94
Exercised. . . . . . . . . . . . . . . . . . . (40,263) $2.35
Canceled . . . . . . . . . . . . . . . . . . . (305,334) $7.50
---------------------------------
Balance, Sept 30, 1996 . . . . . . . . . . . . . 1,581,360 $3.46
---------------------------------
---------------------------------
Balance, January 1, 1997 . . . . . . . . . . . . 1,375,695 $3.53
Granted. . . . . . . . . . . . . . . . . . . . 207,500 $2.07
Exercised. . . . . . . . . . . . . . . . . . . 0 $0.00
Canceled . . . . . . . . . . . . . . . . . . . (447,973) $3.55
---------------------------------
Balance, Sept 30, 1997 . . . . . . . . . . . . . 1,135,222 $3.25
---------------------------------
---------------------------------
Currently exercisable. . . . . . . . . . . . . . 669,212 $3.71
---------------------------------
---------------------------------
</TABLE>
During the three-month period ended September 30, 1997, the Compensation
Committee of the Board of Directors approved grants to employees of incentive
stock options under the Company's 1989 Restated Stock Option Plan to purchase
243,000 shares of common stock. All options are subject to vesting schedules.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," was recently issued and is effective for the Company's fiscal year
ending December 31, 1997. This statement requires a change in the presentation
of earnings per share. Early adoption of this statement is not permitted.
Management believes that the impact of the adoption of this statement on the
financial statements, taken as a whole, will not be material.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was also recently issued and is effective for the Company's year
ending December 31, 1998. The Company is currently evaluating the effects of
this statement; however management believes that the impact of its adoption will
not be material to the financial statements, taken as a whole.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CORPORATE OVERVIEW
For the first nine months of 1997 ProCyte introduced or received clearance
to market an array of wound care products. As the Company's product line has
expanded, it has begun to focus its efforts on the specialty wound care sectors
- - including dermatologists and plastic and cosmetic surgeons.
ProCyte initially began marketing in the wound care sector with its own
direct sales force whose efforts revolved around promotion of ProCyte's wound
care products - particularly Iamin-REGISTERED TRADEMARK- Hydrating Gel and the
OsmoCyte-REGISTERED TRADEMARK- Pillow Wound Dressings - to the broad-based
chronic and acute care markets. This market includes hospitals, nursing homes
and home health care. In third quarter 1997, the Company elected to eliminate
the expense of having its own sales force in light of plans to partner the
distribution of its products in these competitive markets with more established
sales and marketing organizations worldwide. Discussions are ongoing with
potential partners.
In September 1997, ProCyte launched the third product in its system of
copper-peptide containing wound care products for use following hair restoration
surgery. GraftCyte-TM- Post-Surgical Shampoo is now available to hair
transplant specialists and their patients, together with the company's
GraftCyte-TM- Moist Dressings and Hydrating Mist.
An estimated 200,000 hair restoration procedures are performed annually in
the United States. ProCyte is the first company to provide a line of products
that address the importance of wound repair in the hair transplant process. The
company's GraftCyte-TM- products are promoted through specialty distributors.
In October, ProCyte presented its GraftCyte-TM- System at the International
Hair Restoration Conference in Barcelona, Spain. The company is sponsoring a
CNBC program on innovations in hair restoration procedures, and the role its
wound care products play, on the November 22, 1997 CNBC program HEALTHY LIVING,
scheduled to air at 12:00 p.m. Eastern time.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies primarily on equity financings, contract manufacturing
fees, interest income, product sales and corporate partnerships to fund its
operations and capital expenditures. At September 30, 1997, the Company had
approximately $14.2 million in cash, cash equivalents and securities available
for sale, as compared to $20.8 million at December 31, 1996.
Through September 30, 1997, the Company has invested a total of
approximately $2.7 million in laboratory and computer equipment, furniture and
leasehold improvements. In addition, the Company has invested approximately
$6.5 million in leasehold improvements and equipment for its manufacturing
plant.
Increases in inventory were anticipated and planned. The increase in raw
material and work-in-process inventory resulted primarily from a ramp-up for a
large, ongoing production campaign of the Company's primary copper peptide
compound. Finished goods inventory rose primarily as a result of the continued
completion and stocking of its finished products, primarily items from the
GraftCyte-TM- family of products.
9
<PAGE>
The Company anticipates that its existing capital resources should be
sufficient to fund its cash requirements for approximately two years. However,
the amounts and timing of expenditures will depend on such things as the
progress and results of ongoing clinical development programs, the rate at which
operating losses are incurred, the execution of in-licensing or product
distribution agreements with others, the establishment of out-licensing
agreements or strategic alliances for certain of the Company's products or
technology, the FDA regulatory process and similar processes among similar
agencies in other countries, and other factors, many of which are beyond the
Company's control, such as changes in healthcare product reimbursement
schedules.
OPERATING LOSSES
The Company is engaged in the development of healthcare products utilizing
copper-peptide containing and polymer-based compounds. Such research and
development has historically been funded from the Company's equity-derived
working capital and through corporate partnerships. The Company has incurred
operating losses since its inception due to financial and regulatory
requirements required to support research, development and clinical studies of
its proprietary technology. In particular, the Company has supported and
continues to finance development of investigational Iamin-Registered Trademark-
gel for potential treatment of chronic dermal wounds, and other wound care
studies or pharamacoeconomic analyses involving its product candidates or
commercial products.
The Company expects to incur additional operating losses for a number of
years until its product lines have been expanded and successfully distributed.
At September 30, 1997, the Company's accumulated deficit was approximately $61.2
million.
REVENUE
For the three and nine-month periods ended September 30, 1997, ProCyte
earned revenue from product sales, contract manufacturing services, other
income and interest income of $429,819 and $1,989,904, respectively. The
Company was performing contract research and development in 1996 that it is not
conducting in 1997, and ProCyte received its first FDA product clearances in
1996 to begin promoting its products in the US in the second half of that year.
Consequently, comparisons between revenue for the three and nine-month periods
ended September 30, 1997 and the corresponding periods in 1996 are not
meaningful.
The increase in the Company's three and nine-month operating revenue for
the period ended September 30, 1997, compared to the like year-ago periods, was
primarily a result of increased product sales and fees from contract
manufacturing. The decrease in total revenue for the three and nine-month
periods ended September 30, 1997, compared to the same periods in 1996, was
primarily a result of lower interest earnings due to decreased cash available
for investment.
EXPENSES
Research and development expenses continued to decrease to $1,025,296 and
$3,677,586, respectively, for the three and nine-month periods ended September
30, 1997, and related primarily to the Company's planned expenditures for
development of its wound care, skin and hair health product candidates. This
compares to research and development expenses of $1,701,652 and $4,908,639,
respectively, for the same three and nine-month periods in 1996. The Company
anticipates that expenditures for research and development will remain at or
near current levels as a result of the stage of current product development and
distribution.
10
<PAGE>
General and administrative expenses were also reduced to $1,036,660 and
$3,542,554 for the three and nine-month periods ended September 30, 1997,
compared to $1,130,885 and $3,554,731, respectively, for the like periods in
1996. The decreases in such expenses were planned and were primarily related to
reduced staffing expenses. The Company anticipates that expenditures may
decrease or remain at or near current levels as a result of planned distribution
changes. In third quarter 1997 the Company implemented its plan to eliminate
its direct sales staff and promote products through corporate partnerships and
select distributorships. The impact of the reduced sales force expenses will be
reflected in the fourth quarter.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
The entire discussion in this report contains forward-looking statements.
Any and all statements of goals, beliefs, intent, plans, anticipation or
expectations set forth in its SEC reports and other communications may be
forward-looking statements. Readers are cautioned not to place undue reliance
on these forward-looking statements which reflect the Company's position only as
of the date hereof. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
The following factors, among others (including those described in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996),
could affect the Company's actual results with regard to such forward-looking
statements, and could cause such results to differ materially from those
expressed in the Company's forward-looking statements.
GENERAL FINANCIAL POSITION OF THE COMPANY
The Company anticipates that its operating expenses will remain the same
or decrease in 1997 and subsequent years as the Company moves products
forward in commercialization, enters distribution relationships or reduces
certain of its overhead expenses. The Company may be required to raise
additional capital through equity offerings, strategic alliances, technology
or product out-licensing or other sources. There can be no assurance that
such funds will be available to the Company on acceptable terms, if at all.
The Company expects to try to negotiate strategic collaborations or other
suitable partnerships for certain applications of its technology, such as
inflammatory bowel disease, and to seek product distributors for its chronic and
acute wound care products worldwide. There can be no assurance that the Company
will be successful in these endeavors.
Although strategic partnerships have provided revenue to the Company in
the past, the Company has no such partnerships at present and there can be no
assurance of such alliances in future or that any future alliances will be
successful. Additionally, though the Company makes every effort to
extensively review products or technologies it may seek to acquire,
distribute or in-license, there can be no assurance that products so obtained
will be commercialized successfully, if at all.
11
<PAGE>
CLINICAL AND COMMERCIAL DEVELOPMENT OF NOVEL COMPOUNDS AND PRODUCTS
There can be no assurance that the Company will commence, continue or
successfully complete preclinical or clinical testing or commercial development,
including commercial-scale manufacturing and market launch of any of the
Company's product candidates identified above, or that, if successfully
developed, such product candidates would be cleared by the FDA for sale in the
United States or by comparable regulatory authorities for sale in other
countries. Approval of a product for marketing in one country does not ensure
approval for marketing in other countries. Launch of a product does not ensure
market acceptance. The results of Phase I, Phase II or Phase III studies are
not necessarily indicative of efficacy or safety of a commercial product for
human use.
CONTRACT MANUFACTURING
ProCyte's manufacturing plant was commissioned in 1994, and allows the
Company to offer to provide select contract manufacturing services to industry
clientele in addition to serving its own product manufacture requirements. For
the quarter ended September 30, 1997, ProCyte had provided or was still
performing contract manufacturing services on behalf of two clients, including
one multinational pharmaceutical company and one biotechnology company.
The Company expects to utilize approximately 75% of the plant's current
capacity for these endeavors in 1997, though, for the reasons outlined elsewhere
in this report, and including such things as unexpected or unsuccessful plant
audits or regulatory inspections, the potential impact of adverse weather
conditions on plant operations, the decision of a client to manufacture its own
products or have them manufactured elsewhere, the potential lack of market
acceptance of the Company's or clients' products, and competition, there can be
no assurance that the Company will be successful.
Given the risks and uncertain timelines associated with device,
pharmaceutical and biotechnology products being developed, tested, reviewed or
sold by clients of the manufacturing facility, and the Company's own products,
the Company may be unable to maintain sufficient clientele to counter the effect
that regulatory delays, product failures, product recalls, and other such
circumstances may have on its contract manufacturing capabilities and revenues.
Also, such factors as unexpected or unsuccessful plant audits or regulatory
inspections, the potential impact of adverse weather conditions on plant
operations, the decision of a client to manufacture its own products or have
them manufactured elsewhere, inability or failure to manufacture a product to
established product specifications, the potential lack of market acceptance of
clients' products, and competition, mean there can be no assurance that the
Company will be successful in its contract manufacturing endeavors.
WOUND CARE PRODUCT DEVELOPMENT, MANUFACTURE AND DISTRIBUTION
Factors beyond the Company's control, such as delays in obtaining FDA
clearance to market new products, delays in product launch, the promotion and
introduction of competitive products by others with larger and more
established sales and marketing organizations, lack of product acceptance by
the marketplace, changes in Medicare reimbursement and the impact this would
have on product pricing, unexpected difficulties in scaling-up the full scale
commercial manufacturing processes, obtaining suitable raw materials, and
staffing the production operation, mean that there can be no assurance that
the Company will be able to commercialize any of its planned wound care
products in a cost-effective, timely manner, if at all.
12
<PAGE>
PATENTS AND PROPRIETARY RIGHTS
ProCyte's success depends in part upon its ability to protect its
products and technology under intellectual property laws in the Unites States
and abroad. As of September 30, 1997, the Company had 18 issued United States
patents expiring between 2005 and 2010, and over 100 issued foreign patents
and patent registrations. The patents relate to use of the Company's
copper-based technology for a variety of healthcare applications, and to the
composition of certain biologically active, synthesized compounds. The
Company's strategy has been to apply for patent protection for certain
compounds and their discovered uses that are believed to have potential
commercial value in countries which offer significant market potential.
The Company currently holds several registered trademarks for its
product candidates. There can be no assurance as to the breadth or degree of
protection that the Company's existing trademarks or patents, or any
additional trademarks or patents that may be granted in the future, will
afford the Company, or that any additional trademarks or patents will be
issued to the Company. In addition, there can be no assurance that others
will not independently develop substantially equivalent proprietary
technology that is not covered by the Company's patents or that others will
not be issued patents that may prevent the Company's manufacture, sale or use
of the Company's proposed products or require licensing and the payment of
significant fees or royalties by the Company for the pursuit of its business.
Litigation, which could result in substantial cost to the Company, may be
necessary to enforce the Company's patents or to determine the scope and
validity of other parties' proprietary rights. If the outcome of any such
litigation were adverse, the Company's business could be materially affected.
The Company is unable to predict how courts would resolve any future issues
relating to the validity and scope of the Company's patents or trademarks
should they be challenged.
The Company also intends to rely on its unpatented proprietary know-how,
and there can be no assurance that others will not develop or acquire
equivalent proprietary information. To the extent that corporate partners or
consultants apply Company technological information independently developed
by them or by others to Company projects or apply Company technology or
know-how to other projects, disputes may arise as to the ownership of
proprietary rights to such information.
COMPETITION
Competition in the Company's initial area of sales and distribution -
wound care and related applications - is particularly intense, involving a
number of well-established, major pharmaceutical and healthcare companies,
such as Bristol Myers Squibb's Convatec division, Kendall Healthcare Company,
and Johnson and Johnson. A significant number of smaller companies as well
are developing or marketing competitive wound care products, some of which
may have an entirely different approach than products being developed by the
Company.
Wound care is an evolving field as far as technology, regulations, and
products are concerned. The Company believes that its most substantial
competition with respect to its planned wound care product line will come
from established pharmaceutical and healthcare companies, which are
significantly larger than the Company and have substantially greater
financial resources, marketing and sales staffs, and experience in obtaining
regulatory approvals, as well as in manufacturing and marketing wound care
products. In addition, such companies have considerable years of experience,
and established reputations, promoting to healthcare providers.
13
<PAGE>
Competition in all of the Company's areas of interest, including wound
care, is based on scientific and technological advances, the availability of
patent protection, access to adequate capital, the requirement for and
ability to obtain government approval for new products or testing, timing and
scope of regulatory approvals, product pricing, manufacturing and marketing
capability. There can be no assurance that the Company's competitors will not
succeed in bringing to market technologies and/or products that may make the
proposed products being developed by the Company obsolete or noncompetitive.
Some of the Company's competitors may achieve product commercialization
earlier than the Company, which may adversely affect market introductions and
sales of the Company's proposed products. Competition for highly qualified
scientific, technical, and managerial personnel, consultants and advisors on
whose services the Company depends is also intense.
The contract manufacturing service business also is highly competitive.
Competitors include major chemical and pharmaceutical companies, as well as
specialized biotechnology firms, smaller contract chemical manufacturers and
some universities. Many of these companies or institutions have greater
financial, technical and marketing resources than the Company.
The chemical, commodity-products and pharmaceutical industries have
undergone and are expected to continue to undergo significant technological
and strategic change, and the Company expects the competition to intensify as
technical advances or business alliances are made by others in fields of
interest to the Company. The Company believes that its success in competing
with others will depend on such things as its ability to retain scientific
expertise and capable, experienced management, and identifying and pursuing
scientifically feasible, medically relevant, and commercially viable
opportunities.
GOVERNMENT REGULATION
The manufacture and marketing of ProCyte's products, whether internally
developed and licensed-in, and its research and development activities in
general, are subject to extensive regulation in the United States by the
federal government, principally by the FDA, and in other countries by similar
health and regulatory authorities. The Federal Food, Drug and Cosmetic Act
and the regulations promulgated thereunder, and other federal and state
statutes govern, among other things, the testing, manufacture, safety,
labeling, storage, recordkeeping, advertising and promotion of pharmaceutical
products and medical devices. Product development and approval or clearance
within the regulatory framework requires a number of years and involves the
expenditure of substantial resources.
In order to obtain FDA clearance to market a new drug or device in the
United States for use in humans, it is necessary to proceed through several
stages of product testing, including research and development, clinical
trials, the filing of a product registration dossier such as a new drug
application or 510(k) application with the FDA to obtain authorization to
market a product. The Company's product candidates may be regulated by any of
a number of divisions of the FDA.
Before human testing of a therapeutic product candidate may commence,
the FDA, and like agencies in other countries, generally require certain
preclinical testing, such as toxicology studies in animals, to begin to
establish product safety. Results of such studies are submitted as part of
the application to the regulatory agency. Preclinical testing is not
necessarily indicative of the safety or effectiveness of a product candidate
for human use.
14
<PAGE>
Human clinical trials of an investigational therapeutic compound in the
United States typically involve a three-phase process. Following the IND
submission period, Phase I trials may be conducted with a small group of
healthy volunteers or, in some instances, patients, to determine the early
safety profile and the pattern of drug absorption, distribution and
metabolism. Phase II trials are conducted with groups of patients afflicted
with a specific disease or specific element of a disease to determine
preliminary effectiveness, optimal dosage and treatment regimens and expanded
evidence of safety. Phase III comparative trials are conducted with a larger
number of patients at multiple test sites to gather information about safety
and effectiveness that is needed to evaluate the overall benefit-risk
relationship of the compound and to provide an adequate basis for proposed
product labeling.
The results of clinical trials are submitted to the FDA, and to similar
agencies in other countries, in the form of an of NDA or like submission, for
approval to commence commercial distribution of the product. The regulatory
agencies may take one to two years or more to act on an NDA or like
submission, if they elect to act at all. The final decision rests with the
regulatory agency as to whether or not approval will be granted. The
regulatory agencies, at their discretion, may request further testing,
additional data, or may deny approval if the agency determines that
regulatory approval criteria are not sufficiently satisfied. As such, there
can be no assurance that any approvals of the Company's proposed candidates
would be granted on a timely basis, if at all, following completion of
clinical testing.
In the United States, products that do not seek to make effectiveness
claims based on human clinical evaluation, may be subject to review and
regulation under the FDA's 510(k) medical device guidelines. Similar
guidelines exist for such products in other countries. Such products, which
include wound care dressings, ointments and gels, must show safety and
substantial equivalency with predicate products already cleared to be
marketed by the FDA. There can be no assurance that such product pre-market
notification applications submitted to the FDA or similar agencies in other
countries will receive clearance to be marketed, or that the labeling claims
sought will be approved, or that, if cleared, such products will be
commercially successful.
In addition to obtaining FDA or other countries' approval or clearance
to market a product, the prospective manufacturer's quality control and
manufacturing procedures must conform to current good manufacturing practices
("cGMPs") guidelines, or ISO 9000 standards, when appropriate. In complying
with standards set forth in these regulations, which are subject to change at
any time without notice to the Company, manufacturers must continue to expend
time, monies and effort in production and quality control. Manufacturing
establishments, such as ProCyte's manufacturing plant, are also subject to
regulations from and inspections by other foreign, federal, state or local
agencies, such as the Drug Enforcement Agency, the city water and waste
treatment agencies, and state and federal safety and health regulations.
There can be no assurance that the Company's manufacturing facility or its
operations for the manufacture of its own product candidates or the bulk
products manufactured and processes followed by the Company on behalf of its
clients will be able to meet all appropriate guidelines or to pass
inspections by any government agency. If the Company's manufacturing
operations should fail to pass an inspection, for any reason, the possible
resultant outcome on the plant's continuing operations, and the financial
impact on the Company's overall reputation and operations could be severely
adversely affected.
The Company also is or may become subject to various other foreign,
U.S., state and local laws, regulations and policies relating to, among other
things, safe working conditions, good laboratory practices, animal welfare,
and the use and disposal of hazardous or potentially hazardous substances
used in connection with research, development and/or manufacturing.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the shareholders for vote during third
quarter 1997.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K - None.
16
<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.
PROCYTE CORPORATION
(REGISTRANT)
Date: October 31, 1997 By: /s/ John F. Clifford
-----------------------------------
John F. Clifford, President and CEO
Date: October 31, 1997 By: /s/ Jon Sortland
-----------------------------------
Jon Sortland, Manager of Accounting
17
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